|Company Law Reform Bill [HL] - continued||House of Commons|
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Clauses 174 and 175: Service contracts
379. These clauses require member approval of long-term service contracts. In broad terms, these are contracts under which a director is guaranteed at least 2 years of employment with the company of which he is a director, or with any subsidiary of that company.
380. Directors service contract is defined in clause 211 as including contracts of service, contracts for service and letter of appointment as director.
381. Failure to obtain approval allows the company to terminate the service contract at any time by giving reasonable notice. The purpose of this clause is to limit the duration of directors' service contracts, as a long-term contract can make it too expensive for the members to remove a director using the procedure in clause 154 (ordinary resolution to remove director) while allowing the members to approve longer arrangements if they wish.
382. These clauses replace section 319 of the 1985 Act. The length of service contract for which member approval is required has been reduced from those longer than 5 years to those longer than 2 years.
Clauses 176 to 182: Substantial property transactions
383. These clauses require member approval to substantial property transactions. These are transactions where the company buys or sells a non-cash asset (as defined in section 739(1) of the 1985 Act) to or from:
Approval is only required where the value of the asset exceeds £100,000 or 10% of the company's net assets (based on its last set of annual accounts or called-up share capital if it has not yet produced any accounts). No approval is required if the value of the asset is less than £5,000.
384. These clauses replace sections 320 to 322 of the 1985 Act. The changes include:
Clauses 183 to 198: Loans, quasi-loans and credit transactions
385. These clauses require member approval for loans, quasi-loans (as defined in clause 184), credit transactions (as defined in clause 186) and related guarantees or security made by a company for:
386. Member approval is not required by these clauses for:
387. These clauses replace sections 330 to 342 of the 1985 Act. The changes include:
Clauses 199 to 206: Payments for loss of office
388. These clauses require member approval for payments for loss of office. These are payments made to a director (or former director) to compensate them for ceasing to be a director, or for losing any other office or employment with the company or with a subsidiary of the company. They also include payments made in connection with retirement. In the case of loss of employment or retirement from employment, the employment must relate to the management of the affairs of the company.
389. Member approval is required under clause 201 if a company wishes to make a payment for loss of office to:
390. Member approval is also required if any person (including the company or anyone else) wishes to make a payment for loss of office to a director of the company
in connection with the transfer of the whole or any part of the undertaking or the property of the company or of a subsidiary of the company (clause 202).
391. In the case of a payment for loss of office to a director in connection with the transfer of shares in the company or in a subsidiary of the company resulting from a takeover bid, approval is required of the holders of the shares to which the bid relates and of any other holders of shares of the same class (clause 203).
392. These clauses replace sections 312 to 316 of the 1985 Act. The changes include:
Clause 211: Directors' service contracts
393. This clause defines what is meant by references to a director's service contract in this Part. The term is used in clauses 163, 168, 174 and 176 and in this Chapter. It includes contracts of employment with the company, or with a subsidiary of the company. It also includes contracts for services and letters of appointment to the office of director. The contract may relate to services as a director or to any other services that a director undertakes personally to perform for the company or a subsidiary.
Clause 212: Copy of contract or memorandum of terms to be available for inspection
394. This clause requires a company to keep copies of every service contract entered into by the company or by a subsidiary of the company for a director of the company. If the contract is not in writing, the company must keep a written memorandum of its terms. This clause, together with clauses 213 and 214, replaces section 318 of the 1985 Act.
395. Subsection (3) is new. It requires the service contracts to be kept by the company for at least one year after they have expired, but the subsection does not require the copies to be retained thereafter. As a result of the expanded definition of service contract in clause 211, this clause now applies to contracts for services and letters of appointment, as recommended by the Law Commissions.
396. As recommended by the Law Commissions, the exemption for contracts requiring a director to work outside the UK (section 318(5) of the 1985 Act) and the exemption for contracts with less than 12 months to run (section 318(11) of the 1985 Act) have not been retained.
397. Failure to comply with the requirements of this clause is a criminal offence for which every officer of the company who is in default may be held liable on summary conviction to a fine not exceeding level 3 on the standard scale (currently £1,000) or in cases of continued contravention a daily default fine not exceeding one-tenth of that. In a change from the current position under section 318 of the 1985 Act, the company will no longer be liable under the criminal offence.
Clause 213: Right of member to inspect and request copy
398. This clause gives members a right to inspect without charge the copies of service contracts held by the company in accordance with clause 212. Subsection (2) creates a new right for members to request a copy of the service contracts on payment of a fee set by regulations under clause 788.
Clause 214: Directors' service contracts: application of provisions to shadow directors
399. This clause applies the requirements of this Chapter to service contracts with shadow directors.
Clause 215: Contract with sole member who is also a director
400. Under this clause, contracts entered into by a company with its only member must be recorded in writing if the sole member is also a director or shadow director of the company. This does not apply to contracts entered into in the ordinary course of the company's business. The purpose of this clause is to ensure that records are kept in those cases where there is a high risk of the lines becoming blurred between where a person acts in his personal capacity and when he acts on behalf of the company. This may be of particular interest to a liquidator should the company become insolvent.
401. This clause replaces section 322B of the 1985 Act, which implements article 5 of the 12th Company Law Directive (89/667/EEC). As the Bill will permit public companies to have a single shareholder, this clause applies to both private and public limited companies.
402. A failure to record the contract in writing will not affect the validity of the contract (subsection (6)) but other legislation or rules of law might (subsection (7)).
403. If there is a breach of this clause, every officer of the company in default is liable on summary conviction to a fine not exceeding level 5 on the standard scale (currently £5,000). In a change from the current position under section 322B of the 1985 Act, the company will no longer be liable under the criminal offence.
404. The clauses in this Chapter deal with two matters:
Provision protecting directors from liability
Clause 216: Provisions protecting directors from liability
405. This clause prohibits a company from exempting a director from, or indemnifying him against, any liability in connection with any negligence, default, breach of duty or breach of trust by him in relation to the company. Subsection (2) prohibits indemnification by an associated company as well as by his own company. "Associated company" is defined in clause 239 as, in effect, a company in the same group.
406. Any provision, whether in the company's articles, in a contract or otherwise, attempting to exempt or indemnify a director in breach of this clause is void. But this does not apply to lawful provisions in the articles for dealing with conflicts of interest.
407. Clause 217 permits the purchase of insurance and clause 218 creates an exception for qualifying third party indemnity provisions.
Clause 217: Provision of insurance
408. This clause permits a company to purchase and maintain insurance for its directors, or the directors of an associated company, against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to the company of which they are a director.
Clause 218: Qualifying third party indemnity provision
409. This clause permits (but does not require) companies to indemnify directors in respect of proceedings brought by third parties (such as class actions in the US). It also permits (but does not require) companies to indemnify directors in respect of applications for relief from liability made under clause 804 (general power of the court to grant relief in case of honest and reasonable conduct) or under section 144(3) or (4) of the 1985 Act (power of court to grant relief in case of acquisition of shares by innocent nominee).
410. The indemnity may cover liability incurred by the director to any person other than the company or an associated company. This may include both legal costs and the financial costs of an adverse judgement. But the indemnity must not cover liabilities to the company or to any associated company (subsection (2)).
411. Another condition is that the indemnity must not cover criminal fines, penalties imposed by regulatory bodies (such as the Financial Services Authority), the defence costs of criminal proceedings where the director is found guilty, the defence costs of civil proceedings successfully brought against the director by the company or an associated company and the costs of unsuccessful applications by the director for relief (subsection (3)).
412. Subsections (4) and (5) explain when legal proceedings will be considered to have concluded for the purpose of the conditions imposed by subsection (3).
413. An indemnity that complies with these conditions is described as a qualifying third party indemnity provision.
Clause 219: Qualifying third party indemnity provision to be disclosed in directors' report
414. If a qualifying third party indemnity provision is in force for the benefit of one or more directors or was in force during the previous year, this must be disclosed by the company in the directors' report (as to the directors' report, see Chapter 5 of Part 15). Where the director is of one company but the qualifying third party indemnity provision is provided by an associated company, then it must be disclosed in the directors' reports of both companies. Companies which choose not to indemnify directors will not have to make any disclosure.
Clause 220: Copy of qualifying third party indemnity provision to be available for inspection
415. This clause requires a company to keep copies of all the qualifying third party indemnity provisions it has made for its own directors, and also copies of all those it has made for directors of associated companies.
416. Subsection (4) is a new provision. It requires all qualifying third party indemnity provisions to be retained and made available for inspection for a further year after they have expired or terminated. But the company is not required by this clause to retain copies of the indemnity provision thereafter.
417. Subsection (6) makes a failure to comply with the requirements of this clause a criminal offence. The maximum penalty that can be imposed on summary conviction is a fine not exceeding level 3 on the standard scale (currently £1,000) or in cases of continued contravention a daily default fine not exceeding one-tenth of that. In a change from the current position under section 309C of the 1985 Act, the company will no longer be liable under the criminal offence.
Clause 221: Right of member to inspect and request copy
418. This clause gives members a right to inspect without charge the copies of the qualifying third party indemnity provisions (or where they are not in writing, the
written memorandum of their terms) held by the company in accordance with clause 220.
419. This clause also creates a new right for members on payment of a fee to request a copy of the copy or memorandum held by the company. The fee will be set by regulations made under clause 788.
Ratification of acts giving rise to liability
Clause 222: Ratification of acts of directors
420. This clause preserves the current law on ratification of acts of directors, but with one significant change. Any decision by a company to ratify conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company must be taken by the members, and without reliance on the votes in favour by the director or any connected person. Clause 235 defines what is meant by a person being connected with a director. For the purposes of this clause it may also include fellow directors (clause 222(5)(d)).
421. If the ratification decision is taken by way of a written resolution (see Chapter 2 of Part 13) the director and his connected persons may not take part in the written resolution procedure (subsection (3)). This means that the company does not need to send them a copy of the written resolution, and they are not counted when determining the number of votes required for the written resolution to be passed.
422. If the ratification decision is taken at a meeting, those members whose votes are to be disregarded may still attend the meeting, take part in the meeting and count towards the quorum for the meeting (if their membership gives them the right to do so).
423. Subsection (6) makes clear that nothing in this clause changes the law on unanimous consent, so the restrictions imposed by this clause as to who may vote on a ratification resolution will not apply when every member votes (informally or otherwise) in favour of the resolution. The subsection also makes clear that nothing in this clause removes any powers of the directors that they may have to manage the affairs of the company.
424. Subsection (7) explains that the requirements imposed by this clause are in addition to any other limitations or restrictions imposed by the law as to what may or may not be ratified and when.
425. Under the 1985 Act (and previous Companies Acts), the usual residential address of every director must be entered on the public record held by:
Access to the public record held by the registrar is made in a variety of ways, including daily bulk downloading by some subscribers. There is also a public right to inspect companies' registers of directors.
426. There is an exception for directors at serious risk of violence or intimidation, e.g. from political activists and terrorists. Under sections 723B - 723E of the 1985 Act, introduced by the Criminal Justice and Police Act 2001, they may apply for a "confidentiality order". A director with a confidentiality order provides a single service address in addition to his usual residential address. The service address is entered on the public record; the usual residential address is kept on a secure register to which access is restricted to specified enforcement authorities. The historic record is not affected by the confidentiality order. There are some 5 million directors of whom about 5,000 (about 1%) have a confidentiality order.
427. The CLR considered it essential that directors' residential addresses be filed with the central register, so that enforcement and regulatory bodies as well as liquidators and, in some circumstances, creditors and shareholders can discover the individual's residential address. However they were concerned that unrestricted public access to directors' residential addresses had been abused. They considered that there should not be any discretion as to whether particular addresses should or should not be placed on the public record. Therefore, while welcoming the introduction of the confidentiality order regime, they recommended all directors be given the option of:
428. This Chapter of the Bill, together with the provisions on the register of directors' residential addresses in Chapter 1 of this Part, is based on this recommendation. These provisions replace the confidentiality order regime.
|© Parliamentary copyright 2006||Prepared: 26 May 2006|