Clause 223: Protected information

429.     This clause sets out the information about directors' usual residential addresses, recorded under Chapter 1 of this Part, that will be protected under the new provisions.

Clause 224: Protected information: restriction on use or disclosure by company

430.     This clause provides for the protection that a company must give to the information covered by clause 223. It prohibits the company from using or disclosing an individual director's home address without his consent except for communicating with him, or to comply with an obligation to send information to the registrar or when required by a court.

Clause 225: Protected information: restriction on use or disclosure by the registrar

431.     This clause provides for protection by the registrar of information that is covered by clause 223. The registrar need only protect information where it is submitted on a form where directors' usual residential addresses are required and entered in the appropriate place. The registrar is not obliged to check all documents submitted to her to ensure that an address has not been inadvertently disclosed. The protection is not retrospective: it does not apply to information on the public record when these provisions come into force. The Bill makes separate provision for removal of addresses from the register in circumstances specified by regulations.

Clause 226: Permitted use or disclosure by the registrar

432.     This clause provides for certain kinds of permitted use or disclosure of protected information, ie directors' home addresses and whether a service address is a home address. Subsection (1) provides that the registrar may use the protected information for communicating with the director in question. Subsection (2) provides that the registrar may disclose protected information to a public authority or credit reference agency (the definition of the latter is drawn from the Consumer Credit Act 1974) but this should be read with subsection (3). Subsection (3) confers power on the Secretary to make regulations specifying conditions that must be met before the registrar may disclose protected information. The regulations may also provide for fees to be paid by the authority or agency seeking the address.

Clause 227: Disclosure under court order

433.     This clause provides for two circumstances in which the court may require the company to disclose protected information. The first circumstance is that the service address is not effective; the second is that the home address is needed for the enforcement of an order or decree of the court. If the company cannot provide the address, the court may require the registrar to reveal it. Subsection (3) provides that

the application for the order may be made not only by a liquidator, creditor or member of the company but also by anyone with sufficient interest.

Clause 228: Circumstances in which registrar may put address on the public record.

434.     This clause provides that if a service address is not effective, then the home address can be put on the public record. It provides for the registrar to send a warning notice, with a specified period for representations before the intended revocation, both to the director and to every company of which he is a director. The registrar must take account of any representations made within the specified period in deciding whether to proceed as provided by the next clause.

Clause 229: Putting the address on the public record

435.     This clause provides that, if the registrar is putting a director's home address on the public record under the previous clause, then the registrar updates the public record as if she had been notified that the service address is the director's home address. She must also notify both the director and every company of which he/she is a director. The companies must each put the director's home address on its register of directors as his/her service address. And for the next 5 years, the director may not register a service address other than his usual residential address.

CHAPTER 9: SUPPLEMENTARY PROVISIONS

Clause 230: Power to make provision for employees on cessation or transfer of business

436.     This clause confers a power on the directors to make provision for the benefit of employees (including former employees) of the company or its subsidiaries on the cessation or transfer of the whole or part of the undertaking of the company or the subsidiary (subsection (1)).

437.     The directors may exercise this power, even if it will not promote the success of the company. The directors' general duty under clause 158 to act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole, does not apply when the directors exercise this power to make provision for employees (subsection (2)).

438.     There are a number of conditions to the exercise of this power. It must be authorised by a resolution of the members or, if the articles of the company allow it, by the board of directors. The company's articles may also impose further conditions on its use (subsection (7)).

439.     Any payments made by the directors using the power conferred by this clause must be made before the commencement of the winding up of the company and can only be made out of profits available for dividend. Section 187 of the Insolvency Act 1986 confers power to make provision for employees once the company has commenced winding up.

440.     This clause replaces section 719 of the 1985 Act. In a change from that section, the directors can no longer use the power conferred by this clause to make payments to themselves or to former directors or to shadow directors, unless the payments are authorised by the members. The CLR recommended that directors should be prevented from abusing the power by making excessive payments to themselves.

Records of meetings of directors

Clause 231: Minutes of directors' meetings

441.     This clause, together with clause 232, replaces the provisions of section 382 of the 1985 Act relating to records of meetings of directors. The requirements of section 382 of the 1985 Act relating to records of meetings of managers have not been retained. This clause requires a company to record minutes of all meetings of its directors.

442.     Subsection (2) is new. The minutes must be kept for at least ten years.

443.     Failure to make and keep minutes as required by this clause is a criminal offence, applying to every officer of the company who is in default. In a change from section 382 of the 1985 Act, liability for the offence will no longer fall on the company.

444.     Part 31 of the Bill makes provision as to the form in which company records (including minutes) may be kept and imposes a duty to take precautions against falsification.

Clause 232: Minutes as evidence

445.     This clause makes provision in respect of the evidential value of the minutes of directors' meetings.

Meaning of "director" and "shadow director"

Clause 233: "Director"

446.     This clause restates the definition of "director" in section 741 of the 1985 Act.

Clause 234: "Shadow director"

447.     This clause restates the definition of "shadow director" in section 741 of the 1985 Act.

Other definitions

Clause 235: Persons connected with a director

448.     This clause sets out the definition of "connected person" which is used in many of the clauses in this Part in relation to the regulation of directors. The persons who are "connected" for this purpose with a director include:

• certain family members (see clause 236);

• certain companies with which the director is connected (see clause 237);

• trustees of a trust under which the director or a relative mentioned in clause 236 or a company with which the director is connected is a beneficiary (but not if the trust exists for the purposes of an employees' share scheme as defined in section 743 of the 1985 Act or a pension scheme);

• certain partners; and

• certain firms with legal personality (such as a Scottish firm in which the director is a partner).

This clause, together with clauses 236 to 238, replaces section 346 of the 1985 Act.

Clause 236: Members of a director's family

449.     This clause sets out those members of a director's family who fall within the definition of persons connected with the director. The list includes all those family members currently falling within the definition of connected person in section 346 of the 1985 Act, and in addition it covers:

• the director's parents;

• children or step-children of the director who are over 18 years old (those under 18 were already included under section 346 of the 1985 Act);

• persons with whom the director lives as partner in an enduring family relationship; and

• children or step-children of the director's unmarried partner if they live with the director and are under 18 years of age.

This implements the Law Commissions' recommendation that the definition of connected person be extended so as to include cohabitants, infant children of the cohabitant if they live with the director, adult children of the director and the director's parents. The recommendation that the definition be extended to siblings has not been implemented.

Clause 237: Director "connected with" a body corporate

450.     This clause determines whether a company or other body corporate is a person connected with a director. Broadly speaking, the director, together with any other person connected with him, must be interested in 20% of the equity share capital, or control (directly or indirectly through another body corporate controlled by them) more than 20% of the voting power exercisable at any general meeting.

451.     Schedule 1 contains the rules for determining whether a person is "interested in shares" for this purpose.

Clause 238: Director "controlling" a body corporate

452.     This clause defines the circumstances in which a director is deemed to control a body corporate for the purposes of clause 237. These circumstances involve two cumulative hurdles. First, the director or any other person connected with him must be interested in the equity share capital or be entitled to control some part of the voting power exercisable at any general meeting. Secondly, the director, fellow directors and other persons connected with him must be interested in more than 50% of the equity share capital or be entitled to control more than 50% of the voting power exercisable at any general meeting.

453.     Schedule 1 contains the rules for determining whether a person is "interested in shares" for this purpose.

Clause 239: Associated bodies corporate

454.     This clause explains what is meant by references in this Part to associated bodies corporate and associated companies. A holding company is associated with all its subsidiaries, and a subsidiary is associated with its holding company and all the other subsidiaries of its holding company.

Clause 240: References to company's constitution

455.     This clause makes provision as to the meaning of references to a company's constitution in this Part.

456.     The clause is relevant to a number of provisions in this Part, including the duty to act within powers (clause 157) and the duty to exercise independent judgment (clause 159).

General

Clause 241: Power to increase financial limits

457.     This clause deals with the power of the Secretary of State to increase financial limits in this Part of the Bill. All the financial limits appear in Chapter 4 (provisions regulating transactions with directors requiring approval of members). This clause restates section 345 of the 1985 Act.

Clause 242: Transactions under foreign law

458.     This clause makes clear that the rules under this Part of the Bill apply whether or not the proper law governing a transaction or arrangement is the law of a part of the UK.

459.     This provision is necessary to prevent parties seeking to avoid the application of the rules relating to approval of long-term service contracts, substantial property transactions and loans and similar transactions by choosing a foreign law. This clause restates section 347 of the 1985 Act.

PART 11: DERIVATIVE CLAIMS AND PROCEEDINGS BY MEMBERS

460.     Clause 156 (Scope and nature of general duties) provides that directors' general duties are owed to the company rather than to individual members (or third parties such as employees or pressure groups). It follows that, as now, only the company can enforce them. There are three main ways in which the company can take legal action against a director (or, more usually, a former director) for breach of duty:

• if the board of directors decides to commence proceedings;

• if the liquidator or administrator following the commencement of a formal insolvency procedure such as liquidation or administration decides to commence proceedings;

• through a derivative claim or action brought by one or more members to enforce a right which is vested not in himself but in the company.

This part of the Bill is concerned with the third of these types of action.

EXISTING LAW

England and Wales or Northern Ireland

461.     In England and Wales, it is possible as a matter of common law for a member to bring an action, in certain circumstances, on behalf of the company of which he is a member. This is known as a derivative claim. As noted above, a member may bring such an action to enforce liability for a breach by one of the directors of his duties to the company.

462.     The law relating to the ability of a member to bring proceedings on behalf of the company is not written down in statute. The general principle - commonly known as the rule in Foss v Harbottle - is that it is for the company itself to bring proceedings where a wrong has been done to the company. However, where there has been conduct amounting to a "fraud on the minority", an exception may be made to the rule, so that a minority shareholder may bring an action to enforce the company's rights (for example, where there has been an expropriation of company property or dishonest behaviour by a director, and the company is improperly prevented from bringing proceedings against the director by the majority shareholders, perhaps because the wrongdoing director controls the majority of votes).

463.     Under the current law, if a wrong has been effectively ratified by the company, this will be a complete bar to a derivative claim. In addition, if a wrong is capable of being ratified, then even if there has been no formal ratification, it may not be possible for a minority shareholder to bring a derivative claim.

464.     The law in Northern Ireland in this area is the same as that in England and Wales.

Scotland

465.     Under Scots law, the member's right to raise an action is conferred by substantive law. Accordingly, a member has title as a matter of substantive law to raise proceedings in respect of a director's breach of duty to obtain a remedy for the company. The action is raised in the name of the member but the remedy is obtained for the company and the rights which the member can enforce against a director or third party are those of the company.

466.     The member's right arises where the action complained of is fraudulent or ultra vires and so cannot be validated by a majority of the members of the company. This remedy is not available if the majority of members acting in good faith have validated or may validate the act complained of.

467.     Two rules of substantive law apply to actions brought by the member to protect the company's interests (as well as to actions brought to protect the shareholder's personal interests such as enforcement of rights in the articles of association). First, the directors of a company owe duties to the company and not to the members. Second, the court will not interfere in matters of internal management which may be sanctioned by a majority of the members. The effect of these rules is similar to the first two legs of the rule in Foss v Harbottle.

CHAPTER 1: DERIVATIVE CLAIMS IN ENGLAND AND WALES OR NORTHERN IRELAND

468.     The clauses in this Part do not formulate a substantive rule to replace the rule in Foss v Harbottle, but instead reflect the recommendation of the Law Commission that there should be a "new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder can pursue an action" (Shareholder Remedies, paragraph 6.15). In line with the recommendations of the Law Commission, the derivative claim will expressly be available for breach of the duty to exercise reasonable care, skill and diligence, even if the director has not benefited personally, and it will not be necessary for the applicant to show that the wrongdoing directors control the majority of the company's shares.

469.     The clauses in Chapter 1 of this Part introduce a two-stage procedure for permission to continue a derivative claim. At the first stage the applicant will be required to make a prima facie case for permission to continue a derivative claim and the court will be required to consider the issue on the basis of the evidence filed by the applicant only, without requiring evidence from the defendant. The courts must dismiss the application if the applicant cannot establish a prima facie case. At the second stage - but before the substantive action begins - the court may require evidence to be provided by the company. The clauses set out a list of the matters which the court must take into account in considering whether to give permission and the circumstances in which the court is bound to refuse permission.

470.     The clauses will be supplemented by amended Civil Procedure Rules.

Clause 243: Derivative claims

471.     This clause sets out the key aspects of a derivative claim.

• ???Subsection (1) defines what is meant by a derivative claim. There are three elements to this: the action is brought by a member of the company; the cause of action is vested in the company; and relief is sought on the company's behalf. (A "member" is defined in clause 111. Subsection (5) provides that references to a member in this Chapter include a person who is not a member but to whom shares in the company have been transferred or transmitted by operation of law, for example where a Trustee in Bankruptcy or Personal Representative of a deceased member's estate acquires an interest in a share as a result of the bankruptcy or death of a member).

• ???Subsection (2) provides that the claim may only be brought either under this Chapter or in pursuance of an order of the court in proceedings under section 459 of the 1985 Act.

• ???Subsection (3) provides that a derivative claim "may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company". As such, a derivative claim may be brought in respect of an alleged breach of any of the general duties of directors in Chapter 2 of Part 10, including the duty to exercise reasonable care, skill and diligence (clause 160).

• ???Subsection (3) also provides that the cause of action may be against the director or against a third party, or both. Derivative claims against third parties would be permitted only in very narrow circumstances, where the damage suffered by the company arose from an act involving a breach of duty etc on the part of the director (e.g. for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust).

• ???Subsection (4) provides that a derivative claim may be brought by a member in respect of wrongs committed prior to his becoming a member. This reflects the fact that the rights being enforced are those of the company rather than those of the member and is the position at common law.

• Under subsection (5), the reference to a director in this Chapter includes a former director; and a shadow director is treated as a director.

Clause 244: Application for permission to continue derivative claim

472.     This clause provides that, once proceedings have been brought, the member is required to apply to the court for permission to continue the claim. This reflects the current procedure in England and Wales under the Civil Procedure Rules. The applicant is required to establish a prima facie case for the grant of permission, and the court will consider the issue on the basis of his evidence alone without requiring evidence to be filed by the defendant. The court must dismiss the application at this stage if what is filed does not show a prima facie case, and it may make any consequential order that it considers appropriate (for example, a costs order or a civil restraint order against the applicant). If the application is not dismissed, the court may direct the company to provide evidence and, on hearing the application, may grant permission, refuse permission and dismiss the claim, or adjourn the proceedings and give such directions as it thinks fit. This will enable the courts to dismiss unmeritorious claims at an early stage without involving the defendants or the company.

Clause 245: Application for permission to continue claim as a derivative claim

473.     This clause addresses the possibility that, where a company has brought a claim and the cause of action on which the claim is based could be pursued by a member as a derivative action:

• the manner in which the company commenced or continued the claim may amount to an abuse of process (e.g. the company brought the claim with a view to preventing a member bringing a derivative claim);

• the company may fail to prosecute the claim diligently; and

• it may be appropriate for a member to continue the claim as a derivative claim;

• the clause provides that, in these circumstances, a member may apply to the court to continue the claim as a derivative action.

Clause 246: Whether permission to be given

474.     This clause sets out the criteria which must be taken into account by the court in considering whether to give permission to continue a derivative claim.

475.     Subsection (2) provides that the court must refuse leave to continue a derivative claim if it is satisfied that:

a)     a person acting in accordance with the general duty of directors to promote the success of the company (clause 158) would not seek to continue the claim; or

b)     the act or omission giving rise to the cause of action has been authorised or ratified by the company. (Clause 166(4) preserves any rule of law enabling the company to give authority for anything that would otherwise be a breach of duty. Clause 222 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.)

476.     Subsection (3) sets out the criteria which the court must, in particular, take into account in considering whether or not to grant permission for the derivative claim to be continued.

477.     Subsection (4) provides that, in considering whether to give permission, the court must have particular regard to any evidence before it as to the views of independent members of the company i.e. members who have no personal interest, direct or indirect in the matter.

478.     Subsection (5) confers on the Secretary of State a power to make regulations with regard to the criteria to which the court must have regard in determining whether to grant leave to continue a derivative claim and where leave of the court must be refused. Subsection (6) provides that, before making any such regulations, the Secretary of State must consult with such persons as he considers appropriate. The power reflects a recommendation by the Law Commission in its 1997 report on shareholder remedies in respect of analogous shareholder actions in Scotland. Under subsection (7), the regulations will be subject to the affirmative resolution procedure.

Clause 247: Application for permission to continue derivative claim brought by another member

479.     This clause addresses the possibility that, where the court has already decided that there is an appropriate case for a derivative claim and a member has commenced or continued a claim:

• the manner in which the member commenced or continued the claim may amount to an abuse of the court (e.g. the member brought the claim with a view to preventing another member from bringing the claim);

• the member may fail to prosecute the claim diligently;

• it may be appropriate for another member to continue the claim (e.g. because the member who brought the claim has become very ill).

480.     The clause provides that, in these circumstances, another member may apply to the court to continue the claim as a derivative action.