|Company Law Reform Bill [HL] - continued||House of Commons|
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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.
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.
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:
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:
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).
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.
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:
This part of the Bill is concerned with the third of these types of action.
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.
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.
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.
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:
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:
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:
480. The clause provides that, in these circumstances, another member may apply to the court to continue the claim as a derivative action.
|© Parliamentary copyright 2006||Prepared: 26 May 2006|