Company Law Reform Bill [HL] (79-85)

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL] (79-85)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 2 — General duties of directors
79

173
Duty to promote the success of the company
(1)
A director of a company must act in the way he considers, in good faith, would
be most likely to promote the success of the company for the benefit of its
members as a whole, and in doing so have regard (amongst other matters) to—
(a)
the likely consequences of any decision in the long term,
5
(b)
the interests of the company’s employees,
(c)
the need to foster the company’s business relationships with suppliers,
customers and others,
(d)
the impact of the company’s operations on the community and the
environment,
10
(e)
the desirability of the company maintaining a reputation for high
standards of business conduct, and
(f)
the need to act fairly as between members of the company.
(2)
Where or to the extent that the purposes of the company consist of or include
purposes other than the benefit of its members, subsection (1) has effect as if
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the reference to promoting the success of the company for the benefit of its
members were to achieving those purposes.
(3)
The duty imposed by this section has effect subject to any enactment or rule of
law requiring directors, in certain circumstances, to consider or act in the
interests of creditors of the company.
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174
Duty to exercise independent judgment
(1)
A director of a company must exercise independent judgment.
(2)
This duty is not infringed by his acting—
(a)
in accordance with an agreement duly entered into by the company
that restricts the future exercise of discretion by its directors, or
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(b)
in a way authorised by the company’s constitution.
175
Duty to exercise reasonable care, skill and diligence
(1)
A director of a company must exercise reasonable care, skill and diligence.
(2)
This means the care, skill and diligence that would be exercised by a
reasonably diligent person with—
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(a)
the general knowledge, skill and experience that may reasonably be
expected of a person carrying out the functions carried out by the
director in relation to the company, and
(b)
the general knowledge, skill and experience that the director has.
176
Duty to avoid conflicts of interest
35
(1)
A director of a company must avoid a situation in which he has, or can have, a
direct or indirect interest that conflicts, or possibly may conflict, with the
interests of the company.
(2)
This applies in particular to the exploitation of any property, information or
opportunity (and it is immaterial whether the company could take advantage
40
of the property, information or opportunity).

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 2 — General duties of directors
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(3)
This duty does not apply to a conflict of interest arising in relation to a
transaction or arrangement with the company.
(4)
This duty is not infringed—
(a)
if the situation cannot reasonably be regarded as likely to give rise to a
conflict of interest; or
5
(b)
if the matter has been authorised by the directors.
(5)
Authorisation may be given by the directors—
(a)
where the company is a private company and nothing in the company’s
constitution invalidates such authorisation, by the matter being
proposed to and authorised by the directors; or
10
(b)
where the company is a public company and its constitution includes
provision enabling the directors to authorise the matter, by the matter
being proposed to and authorised by them in accordance with the
constitution.
(6)
The authorisation is effective only if—
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(a)
any requirement as to the quorum at the meeting at which the matter is
considered is met without counting the director in question or any
other interested director, and
(b)
the matter was agreed to without their voting or would have been
agreed to if their votes had not been counted.
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(7)
Any reference in this section to a conflict of interest includes a conflict of
interest and duty and a conflict of duties.
177
Duty not to accept benefits from third parties
(1)
A director of a company must not accept a benefit from a third party conferred
by reason of—
25
(a)
his being a director, or
(b)
his doing (or not doing) anything as director.
(2)
A “third party” means a person other than the company, an associated body
corporate or a person acting on behalf of the company or an associated body
corporate.
30
(3)
Benefits received by a director from a person by whom his services (as a
director or otherwise) are provided to the company are not regarded as
conferred by a third party.
(4)
This duty is not infringed if the acceptance of the benefit cannot reasonably be
regarded as likely to give rise to a conflict of interest.
35
(5)
Any reference in this section to a conflict of interest includes a conflict of
interest and duty and a conflict of duties.
178
Duty to declare interest in proposed transaction or arrangement
(1)
If a director of a company is in any way, directly or indirectly, interested in a
proposed transaction or arrangement with the company, he must declare the
40
nature and extent of that interest to the other directors.
(2)
The declaration may (but need not) be made—
(a)
at a meeting of the directors, or

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 2 — General duties of directors
81

(b)
by notice to the directors in accordance with—
(i)
section 185 (notice in writing), or
(ii)
section 186 (general notice).
(3)
If a declaration of interest under this section proves to be, or becomes,
inaccurate or incomplete, a further declaration must be made.
5
(4)
Any declaration required by this section must be made before the company
enters into the transaction or arrangement.
(5)
This section does not require a declaration of an interest of which the director
is not aware or where the director is not aware of the transaction or
arrangement in question.
10

For this purpose a director is treated as being aware of matters of which he
ought reasonably to be aware.
(6)
A director need not declare an interest—
(a)
if it cannot reasonably be regarded as likely to give rise to a conflict of
interest;
15
(b)
if, or to the extent that, the other directors are already aware of it (and
for this purpose the other directors are treated as aware of anything of
which they ought reasonably to be aware); or
(c)
if, or to the extent that, it concerns terms of his service contract that have
been or are to be considered—
20
(i)
by a meeting of the directors, or
(ii)
by a committee of the directors appointed for the purpose under
the company’s constitution.
Supplementary provisions
179
Civil consequences of breach of general duties
25
(1)
The consequences of breach (or threatened breach) of sections 172 to 178 are the
same as would apply if the corresponding common law rule or equitable
principle applied.
(2)
The duties in those sections (with the exception of section 175 (duty to exercise
reasonable care, skill and diligence)) are, accordingly, enforceable in the same
30
way as any other fiduciary duty owed to a company by its directors.
180
Cases within more than one of the general duties

Except as otherwise provided, more than one of the general duties may apply
in any given case.
181
Consent, approval or authorisation by members
35
(1)
In a case where—
(a)
section 176 (duty to avoid conflicts of interest) is complied with by
authorisation by the directors, or
(b)
section 178 (duty to declare interest in proposed transaction or
arrangement) is complied with,
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Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 2 — General duties of directors
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the transaction or arrangement is not liable to be set aside by virtue of any
common law rule or equitable principle requiring the consent or approval of
the members of the company.

This is without prejudice to any enactment, or provision of the company’s
constitution, requiring such consent or approval.
5
(2)
The application of the general duties is not affected by the fact that the case also
falls within Chapter 4 (transactions requiring approval of members), except
that where that Chapter applies and—
(a)
approval is given under that Chapter, or
(b)
the matter is one as to which it is provided that approval is not needed,
10

it is not necessary also to comply with section 176 (duty to avoid conflicts of
interest) or section 177 (duty not to accept benefits from third parties).
(3)
Compliance with the general duties does not remove the need for approval
under any applicable provision of Chapter 4 (transactions requiring approval
of members).
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(4)
The general duties—
(a)
have effect subject to any rule of law enabling the company to give
authority, specifically or generally, for anything to be done (or omitted)
by the directors, or any of them, that would otherwise be a breach of
duty, and
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(b)
where the company’s articles contain provisions for dealing with
conflicts of interest, are not infringed by anything done (or omitted) by
the directors, or any of them, in accordance with those provisions.
(5)
Otherwise, the general duties have effect (except as otherwise provided or the
context otherwise requires) notwithstanding any enactment or rule of law.
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182
Modification of provisions in relation to charitable companies
(1)
In their application to a company that is a charity, the provisions of this
Chapter have effect subject to this section.
(2)
Section 176 (duty to avoid conflicts of interest) has effect as if—
(a)
for subsection (3) (which disapplies the duty to avoid conflicts of
30
interest in the case of a transaction or arrangement with the company)
there were substituted—
“(3)
This duty does not apply to a conflict of interest arising in
relation to a transaction or arrangement with the company if or
to the extent that the company’s articles allow that duty to be so
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disapplied, which they may do only in relation to descriptions
of transaction or arrangement specified in the company’s
articles.”;
(b)
for subsection (5) (which specifies how directors of a company may
give authority under that section for a transaction or arrangement)
40
there were substituted—
“(5)
Authorisation may be given by the directors where the
company’s constitution includes provision enabling them to
authorise the matter, by the matter being proposed to and
authorised by them in accordance with the constitution.”.
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Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 3 — Declaration of interest in existing transaction or arrangement
83

(3)
Section 181(2)(b) (which disapplies certain duties under this Chapter in
relation to cases excepted from requirement to obtain approval by members
under Chapter 4) applies only if or to the extent that the company’s articles
allow those duties to be so disapplied, which they may do only in relation to
descriptions of transaction or arrangement specified in the company’s articles.
5
(4)
After section 26(5) of the Charities Act 1993 (c. 10) (power of Charity
Commission to authorise dealings with charity property etc) insert—
“(5A)
In the case of a charity that is a company, an order under this section
may authorise an act notwithstanding that it involves the breach of a
duty imposed on a director of the company under Chapter 2 of Part 10
10
of the Company Law Reform Act 2006 (general duties of directors).”.
(5)
This section does not extend to Scotland.
Chapter 3
Declaration of interest in existing transaction or arrangement
183
Declaration of interest in existing transaction or arrangement
15
(1)
Where a director of a company is in any way, directly or indirectly, interested
in a transaction or arrangement that has been entered into by the company, he
must declare the nature and extent of the interest to the other directors in
accordance with this section.

This section does not apply if or to the extent that the interest has been declared
20
under section 178 (duty to declare interest in proposed transaction or
arrangement).
(2)
The declaration must be made—
(a)
at a meeting of the directors, or
(b)
by notice in writing (see section 185), or
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(c)
by general notice (see section 186).
(3)
If a declaration of interest under this section proves to be, or becomes,
inaccurate or incomplete, a further declaration must be made.
(4)
Any declaration required by this section must be made as soon as is reasonably
practicable.
30

Failure to comply with this requirement does not affect the underlying duty to
make the declaration.
(5)
This section does not require a declaration of an interest of which the director
is not aware or where the director is not aware of the transaction or
arrangement in question.
35

For this purpose a director is treated as being aware of matters of which he
ought reasonably to be aware.
(6)
A director need not declare an interest under this section—
(a)
if it cannot reasonably be regarded as likely to give rise to a conflict of
interest;
40
(b)
if, or to the extent that, the other directors are already aware of it (and
for this purpose the other directors are treated as aware of anything of
which they ought reasonably to be aware); or

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 3 — Declaration of interest in existing transaction or arrangement
84

(c)
if, or to the extent that, it concerns terms of his service contract that have
been or are to be considered—
(i)
by a meeting of the directors, or
(ii)
by a committee of the directors appointed for the purpose under
the company’s constitution.
5
184
Offence of failure to declare interest
(1)
A director who fails to comply with the requirements of section 183
(declaration of interest in existing transaction or arrangement) commits an
offence.
(2)
A person guilty of an offence under this section is liable—
10
(a)
on conviction on indictment, to a fine;
(b)
on summary conviction, to a fine not exceeding the statutory
maximum.
185
Declaration made by notice in writing
(1)
This section applies to a declaration of interest made by notice in writing.
15
(2)
The director must send the notice to the other directors.
(3)
The notice may be sent in hard copy form or, if the recipient has agreed to
receive it in electronic form, in an agreed electronic form.
(4)
The notice may be sent—
(a)
by hand or by post, or
20
(b)
if the recipient has agreed to receive it by electronic means, by agreed
electronic means.
(5)
Where a director declares an interest by notice in writing in accordance with
this section—
(a)
the making of the declaration is deemed to form part of the proceedings
25
at the next meeting of the directors after the notice is given, and
(b)
the provisions of section 248 (minutes of meetings of directors) apply as
if the declaration had been made at that meeting.
186
General notice treated as sufficient declaration
(1)
General notice in accordance with this section is a sufficient declaration of
30
interest in relation to the matters to which it relates.
(2)
General notice is notice given to the directors of a company to the effect that the
director—
(a)
has an interest (as member, officer, employee or otherwise) in a
specified body corporate or firm and is to be regarded as interested in
35
any transaction or arrangement that may, after the date of the notice, be
made with that body corporate or firm, or
(b)
is connected with a specified person (other than a body corporate or
firm) and is to be regarded as interested in any transaction or
arrangement that may, after the date of the notice, be made with that
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person.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 10 — A company’s directors
Chapter 4 — Transactions with directors requiring approval of members
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(3)
The notice must state the nature and extent of the director’s interest in the body
corporate or firm or, as the case may be, the nature of his connection with the
person.
(4)
General notice is not effective unless—
(a)
it is given at a meeting of the directors, or
5
(b)
the director takes reasonable steps to secure that it is brought up and
read at the next meeting of the directors after it is given.
187
Declaration of interest in case of company with sole director
(1)
Where a declaration of interest under section 183 (duty to declare interest in
existing transaction or arrangement) is required of a sole director of a company
10
that is required to have more than one director—
(a)
the declaration must be recorded in writing,
(b)
the making of the declaration is deemed to form part of the proceedings
at the next meeting of the directors after the notice is given, and
(c)
the provisions of section 248 (minutes of meetings of directors) apply as
15
if the declaration had been made at that meeting.
(2)
Nothing in this section affects the operation of section 231 (contract with sole
member who is also a director: terms to be set out in writing or recorded in
minutes).
188
Declaration of interest in existing transaction by shadow director
20
(1)
The provisions of this Chapter relating to the duty under section 183 (duty to
declare interest in existing transaction or arrangement) apply to a shadow
director as to a director, but with the following adaptations.
(2)
Subsection (2)(a) of that section (declaration at meeting of directors) does not
apply.
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(3)
In section 186 (general notice treated as sufficient declaration), subsection (4)
(notice to be given at or brought up and read at meeting of directors) does not
apply.
(4)
General notice by a shadow director is not effective unless given by notice in
writing in accordance with section 185.
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Chapter 4
Transactions with directors requiring approval of members
Service contracts
189
Directors’ long-term service contracts: requirement of members’ approval
(1)
This section applies to provision under which the guaranteed term of a
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director’s employment—
(a)
with the company of which he is a director, or
(b)
where he is the director of a holding company, within the group
consisting of that company and its subsidiaries,

is, or may be, longer than two years.
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