Company Law Reform Bill [HL] (98-104)

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL] (98-104)

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
98

212
Loans etc: civil consequences of contravention
(1)
This section applies where a company enters into a transaction or arrangement
in contravention of section 198, 200 or 202 (requirement of members’ approval
for loans etc).
(2)
The transaction or arrangement is voidable at the instance of the company,
5
unless—
(a)
restitution of any money or other asset that was the subject-matter of
the transaction or arrangement is no longer possible,
(b)
the company has been indemnified for any loss or damage resulting
from the transaction or arrangement, or
10
(c)
rights acquired in good faith, for value and without actual notice of the
contravention by a person who is not a party to the transaction or
arrangement would be affected by the avoidance.
(3)
Whether or not the transaction or arrangement has been avoided, each of the
persons specified in subsection (4) is liable—
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(a)
to account to the company for any gain that he has made directly or
indirectly by the transaction or arrangement, and
(b)
(jointly and severally with any other person so liable under this section)
to indemnify the company for any loss or damage resulting from the
transaction or arrangement.
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(4)
The persons so liable are—
(a)
any director of the company or of its holding company with whom the
company entered into the transaction or arrangement in contravention
of section 198, 200 or 202,
(b)
any person with whom the company entered into the transaction or
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arrangement in contravention of any of those sections who is connected
with a director of the company or of its holding company,
(c)
the director of the company or of its holding company with whom any
such person is connected, and
(d)
any other director of the company who authorised the transaction or
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arrangement.
(5)
Subsections (3) and (4) are subject to the following two subsections.
(6)
In the case of a transaction or arrangement entered into by a company in
contravention of section 198, 200 or 202 with a person connected with a director
of the company or of its holding company, that director is not liable by virtue
35
of subsection (4)(c) if he shows that he took all reasonable steps to secure the
company’s compliance with the section concerned.
(7)
In any case—
(a)
a person so connected is not liable by virtue of subsection (4)(b), and
(b)
a director is not liable by virtue of subsection (4)(d),
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if he shows that, at the time the transaction or arrangement was entered into,
he did not know the relevant circumstances constituting the contravention.
(8)
Nothing in this section shall be read as excluding the operation of any other
enactment or rule of law by virtue of which the transaction or arrangement
may be called in question or any liability to the company may arise.
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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
99

213
Loans etc: effect of subsequent affirmation

Where a transaction or arrangement is entered into by a company in
contravention of section 198, 200 or 202 (requirement of members’ approval for
loans etc) but, within a reasonable period, it is affirmed—
(a)
in the case of a contravention of subsection (1) of that section, by
5
resolution of the members of the company, and
(b)
in the case of a contravention of subsection (2) of that section, by
resolution of the members of the holding company,

the transaction or arrangement may no longer be avoided under section 212.
Payments for loss of office
10
214
Payments for loss of office
(1)
In this Chapter a “payment for loss of office” means a payment made to a
director or past director of a company—
(a)
by way of compensation for loss of office as director of the company,
(b)
by way of compensation for loss, while director of the company or in
15
connection with his ceasing to be a director of it, of—
(i)
any other office or employment in connection with the
management of the affairs of the company, or
(ii)
any office (as director or otherwise) or employment in
connection with the management of the affairs of any
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subsidiary undertaking of the company,
(c)
as consideration for or in connection with his retirement from his office
as director of the company, or
(d)
as consideration for or in connection with his retirement, while director
of the company or in connection with his ceasing to be a director of it,
25
from—
(i)
any other office or employment in connection with the
management of the affairs of the company, or
(ii)
any office (as director or otherwise) or employment in
connection with the management of the affairs of any
30
subsidiary undertaking of the company.
(2)
The references to compensation and consideration include benefits otherwise
than in cash and references in this Chapter to payment have a corresponding
meaning.
(3)
For the purposes of sections 216 to 220 (payments requiring members’
35
approval)—
(a)
payment to a person connected with a director, or
(b)
payment to any person at the direction of, or for the benefit of, a
director or a person connected with him,

is treated as payment to the director.
40
(4)
References in those sections to payment by a person include payment by
another person at the direction of, or on behalf of, the person referred to.

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
100

215
Amounts taken to be payments for loss of office
(1)
This section applies where in connection with any such transfer as is
mentioned in section 217 or 218 (payment in connection with transfer of
undertaking, property or shares) a director of the company—
(a)
is to cease to hold office, or
5
(b)
is to cease to be the holder of—
(i)
any other office or employment in connection with the
management of the affairs of the company, or
(ii)
any office (as director or otherwise) or employment in
connection with the management of the affairs of any
10
subsidiary undertaking of the company.
(2)
If in connection with any such transfer—
(a)
the price to be paid to the director for any shares in the company held
by him is in excess of the price which could at the time have been
obtained by other holders of like shares, or
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(b)
any valuable consideration is given to the director by a person other
than the company,

the excess or, as the case may be, the money value of the consideration is taken
for the purposes of those sections to have been a payment for loss of office.
216
Payment by company: requirement of members’ approval
20
(1)
A company may not make a payment for loss of office to a director of the
company unless the payment has been approved by a resolution of the
members of the company.
(2)
A company may not make a payment for loss of office to a director of its
holding company unless the payment has been approved by a resolution of the
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members of each of those companies.
(3)
A resolution approving a payment to which this section applies must not be
passed unless a memorandum setting out particulars of the proposed payment
(including its amount) is made available to the members of the company whose
approval is sought—
30
(a)
in the case of a written resolution, by being sent or submitted to every
eligible member at or before the time at which the proposed resolution
is sent or submitted to him;
(b)
in the case of a resolution at a meeting, by being made available for
inspection by the members both—
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(i)
at the company’s registered office for not less than 15 days
ending with the date of the meeting, and
(ii)
at the meeting itself.
(4)
No approval is required under this section on the part of the members of—
(a)
a body corporate that is not—
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(i)
a company as defined in section 1 of this Act, or
(ii)
a body registered under the Companies Acts by virtue of
section 1006 (bodies not formed under Companies Acts but
authorised to register);
(b)
a body corporate that is a wholly-owned subsidiary of another body
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corporate.

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
101

217
Payment in connection with transfer of undertaking etc: requirement of
members’ approval
(1)
No payment for loss of office may be made by any person to a director of a
company in connection with the transfer of the whole or any part of the
undertaking or property of the company unless the payment has been
5
approved by a resolution of the members of the company.
(2)
No payment for loss of office may be made by any person to a director of a
company in connection with the transfer of the whole or any part of the
undertaking or property of a subsidiary of the company unless the payment
has been approved by a resolution of the members of each of the companies.
10
(3)
A resolution approving a payment to which this section applies must not be
passed unless a memorandum setting out particulars of the proposed payment
(including its amount) is made available to the members of the company whose
approval is sought—
(a)
in the case of a written resolution, by being sent or submitted to every
15
eligible member at or before the time at which the proposed resolution
is sent or submitted to him;
(b)
in the case of a resolution at a meeting, by being made available for
inspection by the members both—
(i)
at the company’s registered office for not less than 15 days
20
ending with the date of the meeting, and
(ii)
at the meeting itself.
(4)
No approval is required under this section on the part of the members of—
(a)
a body corporate that is not—
(i)
a company as defined in section 1 of this Act, or
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(ii)
a body registered under the Companies Acts by virtue of
section 1006 (bodies not formed under Companies Acts but
authorised to register);
(b)
a body corporate that is a wholly-owned subsidiary of another body
corporate.
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(5)
A payment made in pursuance of an arrangement—
(a)
entered into as part of the agreement for the transfer in question, or
within one year before or two years after that agreement, and
(b)
to which the company whose undertaking or property is transferred, or
any person to whom the transfer is made, is privy,
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is presumed, except in so far as the contrary is shown, to be a payment to which
this section applies.
218
Payment in connection with share transfer: requirement of members’
approval
(1)
No payment for loss of office may be made by any person to a director of a
40
company in connection with a transfer of shares in the company, or in a
subsidiary of the company, resulting from a takeover bid unless the payment
has been approved by a resolution of the relevant shareholders.
(2)
The relevant shareholders are the holders of the shares to which the bid relates
and any holders of shares of the same class as any of those shares.
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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
102

(3)
A resolution approving a payment to which this section applies must not be
passed unless a memorandum setting out particulars of the proposed payment
(including its amount) is made available to the members of the company whose
approval is sought—
(a)
in the case of a written resolution, by being sent or submitted to every
5
eligible member at or before the time at which the proposed resolution
is sent or submitted to him;
(b)
in the case of a resolution at a meeting, by being made available for
inspection by the members both—
(i)
at the company’s registered office for not less than 15 days
10
ending with the date of the meeting, and
(ii)
at the meeting itself.
(4)
Neither the person making the offer, nor any associate of his (as defined in
section 430E of the Companies Act 1985 (c. 6)), is entitled to vote on the
resolution, but—
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(a)
where the resolution is proposed as a written resolution, they are
entitled (if they would otherwise be so entitled) to be sent a copy of it,
and
(b)
at any meeting to consider the resolution they are entitled (if they
would otherwise be so entitled) to be given notice of the meeting, to
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attend and speak and if present (in person or by proxy) to count
towards the quorum.
(5)
If at a meeting to consider the resolution a quorum is not present, and after the
meeting has been adjourned to a later date a quorum is again not present, the
payment is (for the purposes of this section) deemed to have been approved.
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(6)
No approval is required under this section on the part of shareholders in—
(a)
a body corporate that is not—
(i)
a company as defined in section 1 of this Act, or
(ii)
a body registered under the Companies Acts by virtue of
section 1006 (bodies not formed under Companies Acts but
30
authorised to register);
(b)
a body corporate that is a wholly-owned subsidiary of another body
corporate.
(7)
A payment made in pursuance of an arrangement—
(a)
entered into as part of the agreement for the transfer in question, or
35
within one year before or two years after that agreement, and
(b)
to which the company whose shares are the subject of the bid, or any
person to whom the transfer is made, is privy,

is presumed, except in so far as the contrary is shown, to be a payment to which
this section applies.
40
219
Exception for payments in discharge of legal obligations etc
(1)
Approval is not required under section 216, 217 or 218 (payments requiring
members’ approval) for a payment made in good faith—
(a)
in discharge of an existing legal obligation (as defined below),
(b)
by way of damages for breach of such an obligation,
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(c)
by way of settlement or compromise of any claim arising in connection
with the termination of a person’s office or employment, or

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
103

(d)
by way of pension in respect of past services.
(2)
In relation to a payment within section 216 (payment by company) an existing
legal obligation means an obligation of the company, or any body corporate
associated with it, that was not entered into in connection with, or in
consequence of, the event giving rise to the payment for loss of office.
5
(3)
In relation to a payment within section 217 or 218 (payment in connection with
transfer of undertaking, property or shares) an existing legal obligation means
an obligation of the person making the payment that was not entered into for
the purposes of, in connection with or in consequence of, the transfer in
question.
10
(4)
In the case of a payment within both section 216 and section 217, or within both
section 216 and section 218, subsection (2) above applies and not subsection (3).
(5)
A payment part of which falls within subsection (1) above and part of which
does not is treated as if the parts were separate payments.
220
Exception for small payments
15
(1)
Approval is not required under section 216, 217 or 218 (payments requiring
members’ approval) if—
(a)
the payment in question is made by the company or any of its
subsidiaries, and
(b)
the amount or value of the payment, together with the amount or value
20
of any other relevant payments, does not exceed £200.
(2)
For this purpose “other relevant payments” are payments for loss of office in
relation to which the following conditions are met.
(3)
Where the payment in question is one to which section 216 (payment by
company) applies, the conditions are that the other payment was or is paid—
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(a)
by the company making the payment in question or any of its
subsidiaries,
(b)
to the director to whom that payment is made, and
(c)
in connection with the same event.
(4)
Where the payment in question is one to which section 217 or 218 applies
30
(payment in connection with transfer of undertaking, property or shares), the
conditions are that the other payment was (or is) paid in connection with the
same transfer—
(a)
to the director to whom the payment in question was made, and
(b)
by the company making the payment or any of its subsidiaries.
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221
Payments made without approval: civil consequences
(1)
If a payment is made in contravention of section 216 (payment by company)—
(a)
it is held by the recipient on trust for the company making the payment,
and
(b)
any director who authorised the payment is jointly and severally liable
40
to indemnify the company that made the payment for any loss resulting
from it.

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
104

(2)
If a payment is made in contravention of section 217 (payment in connection
with transfer of undertaking etc), it is held by the recipient on trust for the
company whose undertaking or property is or is proposed to be transferred.
(3)
If a payment is made in contravention of section 218 (payment in connection
with share transfer)—
5
(a)
it is held by the recipient on trust for persons who have sold their shares
as a result of the offer made, and
(b)
the expenses incurred by the recipient in distributing that sum amongst
those persons shall be borne by him and not retained out of that sum.
(4)
If a payment is in contravention of section 216 and section 217, subsection (2)
10
of this section applies rather than subsection (1).
(5)
If a payment is in contravention of section 216 and section 218, subsection (3)
of this section applies rather than subsection (1), unless the court directs
otherwise.
Supplementary
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222
Transactions requiring members’ approval: application of provisions to
shadow directors
(1)
For the purposes of—
(a)
sections 189 and 190 (directors’ service contracts),
(b)
sections 191 to 197 (property transactions),
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(c)
sections 198 to 213 (loans etc), and
(d)
sections 214 to 221 (payments for loss of office),

a shadow director is treated as a director.
(2)
Any reference in those provisions to loss of office as a director does not apply
in relation to loss of a person’s status as a shadow director.
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223
Transactions requiring members’ approval: nature of resolution required
(1)
The resolution of the members of a company required by any provision of this
Chapter is an ordinary resolution.
(2)
This is subject to anything in the company’s articles requiring a higher majority
(or unanimity).
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224
Approval by written resolution: accidental failure to send memorandum
(1)
Where—
(a)
approval under this Chapter is sought by written resolution, and
(b)
a memorandum is required under this Chapter to be sent or submitted
to every eligible member before the resolution is passed,
35

any accidental failure to send or submit the memorandum to one or more
members shall be disregarded for the purpose of determining whether the
requirement has been met.
(2)
Subsection (1) has effect subject to any provision of the company’s articles.