Companies Act 2006 - Directors Duties: Dealings With The Company
Friday, August 17, 2007
by
Catherine Feechan and David Gilchrist
Persons Connected To A Director
The definition of persons connected to a director is substantially widened. It is contained in sections 252 and 253 of the Act and is an exclusive list. A director is connected with all ‘members of the directors family’ as defined in section 225. This brings into the group:
- the director's spouse or civil partner;
- his children and step children of whatever age;
- persons with whom the director lives as a partner in an enduring family relationship unless they are his grandparents, siblings, nieces or nephews or aunts or uncles;
- children or step children of the person he is living with in the enduring family relationship if they live with the director and are under 18.
There is no definition of ‘as a partner’, ‘enduring’ or ‘family relationship’. These will be questions of fact and presumably interpreted on the basis of the natural usage of language.
A director is also connected to any person who is acting in his capacity as trustee of a trust for the benefit of the director and members of his family or the terms of which confer a power which may be exercised for the benefit of those persons, but not a trustee of an employee benefit trust or a pension trust.
He is also connected with any business partner of the director or business partner of any person connected to him by the above rules and to any firm with separate legal personality of which he is a partner or anyone connected with him is a partner.
The inclusion of adult children in the extended definition of connected person and a person the director is living with means that the director may well be connected with the business colleagues of their adult children and their partners.
A director is connected with a corporate body in which he and persons connected with him control 20% or more of the voting power, as opposed to 50% at present.
A person connected with a director does not include any person who is himself a director of the Company.
The importance of connected persons is that these categories are caught by the rules on loans to directors, substantial transactions with directors and compensation for loss of office requiring shareholder approval.
Directors need to be aware of the extended group of people with whom they are connected.
Loans To Directors
New provisions permitting loans to directors come into force on 1st October 2007 and are contained in sections197 to 214.
A private company will be permitted to make a loan to its director or a director of its holding company or to provide a guarantee or security to any person giving a loan to a director provided the transaction is approved by members or the company and, in cases where the director is a director of the holding company, members of the holding company. No approval is required on the part of members of a company which is a non-UK company.
A written memorandum setting out the nature of the transaction or arrangement, including the extent of the company’s liability and the amount and purpose of the loan, must be available to members before they give their approval at a meeting or by written resolution.
As currently, there are a number of exceptions when shareholder approval would not be required. These are:
- funding expenditure on company business – one of the current exceptions, this has been extended to cover amounts up to £50,000 (currently £20,000);
- funding expenditure defending proceedings against the director (which has been permitted since CAICE Act 2004);
- funding expenditure in connection with regulatory action against, or investigation of, the director – a new exemption;
- minor transactions – with an increase in the threshold for a small loan from £5,000 to £10,000;
- intra-group transaction – unchanged from the current exception;
- loans and quasi-loans made by money lending companies. The cap on the maximum amount permitted by this exception is removed (formerly £100,000) but the loan must still be of an amount not greater than would be reasonable to have offered to a person of the same financial standing and on no more favourable terms. There is a new concept of a ‘home loan’ to cover a loan to facilitate the purchase of a main residence, for which the tests of reasonableness and favourable terms do not apply.
The value of a transaction where the value cannot be ascertained is deemed to be more than £50,000, whereas currently it is £100,000.
There is no longer a criminal penalty for breach of the sections, but the transaction is voidable at the instance of the company (section 213), which would effectively mean it could be challenged by a liquidator. However if a loan is made without shareholder approval, but is subsequently affirmed within “a reasonable period” then it can no longer be avoided (section 214).
These provisions also apply to persons connected with a director.
Substantial Property Transactions With Directors
The provisions are contained in sections 190 to 196 of the Act replacing the regime in section 320 of the 1985 Act. They come into force on 1st October 2007.
The key change is that transactions may be entered into conditionally upon obtaining shareholder approval. Thus, there can be a legally binding, if conditional, agreement which the company can put to its members. Where the transaction requires the holding companies approval as well as the company’s, it can be conditional on the approval of all the companies whose approval is required.
The de minimis is also raised from £2000 to £5000.
Anything which a director is entitled to under his service contract or by way of compensation for loss of office is excluded from the application of the section. Nor is shareholder approval required where the transaction is entered into by the director with the administrator of the company (as the director does not have the same conflict of interest when the administrator is running the company).
The company has no liability for failing to obtain the approval (although the directors may do for breach of their duties). As currently, the transaction is voidable at the instance of the company, unless it is subsequently affirmed by the shareholders within a reasonable time.
It is important to remember that a substantial property transaction is one not only with a director but also with any of his connected persons.
Compensation For Loss Of Office
The provisions are contained in sections 215 to 222 of the 2006 Act and replace sections 312 to 316 of the 1985 Act. The provisions come into force on 1st October 2007.
It is still the case that some payments to directors for loss of office and payments in connection with the transfer of an undertaking or a takeover offer will require the approval of members. Payments to past directors are now also caught.
The definition of a payment for loss of office is wider in scope than in the 1985 Act. It includes payments for loss of employment in connection with the management of the company and not just loss of the office of director. It includes payments in connection with retirement and covers non cash benefits.
The existing exception to the requirement for shareholder approval where the payment is ‘bona fide' payment by way of damages for breach of contract or by way of pension in respect of past services (section 316(3) of teh 1985 Act), is replaced with an exception for ‘payment made in good faith which discharge a legal obligation, is by way of damages for the breach of such an obligation, by way of settlement of any claim in connection with termination of employment or by way of pension for past service.’ An ‘existing legal obligation’ means an obligation not arising from the loss of office, such as amounts paid for IP rights owned by a director personally.
There is a new de minimis of £2,000.
The section is, however, extended to cover payments to connected persons, of the director and to cover payments made to directors of the holding company of the company. Given the extended definition of connected persons care should be taken in relation to payments to members of directors families who may be employed in the business even if not directors.
It is important that all board members and office holders are made aware of these changes. Biggart Baillie LLP would be pleased to provide you with any further advice you require in relation to directors duties under the new Act, or on other aspects of the new legislation. If you are interested in any particular areas - please click here
The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.