Update on Implementation of Companies Act 2006

A number of provisions of the Companies Act 2006 (“CA 2006”) which come into force on 1 October 2008  are of immediate relevance for the directors (and owners) of private companies and their subsidiaries (if any).

A.  Directors Duties

Of key importance for directors companies is their new (from 1 October 2008) position in respect of certain statutory directors’ duties.  The following new directors’ duties take effect from 1 October 2008.

1. Duty to avoid conflicts of interest (section 175 CA 2006): “a situational conflict”

1.1 This rule prohibits a director from placing himself in a position where there is a conflict, or a possible conflict, between the duties he owes to the company and either his personal interests or other duties he owes to a third party unless he or she has the company’s consent. This applies in particular to the exploitation of property, information or opportunity regardless of whether or not the company itself could take advantage of the property, information or opportunity concerned.

1.2 This new duty is different from that which deals with the conflict of interest arising where a director is involved in a transaction or arrangement with the company (“a transactional conflict”) which is covered by section 177 of the Companies Act 2006 (see below).

1.3 Examples of situational conflicts are as follows.

* Where a director is also a director or a significant shareholder of a company (Company B) which is itself a significant (or the sole) shareholder in the director’s company (Company A).  The same is also likely to apply where a director of a subsidiary has his employment contract with the parent of the company of which he is a director (i.e. a “personal interest” resulting in “duties” to a third party).

* Where a director is associated with any advisor to his company or its group of companies such as auditors, tax advisors, bankers.

* Where a director is associated with a third party body which is a competitor or customer or supplier of  his company.

* Where a director is also a director of a body acting as corporate pensions trustee.

* Where a director is in a position where he (or a company of which he is a director or a material shareholder) could make a profit as a result of his directorship.

1.4 Recommended Action.

Although each company should take relevant advice for its own specific circumstances, it is likely that the following steps will be required where situational conflicts arise.

1.4.1 The shareholders in the company should pass a resolution authorising the directors of the company themselves to authorise as they see fit such situational conflicts as may arise under section 175 of the Companies Act 2006;

1.4.2 A board meeting of the company should then be held at which the quorum requirements are met without counting the interested director. The independent directors should then resolve to authorise each situational conflict (without counting any vote cast by the interested director or directors);

1.4.3 When the company has only one director the shareholders can authorise the situational conflict.

1.5  The duty to avoid a situational conflict of interest is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.  Given that there is as yet, of course, no case law to give further guidance as to the application of section 175, there is inevitably an element of vagueness as to what can not “reasonably be regarded as likely to give rise to a conflict of interest” and the safe procedure to be adopted would be as indicated above.

2. Duty to Declare Interest in any Proposed Transaction or Arrangement with the Director’s Company (Section 177 CA 2006)

2.1 Section 177 replaces the equitable role (in practice, modified by the Articles of most companies) that directors may not have an interest in a transaction with their company unless the interest has been authorised by the members.

2.2 Directors must declare, under the new section, the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with their company.  The director himself need not be a party to the transaction for the duty to apply.  If another person’s interest in a contract with the company amounts to a direct or indirect interest on the part of the director, the interest of that other person in that contract with the company may require the director to make disclosure under this duty.

2.3 Any declaration under this section must be made before the company enters into the relevant transaction or arrangement.

2.4 No declaration will be required:

* where the director is not aware of his interest or where the director is not aware of the transaction or arrangement, but directors will be treated as being aware of matters of which they ought reasonably to be aware; and

* if the interest cannot reasonably be regarded as likely to give rise to a conflict of interest, if the other directors are already aware of it, or if it concerns the terms of the director’s service contract which have been (or are to be) considered at a board meeting of a committee of the board; or

* where the company has only one director.

2.5 Section 177 deals only with proposed transactions or arrangements.  Existing transactions and arrangements are covered by section 182 of the new Companies Act 2006 which provides that a director must declare the nature and extent of his direct or indirect interest in an existing transaction or arrangement to be entered into by the company to the extent that the interest has not already been declared under section 177.

3. Duty not to accept benefits from third parties (section 176 CA 2006).

3.1 This duty simply codifies the existing fiduciary rule prohibiting exploitation by a director of his position for personal benefit.  A director must not accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director.

3.2 The duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.  Benefits conferred by the company, its holding company or subsidiaries, and benefits received from a person who provides a director’s services to the Company, are excluded.

3.3 The members of a company remain able to authorise the acceptance of benefits which would otherwise be a breach of this duty.  It would also be possible, if required, to amend the company’s articles of the members involved to permit directors to accept benefits under a specified value e.g. to ensure that the acceptance of a certain level of corporate hospitality will not cause a director to breach section 176.

These new duties are in addition to those already introduced under the CA 2006 as follows:-

1. Duty to act within powers (s.171 CA 2006)

2. Duty to promote the success of the company (s.172 CA 2006)

3. Duty to exercise independent judgement (s.173 CA 2006)

4. Duty to exercise reasonable care, skill and diligence (s.174 CA 2006)

Since the consequences of a breach of the statutory duties are broadly the same as would apply for breach of the corresponding common law duties (including personal liability of the director concerned), it is clearly important that conflicts of interest are addressed.

The duties and the application of the existing common law and equitable duties of directors are not discussed here.

B. Financial Assistance

The provision prohibiting the giving of financial assistance by a private company without first going through a complex and costly procedure (known as “whitewashing”) will be abolished from 1 October 2008.  This will greatly ease company share sales and purchases and other refinancing arrangements for owners of private companies.

Note:  This note is not an exhaustive summary of those provisions of the 2006 Act coming into force in October; nor is it an exhaustive explanation of the position regarding directors’ duties. 

David McGill is an Associate Solicitor in Burnetts’ Corporate Law team. For specific advice and more information on company law, contact David on 01228 552222.


November 2008