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	Scottish Law Commission (Discussion Papers)
You are here: BAILII >> Databases >> Scottish Law Commission >> Scottish Law Commission (Discussion Papers) >> Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties [1998] SLC 105(18) (DP) (August 1998) URL: http://www.bailii.org/scot/other/SLC/DP/1998/105(18).html Cite as: [1998] SLC 105(18) (DP)

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Part 18




Part 18 Summary of Questions for Consultation

Introduction

18.1      In this part we summarise the issues on which we seek the views of consultees. It would be helpful if, in responding, consultees could indicate either the paragraph of the following summary to which their comments relate, or the paragraph of the paper.
18.2      We have included at the beginning of this part the central general questions which were set out in Part 1. The issues which are raised by these general questions underpin many of the more detailed questions raised in the remainder of the paper and which are brought together below. As we indicated in Part 1, we do not want consultees to lose sight of these more general questions, and it would assist us in analysing the responses to this consultation paper if consultees were able to indicate their views on these central general questions in addition to answering such of the more detailed questions as they wish to or are able to answer.
18.3      In Part 4 we raised in respect of many of the sections of Part X of the Companies Act 1985, a considerable number of different suggestions - which we called "options" - as to the way in which the sections might be dealt with or amended. In some cases these are fundamental changes, in others they are small changes designed to deal with specific problems. Thus it is possible in many cases to choose more than one option. We have not included in this summary an explanation of those cases where consultees may not choose more than one option as we consider that it is apparent from the text of the questions themselves. However, consultees are referred to the earlier explanations given in this respect at paragraphs 4.42, 4.94, 4.132, 4.163, 4.190, and 4.225.
18.4      The consultation questions which have been brought together in this part follow the order in which they appear in the text of the paper and grouped under the following heads:

Part 1: Central general questions

Part 2: Guiding principles for reform

SECTION A: PART X OF THE COMPANIES ACT 1985

Part 4: Substantive improvements 1: Sections 312-323 of the Companies Act 1985

Part 5: Substantive improvements 2: Disclosure of directors' share dealings (sections 324-326, 328-329 and Schedule 13)

Part 6: Substantive improvements 3: Loans and similar transactions (sections 330-342)

Part 7: Substantive improvements 4: Disclosure of transactions in which directors and their connected persons are interested in the annual accounts (Schedule 6, Part II) and the special provisions for banks (sections 343 and 344)

Part 8: Substantive improvements 5: Connected persons (section 346) and remaining sections of Part X of the Companies Act 1985

Part 9: Further options: (1) Can sections in Part X be repealed? (2) Would Part X be improved if it was rewritten?

Part 10: Should Part X of the Companies Act 1985 be decriminalised?

SECTION B: THE CASE FOR A STATUTORY STATEMENT OF DIRECTORS' DUTIES UNDER THE GENERAL LAW

Part 14: A statement of directors' fiduciary duties: Options for reform

Part 15: Duty of care: Options for reform

SECTION C: MISCELLANEOUS MATTERS

Part 17: How should the law apply to different categories of director?

Part 1: Central general questions

Q1 Should detailed substantive amendments be made to Part X?

Q2 Should large parts of Part X be repealed (for example, because they duplicate areas covered by the general law)?

Q3 Should Part X be disapplied where appropriate self-regulatory rules exist?

Q4 Should Part X be rewritten in simple language?

Q5 Should Part X be decriminalised?

Q6 Should directors' duties under the general law be codified? (This involves deciding on the standard of the duty of care).

Q7 Should there be a non-binding but authoritative statement of directors' duties under the general law? (paragraph 1.13)

Part 2: Guiding principles for reform

Q8 Consultees are asked whether, in their view, the appropriate principles to guide reform in this area, are those set out at paragraph 2.17 above; and/or whether some other, and if so what, principles should apply for that purpose. (paragraph 2.17)

Section A: Part X of the Companies Act 1985

Part 4: Substantive Improvements 1: Sections 312-323 of the Companies Act 1985

Sections 312 - 316: Payments to directors for loss of office, etc

Is section 316(3) properly applied?

Q9 Consultees are asked whether section 316(3) is being properly applied in practice and, if not, to produce, where possible, evidence to support their answer. (paragraph 4.27)

Option 1: No Change

Q10 Consultees are asked whether, if retained, sections 312-316 should be retained without amendment. (paragraph 4.43)

Option 2: Reverse the effect of the decision in Taupo Totara Timber v Rowe

Q11 Consultees are asked whether they agree with our provisional view that sections 312-316 should not apply to covenanted payments. (paragraph 4.46)

Option 3: Amend sections 312-316 to make it clear that they do not apply to covenanted payments

Q12 Consultees are asked whether they agree with our provisional view that sections 312-316 should be amended to make it clear that they do not apply to covenanted payments. (paragraph 4.47)

Option 4: Extend the provisions of sections 312-316 to former directors

Q13 Consultees are asked whether they agree with our provisional view that sections 312-316 should not be amended so as to apply to payments to former directors. (paragraph 4.48)

Option 5: Extend the provisions of sections 312-316 to cover payments to connected persons

Q14 Consultees are asked whether sections 312-316 should cover payments made to connected persons, and, if so, in what circumstances. (paragraph 4.49)

Option 6: Require approvals by company in general meeting under sections 312 and 313 to be by special resolution and where disclosure under those sections or section 314 is required, stipulate that disclosure should cover payments made on the same occasion for which disclosure is not required by those sections.

Q15 Consultees are asked whether they agree with our provisional views that

(i) it should not be a requirement that the approval by the company in general meeting, as required by sections 312 and 313, should be by special resolution;

(ii) it should not be a requirement of approval under those sections or section 314 that there should be a stipulation that details of payments which do not require approval should be disclosed when approval of those which require disclosure is sought. (paragraph 4.50)

Option 7: Non-contractual payments received for loss of other offices

Q16 Consultees are asked:

(i) whether they consider that section 312 should require approval of uncovenanted payments made to a director in respect of the loss of some other position in the company, or its group, apart from that of director (a) if he loses that position at the same time as he loses his office as a director, or (b) whenever he receives such a payment;

(ii) whether they consider that sections 312-316 should apply to any such payments which are covenanted as well. (paragraph 4.53)

Option 8: Deem payments approved if notified and members raise no objection to the proposed payment within a stipulated period

Q17 Consultees are asked whether they agree with our provisional view that sections 312-314 should not be amended so as to permit a company to dispense with approval of the company in general meeting if notice is given to members and there is no objection from a specified proportion of members within a specified period. (paragraph 4.54)

Option 9: Amend sections 314 and 315 to cover acquisitions by way of a cancellation of shares under schemes of arrangement etc

Q18 Consultees are asked whether they consider that sections 314 and 315 should be amended:

(i) to cover acquisitions by way of a cancellation of shares under a scheme of arrangement;

(ii) to cover unconditional offers;

(iii) to prevent the offeror or his associates from voting at the meeting convened pursuant to section 315;

(iv) in any other way to remove deficiencies in their application to takeovers in accordance with modern practice. (paragraph 4.55)

Option 10: Amend sections 312-314 to provide civil remedies against the directors and section 315 so that a claim under this section has priority where the amount paid to the director was taken into account in determining the price to offeree shareholders

Q19 Consultees are asked:

(i) whether they agree with our provisional view that sections 312 and 313 should be amended to provide for civil remedies on the lines suggested in paragraph 4.50;

(ii) whether section 315 should be amended so as to provide that, unless the court otherwise orders, the claim of former shareholders under section 315 should prevail over that of any of the company in section 312 in respect of the same payment. (paragraph 4.59)

Option 11: Reinforce section 316(3) by requiring companies to disclose in their annual accounts particulars of the calculation of compensation paid to a director

Q20 Consultees are asked whether they consider that particulars of a severance payment made to a director should be included in the annual accounts and, if so, what in their view those particulars should cover and when the disclosure requirement should arise. (paragraph 4.60)

Option 12: Extend section 312 to cover the situation where the payment is made by a company to a director of its holding company in connection with loss of office as such director

Q21 Consultees are asked whether section 312 should apply to payments made by a company to a director of a holding company in connection with his loss of office as such director and, if so, whether the requirement for disclosure and approval should be satisfied in both companies (other than a wholly-owned subsidiary). (paragraph 4.61)

Generally

Q22 Consultees are asked whether any further reform of sections 312-316 should be considered. (paragraph 4.61)

Section 317: Disclosure by directors to their board

Option 1: No change

Q23 Consultees are asked whether section 317 should be retained as it is. (paragraph 4.95)

Option 2: Limit the duty of disclosure to material interests only

Q24 Consultees are asked whether they consider that section 317 should only apply to material interests in a contract; and if so (a) whether "material" should be defined by statute, and (b) if so, whether it should mean those interests whose disclosure might reasonably be expected to affect the decision of the board or some other meaning. (paragraph 4.97)

Option 3: Exempt from the obligation of disclosure transactions or arrangements which either do not come before the board or a committee of the board, or do not require approval by the board or a committee of the board

Q25 Consultees are asked whether they agree with our provisional view that section 317 should not exempt directors from the need to disclose their interests in transactions or arrangements which either do not come before the board, or a committee of the board, or do not require approval by the board, or a committee of the board. (paragraph 4.99)

Option 4: Exempt sole director companies

Q26 Consultees are asked whether they agree with our provisional views that:

(i) section 317 should not apply where there is only one director; and

(ii) if the suggestion put forward at paragraph 4.118 is not adopted, there should be a requirement that where there is only one director, the director should disclose interests to the company in general meeting, unless this requirement is waived by shareholders or varied by resolution or in the articles. (paragraph 4.101)

Option 5: Exempt from the obligation of disclosure interests in director's own service agreement

Q27 Consultees are asked whether they agree with our provisional view that section 317 should exempt directors from the need to make formal disclosure of their interest in their own service contracts. (paragraph 4.102)

Option 6: Exempt from the obligation of disclosure executive directors' interests in contracts or arrangements made for the benefit of all employees

Q28 Consultees are asked whether there should be an exemption from disclosure under section 317 for benefits which a director receives which are ordinarily made to employees on terms no less favourable. (paragraph 4.103)

Option 7: Exempt from the obligation of disclosure interests arising by reason only of a directorship of, or non-beneficial shareholding in, another group company

Q29 (i) Consultees are asked whether they agree with our provisional view that there should not be excepted from disclosure under section 317 interests which a director has by reason only that he is a director of another company in the same group or has a non-beneficial shareholding in it.

(ii) If consultees disagree, do they consider that this exception should only apply to directorships and shareholdings in (a) wholly-owned subsidiaries, or (b) all subsidiaries (whether or not wholly-owned)?^[1] (paragraph 4.104)

Option 8: Exempt from disclosure an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge

Q30 Consultees are asked whether they agree with our provisional view that section 317 should exempt from disclosure an interest of which a director has no knowledge and of which it is unreasonable to expect him to have knowledge. (paragraph 4.105)

Option 9: Make any contract voidable where the requisite disclosure has not been made and provide a civil remedy for compensation or disgorgement, or alternatively provide that the section does not affect any resulting contract

Q31 Consultees are asked:

(i) whether they agree with our provisional views that:

(a) a breach of section 317 should automatically result in the contract or arrangement being voidable unless the court otherwise directs;

(b) the contract or arrangement should cease to be voidable in the same circumstances as those set out in section 322(2);

(c) a breach of section 317 should result in the director being personally liable (a) to account for any profit he makes, and (b) to indemnify the company for any loss it incurs as a result of the breach.

(ii) whether, if the answer to (i)(a) is no, section 317 should be amended to state that it has no effect on the contract or arrangement.

(iii) whether, if section 317 is amended so as to require the disclosure of the interests of connected persons, the liability referred to in paragraph (i)(c) above should extend to connected persons, and if so whether connected persons should have a defence if they can show that they did not know of the director's failure to comply with the section. (paragraph 4.113)

Option 10: Disqualify directors of public companies from voting on matters in which they have an interest or a material interest

Q32 Consultees are asked whether they consider that the Companies Act should prohibit directors of public companies from voting on matters in which they have a material interest and, if so, whether there should be any exceptions to this general rule. (paragraph 4.114)

Option 11: Require directors to disclose material interests of their connected persons of which they are aware

Q33 Do consultees agree with our provisional view that section 317 should be amended to provide that a director should disclose the interests of connected persons if he is aware of them and if they would have to be disclosed if they were interests of his? (paragraph 4.115)

Option 12: Require that general notice under section 317(4) include details of the interest concerned

Q34 Consultees are asked whether they agree with our provisional view that a general notice under section 317(3) should be required to state that the nature and extent of the interest, and that the director should give notice amending these particulars if they change. (paragraph 4.116)

Option 13: Require a register of directors interests to be kept which would be open to inspection by members or require a report to be made to shareholders in the annual accounts of the nature of interests which directors had disclosed

Q35 Consultees are asked:

(i) whether a register of directors interests should be required to be kept which would be open to inspection by members;

(ii) whether a report should be required to be made to directors in the annual accounts of the nature of interests which directors had disclosed;

(iii) if the answer to (i) or (ii) is yes

(a) whether there should be an exemption from disclosure for information which the directors reasonably consider it would be harmful to the company to disclose; and

(b) whether any information disclosed in the register or report should be audited. (paragraph 4.118)

Section 318: Directors' service contracts (1)

Option 1: No change

Q36 Consultees are asked whether section 318 should be retained as it is. (paragraph 4.134)

Option 2: The Secretary of State should have power to disapply section 318 to the extent that, in the Secretary of State's opinion, a company is already bound by sufficient comparable disclosure obligations under the Listing Rules

Q37 Consultees are asked whether the Secretary of State should be able to disapply section 318 to the extent that, in the Secretary of State's opinion, a company is already bound by sufficient comparable disclosure obligations under the Listing Rules. (paragraphs 4.136)

Option 3: Extend section 318 to contracts for services and non-executive directors' letters of appointment

Q38 Consultees are asked whether they agree with our provisional views that:

(i) section 318 should require the disclosure of contracts for services and not just contracts of service; and that

(ii) section 318 should apply to letters of appointment for non-executive directors. (paragraph 4.139)

Option 4: Repeal of subsection (5) (Director to work abroad)

Q39 Consultees are asked:

(i) whether they agree with our provisional view that section 318(5) should be repealed, and, if so, whether the Secretary of State should be given power to exempt prescribed information from disclosure in the case of directors working wholly or mainly abroad; and

(ii) whether, if there continues to be an exemption or a power to give exemption in respect of service contracts which require a director to work wholly or mainly abroad, it should be made clear that, in the case of a contract which requires a director to work abroad and in the UK for different periods of the contract, the exemption or power applies only in relation to the period for which he actually works mainly abroad. (paragraph 4.144)

Option 5: Repeal of subsection (11) (Contract with less than 12 months to run)

Q40 Consultees are asked whether they agree with our provisional view that section 318(11) should be repealed. (paragraphs 4.147)

Option 6: Amend section 318 to require disclosure of particulars of terms collateral to the service contract

Q41 Consultees are asked whether section 318 should require disclosure of particulars of terms collateral to the service contract, and, if so, whether the Secretary of State should have power to exempt prescribed information from disclosure. (paragraph 4.150)

Option 7: Allow inspection of director's service contracts

Q42 Consultees are asked whether the statutory register ought to be open to public inspection (a) in the case of all companies, or (b) in the case of companies listed a the Stock Exchange or AIM only. (paragraph 4.152)

Section 319: Directors' service contracts (2)

Option 1: No change

Q43 Consultees are asked whether section 319 should be retained in its current form. (paragraph 4.164)

Option 2: Reduce the statutory period in section 319(1) from 5 years to 1, 2 or 3 years

Q44 Consultees are asked:

(i) whether the statutory period in section 319(1) should be reduced to (a) one year, (b) two years, or (c) three years;

(ii) whether any reduction of the statutory period should apply either (a) to both listed and unlisted companies, or (b) only to listed companies. (paragraphs 4.168)

Option 3: Amend section 319 to prohibit (without shareholder approval) the creation of "rolling contracts" having a notice or contract period in excess of the period permitted by section 319

Q45 Consultees are asked whether section 319 should be amended to prevent "rolling contracts" for a period exceeding the maximum term permitted by section 319 unless they are first approved by ordinary resolution. (paragraphs 4.169)

Option 4: Deem terms approved if notified and members raise no objection to the proposed term within a stipulated period

Q46 Consultees are asked whether they agree with our provisional view that section 319 should not be amended so as to permit a company to dispense with approval of the company in general meeting^[2] if a notice was given to members and there is no objection from a specified proportion of members within a specified period. (paragraphs 4.171)

Sections 320-322: Substantial property transactions involving directors etc

Option 1: No change

Q47 Consultees are asked:

(i) whether they are aware of any difficulties in the operation of these provisions which ought to be addressed; and

(ii) whether they would favour retaining sections 320-322 as they stand. (paragraph 4.191)

Option 2: Amend section 320 so that it does not prohibit a company from making a contract which is subject to a condition precedent that the company first obtains approval under section 320

Q48 Consultees are asked whether they agree with our provisional view that section 320 should be amended so that a company is able to enter into a contract which only takes effect if the requisite shareholder approval is obtained. (paragraph 4.192)

Option 3: Amend section 320 to make it clear that it does not apply to covenanted payments under service agreements with directors or to payments to which section 316(3) applies

Q49 Consultees are asked whether they agree with our provisional view that section 320 should be amended to make it clear that it does not apply to covenanted payments under service agreements with directors or to payments to which section 316(3) applies. (paragraph 4.193)

Option 4: A safe harbour for transactions with administrative receivers and court-appointed administrators

Q50 Consultees are asked whether they consider that an exception should be permitted in section 321 for administrators or receivers. (paragraph 4.194)

Option 5: Give the Secretary of State power toexemption listed companies from section 320

Q51 Consultees are asked whether the Scecretary of State should have the power to exempt listed companies from sections 320-322. (paragraph 4.196)

Option 6: Dispense with the requirement for shareholder approval where the independent non-executive directors approve the transaction

Q52 Consultees are asked whether they agree with our provisional view that section 320 should not be amended so as to provide that alternative approval could be provided by a specified minimum number of non-executive directors of the company. (paragraphs 4.199)

Option 7: Deem payments approved if notified and members raise to objection to the proposed payment within a stipulated period

Q53 Consultees are asked whether they agree with our provisional view that section 320 should not be amended so as to permit a company to dispense with approval of the company in general meeting if notice is given to members and there is no objection from a specified proportion of members within a specified period. (paragraph 4.200)

Option 8: Provide that shareholder approval is not required if an expert reports that in his opinion the transaction is fair and reasonable

Q54 Consultees are asked whether they agree with our provisional view that companies should not be able to obtain an independent expert's report as an alternative to having to obtain shareholder approval under section 320. (paragraph 4.202)

Option 9: Provide that the statutory consequences of breach apply only where the company suffers prejudice

Q55 Consultees are asked whether they agree with our provisional view that section 322 should not be amended to the effect that a company will have no remedy under the section where the defendant or defender shows that it was not prejudiced by the transaction. (paragraph 4.204)

Section 322A: Transactions beyond the directors' powers

Q56 Consulteees are asked whether they are aware of any deficiency in section 322A. (paragraph 4.209)

Section 322B: Contracts with sole member directors

Q57 Consulteees are asked whether they are aware of any deficiency in section 322B. (paragraph 4.213)

Sections 323 and 327: Prohibition on option dealing by directors and their near families

Option 1: No change

Q58 Consultees are asked whether section 323 should be left unchanged. (paragraph 4.226)

Option 2: Make off-market dealings in options with inside information an offence

Q59 Consultees are asked whether, if section 323 is not repealed, it should be amended so that it applies only to off market dealings in options on the basis of inside information. (paragraph 4.228)

Option 3: No change, but exempt dealings in options under a scheme for the benefit of employees

Q60 Consultees are asked whether, if section 323 is not repealed, it should be disapplied in relation to the purchase of options under a scheme for the benefit of employees.^[3] (paragraph 4.229)

Part 5: Substantive improvements 2: disclosure of directors' share dealings (sections 324-326, 328-329, and Schedule 13)

The obligation of disclosure: Sections 324 and 328 - Duty of director to notify own and attributed shareholdings in company

Q61 Consultees are asked if non-beneficial holdings should be exempt from section 324 and if so:

(i) whether non-beneficial holdings should be defined as excluding any beneficial interests which the director may have by reason of any right to expenses, remuneration or indemnity;

(ii) whether the exemption should apply irrespective of the size of the transaction or only if the tranaction (when aggregated with other transactions in non-beneficial holdings) does not exceed a certain size;

(iii) if they consider that the exemption should only apply if the transaction does not exceed a certain size, how should such size be ascertained. (paragraph 5.19)

Q62 Consultees are also asked if they consider that there are deficiencies in section 324 not considered above. (paragraph 5.19)

The meaning of "interest" and the mechanics of disclosure: Schedule 13, Parts I-III

Q63 Consultees are asked whether the Secretary of State should be given power by regulation to vary the rules in Part I of Schedule 13 for determining whether a person has an interest in shares or debentures for the purposes of sections 324-326, 328 and 346. (paragraph 5.22)

Q64 Consultees are asked whether the company should be obliged to comply with section 325(2),(3) and (4) within a specified period and if so whether that period should be the expiration of five days beginning with the day on which the event in question occurs or some other and if so what period. (paragraph 5.25)

Q65 Consultees are asked if there are any other issues for reform arising under Schedule 13, Parts I-III. (paragraph 5.26)

The company's register of directors' interests: Sections 325 and 326 and Schedule 13, Part IV

Q66 Consultees are asked whether section 325 and Schedule 13, Part IV raise any other issues for reform. (paragraph 5.30)

Notification to the Exchanges: Section 329

Q67 Consultees are asked if section 329 should be amended so that a company is bound to transmit to the relevant exchange details of information which the company is bound to enter into the register of directors' interests without notification by the director pursuant to section 325(3) and (4). (paragraph 5.39)

Q68 Consultees are also asked if section 329 raises any issue for reform not mentioned above. (paragraph 5.39)

Part 6: Substantive improvements 3: Loans and similar transactions (sections 330-342)

Sections 330 and 331: General restriction on loans etc to directors and persons connected with them and definitions for the purposes of section 330 and subsequent sections

Are restrictions other than on making loans to directors necessary?

Q69 We ask consultees:

(i) Are the restrictions on quasi-loans and related transactions in sections 330-331 required, and, if so, should they extend to directors, holding company directors and connected persons?

(ii) Are the restrictions on credit transactions and related transactions in sections 330-331 required, and, if so, should they extend to directors, holding company directors and their connected persons?

(iii) Are the additional restrictions in section 330(6) and (7) on indirect arrangements required? (paragraph 6.12)

To which companies should the prohibitions extend?

Q70 Consultees are asked:

(i) whether section 330 should continue to apply as now, with some of the restrictions applying only to relevant companies; or

(ii) whether the same restrictions should apply to all companies; or

(iii) whether some of the prohibitions, now applying only to relevant companies, should additionally be applied to some companies other than relevant companies and, if so:

(a) whether such companies should be defined in terms of size; and if so

(b) whether this should be on the same basis as for small and medium sized companies or on some other basis, and if so what basis;

(iv) whether some relevant companies should cease to be subject to the additional restrictions and, if so, in what circumstances. (paragraph 6.14)

Sections 332-338: Exemptions from prohibitions

(1) Short-term quasi-loans (section 332)

Q71 Consultees are asked whether the exemption contained in section 332 is (a) used in practice, and (b) satisfactory. (paragraph 6.15)

(2) Intra-group loans (section 333)

Q72 Consultees are asked whether the exemption contained in section 333 is (a) used in practice, and (b) satisfactory. (paragraph 6.16)

(3) Loans of small amounts (section 334)

Q73 Consultees are asked whether the exemption contained in section 334 is (a) needed, and (b) satisfactory. (paragraph 6.17)

(4) Minor transactions (section 335(1))

Q74 Consultees are asked whether the exemption contained in section 335(1) is (a) needed, and (b) satisfactory. (paragraph 6.18)

(5) Transactions in the ordinary course of business (section 335(2))

Q75 Consultees are asked whether the exemption contained in section 335(2) is (a) used in practice, and (b) satisfactory. (paragraph 6.20)

(6) Transactions at the behest of the holding company (section 336)

Q76 Consultees are asked whether the exemption contained in section 336 is (a) used in practice, and (b) satisfactory. (paragraph 6.21)

(7) Funding of director's expenditure on duty to the company (section 337)

Q77 Consultees are asked whether they consider that the exemption contained in section 337 is (a) used in practice, and (b) satisfactory. (paragraph 6.23)

(8) Loan or quasi-loan by a money-lending company (section 338)

Q78 Consultees are asked:

(i) With regard to the exemption in section 338(3) (taken on its own):

(a) should this exemption be retained;

(b) is this exemption used in practice;

(c) is this exemption satisfactory?

(ii) With regard to the exemption in section 338(3) taken with section 338(6) (house purchase loans):

(a) should this exemption be retained;

(b) is this exemption used in practice;

(c) is this exemption satisfactory? (paragraph 6.25)

Sections 339-340: "Relevant amounts" for purposes of section 334 and other sections and determining the "value" of transactions or arrangements

Q79 Consultees are asked if they have any comment on sections 339-340 apart from their complexity. (paragraph 6.28)

Section 341: Civil remedies

Q80 Consultees are asked whether they have any comments on section 341. (paragraph 6.30)

Section 342: Criminal penalties for breach of section 330

Q81 Consultees are asked whether, if criminal penalties are to be imposed for breach of section 330, they should cover offences by relevant companies (and their officers), or all companies (and their officers). (paragraph 6.31).

A possible additional exemption available to all companies for loans made with the consent of shareholders

Q82 Consultees are asked:

(i) Is there any need in practice to create a new exemption to meet the case where directors hold all or a majority of the shares and creditors are not prejudiced?

(ii) Is it desirable to create a new exemption for this situation?

(iii) Do they consider that there should be safeguards for shareholders and, if so, which do they consider to be the best option:

(a) a special resolution;

(b) unanimous approval by the members?

If they think that some other option is preferable, they are asked to state what that option comprises and why they prefer it.

(iv) Do they consider that there should be safeguards for creditors and, if so, which of the options discussed in paragraphs 6.37-6.39 do they consider to be the best option:

(a) option 1: the company must have to provide for the whole of the value of the transaction out of its distributable profits;

(b) option 2: the company's directors must make a statutory declaration as required by section 173 of the Companies Act 1985?

If they think that some other option is preferable, they are asked to state what that option comprises and why they prefer it.

(v) Should the new exemption apply to:

(a) loans to directors;

(b) loans to holding company directors;

(c) guarantees or security in support of the above;

Or, in the case of relevant companies:

(d) loans in favour of connected persons;

(e) quasi-loans in favour of directors or their connected persons;

(f) credit transactions in favour of directors or their connected persons;

(g) guarantees or security in respect of any of the above;

In the case of all companies:

(h) indirect arrangements caught by section 330(6) or (7) of the Companies Act 1985?

(vi) Should the new exemption apply to:

(a) all companies;

(b) only companies which are not relevant companies as defined by section 331(6);

(c) only another class of companies (please describe)?

(vii) Do consultees think that if this new exemption is adopted:

(a) there should be the same arrangements for publicity as for payment out of capital and as described in paragraph 6.42 above;

(b) there should be power for the court to cancel the approval given by the shareholders on the application of a member or creditor as described in paragraph 6.43 above?

(viii) Do consultees think that if this new exemption is adopted, shareholders who may benefit from the transaction should have their votes disregarded if the resolution would not have been passed without them?

(ix) Do consultees think that if the new exemption is adopted members should have the right to inspect the statutory declaration and the auditors' report? (paragraph 6.43)

Part 7: Substantive improvements 4: Disclosure of transactions in which directors and their connected persons are interested in the annual accounts (Schedule 6, Part II) and the special provisions for banks (sections 343 and 344)

Schedule 6, Part II: Disclosure in annual accounts of transactions in which directors are interested

Q83 Consultees are asked:

(i) whether Schedule 6 should contain a definition of materiality for the purposes of paragraphs 15(c) and 16(c); and

(ii) if so, how materiality should be defined. (paragraph 7.9)

Q84 Consultees are asked:

(i) whether Schedule 6, Part II should be retained notwithstanding the introduction of FRS 8;

(ii) whether a director should have a duty to give notice to the company of such matters relating to himself and (so far as known to him) his connected persons as may be necessary for the purposes of that part;

(iii) whether the exception for transactions in the ordinary course of business in paragraph 21 should be retained and if so whether it should be extended to apply to transactions which are not intra-group;

(iv) whether the details of the value required to be given in relation to loans (and related guarantees and security) under paragraph 22(d) and (e) should be the same in relation to quasi-loans and credit transactions (including related guarantees and security) or vice-versa;

(v) whether the exemption in paragraph 23 should extend to credit transactions;

(vi) whether there should be an exemption like paragraphs 24 and 25 for loans and quasi-loans;

(vii) whether, where the deemed value provision in section 340(7) applies,^[4] the directors should be required if possible to give some estimate of the value;

(viii) whether a transaction should be outside paragraphs 15(c) and 16(d) simply because the director is a common director of both parties to the transaction;

(ix) whether there is any other change to Schedule 6 which should be considered. (paragraph 7.11)

Sections 343-344: Special provisions for banks

Q85 Consultees are asked:

(i) Are sections 343-344 necessary or desirable?

(ii) On the basis these sections are retained, are consultees aware of any deficiency in these sections which are required to be addressed? (paragraph 7.17)

Part 8: Substantive improvements 5: connected persons (section 346) and remaining sections of part X of the Companies Act 1985

Section 346: The meaning of connected person

General

Q86 Consultees are asked:

(i) whether section 346 gives rise to difficulties in practice;

(ii) whether they consider that the test of "connected person" should be closer to any of the definitions of "associate" or "related party" considered above. (paragraph 8.13)

Option for reform (1): Make specified additions to the list of connected persons

Q87 Consultees are asked:

(i) Should cohabitants, defined as persons who have for a specified period been living with a director of the company in the same household and as man and wife, be connected persons for the purposes of:

(a) section 346;

(b) section 327;

(c) section 328?

(ii) Should the specified period be a continuous period of one year, or some other period (and if so what), or should there be no period?

(iii) Should infant children of the cohabitant be treated as connected persons if they live with the director and the cohabitant and the cohabitant has himself or herself become a connected person and if so should that be for the same purposes?

(iv) Are there any other persons who should be connected persons who are not already covered by section 346? (paragraph 8.17)

Option for reform(2): Give the Secretary of State power to vary the list by regulation

Q88 Consultees are asked whether the Secretary of State should be given power to vary the list of connected persons in section 346 by regulation. (paragraph 8.18)

The remaining sections of Part X

Q89 Consultees are asked whether they agree with our provisional view that Part X should apply to acts done outside the jurisdiction. If they disagree with this view, they are asked to state what restrictions should be imposed. (paragraph 8.23)

Q90 Consultees are asked whether they agree with our provisional view that section 347 should be amended to include references to sections 322A and 322B. (paragraph 8.24)

Part 9: Further options: (1) Can sections in Part X be repealed? (2) Would part X be improved if it was rewritten?

Option 1: Repealing sections in Part X

Repealing groups of sections and relying on the general law

Q91 Consultees are asked whether they consider that sections 312-316, 319, 320-22 and 330-342 should be repealed and reliance placed on the general law. (paragraph 9.28)

Repeal of section 311 (Prohibition on tax-free payments to directors)

Q92 Consultees are asked whether they agree with our provisional view that section 311 of the Companies Act 1985 should be repealed. (paragraph 9.32)

Repeal of section 323 (Option dealing by directors)

Q93 Consultees are asked whether they agree with our provisional view that section 323 should be repealed in its entirety. (paragraph 9.33)

Option 2: Can Part X be improved by rewriting?

Q94 Consultees are asked:

(i) to consider carefully the re-draft of sections 330-344 (and part of section 347) set out in Appendix B, and to give their views on the re-draft generally;

(ii) whether they consider that the provisions of Part X are now familiar to users so that it would be better not to disturb the existing layout and language;

(iii) whether they consider that redrafting in this manner represents a significant and worthwhile improvement in the existing text;

(iv) whether section 318 should be simplified in the manner indicated in paragraphs 9.26-9.27 above. (paragraph 9.42-9.43)

Part 10: Should Part X of the companies ACT 1985 be decriminalised?

Q95 Consultees are asked:

(i) whether they agree with our provisional view that the two benchmarks to be applied in determining whether there should be criminal liability for breaches of Part X are proportionality and efficiency;

(ii) whether any of the criminal offences in Part X should be repealed;

(iii) whether, if any provision of Part X is decriminalised, the civil remedies should remain as if the provision had not been decriminalised;

(iv) whether, if any provision of Part X is decriminalised, civil penalties along the lines of section 242A should replace any of the existing offences;

(v) whether a new offence should be created where payments are made in breach of sections 312-316 of the Companies Act 1985 along the lines described in paragraph 10.40 above. (paragraph 10.40)

Section b: The case for a statutory statement of directors' duties under the general law

Part 14: A statement of directors' duties: Options for reform

Option 1: A comprehensive codification

Q96 Consultees are asked whether there should be a comprehensive statutory codification of the duties owed by directors to their company under the general law. (paragraph 14.22)

Option 2: Partial codification of directors' fiduciary duties

Q97 Consultees are asked whether they consider that the duties of directors should be codified in part only and, if so, whether such codification should extend to the duty to act in the company's best interests, or to some other, and if so which, of the duties described in Part 11 above. (paragraph 14.24)

Option 3: Statutory statement of directors' duties not replacing the general law

Q98 Consultees are asked whether they would favour a statutory statement of directors' duties in the Companies Act 1985 which does not replace the general law and, if so, whether the statement should impose liabilites on directors in addition to those to which they are subject under the existing law, or merely convey information for guidance. (paragraph 14.31)

Option 4: A non-binding statement of the main duties of directors to be used in certain prescribed forms etc

Q99 Consultees are asked:

(i) whether they consider that the draft statement in Appendix A sets out the principal duties of directors under the general law;^[5]

(ii) whether the statement should refer to the possibility of the company in general meeting ratifying the breach of duty or releasing a claim that it may have;

(iii) whether they consider that such a statement should mandatorily be annexed to the company's articles;

(iv) whether they consider that such a statement should be required to be included in the Directors' Report attached to the company's annual accounts;

(v) whether they consider that a director should sign that he has read the statement when he signs a return confirming that he has been appointed a director;

(vi) whether they consider that each director should be required to sign that he has read the statement when the company submits its annual return; and

(vii) whether they think that such a statement should appear in any other statutory return which the company makes. (paragraph 14.40)

Option 5: Authoritative pamphlets

Q100 Consultees are asked:

(i) whether they consider that a pamphlet setting out directors' duties - including both the duty of care and fiduciary duties - should be prepared as a means of setting out the duties of directors;

(ii) if so, how they think the pamphlet would be best brought to the attention of directors; and

(iii) whether they consider that a pamphlet of this kind would make it unnecessary to have a statutory statement of directors' fiduciary duties. (paragraph 14.44)

Part 15: Duty of care: Options for reform

Should there be a statutory statement of the duty of care?

Q101 Consultees are asked whether they consider that there are objectives that might be achieved by a statutory statement of the director's duty of care other than those set out in paragraph 15.6. (paragraph 15.6)

Q102 Consultees are asked whether or not they favour a statutory statement of the duty of care. Consultees may wish to consider the options for that statement before deciding how to respond.^[6] (paragraph 15.9)

Content of a statutory statement of the duty of care

Option 1: A subjective test

Q103 Consultees are asked whether they consider that the standard of care expected of a director should be judged by a subjective test - so as to be that expected of a reasonable person having the same knowledge and experience that the director has. (paragraph 15.19)

Option 2: A dual objective/subjective test

Q104 Consultees are asked whether the standard of care expected of a director should be judged by a twofold subjective/objective test. (paragraph 15.25)

Option 3: An objective test only

Q105 Consultees are asked whether they consider that the standard of care expected of a director should be judged solely by an objective test - so as to be that expected of a reasonable person having the knowledge and experience which may reasonably be expected of a person in the same position as the director without taking account of any special expertise that the particular director possesses. (paragraph 15.29)

Matters of commercial judgment

Q106 Consultees are asked whether they consider that there should be a business judgment rule and if so whether it should be on the lines proposed in Australia or on the lines identified by the American Law Institute or in some other way. (paragraph 15.41)

Reliance and delegation

Q107 Consultees are asked whether they consider that there should be a statutory provision which sets out the liability of directors when they delegate their powers to others and the circumstances in which they may rely on information provided by third parties. (paragraph 15.50)

Statutory statement of the duty of care without a statutory statement of fiduciary duties

Q108 Do consultees consider that there would be any objection (not already mentioned) to having a statutory statement of the duty of care on its own? (paragraph 15.51)

Section c : miscellaneous matters

Part 17: How should the law apply to different categories of director?

De facto directors

Q109 Do consultees agree with our provisional view that the provisions of Part X, the statutory duty of care and the statement of duties should apply to directors who have not been legally appointed? (paragraph 17.10)

Shadow directors

Q110 Do consultees consider that (a) Part X, and (b) the statutory duty of care should apply to shadow directors? (paragraph 17.16)

Alternate directors

Q111 Do consultees consider that any provision in Part X is difficult to apply in relation to alternate directors so that special provision is needed for them? (paragraph 17.20)

Note 1   The terms "subsidiary" and "wholly-owned subsidiary" are defined in s 736(2) of the Companies Act 1985.    [Back]

Note 2   A like option could be given with respect to approval of the holding company, when that is required.    [Back]

Note 3   Including former employees and near relatives as in s 743, see para 4.229, n 353 above.    [Back]

Note 4   Schedule 6, para 26.    [Back]

Note 5   Thus including both the duty of care and fiduciary duties.    [Back]

Note 6   See questions 104-106 below.    [Back]