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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(9) (DP) (August 1998) URL: http://www.bailii.org/scot/other/SLC/DP/1998/105(9).html Cite as: [1998] SLC 105(9) (DP)

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Part 9




Part 9 Further Options: (1) Can Sections in Part X be Repealed? (2) Would Part X be Improved if it was Rewritten?

introduction

9.1      In this part, we consider some more radical solutions than we have considered so far. We consider the repeals of certain provisions in Part X. In the Parts 4 to 8, we considered a number of detailed substantive improvements that might be made to Part X. There were many possibilities, some of which we provisionally recommended. Even if only some of the possible amendments considered in Parts 4 to 8 are in due course recommended in our final report, it is clear that Part X will not decrease in size or become less complex. On the contrary, it will increase in size and complexity significantly. In those circumstances, careful thought has to be given to seeing whether at least some of the provisions in Part X can be repealed. We do this under Option 1 below. We first consider whether groups of sections^[1] could be removed and reliance placed on more general principles. We then consider whether two further specified sections should in any event be repealed, sections 311 and 323. Under Option 2 below, we consider the question whether there would be an improvement in Part X if it were rewritten more simply.
9.2      In Part 2 we identified as a potential guiding principle for reform a principle of "enough but not excessive" regulation. We suggested that Part X of the Companies Act 1985 should provide the right balance between regulation and freedom for directors to make business decisions. The application of that aspect of the principle may be regarded as especially challenging in the context of legislation as detailed as Part X. We also said that Part X should not be criticised for failing to deal with every eventuality. Dependent on how complex it was thought that the Companies Act should be, a line can be drawn between those matters which the sections should cover and those which can be left to be dealt with in some other way. In Part 3 we saw that the provisions in Part X have an economic rationale, for instance in protecting third parties (for example creditors) from the prejudice as a result of the ability of others (for example directors) being able to use their powers in a certain way: that consideration might constitute a reason against any move to simplify Part X by removing certain provisions from it. The questions as to whether large parts of Part X should be repealed or disapplied because sufficient self-regulation exists were identified as central general questions in Part 1.^[2] In this part, aspects of those two questions will be found to be interlinked. One of the reasons, but not the sole reason for seeking the repeal of certain provisions of Part X is that there is now sufficient self-regulation. With that introduction we turn to consider the question of repealing sections in Part X.

Option 1: Repealing sections in Part X

Repealing groups of sections and relying on the general law

9.3      The question which we consider here is whether there are sections in Part X which could be wholly repealed, leaving transactions in which directors are interested to be regulated by simpler more general principles. The sections which might be dealt with in this way are:^[3]

(1) Sections 312-316 (compensation for loss of office etc);

(2) Section 319 (Directors' service contracts);

(3) Sections 320-322 (substantial property transactions); and

(4) Sections 330-344 (loans and similar transactions).

9.4      These sections are set out in Part 4, where there is a detailed commentary on them. Sections 312-316 deal with compensation for loss of office received in different circumstances. We suggest some 11 ways in which the sections might be reformed.^[4] Section 319 deals with the length of a director's service contract where it has not been approved by the company in general meeting. We made three suggestions here for the reform of this section.^[5] Sections 320-322 deal with substantial property transactions involving the company and a director or a connected person. Some eight suggestions were made for amending these sections.^[6] Sections 330-344 deal with loans and related transactions in favour of directors or their connected persons. We made only a small number of suggestions as to how these sections might be reformed but we also invited views as to whether the sections were working satisfactorily.^[7]
9.5      It is notable that in relation to sections 312-316, 319 and 320-322 there is now considerable self-regulation. This has developed since these provisions were introduced so that the regulatory landscape for transactions where directors have a conflict of interest is now very different from what it was when they were first enacted. In the case of listed companies, the Combined Code seeks to promote a more principled approach to directors' remuneration, including compensation for loss of office.^[8] There is no longer a concern that shareholders in publicly-owned companies will find that the directors have entered into arrangements to compensate them from loss of office in anticipation of a foreseeable takeover being successful, without full disclosure to the offeree shareholders. The length of service contracts for listed companies is now governed by the Combined Code, which seeks adherence to much shorter service contracts than would be permitted without shareholder consent under section 319 and does not run into the difficulty that affects the efficacy of the statutory rule, namely that it can be circumvented by the device of the rolling contract.^[9] The Listing Rules and the AIM rules contain detailed provisions on transactions between companies and related parties which extend beyond the transactions which sections 320-322 seek to regulate.^[10] It can be argued that it is the shareholders in companies subject to these self-regulatory rules that most need to be protected against abuse by directors of their position, and that accordingly if the position is that they are adequately protected by the system of self-regulation the statutory rules may well no longer be necessary. On the other hand, for private companies and the many public limited companies which are not subject to the Listing Rules nor the AIM rules, the balance between the interests of directors and the interests of shareholders is set not by self-regulatory rules but by the provisions of the Companies Act (particularly Part X) and by the general law.
9.6      If, for those companies to which they apply, reliance were to be placed on self-regulatory rules then a number of considerations arise. First, is there evidence that the rules will be complied with? This issue arises mainly in connection with the provisions of the Combined Code and its predecessors dealing with the length of service contracts.^[11] The Hampel Committee^[12] considered that it was too soon to reach a considered assessment of the long-term impact of the Cadbury Code, and that it was even more difficult to reach a definitive conclusion on the Greenbury Code, and our position is little better. We have discussed in Part 4 some of the evidence available as to the increasing level of compliance with the various codes dealing with the length of directors' service contracts.^[13] Second, is self-regulation backed up by adequate sanctions? The Listing Rules and the City Code are backed up by non-legal remedies as explained in Part 1.^[14] As we have also explained in that part, a major difference between self-regulation and Part X lies in the lack of legal remedies for enforcement.^[15] This would include criminal sanctions, which we discuss in the next part. The question whether any legal underpinning is required for self-regulatory rules on corporate governance is outside this project but is one of the issues for the DTI's wider review.^[16]
9.7      In summary, if sections 312-316, 319, 320-322 and 330-342 were repealed:

(1) the criminal sanctions now available under sections 314(3)^[17] and 342^[18] would no longer be available;

(2) the civil remedies which are specifically provided for in sections 315^[19], 322^[20] and 341^[21] would no longer be available; and

(3) a person wishing to make a claim in the same circumstances would have to rely on the general law or the remedies provided by any relevant self-regulatory rule.

Practical consequences of relying on the general duties

9.8      If these provisions were repealed, then in addition to any relevant self-regulatory rule, the general law would continue to apply. Moreover, if the case for a statutory statement of directors' duties is adopted, it will be easier for people to know what the duties of directors are under the general law. We set out the law in Part 11 below. As that part demonstrates, directors owe a number of fiduciary duties, including the duty to act in good faith in the interests of their company and the duty not to obtain secret profits from their connection with the company.^[22] Reliance could be placed on these principles alone as a means of regulating transactions in which directors are interested. We will seek to explain how the general law would operate and then to draw attention to some possible arguments for and against reliance on it alone.
9.9      If there was no statutory restriction on the payment of compensation for loss of office, then the shareholder who discovered that it had been paid and wanted to recover it for the benefit of the company would have to establish that the payments infringed the rule against secret profits described below.^[23] If they were duly authorised contractual payments they would not be caught by this rule. He might also find that the articles gave the directors a discretion to make gratuitous payments: for example regulation 87 in Table A authorises the company to pay gratuities on retirement to executive directors. If the directors were not authorised by the articles to make the payment in question, the claim would lie against the directors who authorised the payment for failure to observe the terms of the company's constitution^[24] and against the director who received the payment with knowledge that this was the case.
9.10      The directors usually have power to approve contracts of service in favour of other directors.^[25] If the contract which they approve exceeds five years without being terminable by the company, a claim against them would succeed only if the directors had acted otherwise than in the best interests of the company, for example if their intention was to benefit one of their number rather than the company. But the directors when challenged are likely to say that they had to agree to this length of contract or the director would have refused to take up the executive appointment. If this evidence was believed then there would be no uniform restriction on the contractual period.
9.11      Sections 320-322 restrict substantial property transactions in favour of directors or their connected persons without shareholder approval. If the approval is not obtained the contract can be set aside (unless the right to rescission has been lost) and the directors can be called upon to indemnify the company against loss or to account for any profit which they make. Without sections 320-322, the shareholder can only claim that the transaction was entered into in breach of the duty of loyalty or alternatively that a director failed to disclose some interest in the contract in breach of the no-conflict rule described below.^[26] But the articles may well make it impossible to bring a claim under the no conflict rule: for example, if the director's interest was through a company then regulation 84(2)(d) would apply.
9.12      If sections 330-342 were repealed, and there were no prohibitions on making loans or quasi-loans, or entering into credit transactions, it would have to be shown that the directors who approved the transactions acted in breach of duty, for example by approving the transactions, not because they were in the company's best interests, but in order to confer a benefit on the person in whose favour the loan was made. Alternatively the facts might permit a claim on the basis that the director had approved the transaction negligently.^[27] But there would be no automatic invalidity or liability to make good any loss suffered by the company.
9.13      Assuming that the claim overcame the hurdles mentioned above, such as the absence of a special statutory remedy and the terms of some enabling provision in the articles, the question would arise whether any claim would lie against a third party who participated in the breach of duty or who received company property. Such actions will lie in the former case only where the third party acted dishonestly.^[28] In the latter case the third party must again have knowledge of the breach of duty, but in this case it is probably sufficient that there was a breach of duty of which the third party knew or ought to have known.^[29] If the property with which the company parted in the course of the breach of duty can still be identified the court may allow the company to recover that property or to trace it into an asset into which it has been substituted.^[30]
9.14      In Scotland actions will lie against a third party who assists a director in a breach of his duty or who receives benefit from that breach of duty. In the former case a third party is liable only if he was dishonest or lacking in probity, in the sense that he had actual knowledge of or was wilfully blind to the breach of trust.^[31] In the latter case the third party who has given value for the benefit must have acted in bad faith. In other words the third party must have had knowledge or have been put on notice that the benefit was given to him in breach of fiduciary duty.^[32] Claims against a third party in possession of company funds or property which have been transferred in breach of duty may be advanced on the ground of unjustified enrichment.^[33] There is also authority that where company funds have been alienated in breach of fiduciary duty and converted into assets, those assets can be traced on the basis that the circumstances have given rise to a constructive trust.^[34]
9.15      In the above paragraphs we have discussed claims for breach of duty under the general law. The same facts might, if they involved a breach of duty by the directors, also constitute grounds for proceedings for relief under section 459 of the Companies Act 1985 for unfair prejudice.^[35] If the proceedings succeeded the court would be able to make a range of orders, including an order that the wrongdoers purchase the shares of the applicant at a value adjusted to take account of the wrongful acts.^[36] Likewise if the company went into liquidation or administration, the liquidator or administrator might be able to use the statutory remedies available to them under, for example, section 238 of the Insolvency Act 1985 (transactions at an undervalue).

Substantive differences between sections 312-316, 319, 320-322 and 330-342 and the general law

9.16      If sections 312-316, 319, 320-322 and 330-342 were repealed, a party wishing to bring proceedings would not only find himself entitled to different remedies, he would also find that there were material differences in the substantive law. While there is an overlap between these sections and the general law, there are also some significant differences. The sections are generally wider and thus the benefit of this additional protection would be lost if the sections were simply to be repealed.
9.17      The principal differences between sections 312-6 and the general law are as follows:

(1) sections 312 and 313 require prior disclosure.^[37] Under the general law, the secret profit could be ratified after the event;

(2) sections 312 and 313 require disclosure to all members.^[38] Under the general law, on a resolution, whether for approval or ratification, only shareholders having the right to vote could vote on the resolution;

(2) sections 312 and 313 make the payment unlawful. The consequences of this are discussed in Part 10 below. Under the general law, where the payments constitute a breach of trust, they are not for that reason unlawful;

(4) section 314 creates a trust in favour of former members: Under the general law the secret profit belongs to the company even if its shares have changed hands;^[39]

(5) sections 314(3) contains a criminal offence;^[40] and

(6) section 314 creates a statutory duty of disclosure.

However we consider that the payments which sections 312-314 seek to prohibit would be recoverable as secret profits under the general law.^[41]

9.18      The principal difference between section 319 and the general law is that section 319 by stipulating a period of five years lays down a benchmark for the acceptable length of service contract (where stricter voluntary codes of conduct do not apply) so that it is not necessary to reinvent the wheel on this point in each new case.
9.19      The principal difference between sections 320-322 and the general law is that under most articles directors are able to approve transactions in which one of their number is interested. However in listed companies, and many other companies, directors are not permitted to vote on transactions in which they are interested with specified exceptions.^[42] Nonetheless the point remains that a resolution of the company in general meeting would not be required. There are differences between the remedies given by section 322 and the general law, in particular affirmation is only permitted within a reasonable time (ratification could take place under the general law at any time), and under the general law the right of rescission may be available when the third party has constructive as opposed to actual notice of the contravention of the Act.^[43]
9.20      The principal differences between sections 330-342 and the general law are as follows:

(1) under the general law it would have to be shown that the transaction, for example of loan, was not entered into bona fide in the interests of the company. Section 330 creates absolute prohibitions on the type of transactions to which it applies;

(2) section 342 creates criminal offences for breach;

(3) section 341 (civil remedies) does not permit ratification or affirmation, which would be defences to a claim for breach of duty under the general law;

(4) under section 341, rescission is barred by the intervention of a third party who acquires rights in the transaction bona fide and for value only if he has no actual notice of the contravention. Under the general law rescission may be available if the third party has constructive knowledge.

9.21      It would follow if sections 330-342 were repealed that sections 343-344 (record to be maintained by certain banks of transactions and arrangements of the kind described in section 330) would have to be repealed. There would also need to be changes to Schedule 6. On the basis that it was still thought right to require disclosure of loans, quasi-loans and other dealings, the disclosure requirements for the annual accounts would need to be rewritten.

Reasons for repealing sections 312-316, 319, 320-322 and 330-342

9.22      We have referred above to the complexity of these provisions. We have also shown in Part 4 that loopholes exist.^[44] The most obvious example of this is in section 319 which fails to prohibit rolling contracts.^[45] Section 314 applies only to a limited number of takeover offers and the rules allow an offeror to vote shares which have been assented to his offer in favour of the payment. Section 320 only catches the transfer or acquisition of assets: it does not cover other benefits such as the entry into a contract for the provision of services which confers a substantial benefit on the director. The provisions fail to achieve coherent regulation of self-dealing; for instance it is anomalous that section 319 should single out just one term in a service contract, namely a term about the length of a director's service contract and require it to be approved by the shareholders when it exceeds what is considered desirable for management to have discretion to fix without shareholder approval, when other terms in such a contract, notably those as to the period of notice required for termination on notice or predetermined compensation clauses^[46] are not subject to shareholder approval.
9.23      Part X would of course be greatly simplified if these provisions were removed.
9.24      There are also possible reforms which would address certain arguments against repeal:

(1) It would be possible to strengthen the no conflict rule under the general law and thus increase the power of shareholders. We have also seen how the general law failed to provide adequate protection to shareholders because the no conflict rule could be modified by the articles.^[47] However statute could provide that the shareholders had to approve modifications of this kind to the articles at regular intervals. This would give them the opportunity to consider what restriction on such matters were appropriate for the company on an up to date basis.

(2) If it was felt that the only objection to the repeal of these sections was that the duty to act in the company's best interests, and not to obtain secret profits, was only to be found in the case law, and was therefore not particularly accessible to directors, the introduction of a statutory statement of the duties of directors might address this objection by making the law more accessible and comprehensible.^[48]

Reasons for retaining these sections

9.25      The principal reasons for retaining these sections is of course that as shown above they provide protection, in terms of substantive law and remedies, which is superior to that offered by the general law. There is no evidence that such protection is no longer required though in many respects its importance is eclipsed in the case of listed companies by self-regulation. But as we have said, self-regulation rules do not apply to private companies and many public limited companies.^[49] Moreover in the case of section 319 the Cadbury Committee considered this was an area for statutory control,^[50] and the Greenbury and Hampel Committees did not argue to the contrary. The whole or the majority of the board may have a vested interest. In the case of sections 330-342 the protection the sections provide is not merely for the benefit of members. It is also for the benfit of creditors.
9.26      A system for renewing at regular intervals articles which modify the no conflicts rule might well not work in practice and therefore would not necessarily materially alleviate the present situation. There is considerable shareholder apathy and individual shareholders may well have insufficient votes to have any real effect on the voting. It is difficult, therefore, to see that the idea of renewable articles would materially enhance the shareholder's position. Moreover there would have to be a complex statutory scheme worked out so that the consequences of non-compliance with the procedure were readily apparent.
9.27      It is of course correct that the scheme in Part X is not complete and coherent. This is one of the conclusions on the economic considerations in Part 3.^[51] This may however be consistent with the "enough but not excessive" principle which we have provisionally identified above.^[52] The alternative suggested in Part 3 is that there should be a move to a general principle of disclosure to the shareholders of information concerning self-dealing and other conflicts of interest and directors' interests, with shareholder approval being required only where there was a danger of depletion of corporate assets from particular types of transactions or where the agreed division of powers between the board and the shareholders was in danger of being undermined. It can be said that it is desirable to identify the policy which should apply in the regulation of self-dealing situations. Part 3 can be seen as offering a means of doing this without necessarily increasing the burden of regulation. In this it differs from, for instance the approach in the Principles of Corporate Governance published by the American Law Institute.^[53] These identify a duty of fair dealing which imposes a duty upon a director who is materially interested in a transaction to make disclosure to the appropriate organ of the company^[54] and the option of obtaining the approval of the company in general meeting or of an independent quorum of the board; in the latter case the terms of the transaction have to be fair (or reasonably be considered fair) to the company. That would be one possible model if it was desired to have a coherent system of regulation for transactions in which a director was interested, but it would involve applying a general rule across all situations in which a director was interested and this may impede commercial affairs and increase the risk of litigation. An 'across the board' approach is not necessarily consistent with the principles which we have provisionally identified in Part 2.
9.28      In approaching the repeal of sections 312-316, 319, 320-322 and 330-342, it is arguably more profitable to ask whether the legislature has required the right level of disclosure and to the right persons and imposed an appropriate approval requirement than treat the question as simply one of repeal or no repeal. In any event the arguments against repeal appear to outweigh those in favour. We would nevertheless welcome consultees' views on this issue.

Consultees are asked whether they consider that sections 312-316, 319, 320-322 and 330-342 should be repealed and reliance placed on the general law.

9.29      We now turn to consider the case for repealing sections 311 and 323 in any event.

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

311.((1) It is not lawful for a company to pay a director remuneration (whether as director or otherwise) free of income tax, or otherwise calculated by reference to or varying with the amount of his income tax, or to or with any rate of income tax.

(2) Any provision contained in a company's articles, or in any contract, or in any resolution of a company or a company's directors, for payment to a director of remuneration as above mentioned has effect as if it provided for payment, as a gross sum subject to income tax, of the net sum for which it actually provides.^[55]

9.30      This prohibition was introduced by the Companies Act 1947 following a recommendation of the the Cohen Committee.^[56] The concern expressed by the Cohen Committee was that shareholders should be able to estimate "the total amount of remuneration before deduction of tax as the amount of tax would vary according to the total income of the director"^[57] where companies had agreed to pay them their remuneration as directors free of tax. The Cohen Committee's concerns are difficult to follow. Under general principles of tax law it has been clear at least since decisions of the House of Lords in the 1920s that the tax agreed to be paid by the company would itself be taxable.^[58] Moreover, the company's promise to pay the director's tax would appear to be a "benefit received by him otherwise than in cash" for the purposes of Schedule 6, paragraph 1(3)(a), and thus the estimated money value would have to be included in the emoluments of directors required to be disclosed in the notes to the annual accounts.
9.31      The existence of section 311 has arguably become at one and the same time an inconvenient anachronism and an irrelevance. There may be perfectly sensible situations which the section renders illegal, as where an employer wishes to compound a claim to PAYE without involving the director.^[59] Increasingly remuneration is given to directors in the form of shares so that the provision has no impact and in addition entitlements to benefits are often measured by reference to the tax rate.
9.32      We provisionally consider shareholders are adequately protected in this matter by the disclosure provisions of Schedule 6 to the Companies Act 1985 and that section 311 should be repealed. Obviously it would generally be imprudent for a board to pay themselves salaries on this basis because of the damage it would do to relations with staff who did not receive this benefit but there are other remedies available to deal with this situation.

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

Repeal of section 323 (Option dealing by directors)

9.33      We set out this section and described its history in paragraphs 4.214-4.218 above. The argument for repeal of section 323 is that the mischief which this section addresses is now adequately dealt with by the provisions of the Criminal Justice Act 1993^[60] and the Stock Exchange Model Code.^[61] Unlike the Criminal Justice Act 1993, section 323 applies to dealings otherwise than on the basis of unpublished price-sensitive information and to off-market dealings but the fact that section 323 has wider application in these ways is not necessarily a reason for retaining it. It would be open for companies to restrict the option dealing which they permit their directors to do by contract and if institutional investors in listed companies or the Stock Exchange are not satisfied that companies are taking a line on this which sufficiently protects the interests of investors they could require companies to cause their directors to observe some uniform code on option dealings by directors and their families: option dealing may be a matter which is now better regulated by a voluntary code. If a company does not approve of option dealing by any of its directors it would in the last resort be in a position to remove him from office under section 303 of the Companies Act 1985, although it may be difficult to gain the support necessary to pass such a resolution. Our provisional view is that section 323 should be repealed.

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

option 2: Can Part X be improved by rewriting?

9.34      Some of the provisions of Part X were drafted in haste, when they were first introduced, to meet particular problems that had arisen. This is particularly the case with sections 320-322 and 330-347. Some improvements were made when the Companies Acts were consolidated in 1985.^[62] In this option we consider whether sections 318 and 330-344, and 347 (in part) might be improved if they were rewritten more simply.
9.35      There have been a number of developments in legislative drafting since 1985. In particular in November 1995 a project was set up to simplify tax legislation.^[63] This project is now underway and a number of documents have been published seeking views on how such simplification would be best achieved. No simplification bills have yet been introduced, but the techniques that can be used to simplify legislation are being identified and refined. It is clear that this project will provide instructive material for other areas of statute law in need of simplification. The Tax Rewrite Project's methods include among other things:

using a more logical structure;

using shorter sentences; and

using modern language.

9.36      In the field of company law Australia has been experimenting with simplifying its Corporations Law using many of the same techniques as the Tax Law Rewrite.
9.37      Another major development has been the decision by the United Kingdom Parliament to introduce explanatory notes with Bills.^[64] These will be an expanded and improved version of the old explanatory memoranda and notes on clauses and they will be made publicly available. They will be amended as the Bill goes through Parliament and they will present the main points in the Bill in an objective way.
9.38      This development means that if there is a new Bill to give effect to our recommendations at the end of this project, they will probably be introduced with the new Explanatory Notes, which could be accessible to companies and their advisers when the Bill becomes law. This development taken on its own should lead to some improvement in the comprehensibility of legislation to the layman. It will also mean that there will be less cause to have in a Bill material which is merely narrative to help the reader know where to go in the Act. The introduction of notes however may still leave a role for redrafting the statute.
9.39      Parliamentary Counsel has prepared a redraft of the provisions of sections 330-344 and part of section 347 using:

shorter sentences;

more logical structure;

provisions to guide the reader;

formulae;

splitting up more complex propositions; and

more modern language.

Counsel's draft may be found in Appendix B below. This draft is purely for illustrative purposes. Considerable further work would be required before it could be introduced into Parliament.^[65]

9.40      Consultees will notice that the provisions of the draft are not simpler in substance than those in the existing Act. It is only the language which is simplified. To achieve simplicity in this area there would have to be a decision that some of the restrictions or exemptions could be made more simple or be dispensed with altogether. Only in that way will any substantial progress be made towards cutting back on the sheer volume of regulation in the Companies Acts.
9.41      We now give an example of how the sections might be simplified if the policy itself were simplified.
9.42      Section 318 could be dramatically reduced in length by, for example, the following steps:

(1) redrafting section 318(1) so that in lieu of paragraphs (a) to (c) it simply requires the company to keep at its registered office copies of its directors' contracts of service (whether with the company itself or a subsidiary) or to the extent that they were not written, memoranda of their terms;

(2) removing the choice given by the existing section to companies to keep the necessary copies and memoranda at places other than their registered office. This would eliminate the need for subsections (2), (3) and (4); and

(3) deleting subsections (5) and (11).^[66]

9.43      These amendments may reduce the section to about one-third of its present length. Further reduction would be achieved by amalgamating the provisions for inspection of the register in subsection (8) and (9) with the comparable provisions for inspection of the register of debenture holders (section 191(4) and (5)); the register of interests in shares (section 219(3) and (4)); the register of directors and secretaries (section 288(4) and (5)); the register of members (section 356(5) and (6))^[67] and the register of charges (section 423(3) and (4)). The reader would then have to look at more than one section: section 318 would not be a self contained code dealing with all aspects of disclosure of service contracts. Accordingly, the issues for consideration are (a) would the section, as simplified, still be clear to users? and (b) is it acceptable to dispense with the choice of location given by section 318(3), at least for the purpose of simplifying the Act?

Consultees are thus 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 9.42-9.43 above.

Note 1   Sections 312-316, 320-322, and 330-342.    [Back]

Note 2   See para 1.13(2) and (3).    [Back]

Note 3   We discuss the question of partial repeal of ss 312-316 in paras 9.22-9.24 below.     [Back]

Note 4   (Excluding the option of no change); see paras 4.42-4.61.     [Back]

Note 5   (Excluding the option of no change); see paras 4.163-4.171.     [Back]

Note 6   (Excluding the option of no change): see paras 4. 190-4.204.     [Back]

Note 7   See Part 6 above.     [Back]

Note 8   See paras 4.30-4.32 above.    [Back]

Note 9   See paras 4.161-4.169 above.    [Back]

Note 10   See paras 4.182-4.186 above.    [Back]

Note 11   Para 4.158-4.160 above.     [Back]

Note 12   Final Report (January 1998) paras 1.8 and 1.9.    [Back]

Note 13   See para 4.165 above.    [Back]

Note 14   See para 1.25 above.    [Back]

Note 15   See para 1.38-1.44 above.    [Back]

Note 16   DTI Consultative Paper, paras 3.5-3.7.    [Back]

Note 17   See para 10.13 below.    [Back]

Note 18   See para 10.22 below.    [Back]

Note 19   See para 4.40 above.    [Back]

Note 20   See paras 4.177-4.181 above.    [Back]

Note 21   See para 6.29 above.    [Back]

Note 22   See paras 11.5 and 11.13-11.17 below.     [Back]

Note 23   See para 11.13.    [Back]

Note 24   See para 11.18 below.    [Back]

Note 25   See for example regulation 84 in Table A.    [Back]

Note 26   See para 11.13.    [Back]

Note 27   See below para 12.8-12.10.     [Back]

Note 28   Royal Brunei Airlines Bhd v Tan [1995] 2 AC 378, PC.    [Back]

Note 29   See eg Eagle Trust plc v SBC Securities (No 3) [1996] I BCLC 121.    [Back]

Note 30   See generally Re Diplock [1951] AC 251.    [Back]

Note 31   Bank of Scotland v Macleod Paxton Woolard & Co 1998 SLT 258.    [Back]

Note 32   Style Financial Services Ltd v Bank of Scotland 1998 SLT 851. Thomson v Clydesdale Bank (1891) 18 R 751, (1893) 20 R (HL) 59.    [Back]

Note 33   Style Financial Services Ltd and Thomson v Clyesdale Bank Ltd 1998 SLT 851.    [Back]

Note 34   Sutman International Inc v Herbage (unreported) 2 August 1991. Lord Cullen.    [Back]

Note 35   See Shareholder Remedies, Law Commision Consultation Paper No 142, paras 9.21-48.    [Back]

Note 36   Ibid, para 10.21    [Back]

Note 37   See Part 3 above, in particular para 3.57.    [Back]

Note 38   See Re Duomatic Ltd [1969] 2Ch 365.    [Back]

Note 39   See Regal (Hastings) v Gulliver [1967] 2 AC 134 n.    [Back]

Note 40   Discussed in Part 10 below.    [Back]

Note 41   See for example Gaskell v Chambers (No 3) (1858) 26 Beav 360, Attorney-General v Reid [1994] 1 AC 324. In Scotland the director would hold the payments as constructive trustee. See W A Wilson and A G M Duncan Trusts, Trustees and Executors (2 ed, 1995) 6-63f; and Stair Memorial Encyclopaedia vol 24 "Trusts, Trustees and Judicial Factors" para 20.    [Back]

Note 42   See para 4.93 above.     [Back]

Note 43   Cf s 322(2)(b).    [Back]

Note 44   See eg, para 4.17 above.     [Back]

Note 45   See paras 4.161-4.162 above.     [Back]

Note 46   As to this, see para 4.15 et seq above, regarding ss 312-316 of the Companies Act 1985.    [Back]

Note 47   See paras 11.49-11.51 for a discussion as to whether this modification is affected by s 310 of the Companies Act 1985.    [Back]

Note 48   See Part 14 below.    [Back]

Note 49   See para 9.5 above.     [Back]

Note 50   See para 4.14, p 31 of its report, quoted at para 4.158 above.    [Back]

Note 51   See para 3.92(8) above.    [Back]

Note 52   See para 9.2 above.    [Back]

Note 53   Principles of Corporate Governance: Analysis and Recommendations published by the American Law Institute (2 vols, 1994); and see generally para 6.21 of the Hong Kong Consultancy Report in Appendix L below.    [Back]

Note 54   This depends on the organ whose approval is sought.    [Back]

Note 55   The predecessor of s 311(2), s 189(2) of the Companies Act 1948, was applied in the Scottish case of Owens v Multilux Ltd 1974 SLT 189.    [Back]

Note 56   The Cohen Report, para 88. A similar recommendation had been made by the Company Law Amendment Committee in 1918 ( the Wrenbury Committee) on the basis that it was not possible for shareholders to find out how much remuneration was payable by the company (Report of the Company Law Amendment Committee, Cd 9138, para 60) but no action was taken to implement this recommendation. The Greene Committee questioned the need for a prohibition as the tax so paid would be additional remuneration but recommended that there should be obligatory disclosure, on the request of holders of shares carrying 25% of the votes, of the aggregate amount of directors' remuneration, including tax paid where remuneration was agreed to be paid tax-free: Report of the Greene Committee, paras 51 and 52. This recommendation was implemented by ss 128 and 147 of the Companies Act 1929, the sections being repealed and replaced by s 196 of the Companies Act 1948.    [Back]

Note 57   Cohen Report, para 88.    [Back]

Note 58   See North British Railway Co v Scott [1923] AC 37, Hartland v Diggines [1926] AC 289.    [Back]

Note 59   Discharge of the director's liability for unpaid PAYE would constitute "emoluments" for the purposes of disclosure in the annual accounts under Sched 6, but would not require shareholder approval under s 320 because it would not be a non-cash asset for the purposes of s 739. See para 4.189 above.     [Back]

Note 60   See Sched 2, para 5.    [Back]

Note 61   See para 4.223 above.     [Back]

Note 62   For example, minor amendments to ss 320, 322, 343 and 346. This limited revision was achieved through the mechanism of two Orders in Council (SI 1984/134 and SI 1984/1169), short-circuiting the normal parliamentary procedure applicable to consolidating bills, on the basis that the consolidating Act would incorporate any amendments jointly recommended by the Law Commission and Scottish Law Commission. See Law Commission Report No 126 and Scottish Law Commission Report No 83 (1983) Cmnd 9114; and Law Commission Report No 136 and Scottish Law Commission Report No 87 (1984) Cmnd 9272. See also the Companies Act 1981, s 116 (repealed).    [Back]

Note 63   The project was initiated pursuant to s 160 of the Finance Act 1995: see generally, The Path to Simplification, A Background Paper (December 1995).    [Back]

Note 64   See the second report of the Select Committee on Modernisation of the House of Commons HC (1997-98) 389, 3 December 1997.    [Back]

Note 65   In particular, no account has been taken of consequential amendments or transitional provisions.    [Back]

Note 66   See paras 4.140-4.147 above.     [Back]

Note 67   In this case the court can also order that the company gives a copy of the register or index of members to the party seeking inspection.    [Back]