Directors' Interests in Contracts with the Company
Existing and Proposed Transactions or Arrangements
The Companies Act 2006 has placed new requirements on
directors to declare their interest in any transaction or arrangement that
is proposed to be entered into by the company (section 177) as well
as any existing transaction or arrangement entered into by the
company (section 182) although a further declaration in respect of an
existing transaction or arrangement need not be made if a declaration was
made when the transaction or arrangement was proposed.
The declaration in relation to either an existing or proposed transaction
or arrangement can be made in one of three ways:
- at a meeting of the directors, or
- by notice in writing (under section 184), or
- by general notice (under section 185).
A declaration in relation to a proposed transaction or arrangement
must be made before the company enters into it.
If a declaration of interest proves to be, or becomes, inaccurate or
incomplete, a further declaration must be made.
A declaration in relation to an existing transaction or arrangement
must be made as soon as is reasonably practicable. Failure to
comply with the requirement does not affect the underlying duty to make the
In each case, a declaration of an interest of which the director is not
aware or where the director is not aware of the transaction or arrangement
in question is not required. For this purpose a director is treated as
being aware of matters of which he or she ought reasonably to be aware.
A director need not declare an interest in the following circumstances:
- if it cannot reasonably be regarded as likely to give rise to a conflict
- if the other directors are already aware of it (and for this purpose the
other directors are treated as aware of anything of which they ought
reasonably to be aware); or
- if it concerns terms of his service contract that have been or are to be
considered by a meeting of the directors, or by a committee of the
Substantial Property Transactions
A substantial property transaction involves the sale or purchase by the
company of substantial non-cash assets to or from directors and their
connected persons. The approval of the shareholders is required by means of
an ordinary resolution in a general meeting or a written resolution.
Transactions may now be entered into conditionally upon the necessary
members' approval being obtained (under the Companies Act 1985, it was
necessary to obtain the approval prior to entering into the agreement). The
test of whether a non-cash asset is "substantial" is either it represents
10% of the company's net assets (and is more than £5,000) or it exceeds
£100,000. Where there is more than one non-cash asset and/or a series of
arrangements involving non-cash assets, the amounts are aggregated in order
to determine whether the threshold for requiring members' approval has been
Payments under directors' service contracts and payments for loss of office
are excluded from the scope of the substantial property transaction
provisions (for the avoidance of doubt). Approval is not required where an
acquisition or disposal takes place between a company and a person in his
character as a member of that company. Members' approval is also not
required where the company is being wound up (unless pursuant to a members'
voluntary winding-up) or is in administration (note, however, that the
requirement for approval remains where the company is in receivership or
If a director has a personal interest in a contract you should also check
whether the Articles of Association prevent him from voting on any
resolution at the Board meeting.
A director who breaks these rules may be required either to account to the
company for any gain which results from the unauthorised or undisclosed
contract, or to indemnify the company for any resulting loss or damage it