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 declaration.
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 of interest;
- 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 directors.
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 reached.
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 administrative receivership).
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 may suffer.