Abstract
Company directors are treated as fiduciaries1 and as such must not permit their personal interests and their duty to the company to conflict. In order to avoid such conflicts or potential conflicts arising, transactions between a company and its directors are restricted. Such transactions are regulated in a number of ways, in particular, by means of statutory prohibition, corporate approval and disclosure in the statutory accounts. In this chapter, attention is focused on the Companies Act requirements for disclosure in a company’s financial statements of transactions involving directors (except for those relating to directors’ remuneration which are dealt with in Chapter 26). The provisions determining the legality or otherwise of such transactions are discussed in outline in the Appendix to this chapter.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
A person who holds anything in trust. A fiduciary relationship arises where a person has rights and powers which he is bound to exercise for the benefit of another. Hence he is not allowed to derive any profit or advantage from the relationship between them, except with the knowledge and consent of the other person: J. Burke, Jowitt’s Dictionary of English Law, Volume I A–K, p. 788. If a director breaches this duty, a range of remedies are available to the company. The company may, inter alia, seek an injunction, claim damages or compensation, require the director to account for profits made or rescind contracts entered into with him.
CA 48, s 190(1).
Ibid., s 190(1)(a).
CA 80, ss 49–50.
CA 85, ss 330–346, Sch. 6, Parts II and III.
Ibid., s 741(1).
Companies should ensure that they do not allow persons described as divisional directors to hold themselves out as being members of the board. Otherwise there is a danger that contracts entered into by such persons, in excess of their managerial authority, may be binding on the company.
CA 85, s 741(2).
Ibid.
Ibid., s 741(3).
The position of the alternate director is discussed in more detail in R. Pennington, Company Law, p. 628, and C.M. Schmithoff (ed.), Palmer’s Company Law Volume I, p. 879.
The Companies (Tables A–F) Regulations 1985 (S.I. 1985 No. 85), Table A, Article 65.
CA 85, s 346(2)(a), (3)(a).
Ibid., s 346(2)(b).
Ibid., s 346(4).
Ibid., s 346(5).
Ibid., s 346(6).
Ibid., s 346(2)(c).
Ibid.
Ibid., s 346(3)(b).
Ibid., s 346(2)(d).
Ibid., s 346(2)(e).
Ibid., s 346(6)(a)
Ibid., s 346(7) and Sch. 13, para. 5.
Ibid., s 346(8).
Ibid., s 744.
Champagne Perrier — Jouet SA v H.H. Finch Ltd [1982] 1 WLR 1359.
If a director draws remuneration on account, the Inland Revenue may treat the director as having received a beneficial loan and thus raise an assessment if the notional interest is deemed to exceed £200: Taxes Act 1988, s 160. In the case of a close company, advance corporation tax may be payable which can only be recovered when the loan is repaid: Taxes Act 1988, s 417 et seq. These difficulties may be surmounted if the company accounts for PAYE and NIC on all withdrawals by directors.
CA 85, s 331(3).
Ibid., s 331(7).
Ibid., s 331(8).
Ibid., ss 317(1), (8).
Ibid., s 317(6).
Ibid., ss 232(1)–(2) and Sch. 6, Part II.
Ibid., Sch. 6, para. 15.
Ibid., s 237(4). A discussion of the procedures which the auditor should adopt in relation to directors’ emoluments can be found in A. Brown and D. Foster, Directors’ loans, other transactions and remuneration, pp. 5–7.
CA 85, s 232(1)–(2) and Sch. 6, paras. 15–16.
Ibid., Sch. 9, Part IV.
Ibid., s 232(1)–(2, and Sch. 6, paras. 15–16.
This includes indemnities: ibid., s 331(2).
Ibid., Sch. 6, para. 19(a).
Ibid., para. 19(b).
Ibid., para. 19(c).
Ibid., s 232(1)–(2) and Sch. 6, paras. 16(a), (b).
Ibid.
Ibid., Sch. 6, para. 22(1).
Ibid., para. 22(2)(a).
Ibid., para. 22(2)(b).
Ibid., para. 22(2)(d).
Ibid., para. 22(2)(e).
Ibid., para. 22(2)(f).
Ibid., para. 27(c).
Ibid.
Ibid., s 232(1)–(2) and Sch. 6, para. 15(c).
Ibid., s 232(1)–(2) and Sch. 6, para. 16(c).
Ibid., Sch. 6, paras. 15(c) and 16(c) refer to any ‘other transaction or arrangement’.
Ibid., para. 17(2). Materiality for these purposes should not be confused with the materiality level calculated for the purposes of the audit of the financial statements.
Ibid., Assuming the directors’ opinion is formed in good faith and is not perverse, their view should prevail. However, in extreme circumstances the directors’ opinion may need to be overridden in order for the accounts to give a true and fair view: A. Brown and D. Foster, op. cit., p. 17.
CA 85, Sch. 6, para. 17(2).
C. Rumbelow, ‘When Directors Must Tell’, The Law Society’s Gazette, Wednesday 3 November 1982, pp. 1390–1392.
C. Swinson, ‘Director’s “Material interest” — just how do you measure it’, Accountancy, October 1983, p. 110.
CA 85, Sch. 6, para. 22(1).
Ibid., para. 22(2)(c).
Ibid., para 22(2)(f).
Ibid., s 340(7). The Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order (SI 1990/1393) made under s 345 of the Companies Act 1985 increased this limit from £50,000 to £100,000 with effect from 31 July 1990.
Ibid., s 340(6).
Ibid., Sch. 6, para. 18(a).
Ibid., para. 18(b).
Ibid., para. 18(c).
Ibid., paras. 15(b) and 16(b).
Ibid., para. 24.
Ibid., para. 23.
A. Brown, ‘New exemptions from disclosure of directors’ transactions’, The Accountant’s Magazine, February 1985, pp. 66–67.
CA 85, Sch. 6, para. 17(2).
Ibid., para. 20.
SI 1984 No 1860.
B. Johnson and M. Patient, Accounting Provisions of the Companies Act 1985, p. 270.
The Institute of Chartered Accountants of Scotland, Current Problem Areas in Company Law, p 4.
CA 85, Sch. 6, para. 21.
The Institute of Chartered Accountants of Scotland, loc. cit., has criticised the wording of this provision.
CA 85, Sch. 6, para. 25.
Ibid.
Ibid., Sch. 9, Part IV, para. 2.
Ibid., para. 3.
See generally CA 85, ss 343–344. The Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order (SI 1990/1393) made under s 345 of the Companies Act 1985 increased the de minimis, provision contained in s 344(1) from £1,000 to £2,000 with effect from 31 July 1990.
Ibid., s 343(2)
Ibid., s 343(5)–(6). A pro forma audit report is contained in A. Brown and D. Foster, op. cit., p. 23.
CA 85, Sch. 9, Part IV, para. 3 and Sch. 6, Part III.
Ibid.
Ibid., Sch. 6, para. 30.
The Council of The Stock Exchange, Admission of Securities to Listing, Section 5, Chapter 2, para. 21(k) and Section 6, Chapter 1, paras. 6.1 – 6.3.
The Council of The Stock Exchange, The Stock Exchange Unlisted Securities Market, General Undertaking, para. 1(d).
Admission of Securities to Listing, Section 6, Chapter 1, paras. 6.1–6.3.
Ibid., para. 6.3.
Ibid., paras. 6.1 and 6.2.
Ibid., para. 6.1.
Ibid., para. 6.2. The report by the company’s accountants is known as a Class 4 waiver.
Ibid., Section 5, Chapter 2, para. 21(k).
See The RTZ Corporation PLC, Annual report and accounts 1991, p. 59. P. 46 disclosed transactions with directors which are clearly not contracts of significance in view of the amounts involved.
The Stock Exchange Unlisted Securities Market, General Undertaking, para. 1(d).
CA 85, s 232(1)–(2) and Sch. 6, Part III.
Ibid., s 232(1)–(2).
Ibid.
Ibid., s 232(1).
Ibid., s 232(1)–(2) and Sch. 6, para. 29.
Ibid.
Ibid.
Ibid., Sch. 6, para. 29
Ibid., Sch. 6, paras. 28 and 29(1)(a).
Ibid., paras. 28 and 29(1)(b).
Ibid., para. 30.
Ibid., para. 29(2).
Ibid., Sch. 9, Part IV, para. 3(1).
Banking Act 1987, s 105 (6)–(7).
The Law Society’s Standing Committee on Company Law and the Consultative Committee of Accountancy Bodies ‘Material interest’ — Proposed Amendments to S.54, October 1983.
The Institute of Chartered Accountants of Scotland, op. cit., pp. 3–4.
Hansard, Parliamentary Debates, June 22, 1989, Column 507.
DTI, Consultative Document on Amendments to Schedule 6 to the Companies Act 1985: Disclosure by Companies of Dealings in favour of Directors, October 1991.
Ibid., para. 7 and Draft SI, para. 18(1)(c).
Ibid., paras. 9–11.
Ibid., para. 12.
Ibid., para. 13.
Ibid., para. 15.
Ibid., para. 16.
Appendix
CA 85, ss 317, 320, 330–346.
Ibid., ss 317(8), 320(3), 330(5).
Ibid., s 330(2).
Ibid., s 331(6).
Ibid., s 330(2)(b).
This includes indemnities: ibid., s 331(2).
Ibid., s 330(2)(b).
Ibid., s 330(3)(c).
Ibid., ss 330(3)(a),(b), 330(4)(a).
Ibid., ss 330(3)(c), 330(4)(b).
Ibid., s 330(6).
Ibid., s 330(7).
Ibid., s 334. S. 138 of CA 89 increased the limit from £2,500 to £5,000 with effect from 31 July 1990. S 339 determines how the threshold is to be calculated.
Ibid., ss 334, 339.
Ibid., s 332. S. 138 of CA 89 increased the limit from £1,000 to £5,000 with effect from 31 July 1990.
Ibid., s 335(1). See also s 339. The Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order (SI 1990/1393) made under s 345 of the Companies Act 1985 increased this limit from £5,000 to £10,000 with effect from 31 July 1990.
Ibid., s 335(2).
Ibid., s 333.
Ibid., s 336.
Ibid., s 337(1)–(2).
Ibid., s 337(3).
Ibid., s 337(3). See also s 339. The Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order (SI 1990/1393) made under s 345 of the Companies Act 1985 increased this limit from £10,000 to £20,000 with effect from 31 July 1990.
Ibid., s 338(2).
Ibid., s 338(1).
Ibid., s 38(3).
Ibid., s 338(4). S. 138 of CA 89 increased the limit from £50,000 to £100,000 with effect from 31 July 1990. See also s 339.
Ibid., s 338(6). S. 138 of CA 89 increased the limit from £50,000 to £100,000 with effect from 31 July 1990.
If the pre-consolidation legislation is to be reproduced accurately, the reference in s 339(1) to s 338(4) should actually be a reference to s 338(1).
The legislation applies to companies; that is, an entity formed and registered under the various Companies Acts: ibid., s 735. This definition applies unless the contrary intention appears: ibid., s 735(4). Since no contrary intention is expressed, a body incorporated overseas is not a company for the purposes of the directors’ transactions provisions.
Ibid., s 341(1)(a).
Ibid.
Ibid., s 341(1)(b).
Ibid., s 341(2).
Ibid., s 341(4).
Ibid., s 341(5).
Ibid., s 342(1).
Ibid., s 342(2).
Ibid., s 342(5).
Ibid., s 342(3).
Ibid., s 317(7).
Ibid., s 317(1).
Ibid., s 317(6).
Ibid., s 317(2).
[1988] 1 W.L.R. 863.
CA 85, s 317(2).
Ibid., s 317(3).
Ibid., s 317(8).
The Companies (Tables A–F) Regulations 1985, op. cit, Article 85.
CA 85, s 739(1).
Ibid., s 320(1).
Ibid.
Ibid., s 320(2). The Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order (SI 1990/1393) made under s 345 of the Companies Act 1985 increased this limit from £50,000 to £100,000 with effect from 31 July 1990.
Ibid. The Companies (Fair Dealing by Directors) (Increase in Financial Limits) Order (SI 1990/1393) made under s 345 of the Companies Act 1985 increased this limit from £1,000 to £2,000 with effect from 31 July 1990.
Ibid., s 321.
Ibid., s 321(1).
Ibid., s 321(3).
Ibid., s 321(2)(a).
Ibid., s 321(4).
Ibid., s 322(1).
Ibid., s 322(2)(a).
Ibid., s 322(2)(b).
Ibid., s 322(2)(c)
Ibid., s 322(2).
Ibid., s 322(5).
Ibid., s 322(6).
The Companies (Tables A–F) Regulations 1985, op. cit.
Author information
Authors and Affiliations
Copyright information
© 1992 Ernst & Young
About this chapter
Cite this chapter
Davies, M., Paterson, R., Wilson, A. (1992). Directors’ and officers’ loans and transactions. In: UK Gaap. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-12998-0_25
Download citation
DOI: https://doi.org/10.1007/978-1-349-12998-0_25
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-13000-9
Online ISBN: 978-1-349-12998-0
eBook Packages: Palgrave Business & Management CollectionBusiness and Management (R0)