Clauses 195 to 202: Payments for loss of office

396.     These clauses require member approval for payments for loss of office. These are payments made to a director (or former director) to compensate them for ceasing to be a director, or for losing any other office or employment with the company or with a subsidiary of the company. They also include payments made in connection with retirement. In the case of loss of employment or retirement from employment, the employment must relate to the management of the affairs of the company.

397.     Member approval is required under clause 197 if a company wishes to make a payment for loss of office to:

• one of its directors;

• a director of its holding company;

• a person connected with one of its directors; or

• a person connected with a director of its holding company.

398.     Member approval is also required if any person (including the company or anyone else) wishes to make a payment for loss of office to a director of the company in connection with the transfer of the whole or any part of the undertaking or the property of the company or of a subsidiary of the company (clause 198).

399.     In the case of a payment for loss of office to a director in connection with the transfer of shares in the company or in a subsidiary of the company resulting from a takeover bid, approval is required of the holders of the shares to which the bid relates and of any other holders of shares of the same class (clause 199).

400.     These clauses replace sections 312 to 316 of the 1985 Act. The changes include:

• setting out the exception for payments in discharge of certain legal obligations (clause 200);

• extending the requirements to include payments to connected persons (clause 195(3));

• extending the requirements to include payments to directors in respect of the loss of any office, or employment with the company, and not merely loss of office as a director as such (clause 195). This implements a recommendation of the Law Commissions;

• extending the requirements in connection with share transfers so as to include all offers resulting from a takeover bid (clause 199(1));

• excluding the persons making the offer for shares in the company and any associate of them from voting on any resolution to approve a payment for loss of office in connection with a share transfer (clause 199(4)). This implements a recommendation of the Law Commissions;

• creating a new exception for small payments (clause 201); and

• resolving conflicts between the remedies where more than one requirement of these clauses is breached. For example, if the payments contravenes both clause 197 and clause 199 because it was a payment by a company to one of its directors and it was a payment in connection with a takeover bid, and none of the required member approvals have been obtained, then the payment is held on trust for the persons who have sold their shares as a result of the offer and not on trust for the company making the payment. This implements a recommendation of the Law Commissions;

• clarifying the civil consequences of breach of these clauses (clause 202).

CHAPTER 5: DIRECTORS' SERVICE CONTRACTS

Clause 205: Directors' service contracts

401.     This clause defines what is meant by references to a director's service contract in this Part. The term is used in clauses 161, 165, 171 and 173 and in this Chapter. It includes contracts of employment with the company, or with a subsidiary of the company. It also includes contracts for services and letters of appointment to the office of director. The contract may relate to services as a director or to any other services that a director undertakes personally to perform for the company or a subsidiary.

Clause 206: Copy of contract or memorandum of terms to be available for inspection

402.     This clause requires a company to keep copies of every service contract entered into by the company or by a subsidiary of the company for a director of the company. If the contract is not in writing, the company must keep a written memorandum of its terms. This clause, together with clause 207, replaces section 318 of the 1985 Act.

403.     Subsection (3) is new. It requires the service contracts to be kept by the company for at least one year after they have expired, but the subsection does not require the copies to be retained thereafter. As a result of the expanded definition of service contract in clause 205, this clause now applies to contracts for services and letters of appointment, as recommended by the Law Commissions.

404.     As recommended by the Law Commissions, the exemption for contracts requiring a director to work outside the UK (section 318(5) of the 1985 Act) and the exemption for contracts with less than 12 months to run (section 318(11) of the 1985 Act) have not been retained.

405.     Failure to comply with the requirements of this clause is a criminal offence for which every officer of the company who is in default may be held liable on summary conviction to a fine not exceeding level 3 on the standard scale (currently £1,000) or in cases of continued contravention a daily default fine not exceeding one-tenth of that. In a change from the current position under section 318 of the 1985 Act, the company will no longer be liable under the criminal offence.

Clause 207: Right of member to inspect and request copy

406.     This clause gives members a right to inspect without charge the copies of service contracts held by the company in accordance with clause 206. Subsection (2) creates a new right for members to request a copy of the service contracts on payment of a fee set by regulations under clause 744.

Clause 208: Directors' service contracts: application of provisions to shadow directors

407.     This clause applies the requirements of this Chapter to service contracts with shadow directors.

CHAPTER 6: CONTRACTS WITH SOLE MEMBERS WHO ARE DIRECTORS

Clause 209: Contract with sole member who is also a director

408.     Under this clause, contracts entered into by a company with its only member must be recorded in writing if the sole member is also a director or shadow director of the company. This does not apply to contracts entered into in the ordinary course of the company's business. The purpose of this clause is to ensure that records are kept in those cases where there is a high risk of the lines becoming blurred between where a person acts in his personal capacity and when he acts on behalf of the company. This may be of particular interest to a liquidator should the company become insolvent.

409.     This clause replaces section 322B of the 1985 Act, which implements article 5 of the 12^th Company Law Directive (89/667/EEC). As the Bill will permit public companies to have a single shareholder, this clause applies to both private and public limited companies.

410.     A failure to record the contract in writing will not affect the validity of the contract (subsection (6)) but other legislation or rules of law might (subsection (7)).

411.     If there is a breach of this clause, every officer of the company in default is liable on summary conviction to a fine not exceeding level 5 on the standard scale (currently £5,000). In a change from the current position under section 322B of the 1985 Act, the company will no longer be liable under the criminal offence.

CHAPTER 7: DIRECTORS' LIABILITIES

412.     The clauses in this Chapter deal with two matters:

• they restate sections 309A to 309C of the 1985 Act (provisions relating to directors' liability). The only substantive changes to those sections are the creation of a right for members to request a copy of a qualifying third party indemnity provision, the removal of criminal liability on the part of the company for failures to comply with the requirements of clause 214 (copy of qualifying third party indemnity provision to be available for inspection) and a requirement for all qualifying third party indemnity provisions to be retained by a company for at least one year after they have expired;

• they introduce a substantive reform of the law on ratification of acts giving rise to liability on the part of a director.

Provision protecting directors from liability

Clause 210: Provisions protecting directors from liability

413.     This clause prohibits a company from exempting a director from, or indemnifying him against, any liability in connection with any negligence, default, breach of duty or breach of trust by him in relation to the company. Subsection (2) prohibits indemnification by an associated company as well as by his own company. "Associated company" is defined in clause 235 as, in effect, a company in the same group.

414.     Any provision, whether in the company's articles, in a contract or otherwise, attempting to exempt or indemnify a director in breach of this clause is void.

415.     Clause 211 permits the purchase of insurance and clause 212 creates an exception for qualifying third party indemnity provisions.

Clause 211: Provision of insurance

416.     This clause permits a company to purchase and maintain insurance for its directors, or the directors of an associated company, against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to the company of which they are a director.

Clause 212: Qualifying third party indemnity provision

417.     This clause permits (but does not require) companies to indemnify directors in respect of proceedings brought by third parties (such as class actions in the US). It also permits (but does not require) companies to indemnify directors in respect of applications for relief from liability made under clause 759 (general power of the court to grant relief in case of honest and reasonable conduct) or under section 144(3) or (4) of the 1985 Act (power of court to grant relief in case of acquisition of shares by innocent nominee).

418.     The indemnity may cover liability incurred by the director to any person other than the company or an associated company. This may include both legal costs and the financial costs of an adverse judgement. But the indemnity must not cover liabilities to the company or to any associated company (subsection (2)).

419.     Another condition is that the indemnity must not cover criminal fines, penalties imposed by regulatory bodies (such as the Financial Services Authority), the defence costs of criminal proceedings where the director is found guilty, the defence costs of civil proceedings successfully brought against the director by the company or an associated company and the costs of unsuccessful applications by the director for relief (subsection (3)).

420.     Subsections (4) and (5) explain when legal proceedings will be considered to have concluded for the purpose of the conditions imposed by subsection (3).

421.     An indemnity that complies with these conditions is described as a qualifying third party indemnity provision.

Clause 213: Qualifying third party indemnity provision to be disclosed in directors' report

422.     If a qualifying third party indemnity provision is in force for the benefit of one or more directors or was in force during the previous year, this must be disclosed by the company in the directors' report (as to the directors' report, see Chapter 5 of Part 15). Where the director is of one company but the qualifying third party indemnity provision is provided by an associated company, then it must be disclosed in the directors' reports of both companies. Companies which choose not to indemnify directors will not have to make any disclosure.

Clause 214: Copy of qualifying third party indemnity provision to be available for inspection

423.     This clause requires a company to keep copies of all the qualifying third party indemnity provisions it has made for its own directors, and also copies of all those it has made for directors of associated companies.

424.     Subsection (4) is a new provision. It requires all qualifying third party indemnity provisions to be retained and made available for inspection for a further year after they have expired or terminated. But the company is not required by this clause to retain copies of the indemnity provision thereafter.

425.     Subsection (6) makes a failure to comply with the requirements of this clause a criminal offence. The maximum penalty that can be imposed on summary conviction is a fine not exceeding level 3 on the standard scale (currently £1,000) or in cases of continued contravention a daily default fine not exceeding one-tenth of that. In a change from the current position under section 309C of the 1985 Act, the company will no longer be liable under the criminal offence.

Clause 215: Right of member to inspect and request copy

426.     This clause gives members a right to inspect without charge the copies of the qualifying third party indemnity provisions (or where they are not in writing, the written memorandum of their terms) held by the company in accordance with clause 214.

427.     This clause also creates a new right for members on payment of a fee to request a copy of the copy or memorandum held by the company. The fee will be set by regulations made under clause 744.

Ratification of acts giving rise to liability

Clause 216: Ratification of acts of directors

428.     This clause preserves the current law on ratification of acts of directors, but with one significant change. Any decision by a company to ratify conduct by a director amounting to negligence, default, breach of duty or breach of trust in relation to the company must be taken by the members, and without reliance on the votes of those members with a personal interest in the ratification. A member may have a personal interest in the ratification if, for example, they stand to obtain personal advantage (whether directly or indirectly) from a vote in favour of the ratification.

429.     If the ratification decision is taken by way of a written resolution (see Chapter 2 of Part 13) members with a personal interest in the ratification may not take part in the written resolution procedure (subsection (3)). This means that the company does not need to send them a copy of the written resolution, and they are not counted when determining the number of votes required for the written resolution to be passed.

430.     If the ratification decision is taken at a meeting, members with a personal interest in the ratification may still attend the meeting, take part in the meeting and count towards the quorum for the meeting (if their membership gives them the right to do so).

431.     Subsection (6) makes clear that nothing in this clause changes the law on unanimous consent, so the restrictions imposed by this clause as to who may vote on a ratification resolution will not apply when every member votes (informally or otherwise) in favour of the resolution. The subsection also makes clear that nothing in this clause removes any powers of the directors that they may have to manage the affairs of the company.

432.     Subsection (7) explains that the requirements imposed by this clause are in addition to any other limitations or restrictions imposed by the law as to what may or may not be ratified and when.

CHAPTER 8: DIRECTORS' RESIDENTIAL ADDRESSES: NON-DISCLOSURE CERTIFICATE

433.     Under the 1985 Act (and previous Companies Acts), the usual residential address of every director must be entered on the public record held by:

• the registrar; and

• each company of which he is a director in its register of directors.

Access to the public record held by the registrar is made in a variety of ways, including daily bulk downloading by some subscribers. There is also a public right to inspect companies' registers of directors.

434.     There is an exception for directors at serious risk of violence or intimidation, e.g. from political activists and terrorists. Under sections 723B - 723E of the 1985 Act, introduced by the Criminal Justice and Police Act 2001, they may apply for a "confidentiality order". A director with a confidentiality order provides a single service address in addition to his usual residential address. The service address is entered on the public record; the usual residential address is kept on a secure register to which access is restricted to specified enforcement authorities. The historic record is not affected by the confidentiality order.) There are some 5 million directors of whom about 8,000 (under 2%) have a confidentiality order.

435.     The CLR considered it essential that directors' residential addresses be filed with the central register, so that enforcement and regulatory bodies as well as liquidators and, in some circumstances, creditors and shareholders can discover the individual's residential address. However they were concerned that unrestricted public access to directors' residential addresses had been abused. They considered that there should not be any discretion as to whether particular addresses should or should not be placed on the public record. Therefore, while welcoming the introduction of the confidentiality order regime, they recommended all directors be given the option of:

• either, as now, providing their residential address for the public record;

• or, providing both a service address and their residential address, with the service address being on the public record and the residential address being on a separate secure register to which access would be restricted. Access to the restricted register would be available to certain public authorities. Other parties, such as members and creditors, should have a right to apply to the court for access to a director's residential address. (Final Report, paragraph 11.46)

This Chapter of the Bill implements this recommendation. These provisions replace the confidentiality order regime.

Clause 217: Issue of non-disclosure certificate

436.     This clause enables any director or potential director to apply for a non-disclosure certificate.

Clause 218: Effect of non-disclosure certificate: the company

437.     This clause provides for the protection of the home address of a director with a non-disclosure certificate. Once the director has informed the company that he has a non-disclosure certificate, and has provided the necessary information, the company must substitute a statement of the director's unique identifier, service address, and country of residence wherever it would otherwise record or notify his home address. The clause prohibits the company from using the individual's home address except for communicating with that person and from disclosing it except when required by a court.

Clause 219: Effect of non-disclosure certificate: the registrar

438.     This clause provides for protection by the registrar of the home address of any director with a non-disclosure certificate. The protection applies only when non-disclosure certificate is in force: it is not retrospective. It applies only to documents where the home address would normally appear.

Clause 220: Permitted use or disclosure by the registrar

439.     This clause provides for certain kinds of permitted use or disclosure of a director's home address.

440.     Subsection (1) provides that the registrar may use the home address of any director who has a non-disclosure certificate for communicating with him.

441.     Subsection (2) provides that the registrar may disclose a protected address to a public authority or credit reference agency (the definition of the latter is drawn from the Consumer Credit Act 1974) but this should be read with subsection (3).

442.     Subsection (3) confers power on the Secretary to make regulations specifying conditions that must be met before the registrar may disclose the home address of individual who has a non-disclosure certificate. The regulations may also provide for fees to be paid by the authority or agency seeking the address.

Clause 221: Disclosure under court order

443.     This clause provides for two circumstances in which the court may require the company to reveal the home address of a director protected by a non-disclosure certificate. The first circumstance is that the service address is not effective; the second is that the home address is needed for the enforcement of an order or decree of the court. If the company cannot provide the address, the court may require the registrar to reveal it.

444.     Subsection (3) provides that the application for the order may be made not only by a liquidator, creditor or member of the company but also by anyone with sufficient interest.

Clause 222: Non-disclosure certificate: change of address

445.     This clause requires the holder of a non-disclosure certificate to notify every company of which he is a director, and the registrar, of a change of his home address.

Clause 223: Revocation of non-disclosure certificate

446.     This clause provides for the revocation of a non-disclosure certificate by either the holder or the registrar. In particular, it provides that if a service address is not effective, then the home address can be put on the public record. It provides for the registrar to send a warning notice to the director at his home address with a specified period for representations before the intended revocation.

Clause 224: Effect of revocation

447.     This clause deals with the consequences of revocation of a non-disclosure certificate. The registrar replaces any service address for the individual on the public record with his home address and notifies all the companies of which the individual is a director of the home address now appearing on the public record for that director. Each company must update its register of directors to show the individual's home address. It must also notify the registrar if it has a more recent home address for the director

Clause 225: Lapse of non-disclosure certificate

448.     This clause requires the registrar to remove protected address information from her records if the individual concerned has not been a director for 10 years or has died. It also applies if an individual applies for a non-disclosure certificate in expectation of being appointed director if the appointment is not made within 3 months.

CHAPTER 9: SUPPLEMENTARY PROVISIONS

Clause 226: Power to make provision for employees on cessation or transfer of business

449.     This clause confers a power on the directors to make provision for the benefit of employees (including former employees) of the company or its subsidiaries on the cessation or transfers of the whole or part of the undertaking of the company or the subsidiary (subsection (1)).

450.     The directors may exercise this power, even if it will not promote the success of the company. The directors' general duty under clause 156 to act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole, does not apply when the directors exercise this power to make provision for employees (subsection (2)).

451.     There are a number of conditions to the exercise of this power. It must be authorised by a resolution of the members or, if the articles of the company allow it, by the board of directors. The company's articles may also impose further conditions on its use (subsection (7)).

452.     Any payments made by the directors using the power conferred by this clause must be made before the commencement of the winding up of the company and can only be made out of profits available for dividend. Section 187 of the Insolvency Act 1986 confers power to make provision for employees once the company has commenced winding up.

453.     This clause replaces section 719 of the 1985 Act. In a change from that section, the directors can no longer use the power conferred by this clause to make payments to themselves or to former directors or to shadow directors, unless the payments are authorised by the members. The CLR recommended that directors should be prevented from abusing the power by making excessive payments to themselves.

Records of meetings of directors

Clause 227: Minutes of directors' meetings

454.     This clause, together with clause 228, replaces the provisions of section 382 of the 1985 Act relating to records of meetings of directors. The requirements of section 382 of the 1985 Act relating to records of meetings of managers have not been retained. This clause requires a company to record minutes of all meetings of its directors.

455.     Subsection (2) is new. The minutes must be kept for at least ten years, but not thereafter.

456.     Failure to make and keep minutes as required by this clause is a criminal offence, applying to every officer of the company who is in default. In a change from s.382 of the 1985 Act, liability for the offence will no longer fall on the company.

457.     Part 28 of the Bill makes provision as to the form in which company records (including minutes) may be kept and imposes a duty to take precautions against falsification.