Directors’ duties

The duty not to accept benefits from third parties

(1)A director of a company must not accept a benefit from a third party conferred by reason of:

(a)his being a director, or

(b)his doing (or not doing) anything as director.

Section 176

Third parties mean anyone else other than the company, its holding company or its associated subsidiaries or anyone acting on their behalf. It is worth noting that the word ‘subsidiary’ is used in this exception and not ‘subsidiary undertakings’. For this reason, directors should consider the reasonableness of receiving benefits from subsidiary undertakings such as certain joint ventures, limited liability partnerships and partnerships when considering any payments from such entities which may not be subsidiaries and should seek prior shareholder approval as necessary in such circumstances.

The purpose of separating the conflicts of interest between a director and the company (section 175) and those that may arise through acceptance of third party benefits in section 176 is that conflicts of interest between the independent director and the company may, in most circumstances, be approved by the independent directors, whereas (unless allowed by the constitution) only the shareholders may approve a director receiving benefits from third parties. It is possible to authorise the acceptance of third party benefits by directors of public companies by inserting appropriate authorisations in the company’s constitution to allow independent directors to approve the benefit.

The duty to disclose interests in proposed transactions or arrangements

Under the old law (section 317, Companies Act 1985), a director was obliged to declare his interest immediately before a transaction in which he has an interest is entered into by that company. As already discussed, the law had reached the point where a potential situation could give rise to a conflict and thereby an obligation to disclose much earlier. Section 317 is replaced in the new Act by a duty to disclose and up-date disclosure of interests (direct or indirect) in any proposed transaction or arrangement with the company, and by a criminal offence of failing to declare or update a declaration of an interest (direct or indirect) in an existing matter to which the company is a party.

In relation to the duty to declare interests in proposed transactions or arrangements, the duty is to disclose ‘the nature and extent of that interest’ to the other directors. The declaration may be made at a meeting of the directors or by notice to the directors. If the declaration of interest proves to be, or becomes, inaccurate or incomplete, a further declaration must be made. The declaration of interest (or its update) must be made before the company enters into the transaction or arrangement. The duty does not require a declaration of interest of which the director is not aware or where the director is not aware of the

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