UK: The Companies Act 2006 - Fair Dealing By Directors

Last Updated: 1 November 2007
Article by James Burdett and Nick Thomas


The Companies Act 2006 (the "CA 2006") contains new provisions governing the enforcement of fair dealing by directors (including, for this purpose, shadow directors). These provisions are to be found in Chapter 4 of Part 10 CA 2006, with the corresponding provisions in Part X of the Companies Act 1985 (the "CA 1985") being repealed in their entirety, subject to transitional arrangements. The new provisions (which for the most part apply to all companies, public and private) cover four specific situations in which directors face a potential conflict of interest:

  • long-term service contracts;
  • substantial property transactions;
  • loans, quasi-loans and credit transactions; and
  • payments for loss of office.

Generally speaking, the new provisions apply to agreements or transactions entered into on or after 1 October 2007. However, where there is a requirement for the relevant agreement or transaction to be approved by members, a resolution passed before that date will be effective for the purposes of CA 2006 if it complies with the relevant section(s).

In addition, Chapter 5 of Part 10 CA 2006 restates, with some amendments, the provisions relating to the inspection of directors' service contracts.

This client alert focuses primarily on the main differences between the CA 1985 and CA 2006 regimes and assumes a broad understanding of the pre-existing law in this area.

Background and Overview

The Government has stated that the aim of the changes made by CA 2006 to the previous regime in CA 1985 is to "improve accessibility and consistency" and to implement a number of recommendations for reform in this area made by the Law Commission and taken up by the Company Law Review.

Particular efforts have been made to achieve a greater consistency of approach in the drafting and application of the provisions in Chapter 4, including:

  • the imposition of a general requirement for members' approval (in place of outright prohibition), subject to specified exceptions. Where the director is also a director of the company's holding company, approval by the members of that holding company is also generally required. Approval is by ordinary resolution (unless the company’s articles specify a higher majority). Members' approval is not required in any case where the company from whose members approval would otherwise have been sought is not UK-registered or is a wholly-owned subsidiary of another company;
  • the removal of criminal penalties for failure to comply with the statutory requirements; and
  • enhanced harmonisation of the exceptions to the requirement for members' approval and of the civil consequences of a failure to obtain such approval, where required.

Further points of general application to note are:

  • generally speaking, agreements or transactions will require approval when made with or for the benefit of not only directors of the company or of its holding company but also a director's "connected persons". The new definition of "connected persons" is contained in ss252-256 CA 2006 and is somewhat broader than the old definition in s346 CA 1985: in particular, what constitutes a director's "family" for these purposes has been expanded to include his or her parents (but not siblings), children or step-children (of whatever age, not just minors), co-habiting partners (of whatever sex) and minor children of co-habiting partners if living with the director;
  • directors must still have regard to their general duties even where an agreement or arrangement has been approved by members (see s180(2) CA 2006), subject to certain exceptions. So, for example, directors considering a resolution to approve a loan by a company to a director must be satisfied that this is compatible with their general duties to act within their powers, to promote the success of the company and to exercise independent judgment.

Finally, it is worth noting that a number of provisions formerly contained in Part X CA 1985 have been repealed without being replaced by any equivalent provision in CA 2006. The principal examples are the prohibitions on tax-free payments to directors and on directors' dealing in share options (formerly contained in ss311 and 323 CA 1985 respectively) and the provisions relating to the notification of the interests of directors and members of their immediate family in a company's shares and the keeping of a register of such interests (formerly contained in ss324 to 329 CA 1985).

Long-Term Service Contracts (ss188 and 189 CA 2006)

These sections deal with the requirement for members' approval of long-term service contracts of directors and with the civil consequences of a failure to obtain the necessary approval. The main changes from the equivalent provisions in Part X CA 1985 are:

  • the length of the service contract for which members' approval is required is reduced from longer than 5 years to longer than 2 years; and
  • the definition of a "service contract" (in s227 CA 2006) is broadened to include contracts for services and directors' letters of appointment as well as conventional contracts of employment.

While, therefore, a company does not require members' approval before entering into a rolling contract with a director requiring no more than two years' notice of termination, it should be borne in mind that, in the case of listed companies, the Combined Code on Corporate Governance recommends that notice or contract periods should be set at one year or less (see Code Provision B.1.6).

Substantial Property Transactions (ss190 to 196 CA 2006)

These sections require members' approval of substantial property transactions (i.e. those which involve the sale or purchase by the company of substantial non-cash assets to or from directors and their connected persons) and specify the civil consequences of a failure to obtain the necessary approval. In addition to the more extended definition of "connected persons" (see Background and Overview above), the new provisions differ from the equivalent provisions in Part X CA 1985 in the following main respects:

  • transactions may now be entered into conditionally upon the necessary members' approval being obtained (previously it has been necessary to obtain the approval prior to entering into the agreement, which can prove inconvenient);
  • the minimum value of what may be regarded as a "substantial" non-cash asset is raised from £2,000 to £5,000 (subject to this, the test of whether a non-cash asset is "substantial" remains the same, i.e. the lesser of £100,000 and 10% of the company's net assets);
  • there is now provision for the aggregation of more than one non-cash asset and/or a series of arrangements involving non-cash assets 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 provisions (for the avoidance of doubt);
  • the exception for transactions with members (in their capacity as such) has been extended to include acquisitions from, as well as disposals to, such members; and
  • the requirement for members' approval has been removed 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).

Loans, Quasi-loans and Credit Transactions (ss197 to 214 CA 2006)

These sections are concerned with loans to directors and certain related transactions. The significant change from the CA 1985 regime is that it is no longer unlawful for a private company to make a loan to a director of the company or of its holding company, or for a public company (or a private company "associated" with a public company - see the revised definition in s256 CA 2006) to make a loan or quasi-loan to, or enter into a credit transaction with, a director of the company or of its holding company or persons connected with such a director. Instead, such transactions will be lawful provided that specified information concerning the proposed transaction is supplied to members in advance and their approval is obtained. There are no longer any criminal sanctions for breach of these provisions. Other changes from the previous law include:

  • widening a number of the exceptions to the requirement for members' approval (formerly the prohibition) and raising (or removing altogether) the financial limits for the application of certain of the exceptions; and
  • permitting affirmation of loans, quasi-loans and credit transactions entered into without the necessary approval (in line with the equivalent provisions in respect of substantial property transactions).

Payments for Loss of Office (ss215 to 222 CA 2006)

These sections are concerned with the requirement for members' approval for payments for loss of office (including where the payment is in connection with the transfer of an undertaking or a takeover) and the civil consequences of a failure to obtain the approval, where required. They re-enact provisions formerly contained in ss312 to 316 CA 1985, but with a number of important differences, including:

  • the definition of a payment for loss of office has been expanded. It now includes compensation for loss of (or in connection with retirement from) all offices or employments (not just the office of director) and also for loss of or retirement from office or employment in subsidiaries. Non-cash benefits are now included, as are payments made to persons connected with or at the direction of the director. Payments to past directors are also explicitly caught;
  • prescribed information must be made available to members in advance of their approval being sought;
  • where the proposed payment is in connection with a takeover, the offeror and its associates are prevented from voting on the resolution to approve the payment;
  • the old exception (in s316(3) CA 1985) for "bona fide payments by way of damages for breach of contract" is retained, but in a restated form (see s220 CA 2006); and
  • there is a new exception for small payments (not exceeding £200 in aggregate).

Inspection of Directors' Service Contracts (ss227 to 230 CA 2006)

These sections contain provisions requiring a company to keep available for inspection copies of every director's service contract (having the extended meaning in s227 CA 2006 discussed in Long-Term Service Contracts above) with the company or any of its subsidiaries and giving members rights to inspect and request copies of such contracts. There are a number of changes from the equivalent requirements in Part X CA 1985, including:

  • copies of contracts (or written memoranda of their terms, where the contracts themselves are not in writing) must now be retained and made available for inspection for at least one year following their termination or expiry;
  • the former exemptions for directors working outside the UK, and for contracts with less than 12 months to run, have been abolished; and
  • members are now entitled to request copies of the contract or memorandum on payment of the prescribed fee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.