S177 – The duty to declare interest in proposed transaction PDF

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Summary

Company law covering the duty to declare an interest under s177 CA...

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s177 – The duty to declare interest in proposed transaction 

s177 deals with a transactional conflict, unlike a situational conflict in s175, it imposes on directors a mandatory disclosure obligation in relation to any proposed transaction in which the director has a direct or indirect interest - The CA does allow directors to retain benefits and profits in transactions which are approved or duly declared

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s177 CA - duty to declare interest in proposed transaction or arrangement 1) If a director of a company is in any way directly or indirectly, interest in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors 2) The declaration may (but need not) be made: a) At a meeting of the directors b) By notice to the directors 3) If the declaration becomes inaccurate or incomplete further declaration needed 4) Any declaration required by this section must be made before the company enters into the transaction or arrangement 5) This section does not require a declaration of an interest of which the directors is not aware or where the director is not aware of the transaction in question. For this purpose, a director is treated as being aware of matters of which he ought reasonably be aware.

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Commentary: this section serves as an efficient mechanism to address potential transactional conflicts and enables the company to proceed if it wishes with appropriate safeguards

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Ottley: s177, not s175 generally applies where: - The director enters into a contract with a company leading to conflicts of interest - The director indirectly benefits from the contract between company and X

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Aberdeen Rly Co v Blaikie Bros - Facts: Company entered into contract with partnership, the same person was the director of the company and partner in the partnership – contract voidable. The conflict is obvious: wishing to sell at the highest price, against wishing to buy at the lowest price. - Held: contract voidable at the company’s option.

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Boulting v ACTAT [1963] - Upjohn LJ: The reason why the law permits the rule to be relaxed is because it is often in the best interests of the company. Just because directors are put in a position where their interest and duty conflict does not mean they can’t properly and honestly give their services to both sides.

Interests that need to be disclosed  

Direct or indirect – so the director doesn’t have to be a direct counterparty (the director does not need to be a party to the transaction for the duty to apply) Nature and interest of the interest in the transaction must be disclosed by that director

Interests that are excluded    

If the director is not subjectively/objectively aware of the interest or transaction/arrangement: s177 (5) No reasonable risk of conflict: s177(6)(a) – Boulting v ACTAT If or the to the extent the other directors are aware of the conflict: s177 (6)(b) Matters relating to the director’s service contract (that have been or are to be considered by the board or a committee thereof)

Content and form of disclosure

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Disclosure may be made: - At a meeting: s177 (2)(a) - In writing: s177(2)(b)(i) - Procedural requirements for written (s184) and general notifications (s185) - By general notice = treated as sufficient declaration: s177(2)(b)(ii) and s185

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Lee Panavision Ltd v Lee Lighting [1992] - Facts: Disclosed his interest informally to the directors but not in a board meeting. - Held: this was okay

Consequence of disclosure    

After disclosure, there is no breach and contract is no longer voidable and cannot be set aside Upon disclosure the director can also keep the benefit of the transaction. Failure to comply may result in the transaction being set aside and the director will have to account for profits made pursuant to the applicable law rule Failing to disclose interest makes the contract voidable (company can decide whether to avoid or affirm, but cannot avoid if undue delay, restitution impossible or third party rights have intervened)

Authorisation by shareholders/articles    

s180 (4) makes all the general duties subject to a power of the Members to authorise any breach (act or omission) or for the Articles to authorise a breach The ability of the articles to authorise breach is limited by s232(1) – can’t do negligence, default, breach of duty or trust or s232(4) The articles can require shareholder approval in addition to compliance with s175/s177 Commentary: thus it is a default position that the transaction will not be liable to be set aside if there is due compliance...