Employment Law and the Companies Act 2006
It is worth noting that the new Companies Act 2006, many provisions of which came into force on 1 October 2007 (the rest on 1 October 2008), may well have an effect on the employment of directors and, more importantly, the termination of that employment.
Points to watch out for include:
1. Old section 312 Companies Act 1985 (payment to director’s for loss of office) has been extended and revised in section 215 Companies Act 2006 (effective 1 October 2007). It used to be possible to get around the requirement for shareholder consent to provide compensation for directors on the termination of their employment by specifically stating that the compensation/ex gratia payment was being made as “compensation for loss of employment” (not office). Not any more. The expanded provisions of section 215 apply (save as set out in para 2. below) to all payments made in connection with the cessation of employment of a director, any payments in connection with retirement from office, any payments to connected persons (such as wives) and, even more importantly, consideration which does not comprise cash (section 215(2). That transfer of a company car at book value could, undoubtedly, fall foul of the legislation unless the members approve the transfer.
2. In order for any consideration “payable” to a director as outlined above to be permitted, the shareholders need to have been given a memorandum setting out particulars of the proposed payment and to have approved it (ordinary resolution: 50%). HOWEVER there is no need for such approval where the payment/consideration is either pursuant to a legal obligation to the director or is in settlement of a claim arising in connection with the termination of a person’s employment. With this in mind payments under a compromise agreement should be fine, however directors who are not taking the compromise route will need to get shareholders’ approval.
3. In relation to fixed term or long notice contracts it used to be the case that any director’s service contract which had a fixed term/notice period of over 5 years had to be approved by the shareholders. From 1 October 2007, any director’s service contract which has a fixed term/notice period of over 2 years must be approved by the shareholders.
4. Any director’s service contract (with the company or even its subsidiary) will now have to be retained by the company for a period of not less than 1 year after its expiry and must be available (both during and for the period of 1 year after its expiry) for inspection by the shareholders. (See section 228) Failure to comply is a criminal offence for all the directors.
5. A contract between a sole member company and a director who is that sole member must be evidenced in writing (either a written contract or a memorandum of the terms) unless it has been entered into “in the ordinary course of business” (section 231). There is no substantive change from the current position and, in any event, one would probably argue that a service contract would be in the “ordinary course of business” of the company. Nevertheless, it is worth advising single member companies, whose member is also a director of the company, to have a written service contract since a breach of section 231 can result in a criminal penalty.
6. For the first time, from 1 October 2007, companies will be entitled to make loans to directors. Loans worth more than £10,000 will require the approval of the shareholders (following the provision of a memorandum setting out the terms of the loan) and credit transactions (such as a company guarantee for a director’s borrowings) worth more than £15,000 will also require such approval. Similar provisions apply to loans to persons connected with a director. Hitherto loans to directors have been strictly prohibited.
If you require further clarification of any of these issues please do let us know.
Suzanne Eva, Partner Employment
