On leaving office, it is common for a director to receive a payment from a company in recognition of their service to the company.

Section 251 of the Companies Act 2014 (2014 Act) is an important provision that protects companies from abuses of power by their directors. It does this by requiring that the company disclose the amount and other particulars of any such payment to its members and that the members approve the payment by ordinary resolution. This is also the case where payments to directors are satisfied by the transfer of property rather than in cash.

What types of payment must be approved?

This provision must be considered every time a director leaves office and receives a payment from the company on their departure.

These payments include those made in compensation for loss of office, or as consideration for or in connection with a director’s retirement from:

• His or her office as a director
• Any other office held in relation to the management of the company’s affairs, or
• Any other office held in relation to the management of the affairs of any of the company’s subsidiaries

Payments to a director who continues as a director for the company but ceases to hold an executive capacity with the company or with a subsidiary are also caught, as are payments to past directors.

The meaning of the term “payment” is a matter of fact. In Scotland, a materially identical provision was considered by the courts, which held that certain privileges such as access to a boardroom and a car park pass, while being of benefit to the retiring director, did not constitute a “payment”. Each such arrangement should be considered on its merits, however.

Are all payments to outgoing directors caught?

It is worth noting that certain payments to directors are expressly excluded from the requirements for members’ approval. These include bona fide payments:

• Which discharge existing legal obligations – such as accrued but unpaid fees or wages or the payment of any other contractually agreed amount
• Of damages for breach of contract, and
• Of pension for past services

Each payment should be reviewed on its own merits to see whether it fits into one of these brackets.

How do I disclose a payment to the members?

Where a payment to an outgoing director comes within the scope of section 251 of the 2014 Act, the particulars of the payment, including the amount, must be disclosed to the members.

How do the members approve the payment?

Any qualifying payment must be approved by the members by way of an ordinary resolution. This can be done in a general meeting or by written resolution.

What happens if the payment is not disclosed?

If a qualifying payment is made by a company without it being disclosed to and approved by its members, the recipient is liable to account to the company for any gain that he or she makes either directly or indirectly from the payment or to indemnify the company for any loss or damage resulting from the payment or a combination of the two.

Conclusion

Any payment to an outgoing director should be carefully considered to ensure that it does not require the prior approval of the members of the company. It is important that board members are aware of the importance of this requirement, given that a failure to comply will result in potentially significant consequences for the outgoing director.

Should you require further advice in this area, please contact a member of our Corporate Governance & Compliance team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.