Chapter 6Companiesinto with a building firm run by a director, or by the
spouse of a director.
It might also be a loan to the brother of a director. A
brother is not a connected person but the loan might be
a material interest.
The board of directors will decide whether a transac-
tion is material, though the auditors must disclose it in
their report if the directors fail to disclose it in the
accounts as s 413 requires and the auditor thinks it is
material.
Contracts with a sole member/director
Section 231 applies. This provides that the terms of a
contract with a sole member/director must either be set
out in a written memorandum or recorded in the min-
utes of the next board meeting. This does not apply if
the contract is in writing or is entered into in the ordin-
ary course of business as where the company buys raw
materials from the sole member/director.
Disclosing interests in contracts
Section 182 provides that every director who has an
interest whether direct or indirect (as through a con-
nected person) in a contract or proposed contract with
the company must disclose his interest either at the
board meeting at which the contract is first discussed or
if the interest has not arisen at that time then at the first
board meeting after the interest arises. In Guinnessv
Saunders(1990) the House of Lords decided that dis-
closure had to be made at a full meeting of the board
and not at a meeting of a committee of the board. The
section provides for a general notice procedure under
which a director may give notice that he is a member
of a specified company or a partner in a specified firm
and is to be regarded as interested in any contract which
may, after the date of the notice, be made with that
company or firm. This general notice procedure is not
available unless the interest arises only because the
director is a member of a company or partner in a firm.
Thus, if the interest arises because the director is a dir-
ector of the other company but not a member of it, dis-
closure should be made in relation to each transaction
as it arises.
A director who fails to make disclosure as required
is liable to a fine. In addition, the contract can in ap-
propriate circumstances be regarded as cancelled (or
rescinded) but this must be done quickly and preferably
before any performance has taken place (see below). The
company’s articles may waive the right to rescind, or the
members by ordinary or unanimous written resolution
can do so.
There can be no waiver by the board. However, the
director concerned can vote in favour of adopting it
under the written resolution procedure or at a general
meeting and even in the latter case if he controls the vot-
ing at the meeting. This is because the director is not in
breach of duty in terms of the making of the contract
but only in breach of the duty of disclosure.
Incidentally, a director is not required to declare any
interest which is not likely to give rise to any conflict of
interest.
The above disclosures should be made by new dir-
ectors at the first board meeting insofar as they apply to
then existing contracts.183
Craven Textile Engineers Ltd v Batley
Football Club Ltd(2001)
A director of the claimant company was also a former
director of the football club. The claimant company did
work for and supplied goods to the football club during
the period of the dual directorship. The football club did
not pay the relevant invoices and when sued tried to
avoid the contract because it appeared that the director
concerned had not disclosed his interest in the contracts
to the company. The Court of Appeal noted that s 317
does not deal with the consequences of a breach but at
common law the contracts could be avoided by the com-
pany. However, it must be possible to restore the parties
to their pre-contractual positions before this could be
done. In this case that was not possible as the goods
and services had already been supplied. The company
was therefore entitled to payment of the invoices.The provisions of s 182 extend to any transaction
or arrangement set out in s 330, i.e. loans, quasi-loans
and credit to a director or connected persons such as a
spouse or minor child of the director. The principle of
disclosure also applies whether or not the arrangement
is a valid and enforceable contract so that the disclosure
provisions cannot be avoided by including in, e.g. a loan
arrangement a clause to the effect that it is not intended
to create legal relations (see s 185).
The principles of disclosure are also applied to shadow
directors by s 182. But the interest of a shadow director
must be declared by notice in writing to the directors
and not at a meeting of the board. The notice may state
a specific interest and be given before the date of the
meeting at which the shadow director would have been