Transactions Involving Directors under United Kingdom and Irish Company Law

Transactions Involving Directors: A Comparative Analysis of United Kingdom and Irish Company Law

1. Introduction

Transactions between a company and its own directors occupy a persistent flash-point in corporate governance. While such dealings may be commercially benign, they are inherently vulnerable to abuses flowing from conflicts of interest, information asymmetry, and agency costs. Both the United Kingdom and Ireland subject these transactions to a sophisticated web of fiduciary obligations, statutory prohibitions, and procedural safeguards. This article critically analyses that framework, drawing upon seminal authorities including Aberdeen Railway Co v Blaikie Brothers (1852), Bhullar v Bhullar (2003) and the modern Irish codification in s 238 Companies Act 2014. It evaluates the continuing interaction between equitable principles and statutory regulation, and considers emerging themes such as the creditor-orientated duty recognised in BTI 2014 LLC v Sequana (2022).

2. Historical and Statutory Context

2.1 United Kingdom

Equity’s universal rule that fiduciaries must eschew conflicts of interest was classically expressed by Lord Cranworth in Aberdeen Railway: a fiduciary “is not allowed to put himself in a position where his interest and duty may conflict”[1]. Statutory intervention began with the Companies Act 1929 and culminated, via Part X of the Companies Act 1985, in the Companies Act 2006. Two regimes are most pertinent:

  • Duties of directors – codified in CA 2006, ss 171-177, notably the duty to avoid conflicts (s 175) and the duty to declare interests (s 177).
  • Substantial property transactions – CA 2006, ss 190-196 (substantially re-enacting CA 1985, s 320) requires prior shareholder approval where a director (or connected person) acquires or disposes of a non-cash asset whose value exceeds the statutory thresholds.
  • Loans, quasi-loans and credit – ss 197-214 (formerly ss 330-341 CA 1985) generally prohibit or regulate loans to directors, with civil (s 213) and criminal (s 214) consequences for breach (cf. Official Receiver v Stern (2001)).

2.2 Ireland

The Companies Act 2014 consolidated Irish company law. Section 238 replicates the UK model for “arrangements” concerning non-cash assets of requisite value and renders any contravention voidable at the company’s instance unless certain conditions apply[2]. Irish law also aligns shadow directors (s 221) with de jure directors for these purposes, a principle affirmed in Hocroft Developments Ltd (2009).

3. Fiduciary Foundations and the Conflict Rule

Even in the absence of statutory regulation, equity prohibits a director from placing herself in a position where personal interests may diverge from the company’s. Bhullar v Bhullar epitomises the modern English approach: the Court of Appeal held that a director who secretly acquired an adjacent property breached fiduciary duty, despite the company’s declared moratorium on investment, because there existed a “real sensible possibility of conflict”[3]. The strict no-conflict/no-profit rule renders immaterial both the director’s good faith and the company’s inability or unwillingness to pursue the opportunity (Regal (Hastings) v Gulliver [1942] 1 All ER 378).

Scottish authority remains aligned. In Parks of Hamilton (Holdings) Ltd v Campbell (2011), Lord Drummond Young re-affirmed that informed consent is indispensable; absence of loss or presence of good faith does not absolve the fiduciary from accounting[4].

3.1 Interaction with the Companies Act 2006 Duties

  • Section 175 codifies the general conflict rule, yet preserves its equitable origins by requiring directors to “avoid” conflicts unless authorised. Shareholder authorisation must be given with full disclosure (Sharma v Sharma (2013); Duomatic principle).
  • Section 177 imposes a positive obligation to declare interests in proposed transactions, exemplified by Ball (PV Solar Solutions) v Hughes (2017), where directors minuted their interests before approving a debt-repayment transaction.

4. Substantial Property Transactions

4.1 The Statutory Scheme

Sections 190-196 CA 2006 (Articles 328-330 Companies (Northern Ireland) Order 1986; s 238 CA 2014 (IRL)) require ordinary resolution approval where the asset’s value exceeds £100,000 or 10 % of the company’s net assets (subject to a £5,000 minimum). Failure renders the arrangement voidable and the director liable to account or resell at cost; third-party rights in good faith are protected. The legislative purpose, as Nourse LJ observed in Duckwari v Offerventure (No 2) (1999), is “to give shareholders specific protection” from potentially detrimental self-dealing[5].

4.2 Case Illustration: Dornan Service Station (2018 NI)

The High Court of Northern Ireland considered Articles 328-330 where a director purchased company land. McBride J held the deed voidable absent prior shareholder approval, rejecting the director’s contention that a post-hoc resolution sufficed. The decision underscores the rigidity of procedural pre-conditions and mirrors English authority (Saxton v Clarke (2002) on s 320 CA 1985).

4.3 Irish Perspective: Section 238

In Re Mary Dooley, DECD (2024) the High Court reiterated that arrangements breaching s 238 are voidable unless restitution is impossible or the arrangement is subsequently affirmed. Irish courts have thus far adopted a literal application, emphasising ex ante scrutiny.

5. Loans and Credit Transactions

Loans to directors present acute conflict risks and were historically prohibited (CA 1985, s 330). CA 2006 adopts a more flexible approach but retains shareholder approval requirements (s 197). The civil remedy (s 213 CA 2006; s 341 CA 1985) enables restitution and indemnity, while criminal liability (s 214) targets serious contraventions. Official Receiver v Stern illustrates the dual regime; the Court of Appeal upheld civil recovery of prohibited loans made through cash-pooling within a corporate group.

6. Shareholder Authorisation and the Duomatic Principle

Statutory compliance can be supplanted by unanimous shareholder consent. The Duomatic rule, extended in Sharma v Sharma, validates informal unanimous assent provided full disclosure is made. However, courts police such consent stringently; silence amounts to acquiescence only where shareholders possess all material facts[6]. Companies with dispersed shareholdings rarely benefit, preserving the protective rationale of Part 10.

7. Enforcement, Remedies and the Creditor Dimension

7.1 Civil Remedies

  • Account of profits or constructive trust (Bhullar).
  • Rescission or restitution of property (ss 196 & 213 CA 2006; s 238 CA 2014).
  • Indemnity by the director to the company for any loss.

7.2 Criminal Sanctions

Breach of the loans regime attracts criminal liability (s 214 CA 2006; s 342 CA 1985). Although prosecutions are rare, the possibility intensifies compliance incentives.

7.3 Director Disqualification

Serious misconduct in connected transactions often grounds disqualification proceedings under the Company Directors Disqualification Act 1986 (UK) or Part 14 CA 2014 (IRL). In Secretary of State v Eastaway (2001) the Court of Appeal stressed the public-interest dimension when assessing unfitness.

7.4 Insolvency and the Creditor Duty

Where insolvency looms, directors must consider creditor interests. The Supreme Court in Sequana clarified that the so-called West Mercia rule requires directors not to harm creditors’ interests once insolvency is probable. Thus a self-dealing transaction that prejudices creditor recoveries may constitute both a breach of fiduciary duty and misfeasance under Insolvency legislation.

8. Persistent Tensions and Reform Debates

Three recurrent themes emerge:

  1. Equitable strictness versus commercial flexibility. Cases like Bhullar uphold a zero-tolerance approach, while CA 2006 permits shareholder ratification. The resultant space for private ordering is valuable but risks managerial capture.
  2. Proceduralism. Compliance failures typically render transactions voidable, not void, enabling ex post ratification (s 196 CA 2006). Critics argue that this dilutes deterrence; proponents emphasise transactional certainty for third parties.
  3. Convergence of UK and Irish law. The Irish 2014 consolidation largely mirrors UK provisions, yet subtle differences—e.g., Irish insistence on prior approval without a de minimis 10 % limb—may influence forum selection.

9. Conclusion

Transactions involving directors remain a crucible for testing the balance between entrepreneurial freedom and protective oversight. The United Kingdom’s hybrid regime—rooted in stringent fiduciary doctrine yet tempered by statutory proceduralism—continues to influence Irish law. Jurisprudence from Aberdeen Railway through to Sequana attests to the courts’ willingness to enforce the conflict rule with “inexorable rigidity”, whilst recognising the legitimacy of properly authorised self-dealing. Practitioners must therefore ensure meticulous compliance with both disclosure obligations and shareholder approval mechanisms, mindful that insolvency or shareholder challenge can resurrect historic transactions with devastating effect.

Footnotes

  1. Aberdeen Railway Co v Blaikie Brothers ([1852] UKHL 1) at 122.
  2. Companies Act 2014 (IRL), s 238(1)-(7).
  3. Bhullar & Ors v Bhullar & Anor ([2003] EWCA Civ 424) at [41]-[45].
  4. Parks of Hamilton (Holdings) Ltd v Campbell [2011] CSOH 31 at [27]-[28].
  5. Granada Group Ltd v Law Debenture Pension Trust Corp [2015] EWHC 1499 (Ch) at [38]; citing Duckwari.
  6. Sharma v Sharma [2013] EWCA Civ 1287 at [45]-[48].