Companies Act 2006 - Authorisation required for Donation or Expenditure

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Section 366: Authorisation required for donations or expenditure

619. This section prohibits a company from making a donation or incurring political expenditure unless the transaction or the expenditure is authorised by a resolution of the members of the company. If the company is a subsidiary of another company, a resolution may instead, or in addition, be required from the members of the holding company. Sections 1159, 1160 and Schedule 6 provide the definition of “subsidiary”. This section reproduces the effect of section 347C(1) and (6) and section 347D of the 1985 Act, except that:

• in line with the general approach in the Act, the section does not refer to the general meeting, to make it clear that private companies can authorise donations and/or expenditure by written resolution;

• a donation or expenditure by a subsidiary company must be authorised by the members of the company and by members of a “relevant holding company” (rather than by the members of each holding company within a group). A “relevant holding company” is the ultimate holding company or, where such a company is not a “UKregistered company”, the holding company highest up the chain which is a “UKregistered company”;

• a resolution is not required on the part of a company that is a wholly-owned subsidiary of a “UK-registered company” (rather than of any holding company, as in section 347D of the 1985 Act);

• the section does not reproduce the prohibition (in section 347C(5) of the 1985 Act) on retrospective ratification of breaches of the rules.

Section 367: Form of authorising resolution

620. This section provides that an authorising resolution may identify the subsidiaries, the heads of donations or expenditure, and the amounts that it authorises. The section reproduces the effect of the 1985 Act, but with the following changes:

• under subsection (1) and (2), a holding company may seek authorisation of donations and expenditure in respect of both itself and one or more of its subsidiaries (including wholly-owned subsidiaries) in a single approval resolution. The subsidiaries do not need to be named in the resolution if it applies to all of a holding company’s subsidiaries;

• under subsection (3), a company may pass separate approval resolutions in respect of donations to political parties and donations to other political organisations.

Section 368: Period for which resolution has effect

621. This section provides that an approval resolution may seek authorisation for the making of donations and incurring of expenditure having effect over a period of not more than four years. It reproduces the effect of the 1985 Act.

Section 369: Liability of directors in case of unauthorised donation or expenditure

622. This section imposes civil liability on directors where unauthorised donations are made or unauthorised political expenditure is incurred. The liabilities are owed to the company and may be pursued in the normal manner by the company; that is they may be pursued by the directors in the exercise of the management powers conferred by the articles of association. The directors will be subject to the general duties set out in Chapter 2 of Part 10 in the conduct of the company's business. In addition, section 370 provides for enforcement by shareholder action.

623. The section largely reproduces the effect of section 347F of the 1985 Act, but:

• only a director of the company and of a “relevant holding company” may be liable in respect of an unauthorised donation or unauthorised expenditure. This reflects the new rules relating to the authorisation of donations or expenditure by subsidiaries in section 366;

• directors of the “relevant holding company” will not be liable for an unauthorised political donation or unauthorised political expenditure by a subsidiary if they took “all reasonable steps to prevent the donation being made or the expenditure being incurred”.

624. The conditions under which directors may be exempted from liability (currently set out in section 347H of the 1985 Act) are not reproduced in the new regime.

Section 370: Enforcement of directors' liabilities by shareholder action

625. This section provides a mechanism by which an authorised group of shareholders may enforce on behalf of the company any liability under section 369. In the case of a company limited by shares, an action may be brought by a group of shareholders if they are at least 50 in number, or hold at least 5% of the issued share capital. This section reproduces the effect of section 347I of the 1985 Act, except that, in a case where liability is owed by directors of a holding company in relation to a donation made by a subsidiary, the action may be brought by shareholders of the subsidiary or of the holding company.

Section 371: Enforcement of directors’ liabilities by shareholder action: supplementary

626. This section makes further provision in relation to proceedings brought under section 370. It reproduces the effect of section 347I of the 1985 Act. The group of shareholders wanting to take action under section 370 must give written notice to the company at least 28 days in advance of bringing the proceedings. Any director of the company has the right to apply to the court within 28 days of when the notice was given to request that the proceedings not be brought.

627. This section also provides that if the liability is already being pursued with due diligence by the company, the court may direct that the proceedings brought by the group of shareholders are either discontinued or brought on such terms and conditions as the court sees fit.

Section 372: Costs of shareholder action

628. This section provides that the authorised group of members are not entitled as of right to have the cost of the shareholder action met from the funds of the company, but have the right to apply to the court for an indemnity out of the company's assets in respect of costs incurred or to be incurred in a shareholder action. The court would have full discretion to grant such an indemnity on such terms as it thinks fit. The section reproduces the effect of section 347J of the 1985 Act.

Section 373: Information for purposes of shareholder action

629. This section provides that the authorised group of members is entitled, once the action is commenced, to be provided by the company in whose name it is brought with all information possessed by the company, or in its control or obtainable by it, relating to the subject matter of the action. It reproduces the effect of section 347K of the 1985 Act.