Case Background & Strategy

Under section 227 of the Companies Act 2016, a company may not make any payment to a director as compensation for loss of office, or as consideration for retirement, unless particulars of the proposed payment are disclosed to members and the payment is approved at a general meeting. A payment made in breach is deemed held on trust for the company.

What payments are caught?

The provision targets ‘golden handshakes’ — ex gratia or negotiated payments made because a director is leaving office. It applies whether the exit is by removal, retirement or negotiated resignation. Payments also arise in takeover and asset-sale contexts, where compensation to departing directors must likewise be disclosed and approved.

What is not caught?

Bona fide payments of damages for breach of contract, and payments of pension or retirement benefits under a genuine pre-existing entitlement, generally fall outside the approval requirement. The dividing line matters in settlement negotiations: a departing executive director’s package is usually structured as contractual entitlement plus damages rather than gratuitous compensation, precisely to avoid the section 227 approval process — but mislabelling a gratuitous payment as damages will not save it.

Consequences of getting it wrong

An unapproved payment is held on trust for the company, meaning the company (or a new board, liquidator or aggrieved shareholders through a derivative action) can recover it from the recipient. Directors who authorised the payment may themselves face breach-of-duty claims. Exit packages in contested boardroom departures should therefore be papered with section 227 squarely in mind.

Frequently asked questions

Does section 227 apply to payments by a holding or related company?

Structures routing payment through related entities are scrutinised in substance; advice should be taken before relying on such arrangements.

Can shareholders ratify a payment after it is made?

The safer course is prior approval. Retrospective ratification is contentious and may not cure the trust imposed by the section.

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