Section 123 of the Companies Act 1997 governs what a director or employee may do with what they learn inside the company.
Section 123(1) — the rule
A director or employee of a company who has information in his capacity as a director or employee, being information that would not otherwise be available to him, shall not disclose that information to any person, or make use of or act on the information, except —
(a) for the purposes of the company; or
(b) as required by law; or
(c) in accordance with subsection (2) or (3); or
(d) in complying with section 118.
It applies to employees too, not only directors — and under section 107(1)(b) to (d) the extended definitions of director reach section 123, so shadow directors, delegates and those who direct them are caught.
“Information that would not otherwise be available to him” confines the section to inside knowledge. Public information, and information the person had independently, are outside it.
“Disclose… or make use of or act on” covers three distinct wrongs: telling someone, exploiting it, and simply acting on it — for example by buying or selling something in reliance on it.
Section 123(2) — disclosure to an appointor
A director may, unless prohibited by the board, disclose information to —
(a) a person whose interests the director represents; or
(b) a person in accordance with whose directions or instructions the director may be required or is accustomed to act in relation to the director’s powers and duties;
and where the director discloses the information, the name of the person to whom it is disclosed shall be entered in the interests register.
This is the practical answer for a director appointed by a shareholder, a joint venture partner, a lender or a parent company. Such a director may report back — but:
- only unless prohibited by the board, so the board can shut it down for particular information;
- only to the person whose interests the director represents, or on whose directions they are accustomed to act; and
- the name of the recipient must be entered in the interests register — one of the company records under section 164.
Note the connection with section 107(1)(b): a person on whose instructions the director is accustomed to act is themselves a director for the purposes of sections 112 to 119 and 123 to 127 — so the recipient of the information takes on duties in relation to it.
Section 123(3) — use with board approval
(a) particulars of the disclosure, use, or the act in question are entered in the interests register; and
(b) the director is first authorised to do so by the board; and
(c) the disclosure, use, or act will not, or will not be likely to, prejudice the company.
All three are required, and paragraph (b) requires the authorisation to come first. Retrospective approval does not satisfy the section. Paragraph (c) sets an objective limit that the board cannot waive: even a unanimous board cannot authorise a use likely to prejudice the company.
A director who acts in contravention of subsection (1) commits an offence and is liable on conviction to the penalty in section 413(4).
What section 123 catches in practice
| Conduct | Position |
|---|---|
| Telling a competitor the company’s pricing or customer list | Breach — not for the purposes of the company |
| Taking up a business opportunity the director learnt of through the company | Breach, unless authorised under subsection (3) and not prejudicial |
| Buying or selling the company’s shares on the strength of inside knowledge | Breach of s 123, and of section 127, which imposes a fair value obligation and personal liability |
| Reporting to the shareholder who appointed you | Permitted under subsection (2), unless prohibited by the board — with the recipient’s name entered in the interests register |
| Giving information to the company’s auditor | Permitted — for the purposes of the company, and see section 202 on the auditor’s access to information |
| Producing documents to the Registrar on a lawful requirement | Permitted — as required by law; see sections 400 to 403 |
| Disclosing an interest under section 118 | Permitted — paragraph (d) |
| Using information after resigning | Section 123 speaks of a person who has information in that capacity; the general law duty of confidence continues in any event, alongside any contractual restraint |
The related duties
- Section 112 — taking a corporate opportunity for oneself will rarely be acting in good faith and in what the director believes to be the best interests of the company.
- Sections 117 to 119 — if the director transacts with the company, the interested transaction regime applies and the transaction may be avoided.
- Sections 126 and 127 — disclosure of share dealing, and the restriction on dealing while holding information material to the value of the shares.
- Section 115(2)(b) — the business judgment rule is unavailable where the director has a material personal interest.
- Section 344 — in a liquidation, transactions for inadequate or excessive consideration with directors may be set aside; section 350 allows the Court to order repayment or return of property.
- Section 421 — the offence of fraudulent use or destruction of property, and section 422 on falsification of records.
- Establish the position early. Ask the board to record that reporting to your appointor is permitted under section 123(2), and identify the recipient.
- Keep the interests register entries current — the name of each person to whom information is disclosed.
- Watch for a board prohibition on particular information — commonly on a transaction where your appointor is on the other side.
- Remember your duty runs to the company, not to your appointor — unless the constitution expressly permits otherwise under section 112(2), (3) or (4).
Sources
- Companies Act 1997 — ss 107, 112, 115, 117–119, 123, 126, 127, 164, 202, 344, 350, 400–403, 413, 421, 422
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.