Section 119 of the Companies Act 1997 is the company’s remedy where a director stood on both sides of a deal.
Section 119(1) — the avoidance right
A transaction entered into by a company in which a director of the company is interested may be avoided by the company at any time before the expiration of three months after the transaction is disclosed to all the shareholders, whether by means of the company’s annual report or otherwise.
The three months runs from disclosure to all the shareholders — not from the date of the transaction, and not from the section 118 disclosure to the board.
So a transaction that is never disclosed to shareholders remains avoidable indefinitely. That is a powerful incentive to disclose: the annual report is the ordinary vehicle, and prompt disclosure closes the window. It also means an undisclosed interested transaction from years ago can be unwound when it surfaces — often when a liquidator examines the books.
Under section 119(6), a transaction in which a director is interested can only be avoided on the ground of the director’s interest in accordance with this section or the company’s constitution. The Act therefore displaces any wider general law right to rescind on that ground — though other grounds, such as fraud, are unaffected.
Sections 119(2) to (4) — fair value
(2) A transaction cannot be avoided where the company receives fair value under it.
(3) Whether the company receives fair value is determined on the basis of the information known to the company and to the interested director at the time the transaction is entered into.
Where a transaction is entered into by a company in good faith in the ordinary course of its business and on usual terms and conditions, the company is presumed to receive fair value.
Subsection (3) fixes the assessment at the moment of contracting, on the information then known to the company and to the interested director. A deal that was fair when struck does not become avoidable because the market moved. Equally, a director who knew something the company did not cannot rely on the company’s ignorance — the information known to the interested director counts.
The presumption in subsection (4) mirrors section 118(1A), which relieves a director of the duty to disclose a transaction with the company that is in the ordinary course and on usual terms. Both provisions keep routine dealings out of the regime.
Section 119(5) — the onus of proof
(a) a person seeking to uphold a transaction who knew or ought to have known of the director’s interest at the time it was entered into has the onus of establishing fair value; and
(b) in any other case, the company has the onus of establishing that it did not receive fair value.
| Position of the person upholding the transaction | Who must prove what |
|---|---|
| Knew, or ought to have known, of the director’s interest | That person must establish fair value |
| Did not know and had no reason to know | The company must establish that it did not receive fair value |
The allocation is deliberate. A counterparty who dealt knowing the director was on both sides is expected to be able to justify the price. A genuinely ignorant outsider is not, and the company carries the burden instead.
The test is not confined to actual knowledge. A related company, a family member, a business partner of the director, or a party who was told the director’s role will usually be taken to have known. Note that section 20 — no constructive notice from the register — does not assist here: this is about knowledge of the facts, not of filed documents.
Section 120 — protection of third parties
The avoidance of a transaction under section 119 does not affect the title or interest of a person in or to property which that person has acquired where the property was acquired —
(a) from a person other than the company; and
(b) for valuable consideration; and
(c) without knowledge of the circumstances of the transaction under which the person referred to in paragraph (a) acquired the property from the company.
All three conditions must be met, and paragraph (a) is the key: the protection is for someone who bought from the interested director or other counterparty, not for the counterparty who dealt with the company directly. That person’s position is governed by section 119 itself.
So where a director buys company land cheaply and sells it on to an innocent purchaser for value, the company may avoid the transaction against the director — and pursue the director for the value — but cannot recover the land from the sub-purchaser.
The other consequences of an interested transaction
- Section 118(4) — failure to disclose is an offence, penalty under section 413(3).
- Section 112 — a director who prefers their own interest is unlikely to be acting in what they believe to be the best interests of the company; breach is an offence under section 112(5).
- Section 115(2)(b) — the business judgment rule is unavailable where the director has a material personal interest in the subject matter.
- Section 123 — using company information for a personal transaction engages the restrictions on use of company information.
- Section 344 — in a liquidation, transactions for inadequate or excessive consideration with directors and certain other persons may be set aside, and section 350 allows the Court to order repayment or return of property. Both apply the extended definition of director.
- Sections 143 and 147 — a derivative action, or a personal action against the director.
Doing an interested transaction properly
- Disclose forthwith under section 118 — interests register entry and, if there is more than one director, disclosure to the board.
- Establish fair value at the time: obtain an independent valuation or comparable evidence, and record it.
- Have the disinterested directors decide. Section 122 permits the interested director to vote, but abstention removes the argument.
- Disclose to all shareholders promptly — that starts the three-month clock. The annual report is the usual vehicle, but a standalone notice works and is faster.
- Or use section 89(2)(f) — unanimous written shareholder agreement to a contract between an interested director and the company.
- Keep the file. If avoidance is raised years later, the contemporaneous valuation and minutes are what establish fair value.
Sources
- Companies Act 1997 — ss 20, 89, 107, 112, 115, 117–123, 139, 140, 143, 147, 344, 350, 413
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.