Directors' Duties - New Rules


The Companies Act 2006 ("the Act") codifies the duties of company directors.


The new statutory duties are as follows:-


  • to act in accordance with the company's constitution and only exercise powers for the purpose for which they are conferred (s.171);


  • to act in the way he/she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole (s.172);


  • to exercise independent judgement (s.173);


  • to exercise reasonable care, skill and diligence (s. 174);


  • to avoid conflicts of interest (s.175);


  • not to accept benefits from third parties (s.176); and


  • to declare any personal interest on a proposed transaction with the company (s.177).


The most controversial of these "new" duties is the second, "to promote the success of the company". This replaces the common law duty on directors to act "bona fide in the best interests of the company". Section 172 goes on to list a non-exhaustive set of factors to which a director should have regard when discharging this duty, namely:


  • the likely consequences of any decision in the long term;


  • the interest of the company's employees;


  • the need to foster the company's business relationships with suppliers, customers and others;


  • the impact of the company's operations on the community and the environment;


  • the desirability of the company maintaining a reputation for high standards of business conduct; and


  • the need to act fairly as between members of the company.


The duties owed by the directors are owed to the company, and not to shareholders or employees. However, a shareholder can, under new derivative action rules, bring an action against a director or third party if there is any breach or threatened breach by a director of his duties, and whether the breach occurred before or during the time the shareholder was a shareholder.


In making any decision, not all the factors will be relevant and some may well be contradictory. Directors will need to decide how much weight should be given to each factor when making key decisions.


We recommend you take this opportunity to :-


  • review director's service agreements to incorporate the new duties and the s. 172 factors, so that the directors are aware of these;


  • review your directors' and officers' liability insurance to ensure there is cover in the event of there being a derivative action taken against the directors;


  • if you have a corporate responsibility manual, review this and bring it up to date; if not, consider introducing one; and


  • consider how board decisions are minuted, bearing in mind the importance of each decision.


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Tony Forster Head of Company Commercial

 

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The above notes are intended as guidance to Companies and their directors who can see real dangers ahead. Every situation is different and directors are advised to take professional advice as early as possible. Whilst we hope these guidance notes are helpful they are not a substitute for such advice and are offered free of charge and without liability on our part.