Member Article

Directors' Duties under the Companies Act 2006

With Watson Burton LLP Law Firm

On 1 October 2007 a number of provisions in the Companies Act 2006 (“the Act”) regarding directors’ duties will come into force. The provisions are essentially a codification of the current common law and equitable principles and the existing rules will be used as a means of interpreting the new legislation.

Under the Act, a director must:

• act within his powers under the constitution of the company;
• act in a manner which promotes the success of the company;
• exercise independent judgement; and
• exercise reasonable care, skill and diligence.

As from 1 October 2008, directors must also:

• avoid conflicts of interest;
• not accept benefits from third parties;
• declare interests in proposed transactions.

In the meantime, existing common law rules will continue to govern these areas.

It is important to note that not all the duties to which directors are subject are contained in the Act. For example, liability for wrongful and fraudulent trading and health and safety obligations are not governed by the Act. Further, companies can impose more onerous duties through their Articles.

Promoting the success of the Company

The duty that a director must act in a manner which promotes the success of the company replaces the old fiduciary duty to act in the company’s best interests. In deciding what will best promote the success of a company, a director must consider the following (non-exhaustive) list of factors:

• The possible long term consequences of any decision;
• The interests of employees;
• The need to encourage the company’s relationships with suppliers, customers etc;
• The impact the company’s activities will have on the surrounding community and environment;
• The need to maintain a reputation of high standards of business conduct; and
• The need to act in a fair manner between the members of the company.

What will all this mean in practice?

Most diligent directors will already have been considering these issues whilst executing their duties. To protect themselves in the event that a decision is later challenged, directors may wish to document the consideration of the factors in reaching their decisions. However, the extent to which records are kept should reflect the importance of the decision being taken, so that the company does not become engrossed in bureaucracy.

What should companies be doing?

Companies should ensure that directors are made aware of, and kept up to date with, their duties under the Act. The profile of the director’s role should be amended where necessary, to take into account the new duties. Additionally, existing corporate governance procedures should be reviewed to ensure directors can comply with the new provisions.

If you have any comments or questions about this article or any other corporate related matters, please contact caroline.rye@wastonburton.com.

This was posted in Bdaily's Members' News section by Ruth Mitchell .