COMPANIES ACT 2006 UPDATE
DIRECTOR’S DUTIES
On 1st October 2007, some of the long awaited general duties of directors codified within the Companies Act 2006 were brought into force, the remainder of which will be introduced during 2008. This article deals with only those general duties that have come into effect so far.
Duty to promote the success of the company
Section 172 of the Act sets out the general duty of a director to act in good faith, to promote the success of the company. This duty replaces the old common law duty to act in the best interests of the company, but also adds an additional burden on directors over and above the previous duty. Before making a decision, directors must consider each of the following factors;
1. the likely long term consequences;
2. the interests of the company’s employees;
3. the need to foster the company’s business relationships with suppliers, customers and others;
4. the impact of the company’s operations on the community and the environment;
5. the company’s need to maintain its reputation for high standards of business conduct; and
6. the need to act fairly between its members.
When interpreting whether a director has complied with this duty, regard must also be had to the other general duties including, exercising reasonable care, skill and diligence and independent judgement.
Duty to act within powers
The general duty to act in accordance with the company’s constitution and exercise powers for their proper purpose is set out in Section 171 of the Act.
Duty to exercise independent judgement
Section 173 codifies the existing equitable duties that directors must exercise their powers independently and not to fetter their discretion. The duty requires that directors use their own independent judgement when making decisions and to not blindly follow the judgement of others.
Duty to exercise reasonable care, skill and diligence
Finally, the commonly accepted understanding of a director’s duty of care, skill and diligence has been set out in Section 174 of the Act. To determine the level of this duty it is necessary to consider the standard of a reasonably diligent person with the general knowledge, skill and experience of a person acting as a director, and the specialist knowledge, skill and experience which the director actually has.
When interpreting these general duties, the courts will continue to make reference to the existing case law.
These are only the general duties which directors must comply with. There are still many other duties (both statutory and otherwise) which a director will need to continue to observe, for example, filing of the company’s accounts and other returns and duties under health and safety and insolvency law.
This article is only intended as a brief overview. Should you have any further queries on it’s content or any other Corporate matter please contact Scott Sands on 0845 402 0001 or by email at scott.sands@jmw.co.uk.
