The Companies Act (CA) 2006 sets out a new statutory statement of seven general duties owed by directors to their companies as follows:
– Duty to act within their powers
Section 171 CA replaces existing similar common law duties and requires directors to act in accordance with the company’s constitution. Section 17 of the Act provides that a company’s constitution includes not only the company’s articles of association but the resolutions and agreements specified in s.29, which includes special resolutions passed by the company and any resolutions or agreements that have been agreed to, or which otherwise bind classes of shareholders.
Directors are also required to use powers only for the purposes for which they were conferred. This is a restatement of the long-standing ‘proper purposes doctrine’.
– Duty to promote the success of the company for the benefit of members as a whole
Section 172 CA 2006 replaces the previous common law duty on directors to act in good faith in the best interests of the company. In the course of making their decisions under Part 1 of the section, then, directors are now required to have regard to each of the following list of matters:
– the likely consequences of any decision in the long term,
– the interests 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 above list is non-exhaustive and directors must also have regard to other non-specific matters.
– Duty to exercise independent judgement
This duty, stated in s.173 CA 2006, reflects the previous rule prohibiting directors from fettering their discretion unless acting in accordance with an agreement duly approved by the company.
– Duty to exercise reasonable skill, care and diligence
Section 174 CA 2006 codifies and replaces the previous common law duty but in a way that reflects the recent tightening of control over directors in line with the standard set out in relation to wrongful trading in the Insolvency Act 1986, s.214.
– Duty to avoid conflicts of interest
Section 175 CA 2006 reflects the long-standing common law rule that directors, as fiduciaries, must respect the trust and confidence placed in them and should do nothing to undermine or abuse their position as fiduciaries. The practical effect of the rule is that any conflict of interest must be authorised by the members of the company, unless some alternative procedure is properly provided. In the case of a private company, a conflict can be authorised by the other directors of the board unless the company’s constitution provides to the contrary. The position is the same for public companies, except that the constitution must expressly permit authorisation by the board.
– Duty not to accept benefits from third parties
Under s.176, a director must not accept a benefit from a third party, which is conferred by reason of (a) his being a director or (b) his doing (or not doing) anything as director. This duty is an aspect of the previous general duty to avoid conflicts of interest, but it has been stated separately in order to ensure that the obtaining of a benefit from a third party by a director can only be authorised by members of the company rather than by the board.
– Duty to declare to the company’s other directors any interest a director has in a proposed transaction or arrangement with the company
Under s.177 CA 2006 a director must declare to the other directors any situation in which they are in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company. Again this further emphasises the duty to avoid a conflict of interests by ensuring that directors are transparent about personal interests, which could, even remotely, be seen as affecting their judgement. |
