Vol 5 (2008) - Issue 6

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Directors’ Duties under the Companies Act 2006

Introduction

One of the most significant and controversial areas of the Companies Act 2006 (the ‘2006 Act’) is the introduction of a codified statutory statement of duties for directors, replacing the previous mixture of common law and equitable rules. The majority of these duties came into force in October 2007, with the provisions in relation to directors’ conflicts of interest coming into force in October 2008.

There has been a significant volume of discussion on the new codified duties, and the extent to which the position has changed with the implementation of the 2006 Act. This has led to confusion on the part of directors as to the extent to which they need to arrange their procedures and considerations when making decisions on behalf of the Company. There has also been concern that the new provisions could lead to greater shareholder action against directors. It should be noted that there are additional statutory duties on directors, such as the preparation of accounts, which are outside the scope of this article.

Position prior to the 2006 Act

Prior to October 2007, a director’s duties to the company were set in case law, and comprised of a duty to exercise due skill and care; a duty to act in good faith in the best interests of the company; a duty to act within his powers and to exercise those powers for a proper purpose; a duty not to fetter his discretion; a duty to avoid conflicts of interest; and a duty not to make a secret profit. All of the duties other than the duty of due skill and care (which is a common law duty based in the law of agency) were fiduciary in nature and a breach could be ratified by the shareholders in general meeting provided that this would not amount to a fraud on any minority shareholders.

Statutory duties under the 2006 Act

There are seven codified duties of directors set out in the 2006 Act as follows:
(a) duty to act within the powers conferred by the Company’s constitution and only to exercise powers for the purposes for which they are conferred (section 171);
(b) duty to act in a way which is most likely to promote the success of the company (section 172);
(c) duty to exercise independent judgment (section 173); (d) duty to exercise reasonable skill, care and diligence (section 174);
(e) duty to avoid conflicts of interest (section 175);
(f) duty not to accept benefits from third parties (section 176); and
(g) duty to declare interest in proposed transactions or arrangements (section 177).

It is clear that a number of these duties are similar, if not identical, to the previously existing duties. Indeed, the 2006 Act states at section 170(3) that ‘the general duties are based on certain common law rules and equitable principles and have effect in place of those rules and principles as regards the duties owed to a company by a director’. The 2006 Act goes on to state at section 170(4) that ‘the general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties’. This suggests that the new duties are only partially codified, as the interpretation and application will be subject to the cases from which the pre-existing rules and principles derive. This has led to criticism that the duties are no clearer than they were prior to the 2006 Act coming into force, and that the addition of codification as an extra layer on top of the common law rules and equitable principles, rather than in replacement of them, has in fact made the situation more complex.

It is clear from section 170(1) that these duties are owed to the company directly, rather than to the shareholders, which echoes the previously existing principle in Re a Company (No 004415 of 1996) [1997] 1 BCLC 479.