Vol 19 (2022) - Issue 2

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Directors’ Duties: A Critical Analysis in Light of Reforms in Part 10 of the Companies Act 2006 – Part One

Synopsis
This article is divided into two parts: Part One provides a general analysis of the current law on directors' duties, in particular, Part 10 of the Companies Act 2006; Part Two proceeds to suggest further reforms.
The article argues that in regulating directors' duties in the UK, a balance should be struck between preventing abuse of directorial decision-making power and promoting business efficiency and entrepreneurism.
Part One seeks to show that Part 10 of the Companies Act 2006, as the statutory statement on directors' duties has improved this balance through enhanced but not unduly onerous disclosure obligations. The first section explains that although directors are under fiduciary duties underpinned by trust law principles, they differ from trustees in key aspects. For example, directors are under more lenient rules in relation to unauthorised disposal of the principal's property and unanimous consent of all directors is not required for dealing with the principal's property. These differences reflect the special economic context between companies and directors and the need for directors to have some discretionary power in decision-making.
The second section demonstrates that the pre-2006 common law position does not sufficiently recognise this efficiency need. A line of cases from Regal v Gulliver to Industrial Development Consultants Ltd v Cooley have confirmed that directors are under a strict duty of no-conflict and no-profit. Any profit derived by reason of their directorial status and in the course of their directorial duties is accountable to the company. This has led to some unmeritorious results discouraging entrepreneurism.
Recognising the need for a better balance between directors' accountability and business efficiency, the Law Commission has reviewed the law of directors' duties which is now codified in Part 10 of the Companies Act 2006. A more vigorous and inclusive duty of loyalty is introduced in s.172 by requiring directors to 'have regard to' stakeholders' interests in promoting the company's success. Another key positive change is the introduction of broader accountability. This is shown by the wider reporting obligation under ss.414A, 414C and 414CZA(1) on the performance of s.172 duty.
S.175(1) replaced directors' duty to avoid unauthorised self-dealing transactions with a duty of disclosure. This new emphasis on 'ample but efficient' disclosure to independent directors both deters exploitative selfdealings by directors and allows transactions in the company's interest to proceed. However, the failure to indicate clearly whether Part 10 replaces the common law position and spell out the 'duty of loyalty' underpinning of s.172 and s.175 may potentially dilute the accountability standard.