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Companies Act 2006 - the long term effects on directors

5 March 2013

Until the Companies Act 2006 came into force, a director’s general duty to the company was developed by case law. The Companies Act 2006 codified the duties of company directors into a statutory statement of the following seven general duties:

  • to act within their powers as a company director (s171)
  • to promote the success of the company, for the benefit of its members as a whole (s172)
  • to exercise independent judgment (s173)
  • to exercise reasonable care, skill and diligence (s174)
  • to avoid conflicts of interest (s175)
  • not to accept benefits from third parties (s176)
  • to declare interesting proposed transactions or arrangements with the company (s177)

These duties merely impose minimum standards which directors are required to conform to.

Directors are still expected to manage the company’s affairs in the interest, ultimately, of their members collectively and not of any external parties. However, while directors retain the discretion to make the ultimate decision as to what courses of action are right for their company in a business sense, the law is involved in the structure of the corporate decision-making process in a way that it was not before.

The overriding aim of the legislation is to ensure that, in making decisions, directors are mindful and reflective of all matters which could conceivably have a bearing on the long-term success of their company. Directors must be familiar with the duties they owe the company and they should be able to identify any training or expert advice they may need to ensure continued compliance with those duties.

The introduction of the statement of general duties is highly significant to the way the directors are expected to act and how they account for their actions to the company. This is for two reasons. Firstly, the act introduces new rights for shareholders to take the action against the directors of their company for alleged breach of their duties to the company. Secondly, companies are required to prepare and publish a business review as part of their annual accounts and report. The overriding purpose of this review is to help the company’s members to assess how the directors have performed their duties.

There is no doubt that the codification of directors’ duties makes the law governing them more accessible and clear. It is also unquestionable that directors can improve their performance if they can now more easily access and understand their legal obligations and are clearly aware of the standard of care and duty expected from them. However, it is safe to say that the statute did not introduce any new concepts. The court will still need to refer to case law for interpretation of broach concepts such as “good faith”. In that sense, the fundamentals of the common law and equitable principles are kept intact and are likely to be as important to the development of the law as before.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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