Companies Act 2006 - directors' duties

The Act introduces a statutory set of Directors’ Duties.  They apply automatically to all company directors from 1 October 2007, except the conflict of interest duties which are in force from 1 October 2009 - click here for more information on the duties in force from 1 October 2007.

The duties are:

• A duty to act within powers - not to abuse or exceed your powers (usually as defined by the articles) or use them for an improper purpose

• A duty to act as you consider, in good faith, will promote the success of the company for the benefit of its members as a whole, having regard (amongst other things) to:
  
  the likely long term consequences
  
  employees’ interests
  
  business relations with suppliers, customers and others
  
  impact on the community and the environment
  
  desirability of a reputation for high standards of business conduct
  
  need to act fairly as between members
  
  This duty is made subject to any requirement to act in the interests of creditors (e.g. where the company is insolvent and wrongful trading might occur).
  
  Recommended action: we expect to see the list of factors taken into consideration recorded in many board minutes, to confirm that due regard has been given to the factors mentioned in the Act.

• A duty to exercise independent judgement

• A duty to exercise reasonable care, skill and diligence (this introduces a minimum standard of competence)

• A duty to avoid conflicts of interest – but conflicts can be authorised by the board (so long as there are enough “independent” directors)

• A duty not to accept benefits from third parties – they can still only be approved by the shareholders

• A duty to declare to other directors any interest in a proposed transaction or arrangement – a “general” notice can be provided at a board meeting dealing with ongoing transactions with a particular company.

There are special rules for approval of service contracts over 2 years (previously 5); substantial property transactions with directors; loans to directors (no longer absolutely banned) and payments for loss of office (in force 1 October 2007) - click here for more information

Directors no longer have to notify the company of their interests in its shares. Paying tax-free (i.e. tax paid) remuneration to directors, and directors dealing in share options, are no longer banned (in force 6 April 2007).

It may be slightly easier for shareholders to sue directors in the name of the company, by way of a 'derivative action'. Derivative actions can now include actions for directors' negligence (in force 1 October 2007) - click here for more information

The new ability for auditors to limit their liability may increase the likelihood of directors being sued for losses over the cap.