01/10/2007

Employment e-Brief – Directors’ duties under the Companies Act 2006

The Companies Act 2006 introduces a statutory statement of directors’ duties that will replace many of the existing common law and fiduciary duties which have evolved through case law. These apply equally to public and private companies. Most of the provisions came into force on 1 October 2007.

The Act introduces 7 general statutory duties which directors must act in accordance with and comply with:-

1. To act within powers

1. To promote the success of the Company

2. To exercise independent judgement

3. To exercise reasonable care, skill and diligence

4. To avoid conflicts of interest

5. Not to accept benefits from third parties

6. To declare interest in proposed transactions or arrangements with the Company.

The latter three duties (dealing with conflicts of interest, the duty not to accept benefits from third parties and to declare interests) will not come into force until 1 October 2008.

Arguably the most important duty is to promote the success of the Company. This provides that a director must act in the way he considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. In so doing, the director must have regard (among other matters) to:

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.

The need to act fairly as between the members of the Company.

The codified duties are owed to the Company and only the Company will be able to enforce them, although in certain circumstances shareholders may be able to bring a derivative action on the Company’s behalf.

Directors (and others) should be aware of codified duties and keep up-to-date, particularly as the Act allows for derivative claims to be brought against them for a breach of directors duties. Companies should ensure that any Directors & Officers insurance is sufficient to cover the new potential liabilities and also the possible cost of dealing with and defending derivative claims.

The above is only intended as an over of the new statutory duties for directors in this area. Practical steps that Companies should take are ensuring that their directors are aware of the new duties and act accordingly. The Company should also consider whether or not the terms of directors service agreements will need reviewing in line with the new legislation.