Most of the provisions relating to directors general duties introduced by the Companies Act 2006 ( the "Act") will take effect from October 2007, other than provisions relating to directors conflicts of interest which will come into force by October, 2008. Although the codification of directors duties contained within the new Act is to a large extent a reflection of the existing common law position, there are a number of additional factors that directors need to be aware of in the months leading up to its implementation. There are seven duties set out in Sections 171 to 177 of the Act which are summarised below:
1. To act within the company's powers
This duty requires that a director must act in accordance with the company's constitution and only exercise powers for the purpose for which they are conferred. A director should use his powers for a proper purpose and within the terms for which they were granted with reference to any limitations contained within the company's articles. This is similar to the existing position under common law.
2. To promote the success of the company
This replaces the common law duty to act in good faith and in the best interests of the company and is widely regarded as the most controversial of the new provisions requiring that a director of a company 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, and in doing so have regard (amongst other matters) to:-
(a) the likely consequences of any decision in the long-term;
(b) the interests of the company's employees;
(c) the need to foster the company's business relationships with suppliers, customers and others;
(d) the impact of the company's operations on the community and the environment;
(e) the desirability of the company maintaining a reputation for high standards of business conduct; and
(f) the need to act fairly between the members of the company.
It is important to note that the new duty covers the promotion of the company's success and the six factors merely require to be taken account of in discharging that duty. The list should be used by directors as a guide to the type of factors they should consider when making decisions, rather than a comprehensive checklist. There is no guidance within the Act as to the importance to be attached to each factor, nor how any conflicts between them should be resolved. "Success" is also an undefined term but the section goes on to make clear that where the purposes of the company include purposes other than the benefit of the members, the achievement of those purposes is to be considered when promoting the "success" of the company. This will certainly be relevant to not for profit companies. The need to include evidence of compliance in considering these six factors within board minutes is a current matter of debate. Contrary to the government's intention, it seems likely that board minutes will become more detailed to provide a paper trail of evidence in the decision-making process. Good practice will undoubtedly become established over time. Reference to the directors having considered the factors listed in Section 172, followed by more detailed reasoning in relation to any particular factor impacting on the decision in question is a sensible initial approach. However, directors need to avoid treating this as a box ticking exercise and ensure they exercise reasonable care, skill and diligence in making decisions.
3. To exercise independent judgment
As is the case under the current law, a director of a company must exercise independent judgement and as such cannot fetter his future discretion. This duty is not breached if a director is acting in accordance with an agreement entered into by the company that restricts the future exercise of discretion by its directors, or in a way authorised by the company's constitution. This duty is likely to impact primarily in three situations: Firstly where nominee directors have been appointed, secondly where the board rely on the expert judgement of others and thirdly in relation to the delegation of functions of the board to a committee or individual. The government has provided some guidance on these matters: Dealing with each in turn: In relation to nominees (that is directors appointed to represent the interests of a particular member or stakeholder), unless otherwise authorised by the company's articles a nominee must act in the best interests of the company as a whole and not merely the interests of his appointer. On the issue of directors relying on the opinion of experts, directors may continue to follow the advice of experts provided that they exercise their own judgement as to whether to accept the expert's advice in question. Lastly, the board may continue to delegate any of its functions, provided such delegation is authorised in terms of the company's constitution and they are satisfied that those responsible are suitably qualified. In essence, the position is not much changed from the current common law.
4. To exercise reasonable care, skill and diligence
In this case, the test of whether a director has exercised reasonable care, skill and diligence has two parts which take into account (a) the general knowledge, skill and experience that may be reasonably expected of a person carrying out the functions carried out by the director in relation to the company and (b) the general knowledge, skill and experience that the director has. In other words, as is the case currently, higher levels of skill may be required of a director depending upon his specific responsibilities. In addition, directors are expected to carry out their responsibilities by exercising the skills and experience that they actually possess. This is a replacement but not a significant change to the current common law duty of care and skill.
5. To avoid conflicts of interest
Under the existing common law, directors are required not to put themselves in a position where there is a conflict between their interest and their duties to the company. The new Act states that a director must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict with the interests of the company. This applies in particular to the exploitation of any property, information or opportunity (and it is immaterial whether the company could take advantage of the property information or opportunity). The duty does not apply if the conflict arises in relation to a transaction or arrangement with the company itself (in such circumstances the director can declare his interest at a board meeting) nor if it could not have been reasonably predicted that the situation would give rise to a conflict of interest. A further and important qualification is that the duty will not be infringed if the matter has been authorised by the directors. Prior approval in a conflict situation can be granted by the board, provided that for a private company that there is nothing in its constitution prohibiting this and for a public company, there is a provision enabling this in its constitution. Directors also need to ensure that interested directors abstain from voting and counting in the quorum when such a conflict is authorised by the board. Currently, directors require to obtain the consent of members in such a situation, so the ability for the board to authorise such arrangements will no doubt be welcomed by many companies. Compliance with this duty is likely to be most onerous for directors who have seats on the board of more than one company, particularly where obligations of confidentiality play a part in their ability to disclose.
6. Not to accept benefits from third parties
Currently common law requires a director not to make personal gains from his position as a director. The new Act will prohibit directors from accepting a benefit from a third party conferred by reason of his being a director or his doing (or not doing) anything as a director. In other words, a director cannot accept bribes from third parties that are given purely because he is a director. This prohibition will catch both financial and non-financial benefits. It is worth noting that there will be no infringement if acceptance of the benefit cannot be reasonably construed as a conflict of interest, if it has been authorised by the members, or if the benefit has come from the company itself. However, in contrast to the duty to avoid conflicts of interest, acceptance of such a benefit cannot be authorised by the board alone. Many companies now have corporate governance policies designed to provide guidance for directors on this type of situation and it is likely that this practice will become more popular following implementation of the conflict of interest provisions.
7. To declare an interest in proposed transaction or arrangement with the company
Currently, a director who is in any way interested in a contract or proposed contract with the company is under a duty to declare the nature of his interest at the meeting of directors at which the question of entering into the contract is first considered. Under the new Act, if a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of his interest to the other directors. A director is expected to declare all interests of which he is aware or ought reasonably to be aware before the company enters into the transaction. There is a change in emphasis in that not only does a director have to declare the nature of any interest in a proposed transaction or arrangement with the company, but also the extent of his interest. There is also a requirement for a director to keep his declaration up to date if it becomes inaccurate or incomplete. There will be no breach of this duty if it cannot reasonably be seen that the director's interest would give rise to a conflict of interest, if the other directors were either aware or should have been aware of the interest or if it concerns the terms of his service contract that have or are to be considered by the board. In the interests of completeness, directors should also take care to declare the interests of parties "connected" to them, for instance close family members.
As can be seen there are some significant changes from the current common law position on directors duties and those prescribed by the new Act. It should be remembered that case law will still be referred to when courts begin to interpret the provisions of the new Act. It remains to be seen how the courts will approach this challenge and resolve any inconsistencies.