The Companies Act 2006 (2006 Act) codifies into statute the general duties owed by directors to the company (although not to the exclusion of the previous common law duties and equitable principles). There are both civil consequences for directors who act in breach of the duties and criminal sanctions for breaching the duty to declare an interest in existing transactions or arrangements. The eight principal duties are set out in sections 171-177 and 182 of the 2006 Act, of which the first four took effect on 1 October 2007 and the remaining four will take effect at the earliest on 1 October 2008 (more likely, 2009).
To assist directors, practical guidance on their general duties under the 2006 Act has been published by the Institute of Chartered Secretaries and Administrators (ICSA) (2 January 2008). The guidance is aimed primarily at publicly listed companies but much of it applies to private companies. The guidance attaches a note proposing best practice for complying with the new rules which was prepared by The GC100 Group* and the Department for Business, Enterprise and Regulatory Reform (June 2007).
Whilst the 2006 Act largely codifies the pre-existing common law duties of directors there are a number of key areas of departure including:
- replacing the duty to act in the best interests of the company with the duty to promote the success of the company (and setting out six factors to which directors must have regard, in addition to traditional considerations such as profitability, in assessing whether a decision complies with their duties);
- relaxation of the procedure allowing shareholders to bring derivative actions; and
- new procedures relating to dealing with conflicts of interest.
Regard must be had to the duties as a whole since more than one may apply in any particular circumstance. As well as the duties, directors must comply with the company's constitution. While a company's articles of association may not dilute the duties of the directors except as expressly permitted by the 2006 Act, they can impose more onerous requirements on the directors.
* The Association for the General Counsel and Company Secretaries of FTSE100 companies.