First statutory statement of directors’ duties

One of the most controversial changes to company law to be introduced by the Act is the first statutory statement of directors’ general duties. The statement replaces some of the duties owed by directors, which have developed over time through case law, topped up by previous statutes. The majority of the codified duties came into force on 1 October 2007 (with the exception of the conflict of interest duties which will come into force on 1 October 2008).

What are the new codified duties?

There are seven general duties owed by a director to his company. The four duties in force since 1 October 2007 are:

  • to act within his powers and only exercise those powers for the purposes for which they are conferred;
  • to act in good faith to promote the success of the company for the benefit of its members;
  • to exercise independent judgment subject to any restrictions contained in any agreement entered into by the company or in the company’s constitutional documents;
  • to exercise reasonable care, skill and diligence;

The remaining duties that will come into force on 1 October 2008 are:

  • to avoid conflicts of interest, except where authorised by the board;
  • not to accept benefits from third parties; and
  • to declare any interest in proposed transactions or arrangements with the company.

There is no definitive guidance from the Government on the interpretation of the new duties, although in June 2007 the DTI (now BERR) issued a collection of ministerial statements on the meaning of the new directors’ duties provisions, extracted from the Parliamentary debates on the Bill.

Will this make things easier?

This new approach does not mean that it is all going to be plain sailing. It is not clear how the new duties will be interpreted by the courts or how much weight will be given to previous decisions on directors’ duties.

The new duties do not just codify the old law; there are some significant changes in relation to conflicts of interest which, although intended to reflect current corporate practice, will require companies to review their articles and board procedures. Although the Act does not change the sanctions for breaching directors’ duties, there is increased scope for members and others to challenge board decisions.

What are the main areas of concern?

Most discussion has been about the new duty to promote the success of the company for the benefit of its members which aims to answer the question “in whose interests should companies be run?”.

Previously, a director had to act in the best interests of the company – interests that may not have been the same as those of the shareholders. Now, the focus must be on shareholders’ interests. What does it mean to promote “success”? The ministerial statements highlight explanations given by Lord Goldsmith who summarised it as meaning:

  • for commercial companies – a long term increase in value; and
  • for charities – the achievement of its objectives.

The Act sets out a (non exhaustive) list of six factors that directors must “have regard (amongst other matters)” to when reaching decisions, namely:

  • the likely consequences of any decision in the long term
  • employees’ interests (compare s.309 CA 1985 (now repealed));
  • the need to foster business relationships with customers and suppliers; 
  • the impact of the company’s operations on the community and the environment;
  • the company’s reputation for high standards of business conduct; and
  • the need to act fairly between shareholders.

Directors must still think about the company’s creditors too, particularly where insolvency is threatened, though this remains uncodified.

Not just box ticking

Whilst the ultimate decision that directors reach on a particular issue may not differ under the new regime, the manner in which they get there (in terms of thought process and putting it on record) is likely to alter. The Government takes the new duties very seriously and is determined that consideration of the six factors should not turn into a box ticking exercise. It is not be sufficient merely to pay lip service to the new requirements by using standard paragraphs in board minutes. In the end, directors themselves need to decide how to strike the right balance between a mere ‘box-ticking’ exercise and producing all encompassing records of their deliberations. For private companies without access to the support of an extensive company secretarial function the pragmatic course of action is to take a proportionate approach in the making and recording of board decisions. Directors must recognise that the law changed on 1 October 2007 and they should adapt their board practices in line with their new duties.

Action points

  • Directors should receive training on their new statutory duties, particularly in the light of the company’s sector of operation.
  • Directors’ & Officers’ insurance cover should be reviewed.
  • Consider the grant of directors’ liability indemnities (or review of existing ones).
  • Constitutional documents, board procedures and decision recording should be amended to reflect the new regime.
  • New procedures should be put in place for recording declarations of interest and dealings between directors and third parties where there are conflicts of interest.

Is it in force?

The Companies Act 2006 received Royal Assent on 8 November 2006 and is being introduced via a staggered timetable. Some provisions were introduced in January and April 2007. A substantial part, including some of the more controversial provisions relating to directors’ duties and the new shareholders’ derivative action, went live on 1 October 2007. The remainder was expected to be phased in on 6 April and 1 October 2008. Whilst some provisions will still come into force on those dates, full implementation will not now occur until 1 October 2009. BERR (formerly DTI) has published a revised table of commencement dates taking into account the delays.

Link to more briefings on the Act

More briefings are available on the Companies Act 2006 page on our website.