Mishcon Deals - Issue 1

The new Companies Act 2006 (the “Act”) introduces changes across the entire spectrum of UK corporate activity.

In one of the key changes of the new legislation the scope of directors’ duties was codified through a statutory statement of duties, replacing many existing common law and equitable rules. The new codified duties came into full force and effect on 01 October 2007 (other than the provisions relating to directors’ conflict of interest duties, which will come into force on 01 October 2008) and apply to all company directors, including shadow directors (and in certain cases even former directors of the company). The codified duties, will continue to be owed to the company and only the company will be able to enforce them (though by virtue of the new rights of derivative action, also introduced by the Act, shareholders may be able to bring such an action, albeit essentially on the company’s behalf).

The Act introduced several general duties but, for the purposes of this article, two duties are worthy of particular mention: Section 172 introduced a duty to promote the success of the company. This duty is considered to be the central duty of directors (and broadly corresponds with the old duty to act in the interests of the company). It is a subjective duty which imposes an overarching duty of good faith upon the director to act in the way which he considers most likely to promote the success of the company for the benefit of its members as a whole (the so-called concept of “enlightened shareholder value”). A (non-exhaustive) list of matters to which a director must have regard in discharging this duty is:

The likely consequences of any decision in the long term
The interests of the company’s employees business relationships with suppliers,
The need to foster the company’s customers and others
The impact of the company’s operations on the community and the environment
The desirability of the company maintaining the reputation for high standards of business conduct
The need to act fairly as between members of the company.

The need to consider each of these matters imposes a clear obligation on the directors of the company. Company boards should, however, avoid the temptation to address these new requirements in a formulaic manner. In board meetings, the directors of a company should certainly give consideration to each of these (and all other relevant) matters but this should not become simply a box-ticking exercise, whereby company minutes give a nod to the new requirements in a uniform and unconsidered manner. The decision as to what will promote the success of the company and what constitutes such success is one for a director’s good faith judgment to be addressed in a considered fashion as the company’s circumstances may require from time to time.

The second of the new duties to be considered here is the duty to exercise reasonable care, skill and diligence (contained in Section 174 of the Act). This duty makes clear that the standard of care, skill and diligence expected of a director is subject to both an objective and subjective test. The codification of this dual test clarifies the standard by which a director will be judged in relation to the discharge of his duties - and it is a high standard which will take into account the skills and experience of each particular director.

The codification of directors’ duties by the Act will put directors and their actions firmly in the spotlight. The Act hopefully will serve to clarify what duties a director has and how, and to what standard, they must be discharged. However, the new statement is neither exhaustive nor without its own ambiguities and it remains to be seen whether the codified duties will ensure that the law is “consistent, certain, accessible and comprehensible” as were the lofty aspirations of the White Paper when laid before Parliament.

Directors’ Duties