6 January 2009 00:41

Directors’ duties defined by the Companies Act 2006

Introduction.

With more than 1,300 clauses, the Companies Act 2006, which received royal assent on 8 November 2006, is the biggest reform in company law for 50 years.

The latest legislation will replace the 1985 and 1989 Companies Acts.

The implementation of the Companies Act 2006 will be staggered. Some measures enforcing European requirements came into force in January 2007 but the entire Act will not be fully implemented until October 2008 following consultation, guidance and new regulations for many of its provisions.

The Companies Act 2006 overhauls the law governing how firms are created, run and dissolved. The Act contains many new responsibilities for directors touching on areas beyond the balance sheet such as how businesses handle environmental matters, employees, and social and community issues.

Directors’ duties

For the first time, the Companies Act 2006 details directors’ duties, and the Department of Trade and Industry is due to issue guidance in respect of these duties during the course of this year.

Under the Act, directors have a duty to:-

• Act in accordance with the company’s constitution (i.e. within the company’s own governing powers).

• Promote the success of the company for the benefit of its members.

• Exercise reasonable care, skill and diligence.

• Exercise independent judgement.

• Avoid conflicts of interest.

• Declare interests in proposed company transactions and arrangements.

• Not accept benefits from third parties.

In respect of a director’s duty to promote the success of the company for the benefit of its members, the actual phrase used in the Act is act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of the members as a whole.

In exercising this duty a director may be required to have regard, amongst other things, for;

• The likely long term consequences of his decision.

• The impact of the company’s operations on the wider community (which, may, of course, include environmental issues).

• The company’s reputation for high standards of business conduct.

• The interest of the company’s employees.

• The company’s business relationship with suppliers, customers, and others.

Conclusion.

Although the Companies Act 2006 sets out in one place directors’ duties for the first time, these statutory duties largely simply replace the existing ones found in common law, which have developed through case law over many years.

Despite this, it may prove to be useful to directors (and others) to have their duties set out in one easily accessible place (i.e. within the Companies Act 2006) so they are aware of what is expected from them in the running of a company.
 
Directors now have to be aware of what they can and cannot do when running a company and what the penalties are for failing.

Peter Barnes
January 2007  

 

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