The Companies Act 2006 has codified directors’ duties replacing the common law and fiduciary duties. Some of the provisions including the following duties came into force in 2007:
• To act within the powers conferred by the company’s constitution;
• To promote the success of the company for the benefit of its members;
• To exercise independent judgment;
• To exercise reasonable care, skill and diligence.
Further provisions that came into force on 1 October 2008 include the following duties:
• To avoid conflicts of interest;
• Not to accept benefits from third parties; and
• To declare any personal interest in a proposed transaction or arrangement with a company.
A particularly controversial and rather unquantifiable duty imposed on directors’ is the duty “to promote the success of the company”. Some commentators have suggested that a director of a company must act in a way he considers in good faith most likely to promote the success of the company for the benefit of its members as a whole and in doing so having regard, amongst other matters, to the following:
(i) the likely consequences of any decision in the long term;
(ii) the need to foster the company’s business relationships with suppliers, customers and others and to maintain a reputation for high standards of business conduct; and
(iii) the impact of the company’s operations in the community and the environment.
Ensuring compliance with this duty is somewhat difficult, it is for directors themselves to consider the issue. Third parties do not have rights of action against directors even though directors are under a duty to consider their interests but that duty is owed to the company. In the current economic climate there is increased pressure on directors financially, who have an obligation to promote the success of the company. The key for directors is to ensure that when reaching a decision, they should consider the factors referred to above and record appropriately that they have done so. It is more important than ever for proper minutes to be kept of meetings held and for directors to satisfy themselves of the implications of taking a decision.
In light of the above, companies, should consider changes their articles of association to deal with what should happen in the event of conflicts of interest arising i.e prohibiting disclosure of confidential information, allowing directors to be excluded from meetings/information dealing with multiple appointments held by directors, and covering subsidiary company appointments, although one useful power which is now available is the ability for the board to authorise and sanction conflict situations.
For further guidance on how to achieve compliance in practice in relation to these particular duties or in relation to any other matters relating to directors please contact a member of our Corporate & Commercial team on 01689 887 887.
