legal updates
Thursday, 27 Sep 2007
enhanced Directors’ duties under the companies act 2006
From 1st October 2007, the provisions of the new Companies Act which deal with directors’ duties came into force.
For the first time directors’ general duties are now enshrined in legislation. Not only that, but the scope of directors’ duties have been greatly increased. Essentially the Act imposes the following general duties upon directors:
- to act within their powers;
- to promote the success of the company;
- to exercise independent judgment ;
- to exercise reasonable care, skill and diligence;
- to avoid conflicts of interest; not to accept benefits from third parties; and
- to declare interests in proposed transactions or arrangements to the other directors.
The duty “to promote the success of the company” is wide in its application. The duty is owed to the shareholders as a whole and when exercising this duty directors must:
- consider the long term implications of any decision;
- have regard to how their decisions affect the wider interests of the company’s employees and suppliers, the community, and the environment (as well as other factors);
- take into account the desirability of the company maintaining a reputation for high standards of business conduct; and
- act fairly as between shareholders of the company.
Each director owes the statutory duties to the company and not to its shareholders or any other stakeholder. However, along with there being an increased number of duties incumbent on directors, enhancement of the rules on shareholders being able to raise actions on behalf of the company may make it easier for a shareholder (on behalf of the company) to bring an action against a director for breach of duty.
As breach of these duties can result in substantial penalties being imposed on the director in question, all company directors should be aware of these new duties and ensure compliance with them, particularly given the possibility of more actions being raised against them.
If you would like any further information on this, please contact any member of our corporate & companies team.