Directors’ general duties under the Companies Act 2006

While the Companies Act 2006 provides that the general duties are based on, and have effect in place of, certain common law rules and equitable principles (section 170(3)), it also provides that: The general duties should be interpreted and applied in the same way as the common law rules and equitable principles.

The general duties will apply to all the directors of a company. “Director” is defined to include any person occupying the position of director, by whatever name called (section 250), which includes de facto directors, and in most instances “shadow directors.”

The codified duties are owed to the company and only the company will be able to enforce them, although in certain circumstances
shareholders may be able to bring a derivative action on the company’s behalf.

Companies may, through their articles, go further than the statutory duties by placing more onerous requirements on their directors, however, the articles may not dilute the duties except to the extent permitted by specific sections. Section 232, which prohibits a company from exempting a director from a breach of duty, will not prevent a company’s articles including provisions that have previously been lawful for dealing with conflicts of interest (section 232(4)).

Duty to act within powers (section 171) A director must act in accordance with the company’s constitution and must only exercise his powers for their proper purpose. This duty replaces the common law principles
under which directors must act within the powers conferred on them by the company’s memorandum and articles and exercise their powers for proper purposes.

Duty to promote the success of the company (section 172) Section 172 provides that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In so doing, the director must have regard (among other matters) to: The likely consequences of any decision in the long term.

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

Duty to exercise independent judgment (section 173) This duty codifies the principle of law under which directors must exercise their powers independently, without subordinating their powers to the will of others, whether by delegation or otherwise. It provides that a
director must exercise independent judgment.

Duty to exercise reasonable care, skill and diligence (section 174) Section 174 codifies recent formulations of a director’s common law duty of care, skill and diligence. Under section 174, a director must exercise the care, skill and diligence which would be exercised by a reasonably diligent person with both: The general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company.

Duty to avoid conflicts of interest (section 175) Under section 175, a director must avoid situations in which he has or can have a direct or indirect interest that conflicts with, or may conflict with, the company’s interests. That applies, in particular, to the exploitation of property, information or opportunity, and whether or not the company could take advantage of the property, information or opportunity. The duty in section 175 will not be infringed: If the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.

Duty not to accept benefits from third parties (section 176)
Section 176 codifies the fiduciary rule prohibiting the exploitation of the position of director for personal benefit. Under section 176, directors must not accept any benefit (including a bribe) from a third party which is conferred because of his being a director or his doing or not doing anything as a director. “Benefit” is not defined.

The duty will not be infringed if the acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest. Unlike section 275, board authorisation is not permitted in respect of the acceptance of benefits from third parties.

Duty to declare interest in proposed transaction or arrangement with the company Under Section 177, directors must declare to the other directors the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. The declaration must be made before the company enters into the transaction or arrangement. The declaration may be made at a meeting of the directors, or by notice in writing in accordance with section 184 (notice in writing) or section 185 (general notice).

Acknowledgement: Thomson Reuters online resource Practical Law

NOT LEGAL ADVICE: Information provided in this Blog, is for information purposes only. It is not and should not be taken as legal advice. You should not relay on or take or fail to take any action based upon this information. Never disregard taking legal advice or delay in seeking legal advice because of something you have read in this blog, or on this website. Ian Randall is an Attorney & Counsellor at Law (NY), with 25 years of Corporate and Commercial experience in several jurisdictions. To see how Owllegal could help you, please visit; www.owllegal.org or email Ian Directly, his email address is ian@owllegal.org.