Background
In an uncanny similarity to the UK’s unwritten constitution, the law surrounding the duties of directors was historically constituted by a series of musty cases settled over the course of the last century. These duties were a combination of various fiduciary duties and a duty of skill and care. Much has changed with the advent of the new Companies Act 2006 and Directors need to be aware of what is contained in the CA 2006 and how it impacts on them. This article analyses the principal effect of the new regime.
New Act
With a view to clarifying the law and regulations in this thorny area the government has codified a substantial body of the previous case law relating to directors duties through the implementation of Part 10 of the CA 2006. Unfortunately the new legislation is not exhaustive and so regard must still be had to previous case law and other legislation which will sit alongside the new regime.
The changes The act lists seven general duties which directors owe to their company and which are substantially a restatement of the fiduciary duties established by case law – the new provisions effectively replace the corresponding case law duty. In summary these are:
- to act within powers (i.e. within the company’s constitution)
- to promote the success of the company
- to exercise independent judgment
- exercise reasonable care, skill and diligence
- avoid conflicts of interest
- accept benefits from third parties
- declare an interest in proposed transactions or arrangements
The first four came into force last October (2007) and the remainder will come into force October 2008.
What should directors do now?
Directors should ensure that they are familiar with the new duties and that any newly appointed directors are also suitably briefed.
Ensure that any relevant factors (such as employees, customer relations and the environment) are taken into account and given proper consideration during decision making processes.
Hold regular board, committee or management meetings and take minutes of all important discussions and decisions made. This is best practice in any event and gives the best evidence that the directors have discharged their responsibilities.
Ensure that, as a director, you are fully informed of the company’s affairs and avoid any situations where potential conflicts of interest may arise.
Review the company’s existing constitutional documents and internal policies and procedures to ensure they comply with and assist the directors in complying with their duties.
Consider whether the company should take out a directors and officers indemnity insurance policy if the company has not done so already. If there is a policy in place, review it to ensure it covers directors under the new legislation.
Keep the duties at the forefront of your mind whenever making new decisions or reviewing previous decisions made.
Take advice where there is a conflict between the different duties or a difficult decision to make, to ensure that the directors discharge their duties properly and are aware of any potential ramifications in advance.
Our corporate team has delivered a number of talks on the new legislation. If you require any further assistance or clarification on the new law please do not hesitate to contact a member of the corporate team.
For further information, please contact Johnathan Rees via email or telephone on 0870 850 3422.
