Companies Act 2006 - Directors

Directors

The Act replaced and codified the principal common law and equitable duties of directors, but it does not purport to provide an exhaustive statement of their duties, and so it is likely that the common law duties survive in a reduced form. Traditional common law notions of corporate benefit have been swept away, and the new emphasis is on corporate social responsibility. The seven codified duties are as follows:

1. S171 to act within their powers - to abide by the terms of the company's memorandum and articles of association and decisions made by the shareholders;
2. S172 to promote the success of the company - directors must continue to act in a way that benefits the shareholders as a whole, but there is now an additional list of non-exhaustive factors to which the directors must have regard. This was one of the most controversial aspects of the new legislation at the drafting stage. These factors are:
   1. the long term consequences of decisions
   2. the interests of employees
   3. the need to foster the company's business relationships with suppliers, customers and others
   4. the impact on the community and the environment
   5. the desire to maintain a reputation for high standards of business conduct
   6. the need to act fairly as between members
3. S173 to exercise independent judgment - directors must not fetter their discretion to act, other than pursuant to an agreement entered into by the company or in a way authorised by the company's articles
4. S174 to exercise reasonable care, skill and diligence - this must be exercised to the standard expected of
   1. someone with the general knowledge, skill and experience reasonably expected of a person carrying out the functions of the director (the objective test) and also
   2. the actual knowledge, skill and experience of that particular director (the subjective test)
5. S175 to avoid conflicts of interest - methods for authorising such conflicts by either board or shareholder approval are also to be introduced
6. S176 not to accept benefits from third parties
7. S177 to declare an interest in a proposed transaction with the company - there are to be carve outs for matters that are not likely to give rise to a conflict of interest, or of which the directors are already aware. There will be an additional statutory obligations to declare interests in relation to existing transactions.

Although the changes to directors' duties were the most widely publicised (and controversial) feature of the legislation, the Act also affects directors in various other ways:

• S239 The shareholders' ability to ratify any conduct of a director (including breach of duty, negligence, default or breach of trust) is regulated by the statute, although S 239.7 leaves the door open for common law principles, previously the only guide on this. Under the Act, directors who are also shareholders, or persons connected to them, are not entitled to vote in relation to any ratification resolution concerning their actions.
• Existing restrictions on companies indemnifying directors against certain liabilities were relaxed to permit indemnities by group companies to directors of corporate trustees and occupational pension schemes.
• SS261-3 The Act gave shareholders a statutory right to pursue claims against the directors for misfeasance on behalf of a company (a derivative action), although the shareholders need the consent of the court to proceed with such a claim.
• Certain transactions between the company and its directors which were previously prohibited by law have become lawful subject to the approval of shareholders (for example, loans from the company to its directors)
• The Act requires at least one director on the board of the company to be a natural person, although corporate directors are still permitted.
• The current age restriction of 70 for directors of public companies has been abolished. A new minimum age of 16 has been introduced for all directors who are natural persons (S157).
• Directors will have the option of providing Companies House with an address for service, which will in future enable their home addresses to be kept on a separate register to which access will be restricted.