Company Law - Directors II (Part 2)

The Companies Act 2006 reforms to directors’ duties

Sections 170-177 Companies Act 2006 have to a large extent codified the case law set out above.

s.170(3): “The general duties are based on certain common law rules and equitable principles as they apply in relation to directors and have effect in place of those rules and principles as regards the duties owed to a company by a director”.

s.170(4): “The general duties shall be interpreted and applied in the same way as common law rules or equitable principles, and regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.”

The duties include:

s.171: Duty to act within powers

A director of a company must:

a) act in accordance with the company’s constitution, and

b) only exercise powers for the purposes for which they are conferred.

s.172: Duty to promote the success of the company

(1) A director of a company 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, and in doing so have regard (amongst other matters) to

a) the likely consequences of any decision in the long term,

b) the interests of the company’s employees,

c) the need to foster the company’s business relationships with suppliers, customers and others,

d) the impact of the company’s operations on the community and the environment,

e) the desirability of the company maintaining a reputation for high standards of business conduct, and

f) the need to act fairly as between members of the company.

s.173: Duty to exercise independent judgment

(1) A director of a company must exercise independent judgment.

(2) This duty is not infringed by his acting

a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or

b) in a way authorised by the company’s constitution.

s.174: Duty to exercise reasonable care, skill and diligence

(1) A director of a company must exercise reasonable care, skill and diligence.

(2) This means the care, skill and diligence that would be exercised by a reasonably diligent person with

a) 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, and

b) the general knowledge, skill and experience that the director has.

a.175: Duty to avoid conflicts of interest

(1) A director of a company must avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.

s.176: Duty not to accept benefits from third parties

(1) A director of a company must not accept a benefit from a third party conferred by reason of

a) his being a director, or

b) his doing (or not doing) anything as director.

s.177: Duty to declare interest in proposed transaction or arrangement

(1) If a director of a company is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he must declare the nature and extent of that interest to the other directors.

The full effect of these new codified duties is yet to be fully understood, but s.170 (4) expressly requires the rules to be applied in accordance with previous case law. 

See further Companies Act 2006.
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