The New Companies Act 2006 - Directors' duties

From 1 October 2007 certain parts of the Companies Act 2006 relating to codification of directors' duties will come into force which will replace many existing common law duties.

The Act includes the controversial duty requiring directors "to 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 fulfilling this duty, directors will have to consider a number of factors when making decisions, including the long term consequences of decisions, the interests of the company's employees, the impact on the community and the environment, the long term stability of the company and the need to act fairly as between the members of the company. A failure to do so will now be a statutory breach by a director.

Although there is an express duty to promote the success of the company there is no guidance in the Act as to the weight to be given to each factor to which the directors must have regard, nor is there guidance as to how conflicts between the factors should be resolved. The directors will need to exercise their judgment to resolve any such conflicts.

As a result of the Act it is essential that directors are aware of the changes in the law in this area and directors' agreements and engagement letters may need to be checked and amended in light of the changes.