- A New Code of Directors' Duties

Directors Duties under Companies Act 2006

The law on directors' duties was previously scattered throughout common law and business related Acts of Parliament and was considered difficult for ordinary businessmen to access. The Companies Act 2006 codifies this existing common law (with some modifications) into seven general duties of directors. Some of these duties are in force already, some not until October 2009 (according to current government timelines). It is worth noting that the new codified duties do not amount to a codification of all duties of directors: some, such as such as a duty to maintain the confidentiality of company business or to consider or act in the interests of creditors when the company is insolvent, are set out elsewhere in law.

The seven general duties of directors as follows:

Currently in force:
s.171: Duty of directors to act within their powers (i.e. within the constitution of the company).

s.172: Duty to promote the success of the Company: a director must act in good faith in a way he considers is most likely to benefit the company as a whole. In doing so must consider the following factors:

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; and
the need to act fairly as between shareholders of the company.

s.173: Duty of directors to exercise independent judgement – a director may still seek external advice but must exercise independent judgement in considering that advice.

s.174: Duty of directors to exercise reasonable care, skill and diligence. In exercising this duty, the directors must use the level of 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 those functions in the company (an "objective" test); and
the general knowledge, skill and experience that the director actually has (a "subjective" test).
A director is still entitled to delegate to others within the firm but must supervise the discharge of the delegated functions.

In force from October 2009 (according to current government timelines):
s.175: Duty of directors to avoid conflicts of interest.
s.176: Duty of directors not to accept benefits from 3rd parties.
s.177: Duty of directors to declare interest in proposed transactions.