Directors' duties
Published:  16 November, 2007

Directors have powers to take majority business decisions on behalf of companies. As such, various duties are imposed on them to ensure that the companies' interests are protected.

The Companies Act 2006, which will be fully in place by October 2008, codifies directors' duties into a statutory statement of seven general duties, the first of which takes effect from 1 October, 2007.

These changes will bring benefits to companies. But it may well create confusion in some areas and may result in more claims being brought against directors in the short term, as dissatisfied (minority) shareholders armed with a new statutory right of 'derivative actions' could bring test cases. A 'derivative right' is the right of a company member to bring a claim on behalf of the company against a director in respect of a director's breach of duty or negligence.

Directors now have a duty:

1 to act within their powers

Directors should exercise their powers, normally derived from the company's constitution, for a proper purpose. The scope of a director's powers may also be affected by the terms of his service contract and other contractual terms, such as may be contained in a shareholders' agreement.

2 to promote the success of the firm

The Act imposes a duty to conduct oneself in the way a director considers, in good faith, would be most likely to promote the success of the company. The director is required to bear in mind several factors, including: the long-term consequence of the decision; the interests of the employees; the relationships with suppliers and customers; the impact of the decision on community and environment; and the need to act fairly as between members of the company.

3 to exercise independent judgement

This is a duty on a director of a company to exercise independent judgement. Here, a director must first exercise judgement and secondly, he must exercise that judgement independently.

4 to exercise reasonable care, skill and diligence

This describes the degree of 'care, skill and diligence' expected from a director. It means that a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty.

5 to avoid conflicts of interest

This applies to a transaction between a director and a third party. The Act makes it easier for directors to enter into transactions with third parties when directors' interests conflict with company interests. Such transactions can be authorised by the non-conflicting directors on the board.

6 not to accept benefits from third parties

Under this, a director is not permitted to accept a benefit from a third party by reason of (a) his/her being a director or (b) his/her doing or not doing anything as a director. Benefits cover both monetary and non-monetary items.

A director will not be in breach if the acceptance of such a benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

7 to declare an interest in a proposed transaction with the company

This requires a director to disclose his/her interest - and the nature and extent of that interest - to the board of the company when a transaction is proposed between a director and the company. Disclosure also extends to a person connected with the director - for example, his wife or children.

- Christopher Sykes is a senior partner at Sykes Anderson




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