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UK Companies Act and directors' duties (The general duties of…
UK Companies Act and directors' duties
On the corporate governance front, the major change in CA2006 was the incorporation into statute for the first time of the duties of directors. Until then these had been based on common law principles, that is they had developed though the accumulation of case law. One purpose of the of the move was to make the requirements more accessible to people becoming directors, they can read them in the CA2006 instead of having to look to case law (and potentially have a solicitor explain the duties to them)
The system should also be more stable. The statutory rules are, not a direct codification of the existing common law and even though the duties are known statute, the law requires courts and others to take note of the common law and case history
It is the duties that form the basis on which directors must act to ensure they are acting in the best interests of the company (and hence its shareholders) and this is the foundation for corporate governance in the UK
The general duties of directors of all companies are set out in the CA2006 as follows
Section 171: Duty to act within powers
Section 172: Duty to promote the success of the company
Section 173: Duty to exercise independent judgement
Section 174: Duty to exercise reasonable care, skill and diligence
Section 175: Duty to avoid conflicts of interests
Section 176: Duty not to accept benefits from third parties
Section 177: Duty to declare interest in proposed transaction or arrangement
Section 174: Duty to exercise reasonable care, skill and diligence
The common law duties of care and skill are demonstrated by a number of company law cases
Section 174 of CA2006 introduced a more objective test for directors who, in carrying out their functions, have a duty to exercise reasonable care, skill and diligence, which overlays a subjective standard applying to the knowledge, skill and experience of that particular director
Wider stakeholders and the impact of section 172
Although the members were still the primary focus of the directors when considering the best interests of the company, the directors should also consider wider stakeholders. CA 2006 states that the directors should 'have regard to'
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 (eg with suppliers and customers)
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
the need to act fairly as between members of the company
This approach, sometimes referred to as 'englihtened shareholder value' was a careful balance between pressure from those who think companies should have a wider corporate social responsibility mandate and the needs to satisfy the profit motive of shareholders
The underlying view was that by considering these factors companies would produce better returns for shareholders in the long term. This approach is reflected in the requirements for quoted companies to report about such issues in their Strategic Report but only to the extent that these issues are material to investors
Sections 175-177 conflicts of interest
Duty to avoid conflicts of interest (except where they arise out of a propose transaction or arrangement with the company)
Under the common law, a director must not allow his or her personal interests, or duties to another person, to conflict with his or her duty to the company
If he or she does, unless shareholders consent to the conflict, the company can avoid any relevant contract and the director must account to the company for any 'secret profit' he or she has made
Duty not to accept benefits from third parties
There is no express duty to this effect in common law
It appears to derive from the duties to act in the company's interests and the rule dealing with conflicts of interest
Duty to declare any interest a director has in a proposed transaction or arrangement with the company to the company's other directors
Under the common law, a conflict of interest arising out of a transaction or arrangement with the company is dealt with by the general rule on conflicts of interest
Under the statuary arrangements, such a conflict where it relates to a proposed transaction or arrangement with the company is covered by this duty of disclosure
There are fairly common situations which can cause problems in relation to conflicts of interest. For example it is common for people to have multiple directorships, whether within the same group of companies or with completely unconnected companies. In such situations the best course is immediate disclosure and authorisation to avoid any potential conflicts arising
It is also possible to deal with conflicts in a company's articles of association. Directors may sometimes find it advisable to take independent legal advice in more complicated circumstances
Directors who are members of professional bodies themselves, such as ICSA, as well as being governed also by their own professional body's standards may also be able to seek advice from such bodies
There are also strict rules in the Companies Act in relation to other issues that might give rise to a conflict of interest or a risk that directors might act in their own self-interest. These must generally be approved by shareholders and include
Service contracts for directors lasting longer than two years
Loans or other credit given by a company to a director
Substantial property transactions, where a company sells a major asset to a director
Upon joining the board of an offshore company, directors with a UK background should, as part of heir induction, familiarise themselves with legal and regulatory requirements in that trisection. The company secretary, fellow directors and compliance officer should be able to assist in this repost. It is not sufficient to assume that the principles and requirements of the CA2006 will apply elsewhere
Re City Equitable Fire Insurance Co (1925)
Re D'Jan of London Ltd (1994)
Weavering