Seven up! The statutory duties of directors under the Companies Act 2006

Whilst directors of limited companies have always had a number of duties and obligations (of which every company director should already be aware), the Companies Act 2006 places those duties in a statutory code for the first time. The first four duties came into effect on the 1 October 2007 and the last three are due to come into effect on 1 October 2008. What are they? The duties require a director to :

1. Act within the powers of the company
A director needs to know what is in the company’s constitution (Articles of Association) in order to exercise power properly.

2. Promote the success of the company
A director has to act in a way which he considers to be most likely to promote the success of the company, acting in good faith and for the benefit of all shareholders taking into account the :

• likely consequences of any decision for the long term
• interests of employees
• nurturing relationships with customers, suppliers and others
• impact of operations on the community and environment
• maintenance of reputation for high standards of business conduct
• acting fairly as between shareholders.

3. Exercise independent judgment
 A director should be wary of restricting his discretion unless this is authorised by the company’s constitution or by a third party agreement.

4. Exercise reasonable care, skill and diligence
The duty is by reference to a reasonably diligent person who has the general knowledge skill and experience that may be reasonably required of a director and the actual knowledge, skill and experience that the Director has.

5. Avoid conflicts of interest
 Conflicts may be direct or indirect but the board does have power to authorise transactions where such a conflict does exist.

6. Not accept benefits from third parties
 This is a development of the duty to avoid a conflict of interest. So if acceptance of a benefit cannot reasonably be seen as likely to give rise to a conflict then the duty will not be broken, likewise with benefits which the shareholders have approved.

7. Declare an interest in a proposed transaction
 There is no such duty if the interest will give no rise to a conflict.

Directors should be aware that these duties apply to both executive and non-executive directors and directors can be taken to task for breach by either the company or the shareholders.

This fact sheet has been contributed by Nigel Pepper, Partner in the employment team. For further advice, contact Patrick Farrington - This email address is being protected from spam bots, you need Javascript enabled to view it or 01785 211411 – in our commercial department.