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  • Writer's pictureEddison Cogan Legal Team

Director's duties – Companies Act 2006 Sections 170-181

Updated: May 13

Directors owe duties to the company. The principal duties, derived from the common law, are codified in Sections 170-181 of the Act, but this statement of duties does not cover all duties that a director may owe to the company: other duties are incorporated elsewhere in the Act (e.g. the duty to deliver accounts) and some remain uncodified (e.g. duty to consider creditors' interests in times of threatened insolvency). The directors’ codified duties are owed to the company and only the company can enforce them. Companies are able to impose more onerous duties in their articles, but the articles must not dilute the duties except to the extent expressly allowed by the Act.

Directors’ codified duties will apply to all the directors of a company, including shadow directors and, in some circumstances even former directors. However, as shadow directors and former directors are not in the same position as actual directors, the application of the duties to shadow directors is effective only to the extent that the corresponding common law rules or equitable principles apply (Section 170(5)). Application to former directors is "subject to any necessary adaptations", (Section 170(2)).

Specific Duties

Duty to act within powers (Section171): A directormust act in accordance with the company’s constitution and must only exercise his or her powers for their properpurpose. Duty to promote the success of the company (Section 171). A director must act in the way he or she considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. He or she must have regard (amongst other matters):

  • 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;

  • the need to act fairly as between the members of the company

The above list is the so-called principle of "enlightened shareholder value". The list of factors which directors are required "to have regard to" is not exhaustive. In having regard to the factors listed, the duty to exercise reasonable care, skill and diligence (Section 174) will apply. The duty is subject to any enactment or rule of law requiring directors in certain circumstances to consider or act in the interests of the creditors of the company (for example, this is required under the common law where the company is insolvent or threatened by insolvency) (Section 173(2)).

The meaning of "success for the benefit of the company’s members as a whole means" is unclear; it has been stated that "success" in this context will usually mean "long-term increase in value" for commercial companies. During the implementation of the Act the government stated that the decision as to what will promote the success of the company, and what constitutes such success, is one for the director's good faith judgment; the government's view was that this ensures that business decisions on, for example, strategy and tactics, are for the directors and not subject to decision by the courts, as long as they act in good faith. Section 172 has been criticised as it is thought that it will create greater bureaucracy at board level and expose directors to greater potential liability.

As a consequence, it has been suggested that board minutes need to be more detailed to show that the directors have contemplated the list of factors in Section 172. However, this approach may result in limiting the speed and flexibility of the board's decision-making process and cause further extra administration and a box-ticking approach.

Duty to exercise independent judgement (Section 173). This duty is not infringed by a director acting in accordance with an agreement entered into by the company that restricts the future exercise of the directors' discretion or in a way authorised by the company's constitution. The duty does not confer a power on the directors to delegate, nor does it prevent a director from exercising a power to delegate conferred by the company's constitution, provided that its exercise is in accordance with the company's constitution.

Duty to exercise reasonable care, skill and diligence (Section 174). In applying the test, the functions of the particular director, including his specific responsibilities and the circumstances of the company will be considered. Section 178 makes clear that this statutory duty is not a fiduciary duty – it is more akin to a duty in tort.

Duty to avoid conflicts of interest (Section175).

Duty not to accept benefits from third parties (Section 176). Any acceptance of benefits might also be caught by the Bribery Act 2010.

Duty to declare interest in proposed transaction or arrangement with the company (Section 177) directors must declare to the other directors the nature and extent of any interest, direct or indirect in a proposed transaction or arrangement with the company. The director need not be a party to the transaction for the duty to apply. An interest of another person in a contract with the company may require the director to make a disclosure under this duty, if the other person's interest amounts to a direct or indirect interest on the part of the director. Such declarations must be made before the company enters into the transaction or arrangement. The declaration may (but need not) be made at a board meeting or by way of notice in writing under Section 184 of the Act or general notice under Section185.

Where a declaration of interest proves to be, or becomes, inaccurate or incomplete, a further declaration must be made. However, this is only necessary if the company has not yet entered into the transaction or arrangement at the time the director becomes aware of the inaccuracy or incompleteness (or ought reasonably to have become so aware). No declaration is required where the director is not aware of his interest or where the director is not aware of the transaction or arrangement in question – for these purposes directors are treated as being aware of matters of which they ought reasonably to be aware.

Further, a director need not make a declaration of interest if his interest cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the other directors are already aware of it or, if it concerns the terms of his service contract which have been (or are to be) considered at a board meeting or board committee. It has been suggested that as the duty requires disclosure to be made to other directors, no disclosure is required where the company has only one director.

Duty to declare interest in existing transaction or arrangement with the company (Section 182). The duty will be breached if the director has failed to declare an interest under Section 177 by the time that the contract is entered into. A declaration would also have to be made, for example, when there was already a contract in existence and the director subsequently became interested. This might happen if there was an existing contract between the company of which he was a director and another company, and the director became a shareholder of the second company.

If required to be made, this declaration must be made as soon as is reasonably possible (Section 182). By subsection 182(2), it must be made at a board meeting or by notice in writing in accordance with Section 184 , or it is possible to make a general notice if required in accordance with Section 185 (see above). The same exceptions apply as for the Section 177 declaration (see above), subsections 182(5) and (6)). Under Section 187(1), the requirements under Section 182 of the Act also apply to shadow directors, but with some amendments.

Consequences of a breach of a director's duty

A director’s duty is to the company. Consequently, it is the company that must take action against a rogue director. Under Section 178 of the Act, the consequences of breach or threatened breach of the duties are the same as for breach of the corresponding common law or equitable principles – ie account for profits, return of company property, equitable compensation by the director, rescission, injunction against the director. With the exception of the duty to exercise reasonable care, skill and diligence (Section 174), these statutory duties are enforceable in the same way as other fiduciary duties owed by directors to their company. Breach of Section 174 would give rise to a claim for common law damages for negligence.

Section179 provides that more than one of the general duties may apply in any given case. The cumulative effect of the duties means that, where more than one duty applies, the directors must comply with each applicable duty, and the duties must be read in this context. For example, compliance with the duty to promote the success of the company will not relieve the director of his duty to act within his powers, even if he considers that it would be most likely to promote the success of the company.

As well as complying with all the duties, the directors must continue to comply with all other applicable laws. The duties do not require or authorise a director to breach any other prohibition or requirement imposed on him by law. Section232 states that any provision that purports to exempt a director from liability for negligence, default, breach of duty or breach of trust in relation to the company is void, is subject to the proviso that the company’s articles may include provisions for dealing with conflicts of interest (Section 232(4)) if these were previously permitted, for example under the common law.

Section 239(1) concedes that shareholders may be able to ratify a director’s action but only if it the act was not done unfairly or improperly or illegally or was oppressive towards the minority shareholders.

Claims may be brought for directors' breach of fiduciary duty, without any need for the director in question to have benefited from the alleged breach. However, the fact that any relief granted is for the benefit of the company, rather than the shareholder bringing the derivative claim, means that this is clearly not a route through which an activist may pursue his or her own personal agenda or grievances (and indeed if the court felt this was the case, they would generally refuse to permit the claim to proceed). As such, derivative claims may often be threatened but are rarely pursued.

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