Directors’ Duties Under the Companies Act 2006

The Companies Act 2006 was designed to modernise British company law. The provisions dealing with company directors’ duties are designed to make the law and legal obligations more readily ascertainable to directors. This stands in contrast to previous legislation where director’s duties were not made clear in the Companies Act 1987.

Accordingly, there are several changes which affect directors. As of 1 October 2007, the duties of directors are:

1. Section 171: The duty to act within their powers. These powers are defined in the articles of association and memorandum of association;
2. Section 172: The duty to promote the success of the company. There are six things a director must consider here, including consideration of the company’s employees, the long-term consequences of decisions, fairness to members (shareholders) and the impact of decisions on the community and environment;
3. Section 173: The duty to exercise independent judgment. This is not as restrictive as it may seem, but means not being a ‘yes man’ for the person responsible for their appointment. It does not prevent having an interest in transactions nor relying on the opinion of an expert in appropriate circumstances;
4. Section 174: The duty to exercise reasonable skill, care and diligence. This duty has particular implications for non-executive directors – such directors can no longer afford to take a ‘hands-off’ approach;
5. Section 175: The duty to avoid conflicts of interest. This includes conflicts involving connected persons such as family members;
6. Section 176: The duty not to accept benefits from third parties; and
7. Section 177: The duty to declare an interest in transactions or arrangements. This includes the duty to declare interests of persons connected with the director.

These enumerated duties of directors do not so much change the law but clarifies what is expected from directors by accepting an appointment to serve a company. Directors of companies should conduct a review of their responsibilities within the context of the company and ensure that they take every opportunity to comply with their statutory obligations.