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Companies Act 2006 - Implications For Directors

For the first time, the principal duties owed by directors to their company have been set out in statute, in the new Companies Act 2006.

The statutory duties will replace the common law duties of directors on which they are based, and are coming into force on 1st October 2007. It is essential that Directors of all business sizes should be aware of these new duties. Breach of duty may expose directors to civil & criminal liabilities.

The new Act also modernises & changes the rules by which shareholders can bring actions in the name of the company, known as derivative actions, and this may make it easier for shareholders to sue directors.

The new Act contains seven statutory duties of directors:

A duty to exercise reasonable care, skill & diligence: A director must exercise reasonable care, skill & diligence that would be exercised by a reasonably diligent person with the general knowledge, skill & experience: a) that may reasonably be expected of a person carrying out the functions of a director; and b) that the director has.

A duty to promote the success of the company: A director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.

A duty to act within powers: A director must: a) act in accordance with the company's constiution; and b) only exercise powers for the purposes for which they are conferred.

A duty to exercise independent judgement: A director must execise independent judgment. This duty is not infringed by his acting: a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors; or in a way authorized by the company's constitution.

A duty to avoid conflicts of interest: A director must avoid a situation where he has, or can have, a direct or indirect interest that conflicts with the interests of the company. Applies in particular to the exploitation of any property, information or opportunity.

A duty not to accept benefits from third parties: A director must not accept a benefit from a third party conferred by reason of: his being a director; or his doing (or not doing) anything as a director

A duty to declare any interest in a proposed transaction or arrangement: If a director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, he/she must declare the nature & extent of that interest to the other directors - before the company enters into the transaction or arrangement.

The new general statutory duty to "promote the success of the company" is the most controversial clause in the Act, and includes many considerations of which directors must now take into account – not only the long term business consequences of any decision, but also "the impact of the company’s operations on the community and the environment." This new statutory duty requires directors to consider wider social responsibility factors when making decisions.

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