Director duties under the new 2006 companies act

The question of exactly what a director owes to the company that he or she works for in respect of duties and liability for negligence has been somewhat uncertain in the past. This is addressed by the new regime being brought in by Sections 170 to 177 of the Companies Act 2006.

Although the Sections are expressed to be simply codification of the existing common law and equity principles, in some ways they do create a higher level of responsibility.

Section 170 of the Act makes it clear that the directors duties are owed to the company alone and that any company can sue for breach of such duties. However, the Act goes into new territory in stating that the director must act “to promote the success of the company for the benefit of the members as a whole” and says that he or she must have regard, amongst other matters, to the following:-

1. The likely consequences of any decision in the long term.
2. The interest of the company’s employees.
3. The need to foster good business relationships with suppliers, customers and others.
4. The impact of the company’s operations on the community and environment.
5. The need to maintain a reputation for high standards of business conduct.
6. The need to act fairly between the members of the company.

In the past, the only duty the director had was to the direct financial interest of the shareholders as a whole. Now, however, the law assumes that enlightened shareholders wish their directors to reflect the company’s social responsibility for a much wider community beyond the mere monetary interests of the members.

It will be interesting to see how the courts interpret these concepts. Although the Act makes clear that the statutory provisions replace the old common law and equitable principles, it also implies that those principles will be borne in mind when interpreting the former. The acid test for the individual director is whether any action he or she takes is in good faith, not whether it is reasonable. In other words, errors of judgment are not.