The rules governing directors come from a variety of sources. There are rules contained within case law and within specific legislation (such as employment, health and safety and insolvency legislation) but the Companies Act 2006 (“CA 2006”) sets out a director’s duties.
These seven general duties are contained within sections 171-177 CA 2006 and are:
The second duty is, in many ways, the most fundamental duty that a director owes (although the CA 2006 does not give it any special status). The CA 2006 goes on to give six (non-exhaustive) matters that a director should have regard to when acting in this way being:
It should also be noted that the formulation of this duty refers to ‘the members as a whole’ which doesn’t deal with the situation of whether the interests of the company as a separate entity and the interests of its members can diverge.
In the case of a proposed takeover, for example, it is possible that the potential new owners will not benefit the company as a separate entity but the sale price may well be to the benefit of the current (but not future) members. In this case it is unclear how the duty should be applied.
Lord Goldsmith (the government’s spokesman on this part of the CA 2006 when it was being debated) said that ‘success’, for a commercial company, will usually mean the ‘long term increase in value’. However, there will be some difficult situations that the courts will need to clarify in due course.
The Court of Appeal has decided a case on conflicts of interest that highlights the strictness and importance of these directors’ duties.
Mr Towers, a former director of the company, entered into a free, undisclosed and unapproved loan with a customer of the company.
Even though Mr Towers argued that he had not breached his director’s duties because:
However, the Court of Appeal disagreed and found that, even though the company had not suffered as a result of the arrangement, Mr Towers had breached his duties as a director and he should pay the company an amount based on what it would have cost him in the open market.
This case acts as a timely reminder to directors that these seven duties are fundamental to their role as a director and, specifically in relation to conflicts of interest they should always look to disclose a conflict to the board even if they feel it is inconsequential or common practice.
Elemental has an in-house team of chartered secretaries, governance professionals and lawyers who have helped put in place governance frameworks for FTSE companies, AIM companies and organisations in the not-for-profit sector, including reviewing the current directors’ duties and providing board training. To discuss your individual requirements for governance best practice please get in touch with a member of the team. To find out more about our other corporate governance services visit our services page.
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