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Critically Discuss The Extent of Directors Duties and The Changes Made by The Companies Act 2006
Critically Discuss The Extent of Directors Duties and The Changes Made by The Companies Act 2006
Davies, J. (2007). A guide to directors' responsibilities under the Companies Act 2006, The Association of Chartered Certified
Accountants
2
Ibid.
1
Before analyzing the differentiation of directors' duties under the new Act, it is worthwhile to
review the measures of handling these issues prior to the new one came into force. Traditionally,
there are there main principles regulated the directors duties, which are the fiduciary duty, the
duty of skill and care, and the statutory duties respectively3.
The nature of the director was defined in the case of Bristol and West Building Society v Mothew
[1998] Ch1 that someone acts on behalf of another in certain matters in circumstance with a
relationship of confidence and trust4. It can be seen that directors' obligations are subject to the
relationship of trust and confidence similar with those trustees and professional advisers
undertaken. Moreover, one of the most important obligations imposed in the directors is to
perform in good faith stand for the benefits of shareholders and company 5. It however need to
realize the role of director and trustee is not quite the same even they are often compared that a
trustee is required to have high standard of prudence in order to safeguarding the beneficiary
while the director is liable to reasonably care the companys interests.
With respect to the duty of skill and care, it is developed from the fiduciary duty with the main
purpose of applying the certain implications of the director's role in the limited company 6. Under
this circumstance, directors are liable to operating a business under shareholders' authorization.
Another characteristic of this duty within limited company is that the member of the company
can restrict their liability to the company's creditors. It appears that the duty of skill and care can
be considered as a method of limiting the risk of debts at a reasonable level since not only the
shareholders but creditors always concern the financial risks. Before codifying, the duty of skill
and care was not expected in a high standard for companys directors due to the consideration of
unwilling to discourage company activities7. In addition, a wide scope of background of the
directors' eligibility has been regulated by the court to evaluate all directors through a single
standard8. However, because of impractical of such expectation, the standards imposed on
directors have mainly focused on assessing whether directors running a business by meeting the
3
HMSO. (1999). Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties, Law Commission
Paper No. 261
4
Bristol and West Building Society v Mothew [1998] Ch1
5
Piercy v S Mills & Co Ltd [1920] 1 Ch 77
6
Kershaw, D. (2009). Company Law in Context Text and Materials, Oxford University Press
7
Ibid.
8
Regentcrest plc v Cohen [2001] 2 BCLC 80
2
standards which may be expected by reference to certain environment. Since the Company Act
2006 came into force, this situation has been changed by been regulating a further promotion on
higher standard of skill and care. Furthermore, there are a series of specific obligations imposed
on directors through company legislation and provisions, as well as directors' duties by virtue of
their status. It is important for directors to fulfill obligations regulated by mandatory rule of laws.
As mentioned, the UK legal framework did not provides general statement of directors' duties as
Australia. Hence, this issue have been changed from the situation without statutory statement to
the one contained an extensive statement of directors' duties. The rationale behind the
comprehensive codified statement of directors duties, which have been debated for over ten
decades, is the transformation of the climate of opinion 9. Traditionally, it is incredibly difficult to
express in a words in the rule of laws "all the intricacies and nuances of the general law"10. The
situation is completely different that codified directors duties have play a vital role in the process
of improving corporate governance. Putting it in another way, the codified statement is likely to
establish a higher standard for all directors under the circumstance where reflects best practice.
Moreover, the new Act makes the law more luminous and accessible for directors, in particular
for those unprofessional advisers. A widespread of supporting for re-statement of directors duties
is received by the Law Commission, especially for directors in small companies which have
limited legal sources11.
Arden, M. (2007). Companies Act 2006 (UK): A New Approach to Directors' Duties, Australia Law of Justice, 162(81), 162-179
Ibid.
11
Harner, M. M. (2013). A More Realistic Approach To Directors' Duties, Transaction: the Tennessee Journal of Business Law,
15,15-31
12
Company Act 2006, Section 170
3
10
that some rules and relevant principles under the common law adopted to directors are replaced
by the corresponding provisions of the new statement 13. However, the ruling of Re MC Bacon Ltd
(No 1) [1990] BCLC 324 clearly refers that replaced legislation is not likely to be helpful if the
words of the provisions have been entirely changed14. By virtue of this, although the replaced
rules and principles can not have direct impact on directors any more, the new statement is also
profoundly affected by the the court's accumulated experience in interpreting and defining
directors' duties. In other words, the court need to, as the first task, interpret the new statutory
statement by referring the the relevant rules or equivalent principles under common law.
consequences of any decision in the long term; the interests of the company's employees; the
need to foster the companys business relationships with suppliers, customers and others; the
impact of the companys operations on the community and the environment; the desirability of the
company maintaining a reputation for high standards of business conduct; and the need to act
fairly as between all members of the company17. By virtue of this, the meaning behind these
requirements perhaps can be interpreted as directors will be considered in conformity to the duty
of promote the success of the company only under the circumstance where they have regard
such matters or other matters in relating to certain circumstances. There is no explicit definition
on the term of have regard. But the intention is indicated by the Government which is to weight
that factors will be for the directors good faith consideration, instead of intervening the way of
individual companies implementing such factors in issue18. Accordingly, it might be reasonable to
suggest that directors need to be systematically aware the listed factors and take them into
account during the process of decision making. Generally, directors are likely to be treated as a
violation of the duty of promoting the success of the company if they are failure to put sufficient
attention to listed factors under the circumstance where make conspicuously unsuccessful
decisions19.
The term of reasonable makes sure that the requirements will not be too impractical high to
prevent people from being a director23. In other words, the term is likely to be evaluated in
reliance on either objective or subjective factors as sub-section (2) stated by the court case by
case. With respect the objective factors, the Act reasonably expects a director to run a business in
line with his knowledge, skill and experience. As a result, the director's behavior is expected to
match with the requirements of specific position. For example, an executive director undertaken
21
certain responsibilities for specific position, such as finance or legal advice, will be assessed on
the basis of an objective requirements for that position24. Meanwhile, taking the subjective factors
covered by this section, it requires that a director to conduct based on the his general knowledge,
skill and diligence. A director therefore will be evaluated by reference of his experiences,
qualifications and background. To be more specific, a director with particular business skills,
such as a experienced accountant, will be judged as whether the exhibited standard of skill is
reasonably compliance with the statutory test. It can be understood as a director who has
particular skills will be required to display an appropriate degree of competence and undertake a
higher level of responsibility, compared to those who are featureless. In addition, it is important
to realize that although the Company Act 2006 tends to differentiate rules between private and
public companies in many areas, Section 174 adopts same requirements for all directors set aside
the companys size or the nature of the business.
24
Ibid.
Company Act 2006, Section 175
26
See Cabrelli, D, The Reform of the Law
27
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
25
Furthermore, duty to avoid conflict of interests under common law has been adopted many times
under the circumstance where directors benefit from business opportunities which are supposed
to belong to companys29. Relevant ruling can be seen in the case of Cook v Deeks [1916] 1 AC
554 where directors planed to establish their own business from current clients of the company
constituted a violation of duty to avoid conflict of interests30. Section 175 further incorporates the
principles under the common law that simply resigning will not discharge directors duty to avoid
conflict of interests31 by saying directors are obliged to such duty after retirement as regards the
exploitation of any property, information or opportunity of which he became aware at a time
when he was a director32. It can be clearly understood that Section 175 provides two
expectations to this basic duty, first, the situation of directors transactions or arrangements within
the company covered by Section 177 and 182 of the Act does not subject to duty to avoid conflict
of interests; second, under the circumstance where is not likely to be reasonably considered as a
conflict of interests or matters empowered by the directors according to the requirements under
Section 175(5) will not be regarded as the breach of this duty.
any situation directly or indirectly interested in a proposed transaction or arrangement with the
company34. Section 177(4) detailedly requires that declaration must be made prior to the
transactions or arrangements that the company enters into at a board meeting as Section 177(2)
said through in writing to directors or general notice in line with the requirements under Section
184. Failing to comply with such requirements will be considered as a violation of fiduciary duty,
but it is significant to distinguish this from Section 182 of the Act, duty to declare an interest in
an existing transaction or arrangement, that breach of Section 182 will be treated as a criminal
offense. Meanwhile, a further declaration will be needed as Section 177(3) stated if a declaration
made by a director is not accurate, which a director is not obliged to disclose information which
has already been known or been assume to know by other directors 35. In other words, directors
must make sure that they correct the initial declaration when have realized that some declared
facts is not accurate or comprehensive before the company engages in a transaction or
arrangement. The essence of Section 177 aims to enhance the principle against conflict of interest
by means of making certain that personal interests of the directors are transparent which may
have impact on their judgment.
To sum up, the codified directors duties are profound for the way which expects directors to
performing and being responsible to their company. Firstly, shareholders under the Act is
empowered to filed a legal action against directors by claiming a violation of their duties. The
court will approach the compliant by means of assessing whether the directors have run a
business in compliance with the duty to promote the success of the company set by Section 172.
Secondly, the Act requires companies to disclose a business review as part of their annual
accounts and reports36 which seeks to providing a way to evaluate whether directors have
implemented their duty as Section 172 required. However, fulfilling such codified duties may not
as easy as the the law expected. The reason behind this perhaps is, on the one hand, the words of
directors' general duties has expressed succinctly on the basis of original purpose of serving
education. On the other hand, the codified process conducted by Government has resulted in the
application of different terminology to the existing common law principles in some areas.
34
However, the Explanatory Notes to the Act clearly demonstrates that none of these duties should
be considered superior or inferior than any others under the circumstance where the duties collide
with each other38. Taking a bribe as example, it undoubtedly either will breach the duty not to
accept benefits from third parties under Section 176, or fall into the duty of failing to promote the
success of the company or exercise independent judgment. Due to the cumulative effect of
directors duties, directors must act in compliance with every duties in any certain situations.
Accordingly, it appears that Section 172 is not likely to permit directors to violate their duty to
performing within the scope of their powers, in regardless of whether it can accelerate the
companys success in a large extent. Backing to the argument of whether Section 172 commands
overlordship over the remaining duties, it is explicitly can be seen that a decision seeks to achieve
the success of the company but is likely to run counter to any other duties, Section 172 will not
act as a remedy for the violation of others.
In terms of the relationship between companys constitution and directors duties, Section 171
clearly requires that directors must perform on the basis of the companys constitution. However,
it possible comes to the circumstance where the company places further onerous requirements by
articles of association. However, the Act does not empower the company to discharge directors
duties unless certain cases fallen into the permission of Section 173, which states that a director
will not be treated as a violation of duty to exercise independent judgment once the constitution
has authorized it in advance, and Section 180 by exempting directors duties if they perform
based on any provisions in the companys articles to handling a conflict of interests.
37
38
All directors, as the Act required, shall comply with general duties discussed above in
implementing their functions. In general, legal actions against directors complained by the
company are not regularly to see if the board of directors remain united 39. By virtue of this, it
assumes that if a company goes broke, the liquidator of the company may file lawsuit by accusing
directors in violating relevant duties on behalf of the company40. Moreover, one of the significant
modification under the Act is to expand the shareholders' rights to bring the directors under
obligations41. Before the Act came into force, the derivative actions which occur in rather limited
situations are the only way that shareholders are able to bring the company to litigation against
the directors. Now the shareholders can bring proceeding against the directors referred to any
alleged negligence, violation of duty or trust. If the application filed by shareholders meets the
requirements of prima facie and a series of court assessed factors including in consideration of
whether the shareholders complain in good faith, and whether have authorized the violation in
advance, the court will initiate the proceeding against the directors in name of the company42.
It
appears that the new derivative action on the one hand aims to prevent the directors from
unreasonably opening to the threat of legal action by disgruntled shareholders, in particular for
those shareholders who consider more attention should be paid to the cause they favored; on the
other hand enhance the enforcement of directors compliance with the duties.
5. Conclusion
In conclude, the carefully considered codified statement in the Companies Act 2006 is
considerable ambitious, which is related to the fundamental framework of the law regulating the
directors duties. The rule in this regard have been mainly assessed by the courts through the
cumulative cases until the enactment of the Act in 2006. A major differentiation to set case law
down in legislation is made from the traditional ways, which is the first time happened in the UK
legal system, with the primary purpose of making law more accessible and practical for nonexperts. The common law long established principles are now significantly changed by the Act,
including, duty to act in accordance with the company's constitution and the scope of granted
powers; requiring directors to run a business which is most likely to promote the success of the
39
11
company with the careful consideration of the results of specific decisions, the interests of
companys employees and the environmental influence during the process of operating the
company; duty to exercise independent judgment and reasonable skill, care and diligence; and
directors must avoid conflicts of interest and should not accept benefits from third parties; the last
but not the least as declaring an interest in any proposed transaction or arrangement.
Directors' duties under the Act tends to integrate the company's operation with the society by
developing the the quality of companys decisions with the benefits of the society. It is also likely
to bring about a high degree of awareness on company's debts subject to the outside group.
Meanwhile, there is no need to doubt that the codification of directors duties will result in
significant challenges to the court so that need the court to interpret and apply the provisions as a
direction to be followed by the directors and the companies.
Reference
Articles and Books
Arden, M. (2007). Companies Act 2006 (UK): A New Approach to Directors' Duties, Australia
Law of Justice, 162(81), 162-179
Aviram, A. (2013). Officers' Fiduciary Duties and the Nature of Corporate Organs, University of
Illinois College of Law 3, 763-784
12
Cabrelli, D. (2008). The Reform of the Law of Directors' Duties in UK Company Law, Edinburgh
Research Explorer, available at: http://www.research.ed.ac.uk/portal/files/13215836/ CABRELLI
_D_PRESENTATION_FOR_UNIVERSITA_BOCCONI_ON_THE_REFORM_OF_THE_LAW
_OF_THE_DIRECTORS_DUTIES_IN_UK_COMPANY_LAW.pdf
Davies, J. (2007). A guide to directors' responsibilities under the Companies Act 2006, The
Association of Chartered Certified Accountants
Kershaw, D. (2009). Company Law in Context Text and Materials, Oxford University Press
Cases
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
Boardman v Phipps [1967] 2 AC 46
Bristol and West Building Society v Mothew [1998] Ch1
Cook v Deeks [1916] 1 AC 554
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
IDC v Cooley [1972] 1 WLR 443
Piercy v S Mills & Co Ltd [1920] 1 Ch 77
Re City Equitable Fire Insurance co Ltd [1925] Ch 407
Regentcrest plc v Cohen [2001] 2 BCLC 80
Re MC Bacon Ltd (No 1) [1990] BCLC 324
Re Smith and Fawcett Ltd [1942] Ch 304
Provisions
13
14