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| The New Companies Act 2006 |
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Directors Duties - important changes....
New Companies Act 2006 (although still currently being written and introduced in stages)
Director’s have always owed a duty to act in the best interest of the company (and specifically to the members of the company) they act for. However these duties have had their origins in case law and therefore it has been difficult in the past to sue directors. The new Companies Act aims to make it easier for minority shareholders to sue directors by specifically including the following seven statutory duties, some of which are new.
- Duty to act within the company’s powers: as set out in the company memorandum and articles.;
- Duty to act in the way a director considers, in good faith, would be most likely to promote the success of the company: see comment below;
- Duty to exercise independent judgement : this could effect sleeping or shadow directors, who often follow the advice from other directors;
- Duty to exercise reasonable care, skill and diligence: an experienced director will be assumed to have a higher threshold in discharging his duty;
- Duty to avoid conflicts of interest: (effective 1st Oct 2008) The Act is making it easier for directors to enter into transactions with third parties when directors’ interests conflict with the company’s interests. These transactions can be authorised by the non-conflicted directors on the board, provided certain requirements have been dealt with.
- Duty not to accept benefits from third parties: benefits cover both monetary and non-monetary benefits. However, a director will not be in breach of this duty if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.
- Duty to declare an interest in any proposed transaction or arrangement with the company.
Comment The 2nd duty is a new responsibility and a Director is required to have regard to a list of factors including:
- The long term consequence of decisions as well as the interests of the employees;
- The relationships with suppliers and customers;
- The impact of the decision on the community and the environment;
- The desirability of maintaining a reputation for high standards of business conduct; and
- The need to act fairly as between members of the company.
Because this new duty is owed to the members, companies most at risk, would be those who have employee shareholders. Owner managed companies are considered less at risk because the directors tend to be the members. However, in a dispute situation where a director resigns and therefore just becomes a member, this member could now sue the remaining director. Husband and wife companies are also at risk in a divorce situation as the ex-director has knowledge of how the company works and makes decisions.
How to protect yourself You MUST ALWAYS “minute” decisions showing that you are acting in the best interests of the company. These minutes can then be used as part of your defence in a court of Law should you find yourself being sued for breach of Directors Duties under the new Act.
Should you find yourself in this position we recommend that you take legal advice as soon as possible. Apologies for the “dry” nature of this article however it is important that you are aware of the changes and their implications.
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