The current duties incumbent on Company Directors are set out both in the Companies Act 1985 and in common law. The new Company Law Reform Bill codifies and seeks to update the existing position with a series of "general" duties.
Essentially, these new proposed general duties replicate the existing duties incumbent on directors with some slight changes which seek to facilitate the main themes of the new legislation; deregulation and flexibility, especially for small businesses.
The proposed general duties to be imposed on directors are :-
- To act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred
- To promote the success of the company for the benefit of its members
- To exercise independent judgment
- To exercise reasonable care, skill and diligence
- To avoid conflicts of interest
- Not to accept benefits from third parties; and
- To declare interests in proposed transactions with the company
It can be seen that these are basically a repetition of the duties which are already imposed on directors, although gathered into one location for ease of reference, which in itself is to be welcomed. We highlight some key issues to be considered below.
The fundamental duty of a director under the Bill will be to "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". This is in line with existing law.
In establishing what is required to fulfil this duty, directors under the new regime will be required to have regard (so far as is reasonably practicable) to the following circumstances:- the likely consequences of any decision in the long term, the interests of the company's employees, the need to foster business relationships with suppliers, customers and others, the impact of the company's operations 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.
A plurality of interests would therefore have be taken into account by directors in carrying out any acts rather than merely those interests of the company/shareholders. This approach is more in line with recent trends in company law and with the European "stakeholder" notion of company law, where duties are owed to a much wider group with often conflicting interests.
Other Key Duties
Conflicts of Interest
Directors must currently avoid situations in which they have a conflict of interest. This applies in particular to the exploitation of any property, information or opportunity. In future, however, directors of companies will be able to exploit property, information or opportunities which belong to the company WITHOUT having to obtain the consent of the members so long as the board (voting without the conflicted out director) authorises them to do so.
This more lenient approach is part of the drive towards greater flexibility in company regulation. It should be noted, however, that if the company is public then the board will not have such power unless the company's constitution expressly provides for it.
Declaration of conflict of interest provisions
Under the new Bill, any direct or indirect interest of a director in a proposed transaction, save where it cannot reasonably be regarded as likely to give rise to a conflict of interest or the other directors are already aware of it or it concerns the terms of his service contract, must continue to be declared by a director (as is the case under the existing law). However, the Bill goes further and provides that interests in existing transactions must also be declared.
Claims against Directors
The codified directors' duties are owed to the company and not to shareholders. Under common law a shareholder could only bring actions against the company in certain limited circumstances. The Bill introduces a new route for shareholders by setting out a procedure whereby a member can bring a claim on behalf of the company against a director (derivative claim) where there is "an act or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company". The critical factor in such an action, however, is that to proceed it must have the consent of the court, which will have to consider whether the continuing of the action would be damaging to the "success of the company" before granting permission to proceed. This should allay fears that this new derivative claim procedure would extend directors' liability and lead to a plethora of action by certain types of shareholders in listed companies e.g. hedge funds.
Directors' Home addresses
Useful on a practical level-directors will be able to provide service addresses with home addresses being kept on a separate list to which restricted access would be given. Currently only directors at serious risk of violence and intimidation can have their home addresses kept off the public record which may deter some people from becoming directors.
It will be seen that the majority of the general duties to be imposed upon directors under the new legislation largely restate the existing common law in this area. Despite being codified, however, directors duties remain a complex issue. The new codification of duties does not entirely eliminate existing areas of uncertainty. Also the Bill does not cover all duties owed to the company as many duties are imposed elsewhere in legislation, particularly insolvency legislation. A director must continue to act at all times in good faith but will be required to take account of the general duties imposed upon him in terms of the new Bill.
Next time we will consider how the new proposals will impact on the rules regarding financial assistance.