Company Law Forum - Explaining Companies Act 2006 - Directors Duties

Directors Duties - Primary Duties

Wednesday, 14 November 2007

Are then all duties of directors fiduciary in character? No, and the test for ascertaining this is to consider the type of remedy that normally follows the breach. In the case of a fiduciary duty such as not to make a secret profit from the office of director, the company’s remedy is a full account of profits or losses and a restitution of value from the director or other constructive trustee. In the case of certain agency duties, for example to exercise skill, care and diligence, the consequence of breach is an action for damages for negligence, or for negligent breach of contract if the director is employed under a service contract and it is more convenient or beneficial for the company to sue in contract1. This is not a fiduciary claim, compensation is not awarded on a restitutionary basis, and the company has to satisfy normal common law thresholds of foreseeability, remoteness of damage etc. Confusingly, there are certain other obligations which derive from neither strand, but are nevertheless termed “equitable”, such as the “no conflict” rule, because they were originally enforced in courts of equity, and give rise to claims to account for profits. In the writer’s view this is an unnecessary refinement and such duties should simply be considered “fiduciary” as they operate on the conscience of the director by virtue of his quasi-trusteeship. Directors can also assume liabilities based not on any pre-existing status but on an ordinary assumption of responsibility for their words or actions, such as misrepresentation

The core duties that have developed over time as a result of factual situations presented for interpretation by the courts are few in number, but have escaped precise definition. High on any list would be a duty to act bona fide in the company’s best interests3 although there has always been difficulty in determining whether the company’s interests are reckoned to be represented by its members, creditors, or indeed employees. But different academic formulations would undoubtedly not produce identical outcomes, and a criticism of the existing law until 2006 has been that it is not found in any convenient, user-friendly place. Now it is, and there are seven elements to it which need to be committed to memory:

1. Duty to act within powers.
2. Duty to promote the success of the company.
3. Duty to exercise independent judgment.
4. Duty to exercise reasonable care, skill and diligence.
5. Duty to avoid conflicts of interest.
6. Duty not to accept benefit from third parties.
7. Duty to declare interest in proposed transaction or arrangement.

The formulation (actually only section headings) is contained in Part 10 of the Companies Act 2006 and is mostly in force from 1st October 2007 except for the conflict of interest rules (April 2008) (see timetable shown in APPENDIX 2). The detailed provisions which underpin these headings are contained ss 170 to 181 of the Act and are considered further in this and the next two following chapters. The question that is immediately to be raised, however, is whether the rules as presented are truly a distillation of current law or whether the Government has imposed a new agenda. There is now no reference, for example, to the “best interests” test, but instead an obligation “to promote the success” of the company as if it were a continuous marketing exercise. What has happened? For this we need to make a brief excursion into the ideas of stakeholders and “pluralism”.