If you are a director but have no executive position within the company, you will be classed as a non-executive. As a non-executive director, you may have nothing to do with the day-to-day running of the company. Even so, you will still carry the same responsibilities as other directors. Even if you have never been appointed a director, you could be classed as a shadow director (if the other directors are 'accustomed to act' under your instructions) or as a 'de facto' director if you act as if you were one - for example, if you resign your directorship but continue making decisions as a director. As a shadow director or de facto director you carry many of the legal responsibilities, and are subject to many of the penalties, of other directors.

This article outlines the main duties of Directors as prescribed by the Companies Act 2006 and introduces new concepts to help protect both the directors and the company in times economic hardship.


Directors Duties

The central duty (contained in section 172) is the duty to act in the way that the director considers, in good faith, would be most likely to promote the success of the company for the benefit of members as a whole. This "corresponds" to the old duty to act in the interests of the company, though the changed formulation of the duty must entail some change in its scope. The more notable element of this central duty is the addition of a list of factors to which a director must have regard in considering whether a proposed action is most likely to promote the success of the company.

There are six factors set out in sub-section 172(1), as follows:
a. the likely consequences of any decision in the long term;
b. the interests of the company's employees;
c. the need to foster the company's business relationships with suppliers, customers and others;
d. the impact of the company's operations on the community and the environment;
e. the desirability of the company maintaining a reputation for high standards of business conduct; and
f. the need to act fairly as between members of the company.

This list of factors is not intended to be exhaustive. It seeks to promote the concept of enlightened shareholder value, which has been much debated over recent years. Whilst there were legislative discussions as to whether individual stakeholders (representing the environment, employees, the community, etc) should have independent rights to enforce the duty, the position remains that the duties are owed to the company alone.

The provisions may lead to an increased emphasis upon documentary records. No one could doubt that, if litigation ever arises, directors will wish to prove that they have paid due regard to the listed factors, which is more easily done where they have minuted their discussions or commissioned reports on some or all of those factors. Even though the legislation does not dictate how the directors have regard to particular factors or what weight they should attach to them, directors must take care to consider the potential relevance of each of the factors. Once satisfied of this, the Courts are unlikely to interfere in the decisions made as a result.

There is at least one major factor that is omitted, deliberately, from the list of factors. The existing common law provides that a director can owe a duty to have regard to the interests of creditors. This applies when the company is in a "parlous" financial position or on the verge of insolvency. The duty remains a duty to the company itself, rather than to the creditors. The Act expressly preserves this aspect of the common law so that a director must still have regard to the interests of creditors in these circumstances.

How are the shareholders and others to monitor whether the directors comply with this duty? One simple answer to this question is the annual Business Review, which has been re-stated and expanded in the Act, particularly in the case of quoted companies. This requires a balanced and comprehensive analysis of the development and performance of the company and its position, with a fair review of business and a description of the principal risks and uncertainties faced. One of the stated purposes of this review is to enable the shareholders to assess how the directors have performed their duty to promote the success of the company, this will be of even greater importance in our current climate of economic uncertainty as directors face the scrutiny in a crumbling marketplace.

Duty to exercise reasonable care, skill and diligence

This duty, set out in section 174, combines both an objective and subjective test. A director must exercise the reasonable care, skill and diligence that would be exercised by a reasonably diligent person with both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company and the general knowledge, skill and experience that the director has.

The two remaining duties which are set out in sections 171 and 173 can be characterised as specific instances of the wider duty to promote the success of the company. Section 173 provides that a director must exercise independent judgment: he or she must not fetter the future exercise of discretion unless acting either in accordance with an agreement which has been duly entered into by the company or in a way authorised by the company's constitution. In addition, section 171 provides that a director must act in accordance with the company's constitution and only exercise powers for the purposes for which they are conferred.

Ensuring directors are aware of their duties

Companies should ensure that all board members are aware of their duties under the 2006 Act.  This can be done in all or some of the following ways:

(i) As a transitional move, boards should be given a thorough briefing on the new duties introduced by the Companies Act.  
(ii) On appointment, all new directors should be briefed upon their duties under the Companies Act.
(iii) The terms of appointment and description of the role of any director should specifically refer to their duties.
(iv) The terms of reference of any board or committee may also refer to those duties.
(v) Companies should review their existing policies in areas such as human resources, ethics, compliance and corporate responsibility against the background of the new duties.
(vi) Care will need to be taken to ensure the duties are not inadvertently extended to give new rights of action to third parties.