It is remarkable that until now “directors’ duties” have not been
codified in UK Statute Law but have been subject to the idiosyncrasies
of the courts which have had to interpret common law rules and
equitable principles affecting “directors’ duties” in individual cases.
However, English law has always been remarkable in leaving important
areas of law to the interpretation of the courts.
The courts have used their sense and experience in order to interpret the law according to current social norms.
Notwithstanding the traditional judicial approach, it has been felt
necessary for some time to codify “directors’ duties” in view of the
importance of this subject.
The Companies Bill accordingly lists seven major directors’ duties as follows:-
1. a duty to act within his powers;
2. a duty to promote the success of his company;
3. a duty to exercise independent judgment;
4. a duty to exercise reasonable care, skill and diligence;
5. a duty to avoid conflicts of interest;
6. a duty not to accept benefits from third parties; and
7. a duty to declare any interest in a proposed transaction or arrangement with his company.
These duties are not intended to be a comprehensive list but rather a
list of the most significant rules of general application to directors.
The Bill goes on to explain these seven duties in terms which reflect
commercial life but introduce some ambiguities.
Whilst the Bill’s statement of a director’s general duties are
expressed to be “based on certain common law rules and equitable
principles as they apply in relation to directors and have effect in
place of those rules and principles as regards the duties owed to a
company by a director”, it seems clear that at least some of the duties
as interpreted by the Bill go beyond previous judicial thinking. In
particular, a director’s duty “to promote the success of the company”
is enlarged upon by the Bill as follows:-
(1) “A Director of a company must 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.”
(2) The Bill goes on to list six factors to which a director must “so
far as reasonably practicable” have regard in fulfilling his duty to
promote the success of his company. These six factors are –
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“(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 of high standards of business conduct, and
(f) the need to act fairly as between members of the company.”
These factors do not purport to be all inclusive but, although the duty
itself to promote the success of the company remains a duty owed by a
director of a company to that company (and cannot therefore be enforced
directly by employees, suppliers, customers or others), they
nevertheless impose wide-ranging responsibilities on directors without
giving any clue as to the priorities or weight which should be applied
to those factors in individual cases. I suppose the underlying approach
is that directors are grown-ups (and, indeed, following the Bill it
would be illegal except in prescribed instances for directors to be
appointed under the age of 16!) and that they should know from their
life experience and commonsense how to apply these factors!
The general duties are expressed to have effect “subject to any rule of
law enabling the company to give authority, specifically or generally,
for anything to be done (or omitted) by the directors, or any of them,
that would otherwise be a breach of duty.” They are also expressed to
be subject to the rules relating to “the ratification by a company of
conduct by a director amounting to negligence, default, breach of duty
or breach of trust in relation to the company.” However, these two
provisos (together with other exceptions and qualifications which are
expressed to apply to particular duties) are not self-defining and do
beg the question of the extent to which these duties can be modified by
constitutional provisions in the Articles or by members’ or directors’
approval.
In recent years, the interpretation of a director’s duties has led to
voluminous court litigation. This is clearly unhealthy and therefore an
attempt to define the duties in plain English and in statutory terms is
to be commended. However, it is unlikely that setting these rules down
in writing will be the end of the story or that the interpretative role
of the judges will be rendered redundant!
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