News

Extension of directors statutory duties

Release date: 26/09/2008

Those who have followed the introduction of the Companies Act 2006, will recall that a number of the "common law" duties imposed upon company directors were placed on a statutory footing in October 2007.

These were the duty of a director to act within his powers, to promote the success of the company, to exercise independent judgment and to exercise reasonable care, skill and diligence.

On 1 October 2008, the final three statutory duties imposed by the Companies Act 2006 (the duty to avoid conflicts of interest, the duty not to accept benefits from third parties and the duty to declare an interest in a proposed transaction or arrangement) will come into force.

Companies will therefore need to revise their internal procedures to ensure that they do not fall foul of the new provisions.

The duty to avoid conflicts of interest requires directors to avoid situations in which they have, or can have, an interest that conflicts with, or may conflict with, the company's interests.

This applies in particular to the exploitation of property, information or opportunity (whether or not the company could take advantage of the property, information or opportunity).

It should be noted that this will not apply to situations where a director is involved in a personal capacity in a transaction or proposed transaction with the company itself. (This situation is covered by the separate duty to declare an interest in a proposed transaction or arrangement, see below).

The duty is not infringed if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the matter is authorised by the directors provided that certain requirements are met.

The duty not to accept benefits from third parties prohibits a director accepting benefits (including bribes) from third parties, which are offered because of his being a director. Accepting a benefit is permitted if it cannot reasonably be regarded as likely to give rise to a conflict of interest.

Benefits conferred by the company, its holding company or subsidiaries and benefits given by the director's service contract are specifically excluded.

This duty has been categorised separately from the general duty to avoid conflicts of interest under section 175, so that a "benefit" to a director from a third party can only be authorised by the shareholders of the company, rather than by the board.

The duty to declare an interest in a proposed transaction or arrangement requires directors to declare to the other directors the nature and extent of any interest in a proposed transaction or arrangement with the company (whether direct or indirect).

The director need not be a party to the transaction for the duty to apply.

An interest of another person (for example, a family member) in a contract with the company may therefore require the director to make a disclosure if the other person's interest amounts to a direct or indirect interest on the part of the director.

Declarations must be made before the company enters into a transaction or arrangement and may be made at a board meeting.

Where a declaration of interest proves to be, or becomes inaccurate or incomplete, a further declaration must be made if the company has not yet entered into the transaction or arrangement. Failure to declare an interest can be difficult to ratify at a later date!

The introduction of these new statutory duties means that companies should consider a review of their internal policies and procedures.

This is particularly important given the potential personal liability, which directors could incur as a result of a breach of their statutory duties.

If you would like to discuss this in more detail, please contact Lisa Botterill on (0116) 257 4414.