In October 2007, the majority of new rules governing directors’ general duties will come in to force with the implementation of the new Company Law Act which aims to simplify company law, particularly for small businesses.

Up to now, the rules relating to directors’ duties developed over time through the courts. One of the aims of the new Act has been to codify all directors’ duties to provide clarity. By and large, the Act confirms current case law in this area by stating that directors should act in a way to promote the success of the company for the benefit of its shareholders. They should also take into account long term factors, the interests of other stakeholders and the community and the company’s reputation before making decisions.

In essence, the seven codified duties are:
1. to act within their powers;
2. to promote the success of the company;
3. to exercise independent judgment;
4. to exercise reasonable care, skill and diligence;
5. to avoid conflicts of interest;
6. to not accept benefits from third parties; and
7. to declare an interest in any proposed transaction.

The remainder of the changes will be implemented in October 2008, including the new directors’ conflict of interest rule. Currently, only shareholders can authorise a transaction in which a director has a conflict of interest. The new rule means that directors who are not conflicted will be permitted to authorise the transaction involving a conflicted director provided an appropriate provision is contained in the Articles of Association. The delay in introducing this part of the Act is intended to give companies time to review their Articles of Association and make changes where necessary.

If you would like a review of your existing Articles of Association or require any further advice about directors’ duties, call us on 01491 572138.