Critically discuss the extent of directors duties and the changes

made by the Companies Act 2006

1. Introduction
The new Company Act 2006 (UK), with the largest content in the UK contained approximately
1300 sections, had been approved by Royal Assent on 2006. In addition to its remarkable sizes,
there are some profound changes in certain areas. Perhaps one of the most significant
modifications is to provide a codified statement of directors duties, which was previously
governed by the general law as well as case law. It commonly considers that the outcomes of the
Act provide a relatively comprehensive understanding in the areas of directors' duties to facilitate
the application of non-specialists so that decrease the legal costs in some how, especially for
those companies with small sizes1. Moreover, there is worthwhile to notice that the new director's
duties do not confined to a simple restatement of current principles under common law, in fact,
the Act not only is modified in some fundamental aspect but provides further development. To me
more specific, the responsibilities imposed on the company directors have significantly
progressed by required to taking interests other than the chase of profit into consideration, which
offers an important implications for directors in terms of decision making process. Differentiation
between the requirements adopted to large companies and small companies are also expressed on
the new Act, it is however important to be borne in mind that there is no differential treatment on
directors duties2. Therefore, the purpose of this essay is going to critically analyze how the
directors duties become different compared to the relevant law before 2006. It will start with the
introduction of directors duties until 2006, followed by analyzing the codified statement of
directors duties under the Company Act 2006, and then discuss the relationship between each
duty and its enforcement.

2. Directors duties before reforming

1

Davies, J. (2007). A guide to directors' responsibilities under the Companies Act 2006, The Association of Chartered Certified
Accountants
2
Ibid.
1

Before analyzing the differentiation of directors' duties under the new Act, it is worthwhile to
review the measures of handling these issues prior to the new one came into force. Traditionally,
there are there main principles regulated the directors duties, which are the fiduciary duty, the
duty of skill and care, and the statutory duties respectively3.

The nature of the director was defined in the case of Bristol and West Building Society v Mothew
[1998] Ch1 that someone acts on behalf of another in certain matters in circumstance with a
relationship of confidence and trust4. It can be seen that directors' obligations are subject to the
relationship of trust and confidence similar with those trustees and professional advisers
undertaken. Moreover, one of the most important obligations imposed in the directors is to
perform in good faith stand for the benefits of shareholders and company 5. It however need to
realize the role of director and trustee is not quite the same even they are often compared that a
trustee is required to have high standard of prudence in order to safeguarding the beneficiary
while the director is liable to reasonably care the companys interests.

With respect to the duty of skill and care, it is developed from the fiduciary duty with the main
purpose of applying the certain implications of the director's role in the limited company 6. Under
this circumstance, directors are liable to operating a business under shareholders' authorization.
Another characteristic of this duty within limited company is that the member of the company
can restrict their liability to the company's creditors. It appears that the duty of skill and care can
be considered as a method of limiting the risk of debts at a reasonable level since not only the
shareholders but creditors always concern the financial risks. Before codifying, the duty of skill
and care was not expected in a high standard for companys directors due to the consideration of
unwilling to discourage company activities7. In addition, a wide scope of background of the
directors' eligibility has been regulated by the court to evaluate all directors through a single
standard8. However, because of impractical of such expectation, the standards imposed on
directors have mainly focused on assessing whether directors running a business by meeting the
3

HMSO. (1999). Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties, Law Commission
Paper No. 261
4
Bristol and West Building Society v Mothew [1998] Ch1
5
Piercy v S Mills & Co Ltd [1920] 1 Ch 77
6
Kershaw, D. (2009). Company Law in Context Text and Materials, Oxford University Press
7
Ibid.
8
Regentcrest plc v Cohen [2001] 2 BCLC 80
2

standards which may be expected by reference to certain environment. Since the Company Act
2006 came into force, this situation has been changed by been regulating a further promotion on
higher standard of skill and care. Furthermore, there are a series of specific obligations imposed
on directors through company legislation and provisions, as well as directors' duties by virtue of
their status. It is important for directors to fulfill obligations regulated by mandatory rule of laws.

As mentioned, the UK legal framework did not provides general statement of directors' duties as
Australia. Hence, this issue have been changed from the situation without statutory statement to
the one contained an extensive statement of directors' duties. The rationale behind the
comprehensive codified statement of directors duties, which have been debated for over ten
decades, is the transformation of the climate of opinion 9. Traditionally, it is incredibly difficult to
express in a words in the rule of laws "all the intricacies and nuances of the general law"10. The
situation is completely different that codified directors duties have play a vital role in the process
of improving corporate governance. Putting it in another way, the codified statement is likely to
establish a higher standard for all directors under the circumstance where reflects best practice.
Moreover, the new Act makes the law more luminous and accessible for directors, in particular
for those unprofessional advisers. A widespread of supporting for re-statement of directors duties
is received by the Law Commission, especially for directors in small companies which have
limited legal sources11.

3. Codified statement under the Company Act 2006

The codified directors' duties can be found from Sections 170 to 177 of the Company Act 2006.
Before analyzing the changes and impact of each specific duty, it is worthwhile to give a glace at
the status of the general duties. The statement illustrates in Section 170 in the beginning that the
duties contained in the general statement are belonged to company's director as a collective organ
rather than any other party such as individual shareholders or persons outside the company 12,
which constitutes a significant cornerstone to further promoting the success of the company under
Section 172. The means of applying the codified statement are set out in Section 170(3) and (4)
9

Arden, M. (2007). Companies Act 2006 (UK): A New Approach to Directors' Duties, Australia Law of Justice, 162(81), 162-179
Ibid.
11
Harner, M. M. (2013). A More Realistic Approach To Directors' Duties, Transaction: the Tennessee Journal of Business Law,
15,15-31
12
Company Act 2006, Section 170
3
10

that some rules and relevant principles under the common law adopted to directors are replaced
by the corresponding provisions of the new statement 13. However, the ruling of Re MC Bacon Ltd
(No 1) [1990] BCLC 324 clearly refers that replaced legislation is not likely to be helpful if the
words of the provisions have been entirely changed14. By virtue of this, although the replaced
rules and principles can not have direct impact on directors any more, the new statement is also
profoundly affected by the the court's accumulated experience in interpreting and defining
directors' duties. In other words, the court need to, as the first task, interpret the new statutory
statement by referring the the relevant rules or equivalent principles under common law.

3.1 Duty to act within the companys power

In terms of specific duties of the codified statement, there are two requirements set out in Section
171act on the basis of companys constitution, and exercise powers for the proper purposes and
conferred scope15. To be more specific, it on the one hand requires a director to organize and
administrate the company's activities in line with all the directions of the company's constitution,
especially for acting in compliance with any restrictions. On the other hand, the principle of
exercising powers for the proper purposes, known as proper purpose doctrine, is a long
standing rule under common law. It is however important to recognize that the court, for a long
time, is unable to regulate a fixed definition and interpretation of the proper purpose doctrine due
to the variety of situations confronted by the directors in different type of companies, so that
further attention on this point is unnecessary16.

3.2 Duty to promote the success of the company

The single most significant principle under the codified statement is the duty to promote the
success of the company, provided by Section 172. It starts by requiring the directors performing
in good faith according to their considerations in the companys interests as whole. Therefore, it
appears from the codified statement that company has relatively big chance to achieve success
when the directors have a legal duty to chase such purpose. Although directors are entitled to
make decisions on their own as long as in consideration of promoting companys success, a
number of specific matters are also required to be regarded by directors, including the likely
13

Company Act 2006, Section 170(3) and (4)

Re MC Bacon Ltd (No 1) [1990] BCLC 324
15
Company Act 2006, Section 171
16
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
14

consequences of any decision in the long term; the interests of the company's employees; the
need to foster the companys business relationships with suppliers, customers and others; the
impact of the companys operations on the community and the environment; the desirability of the
company maintaining a reputation for high standards of business conduct; and the need to act
fairly as between all members of the company17. By virtue of this, the meaning behind these
requirements perhaps can be interpreted as directors will be considered in conformity to the duty
of promote the success of the company only under the circumstance where they have regard
such matters or other matters in relating to certain circumstances. There is no explicit definition
on the term of have regard. But the intention is indicated by the Government which is to weight
that factors will be for the directors good faith consideration, instead of intervening the way of
individual companies implementing such factors in issue18. Accordingly, it might be reasonable to
suggest that directors need to be systematically aware the listed factors and take them into
account during the process of decision making. Generally, directors are likely to be treated as a
violation of the duty of promoting the success of the company if they are failure to put sufficient
attention to listed factors under the circumstance where make conspicuously unsuccessful
decisions19.

3.3 Duty to exercise independent judgment

The current principle of exercising directors power independently has been codified by the duty
to exercise independent judgment under Section 173. This duty can not be understood as not to
fetter director's discretion under the common law, but to be interpreted as neither authorize
directors to delegate, nor prevent them from acting on behalf of company's constitution 20.
Because failing to comply with such duty is likely to be permitted in advance by a deal between
the company and outside business partners or even the company's constitution, the Act is
conscious of that the company may confine itself so that unlawfully blocks the discretion of the
directors in the future. It appears that violation of Section 173 may bring about simultaneous
breach of Section 172 as well as 175, duty to avoid conflicts of interests, instead of constructing
17

Company Act 2006, Section 172

Aviram, A. (2013). Officers' Fiduciary Duties and the Nature of Corporate Organs, University of Illinois College of Law 3, 763784
19
Ibid.
20
Cabrelli, D. (2008). The Reform of the Law of Directors' Duties in UK Company Law, Edinburgh Research Explorer, available
at: http://www.research.ed.ac.uk/portal/files/13215836/CABRELLI_D_PRESENTATION_FOR_UNIVERSITA_ BOCCONI
_ON _THE_REFORM_OF_THE_LAW_OF_THE_DIRECTORS_DUTIES_IN_UK_COMPANY_LAW.pdf
5
18

freestanding claims. Moreover, in consideration of directors voting on the board of a company in

line with appointors requirements, the question arisen in this regard is whether such directors
constitute a violation of Section 173. Answer to this is negative due to taking proper care. For
instance, it seems that company's constitution will cope with relevant issues by avoiding lawsuit
in the context of potential gray areas under the circumstance where, for example, a director of a
subsidiary company performing as a nominee of the parent company and conduct according to
the requirements of the parent company.

3.5 Duty of skill, care and diligence

Traditionally, duty to exercise reasonable care, skill and diligence is mainly subjective. Section
174 is noteworthy since it improve the theme of common law by bringing a new statutory test
contained both subjective and objective elements, to apply a higher requirement of skill and care
for directors than traditional ways that the UK courts adopted21. The traditional level of
requirements in the field of skill and care can be found in the case of Re City Equitable Fire
Insurance co Ltd [1925] Ch 407 that a director is only expected to reasonable act in line with his
knowledge or experience, rather than perform at a greater degree of skill 22. The law as it has now
evolved that Section 174(1) requires a director to exercise reasonable care, skill and diligence,
while Section 174(2) further explains the meaning of Section 174(1) by stating that such duty
should be conducted by a reasonably diligent person which has "the general knowledge, skill
and experience that may reasonably be expected of a person carrying out the functions carried
by the director in relation to the company; and the general knowledge, skill and experience that
the director has, which provides a legal conception for a director to implement his duties.

The term of reasonable makes sure that the requirements will not be too impractical high to
prevent people from being a director23. In other words, the term is likely to be evaluated in
reliance on either objective or subjective factors as sub-section (2) stated by the court case by
case. With respect the objective factors, the Act reasonably expects a director to run a business in
line with his knowledge, skill and experience. As a result, the director's behavior is expected to
match with the requirements of specific position. For example, an executive director undertaken
21

Company Act 2006, Section 174

Re City Equitable Fire Insurance co Ltd [1925] Ch 407
23
See Davies, J, A guide to directors' responsibilities
22

certain responsibilities for specific position, such as finance or legal advice, will be assessed on
the basis of an objective requirements for that position24. Meanwhile, taking the subjective factors
covered by this section, it requires that a director to conduct based on the his general knowledge,
skill and diligence. A director therefore will be evaluated by reference of his experiences,
qualifications and background. To be more specific, a director with particular business skills,
such as a experienced accountant, will be judged as whether the exhibited standard of skill is
reasonably compliance with the statutory test. It can be understood as a director who has
particular skills will be required to display an appropriate degree of competence and undertake a
higher level of responsibility, compared to those who are featureless. In addition, it is important
to realize that although the Company Act 2006 tends to differentiate rules between private and
public companies in many areas, Section 174 adopts same requirements for all directors set aside
the companys size or the nature of the business.

3.6 Duty to avoid conflicts of interests

Section 175 stipulates that a director has obligation to avoid a circumstance which may directly
or indirectly run counter to the interests of the company25. This section lasts the long-established
common law principle by demanding directors to respect placed trust and confidence, and
preventing them from damaging that trust and confidence26. Putting it in another way, the
directors must ensure that they will put the interests of the company at the first place if they find
their own personal interests conflict or may conflict with the company's. The attitude from the
court in this regard can be found in the case of Aberdeen Railway Co v Blaikie Bros (1854) 1
Macq 461 which is not allowed a director to put himself in a position which may have conflicts
with company's interests27. Moreover, it should not ignore that duty on Section 175 not only
stipulates directors to avoid a plain conflicts, but to refrain from potential conflicts which may
possibly arise. It can be seen that directors are under obligations of carefully caring whether
interests outside of the company will undermine the company's inside interests. The term of
potential conflict was interpreted in Boardman v Phipps [1967] 2 AC 46 that a reasonable
man looking at the relevant facts and circumstances of the particular case would think that there

24

Ibid.
Company Act 2006, Section 175
26
See Cabrelli, D, The Reform of the Law
27
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
25

was a real sensible possibility of conflict28.

Furthermore, duty to avoid conflict of interests under common law has been adopted many times
under the circumstance where directors benefit from business opportunities which are supposed
to belong to companys29. Relevant ruling can be seen in the case of Cook v Deeks [1916] 1 AC
554 where directors planed to establish their own business from current clients of the company
constituted a violation of duty to avoid conflict of interests30. Section 175 further incorporates the
principles under the common law that simply resigning will not discharge directors duty to avoid
conflict of interests31 by saying directors are obliged to such duty after retirement as regards the
exploitation of any property, information or opportunity of which he became aware at a time
when he was a director32. It can be clearly understood that Section 175 provides two
expectations to this basic duty, first, the situation of directors transactions or arrangements within
the company covered by Section 177 and 182 of the Act does not subject to duty to avoid conflict
of interests; second, under the circumstance where is not likely to be reasonably considered as a
conflict of interests or matters empowered by the directors according to the requirements under
Section 175(5) will not be regarded as the breach of this duty.

3.7 Duty not to accept benefits from third parties

Directors not to accept a benefit from a third party is stipulated under Section 176 of the Act. The
purpose of this duty seeks to prevent directors from being distracting from implementing their
duty to forbidden activities. As a consequence, a director is may entitled to accept such benefits
when it is authorized in advance through ordinary solution or is not likely to be reasonably
considered as causing a conflict of interests, such as, immaterial benefits or benefits which are
irrelevant with companys affairs33, which is different from Section 175 that the board is not
entitled to authorize the acceptance of benefits from the outside of the company.

3.7 Duty to declare interest in proposed transactions or arrangements

Section 177 stipulates that directors need to declare the nature and extent of interests if they are in
28

Boardman v Phipps [1967] 2 AC 46

See Kershaw, D, Company Law
30
Cook v Deeks [1916] 1 AC 554
31
IDC v Cooley [1972] 1 WLR 443
32
Company Act 2006, Section 175 (2)(a)
33
See Cabrelli, D, The Reform of the Law
29

any situation directly or indirectly interested in a proposed transaction or arrangement with the
company34. Section 177(4) detailedly requires that declaration must be made prior to the
transactions or arrangements that the company enters into at a board meeting as Section 177(2)
said through in writing to directors or general notice in line with the requirements under Section
184. Failing to comply with such requirements will be considered as a violation of fiduciary duty,
but it is significant to distinguish this from Section 182 of the Act, duty to declare an interest in
an existing transaction or arrangement, that breach of Section 182 will be treated as a criminal
offense. Meanwhile, a further declaration will be needed as Section 177(3) stated if a declaration
made by a director is not accurate, which a director is not obliged to disclose information which
has already been known or been assume to know by other directors 35. In other words, directors
must make sure that they correct the initial declaration when have realized that some declared
facts is not accurate or comprehensive before the company engages in a transaction or
arrangement. The essence of Section 177 aims to enhance the principle against conflict of interest
by means of making certain that personal interests of the directors are transparent which may
have impact on their judgment.

To sum up, the codified directors duties are profound for the way which expects directors to
performing and being responsible to their company. Firstly, shareholders under the Act is
empowered to filed a legal action against directors by claiming a violation of their duties. The
court will approach the compliant by means of assessing whether the directors have run a
business in compliance with the duty to promote the success of the company set by Section 172.
Secondly, the Act requires companies to disclose a business review as part of their annual
accounts and reports36 which seeks to providing a way to evaluate whether directors have
implemented their duty as Section 172 required. However, fulfilling such codified duties may not
as easy as the the law expected. The reason behind this perhaps is, on the one hand, the words of
directors' general duties has expressed succinctly on the basis of original purpose of serving
education. On the other hand, the codified process conducted by Government has resulted in the
application of different terminology to the existing common law principles in some areas.

34

Company Act 2006, Section 177

Company Act 2006, Section 177(5)
36
See Davies, J, A guide to directors' responsibilities
35

4. Relationship between the directors duties and enforcement

Since the Act has codified a series of directors duties in different aspects, the question arisen here
is whether there is a hierarchy of duties that one of these duties is superior over the rest of others.
Section 179 addresses this question by saying that "except as otherwise provided, more than one
of the general duties may apply in any given case". In practice, Section 172 is regarded as the
most profound duty compared to the rest of duties, since it catches the imperative duty of loyalty
which is the foundation of the fiduciary relationship between the directors and their company37.

However, the Explanatory Notes to the Act clearly demonstrates that none of these duties should
be considered superior or inferior than any others under the circumstance where the duties collide
with each other38. Taking a bribe as example, it undoubtedly either will breach the duty not to
accept benefits from third parties under Section 176, or fall into the duty of failing to promote the
success of the company or exercise independent judgment. Due to the cumulative effect of
directors duties, directors must act in compliance with every duties in any certain situations.
Accordingly, it appears that Section 172 is not likely to permit directors to violate their duty to
performing within the scope of their powers, in regardless of whether it can accelerate the
companys success in a large extent. Backing to the argument of whether Section 172 commands
overlordship over the remaining duties, it is explicitly can be seen that a decision seeks to achieve
the success of the company but is likely to run counter to any other duties, Section 172 will not
act as a remedy for the violation of others.

In terms of the relationship between companys constitution and directors duties, Section 171
clearly requires that directors must perform on the basis of the companys constitution. However,
it possible comes to the circumstance where the company places further onerous requirements by
articles of association. However, the Act does not empower the company to discharge directors
duties unless certain cases fallen into the permission of Section 173, which states that a director
will not be treated as a violation of duty to exercise independent judgment once the constitution
has authorized it in advance, and Section 180 by exempting directors duties if they perform
based on any provisions in the companys articles to handling a conflict of interests.

37
38

See Cabrelli, D, The Reform of the Law

Ibid.
10

All directors, as the Act required, shall comply with general duties discussed above in
implementing their functions. In general, legal actions against directors complained by the
company are not regularly to see if the board of directors remain united 39. By virtue of this, it
assumes that if a company goes broke, the liquidator of the company may file lawsuit by accusing
directors in violating relevant duties on behalf of the company40. Moreover, one of the significant
modification under the Act is to expand the shareholders' rights to bring the directors under
obligations41. Before the Act came into force, the derivative actions which occur in rather limited
situations are the only way that shareholders are able to bring the company to litigation against
the directors. Now the shareholders can bring proceeding against the directors referred to any
alleged negligence, violation of duty or trust. If the application filed by shareholders meets the
requirements of prima facie and a series of court assessed factors including in consideration of
whether the shareholders complain in good faith, and whether have authorized the violation in
advance, the court will initiate the proceeding against the directors in name of the company42.

It

appears that the new derivative action on the one hand aims to prevent the directors from
unreasonably opening to the threat of legal action by disgruntled shareholders, in particular for
those shareholders who consider more attention should be paid to the cause they favored; on the
other hand enhance the enforcement of directors compliance with the duties.

5. Conclusion
In conclude, the carefully considered codified statement in the Companies Act 2006 is
considerable ambitious, which is related to the fundamental framework of the law regulating the
directors duties. The rule in this regard have been mainly assessed by the courts through the
cumulative cases until the enactment of the Act in 2006. A major differentiation to set case law
down in legislation is made from the traditional ways, which is the first time happened in the UK
legal system, with the primary purpose of making law more accessible and practical for nonexperts. The common law long established principles are now significantly changed by the Act,
including, duty to act in accordance with the company's constitution and the scope of granted
powers; requiring directors to run a business which is most likely to promote the success of the
39

See Kershaw, D, Company Law

Ibid.
41
See Arden, M, Companies Act 2006
42
Ibid.
40

11

company with the careful consideration of the results of specific decisions, the interests of
companys employees and the environmental influence during the process of operating the
company; duty to exercise independent judgment and reasonable skill, care and diligence; and
directors must avoid conflicts of interest and should not accept benefits from third parties; the last
but not the least as declaring an interest in any proposed transaction or arrangement.

Directors' duties under the Act tends to integrate the company's operation with the society by
developing the the quality of companys decisions with the benefits of the society. It is also likely
to bring about a high degree of awareness on company's debts subject to the outside group.
Meanwhile, there is no need to doubt that the codification of directors duties will result in
significant challenges to the court so that need the court to interpret and apply the provisions as a
direction to be followed by the directors and the companies.

Reference
Articles and Books
Arden, M. (2007). Companies Act 2006 (UK): A New Approach to Directors' Duties, Australia
Law of Justice, 162(81), 162-179
Aviram, A. (2013). Officers' Fiduciary Duties and the Nature of Corporate Organs, University of
Illinois College of Law 3, 763-784
12

Cabrelli, D. (2008). The Reform of the Law of Directors' Duties in UK Company Law, Edinburgh
Research Explorer, available at: http://www.research.ed.ac.uk/portal/files/13215836/ CABRELLI
_D_PRESENTATION_FOR_UNIVERSITA_BOCCONI_ON_THE_REFORM_OF_THE_LAW
_OF_THE_DIRECTORS_DUTIES_IN_UK_COMPANY_LAW.pdf

Davies, J. (2007). A guide to directors' responsibilities under the Companies Act 2006, The
Association of Chartered Certified Accountants

Harner, M. M. (2013). A More Realistic Approach To Directors' Duties, Transaction: the

Tennessee Journal of Business Law, 15,15-31

HMSO. (1999). Company Directors: Regulating Conflicts of Interests and Formulating a

Statement of Duties, Law Commission Paper No. 261

Kershaw, D. (2009). Company Law in Context Text and Materials, Oxford University Press

Cases
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
Boardman v Phipps [1967] 2 AC 46
Bristol and West Building Society v Mothew [1998] Ch1
Cook v Deeks [1916] 1 AC 554
Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821
IDC v Cooley [1972] 1 WLR 443
Piercy v S Mills & Co Ltd [1920] 1 Ch 77
Re City Equitable Fire Insurance co Ltd [1925] Ch 407
Regentcrest plc v Cohen [2001] 2 BCLC 80
Re MC Bacon Ltd (No 1) [1990] BCLC 324
Re Smith and Fawcett Ltd [1942] Ch 304

Provisions

13

Company Act 2006

14