Corporate Governance - Directors' Duties and Powers

Question 1

What are the seven Statutory Directors’ Duties arising under the Companies Act 2006?

Answer 1

1. To act within their proper powers and use them for a proper purpose, in accordance with the company’s constitution (s.171, CA ‘06).
2. To promote the success of the company for the members as a whole (s.172, CA ‘06).
3. To exercise independent judgement (s.173, CA ‘06).
   - Discretion must not be fettered but may be restricted by company agreements.
4. To use reasonable care, skill and diligence (s.174, CA ‘06).
5. To avoid actual/potential and direct/indirect conflicts of interest (s.175, CA ‘06) => board may authorise conflicts (Regal Hastings v Gulliver).
6. Not to accept benefits from third parties (s.176, CA ‘06) => board cannot authorise; BA ‘10 overlap.
7. To declare any interests in proposed transactions (s.177, CA ‘06) => transaction voidance risk; conceivable director criminal liability.

Question 2

Where do a Director’s Powers generally originate from?

Answer 2

1. Articles of Association.
2. Board or shareholder resolutions.
3. Company agreements.

Question 3

What six Factors shold a Director consider as part of the Duty to Promote the Company’s Success (s.172, CA ‘06)?

Answer 3

1. The likely consequences of decisions in the long-term.
2. The desirability of the company maintaining a reputation for high standards of business conduct.
3. The interests of the company’s employees.
4. The need to foster business relations with customers, suppliers and other stakeholders.
5. The impact of the company’s operations on the community and the environment.
6. The need to act fairly as between company members.
   => Section 172 considerations to be reported on within strategic report (s.414(c), CA ‘06).

Question 4

What does the Duty of Reasonable Care, Skill and Diligence require (s.174)?

Answer 4

• See Re D’Jan of London Ltd. for precursor to statutory duty.
• Two-pronged requirement: directors must behave as a reasonably diligent person with:
  (i) the general knowledge, skill and experience that may be reasonable expected of a person acting as director for that company; and
  (ii) the knowledge, skill and experience that director has.
• Duty differs depending upon NEDs and EDs - for example, a finance director would be expected to have technical financial knowledge and also be expected such knowledge they have.

Question 5

What Legal Actions may arise against a Director in Contravention of a Duty?

Answer 5

1. Derivative action:
   - Brought by shareholder(s) on behalf of company;
   - May cover actual/proposed actions;
   - Any awards payable to company.
2. Insolvency practitioner-instigated claims.
3. Fraudulent or wrongful trading under IA ‘86, if continue trading when insolvency and director aware that company cannot meet liabilities as they fall due..

Question 6

What is the Purpose of D&O Insurance?

Answer 6

1. Provides financial protection to directors against actual or alleged wrongful acts when acting within scope of duties.
2. May cover breach of duty, breach of trust, neglect, wrongful trading and misleading statements.
3. Funds defence costs and financial losses.