Directors could be exposed to increased Litigation
One of the Companies Act 2006’s most significant and controversial changes was the codification of directors' duties. It introduced a statutory statement of duties that has replaced many existing common law and equitable rules and will apply to all the directors of a company, including, in certain circumstances, former directors. The final elements of the new statutory code in relation to conflicts of interest and benefits from third parties came into effect on 1st October 2008 so these provisions are very topical at present.
The most significant change is the statutory requirement for directors to have regard, among other things, to a list of factors in exercising their duty of good faith including the effect of the company’s operations on the community and the environment.
There has been much criticism of the codification of directors' duties, in particular that the list of factors for directors to have regard to, will create greater bureaucracy at board level and expose directors to greater potential liability. Care should be taken, however, not to blur the distinction between the express duty to promote the success of the company and the factors to which the directors must have regard. There is no guidance in the 2006 Act as to the weight to be given to each factor and how conflicts between the factors should be resolved. It will be up to the directors to exercise their judgment to resolve any conflicts that may arise.
There is concern that the changes made to directors' duties coupled with the re-cast provisions governing when shareholders can bring a claim against the directors in the name of the company may expose directors to increased litigation. It is therefore essential that directors are made aware of the changes in this area. Additionally, implementation of these duties means that profiles of directors’ roles, engagement letters and the company’s Articles of Association may need to be checked and amended and existing corporate practices will need to be reviewed.
For advice or more detailed information please contact Tony Fisher on 01206 835230.