The Seven General Duties of Directors as set out in Part 10 Chapter 2 of the Companies Act 2006 - Essay Example

? The Seven General Duties of Directors as set out in Part 10 Chapter 2 of the Companies Act 2006 Introduction A director isa person who is appointed to execute the day to day management concerns of a company. It is a prerequisite that any public company must have at least two main directors and a private company in the other hand must have at least one director. The company directors are collectively referred to us the board of directors who usually perform their duties together. However, the articles of association confer power on one or more directors to perform executive powers, i.e. there is usually one managing director who has a considerable executive power. A director or any equivalent title is responsible for overseeing company’s affairs management. The statute does not have any comprehensive definition of a director except that the term ‘director’ entails any person in the position of the director (IAS Regulation 2006). This paper seeks to critically examine the seven General Duties of Directors as set out in Part 10 Chapter 2 of the Companies Act 2006. To begin with, the elements of company governance are discussed in the following paragraph to help us understand the scope of directorship in the companies after which the general duties of the directors will follow. Some companies also have the position of non executive director. These are directors who are not concerned with the day to day management of company operation and is expected to give own independent view and opinion on the issues of the board. Companies are controlled and directed by a corporate governance system. It is the role of the board of directors to oversee the governance of the company. It is the board that sets the strategies and aims of the company as well as grants the leadership to get them to operation and action1. The board of directors supervises the mechanisms of company management and gives a report to the shareholders. Generally, the action of the board of directors is subjected to regulations, law and shareholders in the general meetings. The ideal qualities that the directors are required to possess include; determination, integrity, originality, creativity, commitment, balance, ethical and strategic awareness, independence, responsibility and accountability. In some particular companies, team spirit and loyalty are highly valued than creativity and originality. An effective performance of the board varies with the difference in personalities and how people interact and not the case of having in the company outstanding individuals. That is the reason why new board members are usually selected to complement the qualities of the already existing members of the board. The most preferred candidate may even be that particular person who balances the team in the best way, and not the one who is technically able than the rest of the candidates. It is not obvious or a must that the director be good at everything, but he or she do not have to command respect from the rest of the board members. The directors should be team players and have the ability to demonstrate communication, decision making, strategic awareness and interpersonal skills. The development of regulation and law that relates to the directors of the company in the United Kingdom is based on the combination of a series of voluntary codes and laws of the company. These laws define the roles and responsibilities of the companies, company secretaries and directors of the companies. The Company Act 2006 was actually a consolidation of different pieces of other legislation of the company, which in that particular applied to the companies that were incorporated under that Act. It is vial to note that partnerships, sole traders and limited partnerships were not initially covered in the Companies Act 2005. The Companies Act 2006 however revised this and replaced the company legislations that were existing and the exceptions of the provisions that were related to the interest of communities over companies and the company investigations. All the parts of the Act was to come into full force by 2008 October, however some of the provisions would apply even much earlier. Several committees were formed to look into the company boards before the Act took its course. The committee also looked into the functions and roles of the board, the qualities that are needed for the non executive directors and the remuneration of the executive directors. The findings of this committee produced the Cadbury Report of the Best Practice on Corporate Governance. Another committee that was formed is the Greenbury Committee of 1995. The report of this committee encouraged an improved performance and strengthened the accountability of the board of directors. The report urged that the remuneration of the executive directors be determined by the non executive directors who at no particular time had vested interests2. Hampel Committee of 1996 reviewed the report submitted by the Cadbury Committee as well as the recommendations that were given by the Greenbury Committee. Additionally, the Hampel Committee had the roles of the non executive directors and the executive directors kept under strict review. In the year 1998, the Hampel Committee provided a code that included the work done by the Greenbury Committee and the Cadbury Committee as well as their committee. That report was taken to the stock exchange of London to stay alongside the rules that were listed. On the other hand, a final committee was formed in 2003, the Higgs Committee, which looked into the concerns of the corporate governance and majored on the reports initially given. The draft from Higgs was then passed on to the council of financial reporting. In 2003, a complete version of a combined code with recommendations from the Smith report about the audit committee and that from Higgs report on the non executive directors was published. This version applied to the financial years that ended anytime before October the 31st of 2007. The combined implementation code was reviewed in 2005 and small changes were incorporated in the updated version published in 2006 June. This applied to the years of financial reporting beginning after or on November 1st 20063. General duties of directors When sections 170 to 178 of the provisions of the Companies Act 2006 was put in place and codified the law of the duties of the directors, the government heralded them as that which represent modernization of the law that is applicable overdue. Specifically, the commentators pointed out section 172 of the Companies Act which had the directors enjoined to have decisions in such away that they would enhance and promote the company success in view of the whole members, pursuant to that which they were obliged to put into consideration interests of the constituencies of the stakeholders like the employees and the suppliers4. The scope and the nature of the general duties of the director are specified in the sections 171 along to 177. If a person ceases to be the designated director, one still has duty to the company; in section 175, such a person has the duty to avoid the conflicts of interest regarded to the exploitation of any particular information, property or opportunity that he or she became aware of when he or she was serving as a director. Section 176 also provides another duty of such a person. Duty not to accept any benefit from the third parties regarding the things that he or she did or omitted before he ceased serving as a director of the company. The mentioned duties apply to an ex director as well as a director and are subjected to necessary adaptations5. The general duties are basically on particular common law, equitable principles as well as the relationships of the directors and the companies. They have their impact in position of the principles and rules that regards the duties that are owed to the company by the company director. These general duties are applied and interpreted in a similar way as equitable principles and common law rules and regards are given to the corresponding equitable principles and common law rules in applying and interpreting these general duties of the directors. The same general duties apply to the shadow directors to the extent in which the corresponding equitable principles and common law rules do apply6. According to the Companies Act 2006, the seven general duties of directors as set out in Part 10 Chapter 2 of the Companies Act 2006 include the following: 1. The duty to act within powers: This section states that the director of a company must only act according to the constitution of the company and for only legitimate powers shall he or she exercise the powers vested in him or her. He or she must strictly adhere to the constitutional requirements and all powers exercised for the reasons in which they are originally conferred (Companies Act 2006). 2. The duty to promote the company’s success: this particular section dictates that any company director have to and must act to promote the success of the company in good faith for the whole members. The director hence should consider the interests of the employees of the company, the likelihood of consequences in the long term of any decision made, the business relationship of the company with the customers, suppliers and other stakeholders, the desirability of the company to have its reputation maintained for high behavior standards, the impact of the operations of the company to the environment in which it operates, and the need to have the members of the company treated fairly. For such considerations, the director must perform his or her duties in the manner he or she considers best for the interest of the company and in good faith, and that which will promote the company’s success and that of its members. In situations where or to the extent in which the functions and purposes of the company include or consist of functions or purposes apart from the interest of the members of the company, subsection (1) has impact such as the reference of promoting the company’s success for the best interest of its own members were achieving the stated purposes or functions. The stated duty that is forced by this subsection has the subject effect to any of the rule of law or enactment that requires directors to act in or consider the interests of the company creditors in certain situations and circumstances. 3. The duty to exercise judgment independently: this section requires that a director be able to exercise his or her judgment independently. The stated duty is not by any means infringed by his or her acting in away authorized by the constitution of the company or according to the duly entered agreement with the company that give restrictions to the exercise of discretion in the future by its own directors. 4. The duty to exercise reasonable skills, care and diligence: this section needs the directors to implement reasonable diligence, care and skill to the company. This infers the skill, care and diligence that would be at anytime exercised by any reasonable diligent individual with the general knowledge, experience and skill that a director possesses and with the same general knowledge, experience and skill that is reasonably expected from someone executing the functions that are carried out by the company’s director in relation to the constitution of the company (Companies Act 2006). 5. The duty to evade conflicts of interest: this section requires that a director avoids as much as possible a circumstance where he or she has, or may have an indirect or direct interest that possibly may conflict, or conflict with those interests of the company. This particularly applies to the exploitation of information, property or opportunity, and it is not important whether the company itself could be able to take any advantage of the information, property or opportunity. This duty however does not apply to the conflict of interest that arises in relation to the arrangement or transaction with the company. In addition, the duty if not at any point infringed if the matter or case has been certified and consented by the directors, or if the situation cannot be reasonably considered as likely to result into a conflict of interest. A go ahead or authorization may be awarded by the directors in situations where the company is a private one and not anything in the constitution of the company fails to support or invalidates that kind of certification, with the issue being proposed to and consented by the company directors; or where the company is a public one and in its constitution, there is a provision that enables the directors to certify the matter, with the issue being proposed to and certified by the same directors according to the constitution of the company. Therefore the authorization or certification is only effective if the matter was agreed to with non of their votes or rather would have been to in case their votes were not counted, and any prerequisite to the quorum in the meeting in which the issue is taken into account is met without considering the director concerned and/ or any other director who is interested. Hence, any reference to this section of the conflict of interest involves the duty and conflict of duties and conflict of interests7. 6. The duty to ignore or not to accept benefits from the third parties: this section demands that a director of a company evades or avoids circumstances or situations where he or she could or has an indirect or direct interests that could conflict or conflicts with the interests of the company. A director of a company therefore must not pocket or accept any benefit from a third party due to his or her being the director or his or her performing any duty as a director. A third party in this concept means any person who is not the company, an individual performing actions on behalf of the company, or a corporate body associate. The benefits that are received by the director from anyone to whom his or her services as the director or not are awarded to the company are not considered to have been conferred by a third party. This particular third party is not at anytime infringed if the receipt of the benefit is not reasonably considered as probably will result into any conflict of interest. Hence, any specific reference to this particular section to the conflict of interest involves conflicts of duties and conflict of interest and duty8. 7. The duty to affirm or declare interest in a proposed arrangement or transaction: this section demands that in case any director of a company is in any particular manner, indirectly or directly interested in an arrangement or transaction proposed with the company, he or she must declare the extent and nature of that interest to the rest of the directors. The declaration does not have to but may be made by notice to all other directors in relation to section 184 which is a notice in written form, or section 185 which is a general notice format or at a meeting of all the directors. If the declaration of interest under the section becomes or ends up being incomplete or inaccurate, further declaration must be made in particular. Any declaration that is needed by this section must be put down before the company gets into any arrangement or transaction. The section does not in particular need the declaration of the interest which the director is not aware of or in a situation where the director has no information regarding the arrangement or transaction in question. For this reason, the director is treated to be aware of all the issues and matters he or she reasonably ought to be aware. A director do not have to declare his or her interest if; the interest can not be considered as likely to rise any conflict of interest, the other directors are aware of the arrangement or transaction already, or if the interest concerns the terms of his or her contract of service that are to be or have been considered by the committee of the directors that are appointed for the reason under the constitution of the company or by the director’s meeting9. The above described sections are what entail the seven general duties of a director of a company according to Part 10 of Chapter 2 of the Companies Act 2006. In addition, there are other supplementary provisions that accompany the duties that the directors owe to the company. For instance, in section 178, there are detailed civil consequences of the breach of the general duties. This section states that the consequences of the breach of the general duties in sections 171 to 177 is the same as that which would be applied if a corresponding equitable principle or common law rule is applied. The stated duties in the sections except for section 174, duty to exercise reasonable skill, care and diligence, are enforceable accordingly in the same manner in which any other fiduciary duties that the directors owe to the company would be enforced. The consent, authorization and approval by the members of the company are also provided for in the supplementary provisions. In a situation where section 175, duty to evade or avoid conflicts of interest, is observed with the certification of the directors or section 177, duty to declare interest in a proposed arrangement or transaction, is conformed with, the arrangement or transaction is not likely to be set aside by the virtue of any equitable principle or common law rule that requires the approval or consent of the members of the company. This should be should be without any prejudice to any provision or enactment of the constitution of the company that requires such approval or consent (Regulations 2008). Case law authorities In relation to the duty of the director to work within his or her powers, an evidence can be seen in the decision of the case law authority of the Howard Smith Ltd vs. Ampol Ltd in which the case concerned directors powers in the issue of shares. It was assumed that directors issued a large quantity of new shares to deprive certain shareholder purely of his voting majority. The court however rejected the argument that the authority and power to issue the shares could be properly exercised only to raise new capital and asserted that it would be prudent for directors to issue shares within their powers to a larger company to see to it that there is financial stability in the company. In relation to the duty of directors to exercise skill, care and diligence, a case law authority in the Dorchester Finance Co Ltd vs. Stebbing [1989] BCLC 498, the decision held by the court was that the rule in Equitable Fire was only related to skill and that it had nothing to do with the diligence. With concern to diligence, such care as any other ordinary man would be expected to have on his behalf is what was required in that case law authority. Other case law authority that had a rule made concerning the duties of directors was in the case of Detwiler vs. Oifenbacher, 128 where a federal court applied a rule of the defendant secretary/vice president/tresurer in the same manner it was applied to the director and the corporate counsel where the claims were that Detwiler breached the fiduciary duties he owed the company that arose from the sale of the corporation. Conclusion The interpretation and application of the general duties of the directors is not at any time affected by the verity that it falls within Chapter 4, arrangements and transactions that need the approval of the members, as well except that which the Chapter applies and the matter is one that is provided that the consent is not required or the approval is given under the same Chapter. It is also not necessary in that case to comply with the sections 175, duty to avoid or evade conflict of interest or section 176, and duty to ignore or not to accept any benefit from the third parties. The compliance with the general duties does not at anytime remove the necessity of approval under any provision of Chapter 4, transactions or arrangements in need of members’ approval, applicable. The general duties therefore have the impact subject to the rule of law that enables the company to give power generally or specifically for anything to be carried out or neglected by the directors would be a breach of duty otherwise and where the articles of the company involves the provisions of handling the conflicts of interests are not contravened by something not or undertaken by the company directors according to those provisions. Otherwise the general duties of the directors have effect not withstanding any rule of law or enactment 10. In summary, the seven general duties of the directors of companies as entailed in Part 10 of Chapter 2 on the Companies Act 2006 briefly states that any director of a company should: act within their powers, promote the company’s success, exercise an independent judgment, exercise a reasonable skill, care and diligence, avoid the conflicts of interests with the company, avoid benefits from the third parties, and to declare interest in any proposed arrangement of transaction. In addition, the governments have raised concerns and issues to guide the directors on how they should act and execute their duties. The directors should act in the best interest of the company, respect the constitution of the company, observe honesty, remain diligent and careful, keep the record of decision made, remain responsible throughout, evade circumstances where your interests conflicts with those of the company, and seek advises from the external environment where necessary. Bibliography Case law authorities of Howard Smith Ltd vs. Ampol Ltd, Detwiler vs. Oifenbacher, 128 and Dorchester Finance Co Ltd vs. Stebbing [1989] BCLC 498. Ezzamel, M. (2000). Governance, directors and boards, Cheltenham: Edward E. (Corporate governance in the new economy). Financial Reporting Council, The Combined Code on Corporate Governance, July 2003, p 4.  Green, S. (2005). Sarbanes-Oxley and the Board of Directors: techniques and best practices for corporate governance. Hoboken, NJ: Wiley Guidance for UK companies on accounting and reporting requirements under the 2006 Act and the application of the IAS Regulation, available at http://www.berr.gov.uk/files/file46791.pdf. Lowry, J. (2009). The duty of loyalty of company directors, the Cambridge Law Journal, Cambridge: Cambridge University Press. 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