Section 175 Companies Act 2006 - Essay Example

? Section 175 Companies Act 2006 To what extent does a director's duty under section 175 Companies Act 2006 continues post-resignation? The Companies Act 2006 is the United Kingdom’s Act of Parliament which covers all the legal issues related to companies. The Act contains amended measures on the following issues: company communications with shareholders; company director’s duties; and financial and non- financial reporting. In regard to the duties of company directors, the Act maintained a principal duty of directors as acting in the shareholders’ interests.1 Nonetheless, in fulfilling this primary duty, the directors are required to consider other matters, including: the interests of employees of the company; company’s operations impact on the environment and the community; the possible long- term consequences of the decision; the necessity to advance the company’s business relationships with customers and suppliers. The Company Act 2006 brought up a statutory code of general duties of directors; this introduction was appearing in the UK’s Company law for the first time. The main purpose of this legislation was to enhance the general understanding of the legal duties of directors. The duties of the directors established in the Act are based on certain equitable principles and common law rules. The interpretation of the statutory duties in the future is required to be according to the development of those principles of case law.2 The director’s duties are not owed to the shareholders but rather to the company. The Act stipulates the duty of each director to include: a duty to foster company’s success as the director deems it in good faith; a duty for the director to avoid any conflicts of interest; a duty of non-acceptance of benefits such as secret commissions and bribes; a duty to act within the terms of powers granted under the constitution of the company; a duty to exercise reasonable diligence, skill, and care; a duty to declare any interests in the company’s transactions; and a duty to effect independent judgment.3 . In addition, the Act incorporates expressly long-standing equitable doctrines in order to provide remedies for director’s breach of duties, as noted for example in the case of Boardman v Phipps.4 Of most interest in this discussion is section 175 of Companies Act 2006. In reference to section 175 Companies Act 2006, this discussion will consider the extent to which a director’s duty will continue post-resignation. In particular, section 175 of the Companies Act 2006 deals with the director’s duties concerning conflict of interest (actual and potential). The main rationale of this provision is to codify the subsisting principles of case law and to develop parallel principles to the existing ones. Section 175 (1) state that a company director must avoid situations in which he has, or can have, conflicts of interest either directly or indirectly, or this interest and that of the company may conflict. Section 175 (2) provides that the duty to avoid conflicts of interest applies particularly to the exploitation of any opportunity, information, or property.5 However, section 175(3) provides that this duty shall not apply to conflicts of interest arising from an arrangement or transaction with the company. Additionally, section 175(4) states that this duty will not be considered infringed if: the directors have authorised the matter or the circumstances cannot be reasonable considered as giving rise to conflicts of interest. In section 175(5), the Act provides that the directors may give the authorisation in the following situations: where the company is a public constitution and the provision enabling authorisation by the directors is contained in its constitution, or where the company is a private company and its constitution does not validate authorisation of matter. Besides, section 175(6) states that authorisation can be effective if: agreement to the matter was made without voting or its agreement could have happened without counting the votes and meeting quorum requirement regarding the matter is met without counting the director in question.6 Lastly, section 175(7) provides that any reference made regarding this section on conflicts of interest includes a conflict of duties and a conflict of interest. At one time or another, a director of a company is bound to leave the board because of a number of reasons. Most of them ultimately leave through resignation. The other way in which the director may leave the board is if the company’s shareholders vote for the removal of the director from the board or decline to re-elect him. However, it should be noted that even in such cases the leaving director is required to formally submit his resignation. As such, since the departing director had been accorded specific duties under the Companies Act 2006, his resignation is definitely going to have certain legal implications.7 These implications largely revolve around the interactions and dealings of the departed director with the company and the board. In practice, the exclusion of the director who has resigned from the board’s future business tends to raise the concern on whether the resignation has been appropriately interpreted and explained. Since section 175 of the Companies Act 2006 provides both the duties of the director and the circumstance leading to conflicts of interest, it is important that the extent of the duty of the director to continue after resigning be determined. The increasing body of UK case law indicate that if the director resigns at a meeting and all the directors present at the meeting consent to it, such a resignation takes effect immediately. This implies that the departed director will no longer have the legal rights to undertake any duty as a director such as inspecting the minute. As noted in the case of CMS Dolphin Ltd v Simonet, the departed director no longer had obligations with the company after the relationship between them had ended.8 Under the Act, there is no express right for the departed director to access the minutes from the time he or she has definitively resigned. Actually, it is required that after the director has resigned, efforts should be made to ensure that the director does not make an appearance as a director to the board. The duty of a departed director ceases at the date and time of the resignation and cannot continue to perform the duties of a director. Under the Act, the term “director” is based not on the title but rather on the activities or duties. Therefore, it is conceivable that a director who resigns formally may continue to act as one or a shadow director. It is important to point out that a person can be a shadow director only if he has issued instructions or directions that other directors will follow, routinely. In regard to statutory duties, a shadow director can have the same liability as the other directors.9 Moreover, where a director has resigned, he can still be subject to specific fiduciary duties and responsibilities towards the company. So, he is required to conduct himself carefully. It is required that he should not conduct himself in a way that could be construed as detrimental or damaging to the company. As such, it is advisable that they exercise care to ensure that they do not make any statement that may easily be interpreted to impugn the integrity of the existing directors. This assertion is informed by section 175(2) that states duty to avoid conflicts of interest of interest applies particularly, among others, to exploitation of information in a manner that may affect the company.10 Additionally, section 175 Companies Act 2006 under sub-section (1) categorically bars any actual and potential conflicts of interest that may arise; this barring is founded on the case law rules in Aberdeen Railway v Blaikie Bros.11 This provision applies even after resignation because any violation top it may be damaging to the company. Therefore, even after resigning, the ex-director should exercise diligent care especially in situations where the circumstances about his resignation are enquired. There is a high possibility that someone who is being invited to replace him on the board may approach the director who has resigned to inquire on his resignations and the circumstances that led to it. This is often done by the enquirer in order to know whether there are any reasons why he should not take the duty. In this case, the ex-director should exercise care in order to avoid discussing the affairs of the company with a person who may have ulterior motives. In a bid to exercise reasonable care, the ex-director is advised to stick to factual material, particularly the material in public domain so as to allow the candidate to make his own conclusions. This is advisable because in an event that he is held responsible for misrepresentations, he can easily correct the misrepresentations using the material that is already in the public domain.12 Section 175 of the Companies Act 2006 not only seek to ensure that there is no conflict of interest between the directors and the company, but also seek to promote the interests of the company in the presence of the existing directors, and after the resignation of any of them. To ensure that this intention is effected, the Act implies that resigning as a director does not allow one to walk away from the problems that may have arose while he was the director. Even after resignation, ex-director still retains the responsibility for the things and decisions he made or contributed in making (sometimes even being held responsible for the things one did not do, but occurred under your “watch” as a director). A good example is the case where the company has been declared insolvent after the resignation of a director. The official receiver of the insolvent company will dig into the actions and conducts of the directors who have been in the office for the previous three years.13 This is because the law expects that the ex-director to have acted as per the provisions of the law in regard to the performance of the company. Companies Act 2006 requires that a director (while on duty) to consider all the likely long-term consequences of the decisions that they make. Therefore, if their decisions lead to detrimental long-term consequences then they should be held responsible.14 Also, such a detrimental consequence might have arisen from the violation of the provisions of the director’s duties such as failure to exercise reasonable care, skill, or diligence, and as such ex-directors have to be held reasonable. Additionally, any detrimental consequence that may have happened to a company may be attributed to the failure of the ex-director to foster company’s success as it deems it in good faith during his term as a director as required by the provision of the Act. Section 175 of the Companies Act 2006 tend to wade off all the actual and potential possibilities that may affect the company and that is why it puts a lot of emphasis on the duties of directors during and after their term in the board of the company.15 In conclusion, it is evidently clear that section 175 of the Companies Act 2006 is tilted towards fostering and protecting the interests of the company both in the short and long run. Since the directors are the one who are vested with the powers to steer the company into success and to ensure that it complies with all the legal provisions under the Companies Act, the provisions relating to them ensure that they have achieved this main purpose. As has been noted, the director’s duties under the Companies Act 2006 are not owed to the shareholders but rather to the company. Particularly, section 175 of the Companies Act 2006 aims at ensuring that direct or indirect interests of the company does not arise between the company and any of the directors, as this may have negative effects to the survival and performance of the company. As noted, this section covers a considerable extent under which the director’s duty continues post-resignation. The duty revolves around aspects that seek to ensure that ex-director’s actions do not impact negatively on the company. For example, they are required to exercise reasonable care when issuing information about the company and are required to rely on factual materials only. Also, their duty continues in regard to being liable to things and decisions made, and sometimes even being held responsible for the things one did not do, but occurred under their “watch” as a director. Bibliography BOOKS Hicks A., & Goo S. H Cases and materials on company law (Oxford, Oxford University Press 2011). Moore M Company Law Statutes 2011-2012 (Routledge 2011) Reisberg A Pettet's Company Law: Company Law & Capital Markets Law (Harlow, Pearson Longman, 2009) Sealy L and Worthington S Sealy's Cases and Materials in Company Law (Oxford: Oxford University Press 2010) Steinfield A Blackstone's Guide to the Companies Act 2006 (Oxford: Oxford University Press 2007) JOURNAL ARTICLES Lowry J “The Duty of Loyalty of Company directors: Bridging the Accountability Gap through Efficient Disclosure” [2009] Cambridge Law Journal 595 Paulo S 2010, 'The UK Companies Act of 2006 and the Sarbanes-Oxley Act of 2002', International Journal of Law & Management, 52, 3, pp. 173-181 CASES Aberdeen Railway v Blaikie Bros (1854) 1 Macq 461 Boardman v Phipps [1966] UKHL 2 CMS Dolphin Ltd v Simonet [2001] EWHC (Ch) 4159 LEGISLATION Companies Act 2006 Read More