Directors' Duties (1st edition)

Citation

Burrows, S.A. (2010), "Directors' Duties (1st edition)", International Journal of Law and Management, Vol. 52 No. 6, pp. 482-483. https://doi.org/10.1108/17542431011093180

This textbook considers the major provisions of the Companies Act 2006, which were in force at the time of writing. The Act codifies the duties of company directors, something which has been in place in many Commonwealth (and other) countries, but is a new concept for the UK, where common law and equitable principles have been the defining elements of directors' duties.

The introduction gives a clear summary of the topics covered in each chapter, and guides the reader to the key issues involved.

Chapter 2 covers the role of directors in companies, and the different types of directorial position which currently exist. It is also noted that the CA 2006 “fails to set out the role of directors in any detail”. The author provides a clear outline of de jure and de facto directors, as well as discussing the role of shadow directors and the fiduciary element.

Chapter 3 is a detailed and well researched overview of the role of directors in corporate governance and provides some key definitions setting it all in context for the codified duties of directors. Issues such as the separation of ownership and control are covered here, as are the two main principles of shareholder value theory and stakeholder theory. Agency theory and need to record actions and decisions conclude a thought‐provoking chapter. The idea of the “enlightened shareholder value”, that is taking a balanced view of short‐ and long‐term activity, is now part of the Act.

The rationale for codification of directors' duties is provided in chapter 4, together with a brief look l at the historical journey to the passing of the Act. Drawing on cases from those countries with similar legislation in place, it provides an insightful overview of how the codified duties can sit side by side with common law rules and equitable principles.

Section 171 of the Act covers the duty of directors to act in accordance with the company's constitution. Again, “constitution” is not clearly defined. The author and other authorities suggest that in interpreting this, constitution will be regarded as the articles of association, resolutions and agreements plus “other decisions of member or a class of them”. All this suggest that greater demands may be made of directors, and that a breach of duty might arise even if the directors believed their actions were in the best interests of the company.

One of the most important chapters is that which covers the new duty to promote the success of the company. Described as controversial, challenging and wide ranging, this duty is the most difficult to interpret. Chapter 6 is a masterly contribution to the debate. Section 172 of the Act requires directors to “promote the success of the company for the benefit of the members as a whole”. Among notable issues arising is that the section applies the duty to all directors, regardless of the size and nature of the company. Further it appears to allow directors absolute discretion in their actions, as long as they are promoting the success of the company. There is much debate in both cases and parliamentary commentary over the meaning of the term “success”.

The interests of employees, suppliers, customers, the community and the environment are considered in detail. Here can also be seen the influence of trends in the modern marketplace, with values, ethics and environmental issues raised.

While this could be viewed as an attempt to ensure that directors do not seek to line their own pockets or to favour some shareholder over others, there is a lack of clarity surrounding the whole section. Indeed, while the Government promised guidance notes on what directors must do to comply with the duties, none have yet been provided. Quoting the author, “The main concern with s172 of the CA 2006 is that neither it nor any other document really provides significant guidance to directors as to what they should be doing and how they should be acting”.

Subsequent chapters cover the remaining duties, including the exercise of independent judgment, duties of care, skill and diligence, the duty of non‐acceptance of benefits (including secret profits and bribes) and declarations of interest. There is further a duty to consider the interest of creditors. A footnote on p. 8 reveals this to be an abbreviation in the literature and that it should be more precisely referred to as the “the duty to the company to take into account the interests of creditors”.

Citing a case heard by Lord Templeman where this was the judgment, this issue has not found support in many Commonwealth jurisdictions, nor here in the UK.

Finally, there are three chapters covering the consequences of breach, authorisation and ratification, and where a breach might be excused. Interestingly, the remedies available when a breach of duty occurs have not been codified. They remain discretionary and reliant on common law rules and equitable principles.

This book provides a thorough and detailed commentary on the Companies Act 2006. It is an ideal text for Company Law scholars and academics. While it is very much a textbook in the legal style, with cases and citations on every page, it should be required reading for all company directors!