One of the most controversial aspects of the Companies Act 2006 (“the 2006 Act”) is the codification of Directors’ duties. Directors have always owed duties to the companies for which they work through a mixture of both the common law and certain sections of the Companies Act 1985 (“the 1985 Act”) but their inclusion in the 2006 Act is the first time they have been expressly set out in statutory form.
The general justification for the codification of Directors’ duties is that of transparency. Directors should be fully aware of their obligations to a company and, equally, the shareholders should be fully aware of what to expect from their Directors. However, until the courts give their interpretation of the 2006 Act the full extent of Directors’ duties remains unclear and there is widespread speculation that the codified duties will give rise to an increase in shareholder litigation.
The 2006 Act identifies seven general duties, these are the duty:
· to act within powers (s.171);
· to promote the success of the company (s.172);
· to exercise independent judgement (s.173);
· to exercise reasonable care, skill and diligence (s.174);
· to avoid conflicts of interest (s.175);
· not to accept benefits from third parties (s.176); and
· to declare interest in proposed transaction or arrangements (s.177).
What must a Director do, and how far must they go, to comply with these duties? The answer to this question will evolve over time as the courts begin to interpret and define the requirements of the 2006 Act. The Court of Session has taken the first step in defining Director’s duties in the case of West Coast Capital (Lios) Limited.
The background to the case is that a minority shareholder (“the Shareholder”) tried to prevent the Directors of the company from proposing to increase the share capital of the company at their AGM. The Shareholder argued that to proceed with the share issue would constitute prohibited unfair prejudice under Section 994 of the 2006 Act. In considering whether the Directors had acted in an unfairly prejudicial manner the court considered their duties under Sections 171 and 172.
As mentioned above, prior to the 2006 Act, Directors’ duties were not expressly defined but existed as a mix of common law and the 1985 Act. In giving his opinion of Sections 171 and 172 Lord Glennie stated “these sections appear to do little more than set out the pre-existing law on the subject”.
The court rejected the Shareholder’s claim of unfair prejudice but, more importantly, the case provides the first indication of how the courts interpret the codified duties. Simply put, in this case the courts did not consider the new codified duties to extend the already existing obligations on Directors – they just record them in black and white.
This judgement may go some way to allaying the fears about the codification giving rise to a greater number of shareholder litigations, however, it is worth noting that Sections 171 and 172 were not the subject of complex legal analysis and future cases will help to further clarify the extent of Directors’ duties.
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