Personnel Today
  • Home
    • All PT content
    • Advertise
  • Email sign-up
  • Topics
    • HR Practice
    • Employee relations
    • Equality, diversity and inclusion
    • Learning & training
    • Pay & benefits
    • Wellbeing
    • Recruitment & retention
    • HR strategy
    • HR Tech
    • The HR profession
    • Global
    • All HR topics
  • Legal
    • Case law
    • Commentary
    • Flexible working
    • Legal timetable
    • Shared parental leave
    • Redundancy
    • Maternity & Paternity
    • TUPE
    • Disciplinary and grievances
    • Employer’s guides
  • AWARDS
    • Personnel Today Awards
    • The RAD Awards
    • OHW Awards
  • Jobs
    • Find a job
    • Jobs by email
    • Careers advice
    • Post a job
  • XpertHR
    • Learn more
    • Products
    • Pricing
    • Free trial
    • Subscribe
    • XpertHR USA
  • Webinars
  • OHW+

Personnel Today

Register
Log in
Personnel Today
  • Home
    • All PT content
    • Advertise
  • Email sign-up
  • Topics
    • HR Practice
    • Employee relations
    • Equality, diversity and inclusion
    • Learning & training
    • Pay & benefits
    • Wellbeing
    • Recruitment & retention
    • HR strategy
    • HR Tech
    • The HR profession
    • Global
    • All HR topics
  • Legal
    • Case law
    • Commentary
    • Flexible working
    • Legal timetable
    • Shared parental leave
    • Redundancy
    • Maternity & Paternity
    • TUPE
    • Disciplinary and grievances
    • Employer’s guides
  • AWARDS
    • Personnel Today Awards
    • The RAD Awards
    • OHW Awards
  • Jobs
    • Find a job
    • Jobs by email
    • Careers advice
    • Post a job
  • XpertHR
    • Learn more
    • Products
    • Pricing
    • Free trial
    • Subscribe
    • XpertHR USA
  • Webinars
  • OHW+

Legal Q&AEmployment law

Duties of directors in new Companies Act 2006: legal Q&A

by Personnel Today 8 May 2007
by Personnel Today 8 May 2007

One of the many company law changes made by the new Companies Act 2006 is to define, for the first time in legislation, directors’ duties. The new provisions come into force on 1 October 2007.


Among the new statutory requirements under the Act are duties to:




  • promote the success of the company


  • exercise independent judgement


  • exercise reasonable care, skill and diligence.

Q What has changed?


A Many of the new duties are similar to the current common law duties. There is one significant change, however, which is the duty to promote the success of the company (section 172). In doing so, the director must consider a number of factors, including:




  • the likely consequences of any decision in the long term


  • the interests of the company’s employees


  • the need to foster the business relationships of the company with suppliers, customers and other organisations


  • the impact of the company’s operations on the community and the environment


  • the desirability of the company maintaining a reputation for high standards of business conduct


  • the need to act fairly as between members of the company.

Coupled with the duties to exercise independent judgement and take reasonable care, many directors have been left wondering how they can meet their obligations and what risks they run if they get it wrong.


Q Is there any conflict between the duties of a director as an employee and the new directors’ duties?


A Employment agreements often require a director “to use his best endeavours at all times to promote and protect the interests of the company” but do not usually permit directors to take into account the interests of others in reaching their decisions on behalf of the company. There may, therefore, appear to be a potential conflict.


The new duty is owed to the company and not to its employees or customers. So directors must take a broad and socially responsible view of what they do, consistent with promoting the success of the company.


For example, a company with a large fleet of delivery vans will have an impact on the environment. A director is not expected to let the environmental impact override the needs of the company to conduct its business efficiently. However, corporate social responsibility might dictate considering the use of environmentally friendly delivery systems where possible, such as green fuels or energy-efficient vehicles.


Provided that the directors can show they considered the relevant factors, it is unlikely they will be in breach of the new duty – or their employment contracts – even if they do not ultimately decide to take the most environmentally friendly approach.


Q Are there any circumstances where the requirement to take into account the external factors could lead to a different decision?


A One example may be where a company can make a quick profit by the sale of a business which, if not sold, is likely to be highly profitable in the longer term. A director who ignored the long term and focused solely on the immediate profit to be made might be found to be in breach of duty by ignoring a relevant factor.


Q What should you take into account when drafting directors’ employment contracts?


A From an employment point of view, you should ensure that the director is entitled to promote the success of the company and consider the external factors.


To make the position clear, you could word the director’s obligation thus: “to use his/her best endeavours at all times to promote and protect the interests of the company in accordance with section 172 of the Companies Act 2006 and all or any other duties he/she may have as a director of the company or any company in the group of which he/she is a director”.


From a corporate governance point of view, this also draws the director’s attention to the duties that are owed to the company. Like many companies, you should now be considering what arrangements should be put in place to ensure that future decisions of directors are appropriately recorded in case a subsequent challenge arises.


Q How will this new duty be enforced?


A By the company itself. However, there is the possibility of what is known as a ‘derivative action’, under which a shareholder (rather than the company) takes action against a director, even though a majority of shareholders may not be in favour. The shareholder will, however, need the permission of the court to take it forward.


By Peter Cooke, head of the European employment practice, Covington & Burling

Avatar
Personnel Today

previous post
Personnel Today ‘teasing’ survey finds UK workplace is becoming increasingly ‘lookist’
next post
What did Tony Blair do for HR in 10 years as prime minister?

You may also like

Employers lack data to make IR35 worker status...

25 May 2022

Maternity leave: Cost of living crisis highlights need...

25 May 2022

One in five employers planning ‘no jab no...

19 May 2022

MP demands timeline on carer’s leave legislation

13 May 2022

Queen’s Speech: absence of employment bill leaves organisations...

10 May 2022

Queen’s Speech: Exclusivity contracts for low-paid workers to...

9 May 2022

MP seeks legal protections for employees undergoing fertility...

9 May 2022

PwC staff to benefit from extended summer hours...

5 May 2022

A dark day for workers’ rights – why...

29 Apr 2022

P&O Ferries told to return £11m furlough money...

28 Apr 2022
  • The Search for Talent: Six Major Employer Pitfalls PROMOTED | The Great Resignation continues unabated...Read more
  • Navigating the widening “Skills Confidence Gap” in 2022, and beyond PROMOTED | Cornerstone OnDemand conducted a global study...Read more
  • Apprenticeships are the solution to your recruitment problems PROMOTED | Apprenticeships have the pulling power...Read more
  • What it really means to be mentally fit PROMOTED | What is mental fitness...Read more
  • How music can help to ease anxiety at work PROMOTED | A lot has happened since March 2020, hasn’t it?...Read more

Personnel Today Jobs
 

Search Jobs

PERSONNEL TODAY

About us
Contact us
Browse all HR topics
Email newsletters
Content feeds
Cookies policy
Privacy policy
Terms and conditions

JOBS

Personnel Today Jobs
Post a job
Why advertise with us?

EVENTS & PRODUCTS

The Personnel Today Awards
The RAD Awards
Employee Benefits
Forum for Expatriate Management
OHW+
Whatmedia

ADVERTISING & PR

Advertising opportunities
Features list 2022

  • Facebook
  • Twitter
  • Instagram
  • Linkedin


© 2011 - 2022 DVV Media International Ltd

Personnel Today
  • Home
    • All PT content
    • Advertise
  • Email sign-up
  • Topics
    • HR Practice
    • Employee relations
    • Equality, diversity and inclusion
    • Learning & training
    • Pay & benefits
    • Wellbeing
    • Recruitment & retention
    • HR strategy
    • HR Tech
    • The HR profession
    • Global
    • All HR topics
  • Legal
    • Case law
    • Commentary
    • Flexible working
    • Legal timetable
    • Shared parental leave
    • Redundancy
    • Maternity & Paternity
    • TUPE
    • Disciplinary and grievances
    • Employer’s guides
  • AWARDS
    • Personnel Today Awards
    • The RAD Awards
    • OHW Awards
  • Jobs
    • Find a job
    • Jobs by email
    • Careers advice
    • Post a job
  • XpertHR
    • Learn more
    • Products
    • Pricing
    • Free trial
    • Subscribe
    • XpertHR USA
  • Webinars
  • OHW+