One of the most significant and controversial areas of the

Companies Act 2006 is the introduction of a codified statutory

statement of duties for directors, replacing the previous mixture of
common law and equitable rules. Before the Companies Act 2006,
the law on directors duties was in places uncertain, contradictory
and anachronistic. It was ripe for reform, and the code of directors
duties, contained in the Act, was the governments response. This
streamlined and clarified the old rules but was more than a
consolidation or simplification of what had gone before. There were
some subtle changes to the rules, and Parliament introduced a new
concept: enlightened shareholder value. The old formula was clear
that a directors primary duties were to the company and its
shareholders. There was an ineffectual reference to employees, and
creditors always took precedence on insolvency, but the law was
settled that a director should act in the best interests of all
shareholders, and that included future shareholders.

With the Companies Act 2006, directors were required to

consider other concerns that may affect a companys success. The
focus for directors shifted from looking solely at shareholders
interests : enlightened shareholder value means taking account of
other stakeholders as well. Under s.250 of the CA 2006 the term
director" is defined so as to include any person occupying the
position of director, by whatever name called. There are different
types of directors such de facto , de jure , shadow director and non

executive director . Indeed, the 2006 Act states at section 170(3)

that the general duties are based on certain common law rules and
equitable principles and have effect in place of those rules and
principles as regards the duties owed to a company by a director.
The 2006 Act goes on to state at section 170(4) that suggests that
the new duties are only partially codified, as the interpretation and
application will be subject to the cases from which the pre-existing
rules and principles derive.

Before delving into the discussion of the codified duties , there

are specific duties to look at which can be found in S.190 CA 2006
where shareholder approval is requisite for specific transactions with
directors, or connected person ,when the sum of money either
exceeds 10% of the company and is over 5000, or is over 100,000
in a company of any size. Prior to October 2007, a directors duties
to the company were set in case law is now codified and set out in
the 2006 Act.
The duty to act within powers
Firstly , this duty is recognised in S .171 Company Act 2006, is
the codification of the well-known as proper purpose rule test that
can be found in Hogg v Cramphorn Ltd and Horward Smith Ltd v
Ampol Petroleum Ltd , which state that the director must act in
accordance with the company's constitution and only exercise

powers for the purposes for which they are conferred. Nothing has
been changed either improvement between the existing Common
law and the restatement.
The duty to promote the success of the company
In S. 172 CA 2006 subtly re-cast the old law, which imposed a
duty to act in good faith in the best interests of the company as a
whole (Re Smith & Fawcett Ltd ) . Now, a director of a company
must act in the way they consider, in good faith, would be most
likely to promote the success of the company for the benefit of its
members as a whole. This was evaluates based on the objective
test: whether and intelligent, honest man in the position of a
director in the existing circumstances reasonably believed that the
transactions would benefit the company .(Chartter Bridge Corp v
Lloyds Bank) . In JJ Harrison (Properties) v Harrison (2002) ,the
Director who borrows money for the benefit of company A but
transfers it to company B, which was insolvent is not acting in the
benefit of the company.

Lawyers in 2006 might have worried about how you define

success, but the reality was that there was no practical difference
between this wording and the old duty to act in the best interests
of the company. The improvement lay, instead, in the addition of the
principle of enlightened shareholder value and the idea that the
interests of other stakeholders, not just those of shareholders, need

to be considered. To fulfil their duty to promote the success of the

company, the legislation requires directors, in reaching their
decisions, to have regard to six factors that demonstrate what the
government has called responsible business behaviour. These six
factors are guidelines that is found in S.172(1) CA 2006 .

The duty to exercise independent judgment

The directors owe a duty, in section 173, to exercise
independent judgment. This no-fettering rule already existed in
Boulting v Association of Cinematograph and Fulham FC v Cobra
Estates , where the held the agreement with the landlords was part
of the contract and conferred a benefit to the company. The courts
would not limit the discretion of the director. Nothing seems very
new in this section.

The duty to exercise reasonable care, skill and diligence

The section 174 deals with this duty to exercise reasonable
care, skill and diligence. The difficulty in codifying this duty was to
choose, looking at case law, if the test to judge the standard of skill
and diligence should be an objective (Re Barrings plc) or a
subjective one (Re Brazillian Rubber Plantation ).

In Re City

Equitable Fire Insurance Romer J held A director need not exhibit

performance greater than expected. His value is based on his
previous

performance.

The

answer

was

given

by

the

Law

Commission, which took model on what Hoffman J expressed in Re

D'Jan of London Ltd , the facts were Mr D Jan was accused to be
liable for the companys loss as he had signed an incomplete
proposal without reading it. This was not a gross breach, but the
kind of thing that can happen to any busy man. The improvement
here the test was a dual objective and subjective test which settled
a minimal standard of skill and diligence ( Norman v Theodore
Goddard). Thanks to the Law Commissions proposal, the test is not
uncertain anymore, and so an improvement of the law can be seen
here because if it is a mixture it gives higher standard of care .

The duty to avoid conflicts of interest

The conflict of interest which is referred here is a conflict
between a directors fiduciarys duties and his personal interests.
For example, there would be a conflict of interest in a situation in
which a director of a company was also carrying on business as a
sole trader in competition with the company and so voted at a
meeting of the board of directors against exploiting a specific
business opportunity so that he could exploit it on his own account.
This duty replaces the old conflict-rule that can be found in the case
Aberdeen Railway Co v Blaikie Bros , a case of 1843 which the
courts held, a director cannot enter into an agreement of competing
interests. However, if there is disclosure to an independent BOD,

then it is fine . In Bhular v Bhular , It was held even though the

family company had stopped trading, the directors has a duty to
disclose this information to a BOD. This was in breach of fiduciary
duty as followed in Cooks v Deeks .
In Section 175 of the Company Act:" A director must not place
himself in a situation where his interest may conflict with the
interests of the company" .This rules had restraint directors from
decision making or to accept opportunities . Fortunately, there is
some relief for it to be no breach of duty , if the situation cannot
reasonably be regarded as likely to give rise to a conflict or it has
been authorised by the rest of the board. This duty appears as
obvious for a director and didn't suffer any difficulty to be codified
on the basis of the pre existing common law.

The duty not to accept benefits from third parties

In the section 176, is that a director must not accept a benefit
from a third party conferred by reason of his position as director or
anything he does or doesn't do as a director. As an example a large
contract is up for tender, the director who will make the decision
should not accept hospitality or a gift from one of the potential
bidders. There is no need to show that the company has suffered
harm: it is the directors acceptance of the benefit and the reason it
was offered that are key. A director is free to accept the benefit if no

reasonable person would see it as giving rise to a conflict, but that

may not always be an easy call to make. Having a company policy
on the acceptance of gifts and hospitality will help set an
appropriate standard. This duty is only the restatement of what has
been settled in 1888 .Boston Deep Sea Fishing & Ice Co Ltd v
Ansell .
Conclusion
Having seen from the section 171 to 176 , it benefits to
directors, it will help them to understand what their duties are,
without needing to have a look at all the existing common law. This
restatement is good in that it now reflects the modern view of the
directors in business needs. From an international point of view,
because being a director nowadays often implies an international
context, it will clarify the duties owed by a director to its foreign
clients, shareholders and employees. To the employees and
shareholders, they now will be able to have a clearer view of the
general duties owed by directors, and by so it will improve their
situation. Moreover from now on the directors will have to take into
account the interests of the stakeholders through the duty to
promote the success of the company.