In the line of duty

The Companies Act 2006 received royal assent in November 2006 and is seen as the biggest company law shake-up in 20 years. Its provisions are being implemented in stages, with the Act taking full effect by October 2008. For the first time in history, directors' duties will be spelt out in statute.

The legal statement of directors' duties specifies their broad general duties. However, some duties, for example delivering accounts, are contained elsewhere in the Act, while others, such as the duty to consider creditors' interests, remain uncodified.

General duties from October 1, 2007 include: to act in accordance with the company's memorandum and articles of association; to exercise powers for a proper purpose; to promote the company's success by acting in good faith. On this latter point, when making decisions directors should consider, among other matters, the likely long-term consequences, interests of employees, the need to foster business relationships, the impact on the community and environment, maintenance of high standards of conduct and the need to act fairly between shareholders.

Another general duty applying from October is to exercise independent judgement. The duty to exercise the reasonable skill, care and diligence of a reasonably diligent person with the knowledge reasonably expected of a person carrying out these functions and the director's own personal knowledge completes this list.

From October 1, 2008, further duties will be introduced to avoid potential or actual conflicts of interests: not to accept a benefit from a third party conferred by reason of being a director if this could lead to a conflict of interest; and to declare interests in a proposed or existing transaction or arrangement with the company.

Breach of the above may bring civil and criminal liabilities and disqualification. Directors may have to pay damages or compensation, restore property or account for profits. They should be able to show that in executing their functions they have complied with the code's requirements.

Most decisions will rely on common sense, but how courts will interpret the new code is unclear. In cases of doubt, professional advice should be sought.

For the food sector, health and safety and consumer protection issues will likely remain the most notable sources of potential liability. FM

Andrew Glaze is an associate in Wragge & Co's corporate team​