The Legal Backbone: Companies Act 2006
Company directors play a crucial role in steering the strategic direction and governance of a business. In the UK, their responsibilities are contained in the Companies Act 2006, which outlines seven key statutory duties designed to promote accountability, transparency, and the long-term success of the company.
What are the Seven Statutory Duties?
1. Duty to Act Within Powers (Section 171)
- Directors must act in accordance with the company’s constitution and only exercise their powers for the purposes for which they were given. This includes following the provisions contained in the company’s articles of association and any shareholders agreements currently in place.
2. Duty to Promote the Success of the Company (Section 172)
- Directors are required to act in a way they consider, in good faith, would most likely promote the success of the company for the benefit of its members. This involves considering factors such as:
- The likely long-term consequences of any decisions made by the company.
- Interests of the company’s employees.
- Relationships with suppliers and customers.
- Any environmental impact resulting from the company’s operations.
- Maintaining a reputation for high standards of business conduct.
3. Duty to Exercise Independent Judgment (Section 173)
- Directors must make decisions independently, without undue influence from others.
4. Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)
- This duty requires directors to perform their role with the care, skill, and diligence that would be expected from a reasonably diligent person with both:
- The general knowledge, skill and experience that may reasonably be expected of someone carrying out the director’s functions.
- The actual knowledge, skill and experience the director themselves possess.
5. Duty to Avoid Conflicts of Interest (Section 175)
- Directors must avoid situations where they have, or could have, a direct or indirect interest that conflicts with the interests of the company. This includes personal relationships, financial interests, or competing business ventures.
6. Duty not to Accept Benefits from Third Parties (Section 176)
- Directors must not accept any benefit from a third party that is offered because of their position as a director, unless it is authorised by the company. This helps prevent bribery and undue influence.
7. Duty to Declare Interest in Proposed Transactions or Arrangements (Section 177)
- If a director has any interest in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors before the transaction is entered into.
The above duties are designed to ensure directors act responsibly and in the best interests of the company and its shareholders. Breach of these duties can result in personal liability, disqualification, or other legal consequences, and therefore directors should regularly review their obligations to ensure compliance and to uphold good corporate governance.
At BHW, we provide clear, practical legal advice to directors across all sectors. Whether you’re facing a potential conflict of interest, unsure about your responsibilities, or simply want to ensure you’re acting in accordance with the legal requirements, please contact BHW’s Corporate and Commercial team for more information on 0116 289 7000 or email info@bhwsolicitors.com.