The autumn changes to the Companies Act are raising the bar for directors. Baker Tilly, restructuring and
recovery partner Graham Bushby, explains how
Chances of corporate survival are enhanced if a company has knowledgeable, disciplined and committed directors on board.
The Companies Act 2006 sets out a statutory code of conduct for directors. Notably, the act raises the bar in for the skill, care and participation expected from those leading a company forward.
The set of principles does not tell directors precisely what to do, nor is it exhaustive. But it comprises seven specific duties, the first four of which became law in October. The three that deal with conflicts of interest between the director and the company will come into effect by October 2009.
The first duty that applies to all directors is that they must act within the powers granted by the company's constitution and only use these powers for the purposes for which they were conferred. Overstepping these powers could result in personal liability.
The second is the central duty for directors to act in good faith to promote the success of the company for the benefit of all stakeholders. The only instance where this is displaced is when the company is threatened with insolvency. Then, the interests of the creditors must take priority.
Thirdly, directors are required to exercise their powers independently, without subordinating them to the will of others.
Lastly, directors must exercise reasonable skill, care and diligence. The basic standard is not lowered because the individual takes no part in the company's management.
The remaining three general duties require avoidance of situations in which the director could have a conflict of interest with the company.