The Statutory Framework: Companies Act 2006, ss. 171–177

The Companies Act 2006 codified directors’ duties for the first time in English law. There are seven duties, owed by every director to the company itself — not to shareholders individually, not to creditors, except in modified form when insolvency is threatened.

The Seven Duties in Detail

• s.171 — Act within powers: Act in accordance with the company’s constitution and only exercise powers for the purposes for which they were conferred.
• s.172 — Promote the success of the company: Act in the way the director considers, in good faith, would most likely promote the success of the company for the benefit of its members as a whole. Must have regard to long-term consequences, employees, relationships, community, environment, reputation, and fairness between members. Shifts towards creditors when insolvency threatens.
• s.173 — Exercise independent judgment: Must not fetter their discretion or agree in advance to vote in a particular way.
• s.174 — Exercise reasonable care, skill and diligence: Dual standard — the general knowledge and skill of a person carrying out the director’s functions, plus the director’s own actual knowledge and skill if higher.
• s.175 — Avoid conflicts of interest: Avoid situations where the director has an interest that conflicts with the company’s interests. Authorisable by the board (non-interested directors forming a quorum).
• s.176 — Not accept benefits from third parties: Do not accept benefits conferred by reason of being a director. No board authorisation exception (unlike s.175).
• s.177 — Declare interest in proposed transaction: Before the company enters a transaction in which the director has an interest, declare the nature and extent of that interest to the other directors.

A common exam question presents a director taking a business opportunity that belongs to the company. This engages s.175 (conflicts) and possibly s.172 (acting in the company’s best interests). Work through each duty — they can overlap, and multiple duties may be breached simultaneously.

Consequences of Breach and Derivative Actions

The company may seek to enforce duties against a director through a derivative action — a claim brought by a shareholder on the company’s behalf under Part 11 CA 2006. The court must give permission for the action to continue and will consider whether a hypothetical independent board would authorise it. Shareholders may ratify a breach by ordinary or special resolution depending on the nature of the duty.

Shadow Directors and De Facto Directors

A shadow director is a person in accordance with whose instructions the directors are accustomed to act. A de facto director acts as a director without having been formally appointed. Both are subject to the majority of CA 2006 duties.

Disqualification

Under the Company Directors Disqualification Act 1986, a director may be disqualified for 2–15 years on grounds of unfitness, persistent filing breaches, or fraud.

Practise This Topic on Sqewise

Directors’ duties questions in FLK1 often involve complex multi-party scenarios. Build your confidence through targeted practice questions on Sqewise, and use the study planner to ensure business law gets the coverage it deserves alongside contract and tort. See the full SQE1 topic list for everything covered.

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