Executive Summery

Essentially, directors are agents of the company, appointed by shareholders to manage

the day-to-day affairs of the company on behalf of shareholders. As a general rule of
thumb, directors should act together as a board in order to make decisions. The majority
of the time it is uncommon for the board to delegate some of the authority it has to
individual directors or to a committee of the board. This is in order to accomplish certain
tasks.
There are two bodies of people that are responsible for the governance of a company -
its shareholders and its board of directors. In the case of a company, the board of
directors is responsible for the management of the company's business; they make the
strategic and operational decisions that will lead to the company's success and ensure
that the company meets its statutory obligations in relation to its business operations. In
your role as a director, one of your responsibilities is to attend board meetings. This is to
ensure that the board is able to reach these decisions and that the company meets its
obligations.

This article is intended to provide an overview of the powers and duties that are
conferred upon directors based on the Companies Act 2006. This Act has been
implemented since 2006. In order to ensure that directors are in a position to act in the
highest interests of shareholders, this requirement must be met. An overview of the
powers granted to directors by the Companies Act 2006 can be found below.
Consequently, this report has been written with the purpose of achieving this goal.

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 Table of Contents

Executive Summery---------------------------------------------------------------------------------------

01

Introduction--------------------------------------------------------------------------------------------------

03

Directors-----------------------------------------------------------------------------------------------------04

Powers of Directors---------------------------------------------------------------------------------------05

Duties of Directors----------------------------------------------------------------------------------------06

The Fiduciary Duty---------------------------------------------------------------------------------------09

The Duty of Skill and Care-----------------------------------------------------------------------------10

The Statutory Duties------------------------------------------------------------------------------------11

References-------------------------------------------------------------------------------------------------11

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Introduction:
In November of the same year, the Companies Act 2006 was enacted as the result of a
nine-year project that culminated in a comprehensive review of company law in the UK
that amounts to the largest change in the law in over 40 years. As part of the project, a
Government-appointed expert group – the Company Law Review Steering Group (CLR)
(uk.practicallaw.thomsonreuters.com, n.d.) – conducted an in-depth investigation over a
period of three years, conducted detailed research on specific issues on behalf of the
Law Commissions of England and Wales and Scotland, as well as conducting extensive
public consultations on a variety of technical matters. This process has led to the
development of the new Act, which, as a result, consolidates the vast majority of the
preexisting laws governing companies, resulting in the creation of one of the biggest
laws in UK history. In addition to the 1,300 sections and 16 schedules of the Act, much
more material will be issued separately in the form of regulations made by the
government under the Act as well.

While the goal of the reform process was to consolidate what had become a fragmented
state of the regulatory framework for UK companies, where appropriate it was
modernized and, as a result, made it more relevant to the business conditions of the
21st century, rather than simply consolidating it.

There has been considerable care taken in the wording of the new Act in order to make
it clear that, as has always been the case, directors owe their legal responsibilities to
the company alone and not to outside parties (except in certain exceptional cases). In
other words, there is no doubt that while directors carry out their duties, individual
shareholders or third parties will routinely be held accountable for their actions based
upon the performance of their duties. There are new legal rights given to shareholders
for bringing company proceedings against directors when they fail to follow the rules of
their responsibilities to their own members. The rules on directors' accountability to their
own members are strengthened. It is thus evident that the revised provisions concerning
directors' duties are accompanied by strengthened provisions for ensuring that these
duties are made effective.

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Directors:

Generally, every company is required to have at least one director (a public company is
required to have two directors) (section 154 CA 2006) (www.legislation.gov.uk, n.d.). It
is due to the fact that companies cannot act on their own behalf as legal entities since
they are 'artificial' - and need to be represented by other individuals. A company's
directors are responsible for directing a company's affairs on behalf of its owners while
acting as representatives of the company in the eyes of the law. It goes without saying
that this is the case even for small private companies that may only have one or two
shareholders. Even if the director and the shareholder are one and the same person,
such a company must still have at least one director. There is still a technical distinction
to be made by the law in a situation like this between the interests of the shareholder as
the owner of the company and the responsibilities of the director as the person who
makes decisions on the company's behalf in such a case.

As a result of the absence of a precise definition of this term, it may be argued by many
that such a definition does not serve the purpose of making legal information accessible
to non-specialists in the context. However, the absence of a comprehensive definition
also serves the interests of flexibility: a majority of companies are commercial entities,
but they can also function as charities or quasi-partnerships. It may be the case in these
cases that the companies concerned would prefer that the individuals who control them
be referred to predominantly as 'trustees' or 'partners' as this is in keeping with the
nature of their operations. There is a broad definition of the term 'director' that ensures
that people who are commonly referred to in such terms will also be treated by the law
as directors for company law purposes and will be treated by that law as directors. It
should also be noted that the deliberately wide definition of director's duties also allows
person who are acting in the capacity of a director of a corporation to be covered by the
law on directors' duties even though the person is not formally registered as a director of
the company for whatever reason.

The law considers that a person is a director of a company when he or she plays a
significant role in the company and, in particular, in the decision-making processes that

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govern that company, not so much because he or she holds a particular title, but due to
the role that he or she plays inside that company and the relationship that he or she has
with that company. There are some situations where a person has a job title that
includes the title 'director', then it is likely that the person concerned is in fact a director
of the company of which he or she is a part of. Nevertheless, this does not mean that
this is always the case - the title of a director can also sometimes be bestowed on an
employee simply as a designation of internal significance. The third party may be
entitled to infer from a third party that an employee with a job title that includes the word
'director' is a director for legal purposes if that employee presents himself or herself as
such. On the other hand, a person whose title does not include the word 'director'
nonetheless participates in the central decision-making processes within the company
despite the fact that their title does not include that word, will then be classified as
'occupying the office of director' under section 250. Therefore, under the law, this
person will be a director.

The Companies Act 2006 provides that all directors are deemed to be officers of their
company for the purposes of attributing compliance responsibilities under the Act
(section 1121 of the Companies Act 2006) (2006, n.d.). There are a number of officers
within a company, including the secretary of the company, and the auditor in some
cases.

Powers of Directors:
The legal powers that any board of directors may use on behalf of their company are
those that allow them to act in the interests of their company. They do not have any
independent powers of their own and, as a general rule, they cannot perform any
activity in the name of the company that the company itself is not entitled to perform in
its own name. There is therefore a need for directors' powers to be considered in the
context of the powers of the company itself, when considering the issue of directors'
powers.

There has been a substantial reduction in the restrictions on what companies

themselves can and cannot do today. As a matter of fact, in the past, the activities of

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companies were subject to a rule of ultra vires, which meant that each company was
limited to performing only those activities that were specified in the objects clause of
their constitutions, either explicitly or implicitly. Consequently, as a consequence of this
rule, many companies drafted very lengthy objects clauses, so that they were able to
ensure that the validity of their activities would not be called into question as a result of
such a wide range of powers being granted to them. As a result of the Companies Act
2006, there is now a general provision that, unless the articles of the company
specifically restrict the objects of the company, the company's objects are unrestricted
(section 31 CA 2006) (CA_2006, n.d.). Consequently, while a company's constitution
used to specify what activities a company was entitled to perform, under the new Act
the constitution is now primarily concerned with defining what restrictions are to be
imposed on what the company may do when it comes to its powers, as opposed to
determining what activities are to be permitted for the company to conduct. The range of
lawful activities a company can conduct is unlimited if there are no constitutional
restrictions.

Duties of Directors:
As explained in Chapter 1, one of the results of the company law reform process was
the codification of the principles of directors' duties under common law, as a result of the
company law reform process. It should be noted that this particular reform has been
strongly supported by both the CLR and the England and Wales and Scotland Law
Commissions. They all considered that it would improve the general understanding of
the law in this area: setting out the established law concerning directors’ duties in
statute would make the law easier to follow by non-specialists and thereby help reduce
unnecessary legal costs, particularly for smaller companies

There has been a consensus within the Government that this approach should be
followed, and Parliament subsequently did so by issuing the Statement of the 'General
duties of directors'. A statement to this effect is found in Chapter 2 of Part 1 of the Act
(legislation.gov.uk, n.d.). It is a fact that as a result of the existence of these provisions,
what were previously thought to be common law principles are now regarded as

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provisions of primary legislation. It is likely that the courts will view them as such in the
future.

In addition to the provisions regarding the general duties of directors, there are also
provisions that are not simply a reiteration of existing common law principles. It is critical
to note, however, that not all existing rules have been codified. In some significant
aspects of the law on directors' duties, the statement adds wholly original elements to
the law in some significant ways. I think that it is fair to say that the provisions of the Act
in this area not only codify the most fundamental aspects of the established law on the
duties of directors, but also enhance them in a number of ways.

During the course of the Company Law Review process, there was a conscious effort
made to rethink the legal position of limited companies within the wider business and
social environment, which has resulted in this evolution of the law on directors' duties. A
commercial company's mission, traditionally, has been to maximize economic value for
its owners as the primary objective. Other objectives are ancillary to this core purpose.
The UK has long accepted that any commercial company's mission is to maximize
economic value for its shareholders. The argument has been put forth, however, that
the activities of companies may have such a wide impact on other elements of society
that it is not sufficient for companies to operate solely for the benefit of their
shareholders and to be held only accountable to them as a result of their actions.

As a matter of fact, these arguments are not original; the fundamental question – ‘to
whose benefit are companies supposed to be run?’ – was discussed at length by two
US commentators AA Berle and EM Dodd back in the mid-20th century (Plessis, 2007).
According to Berle, any power that is granted to a corporation or the management of a
corporation is obligated and at all times exercisable only for the benefit of its
shareholders. This theory has been known as the shareholder primacy theory, and it
has tended to hold sway in the company law regimes of the Anglo-Saxon world for a
long time. According to Dodd, his counter-argument was that companies are social
institutions, and therefore they ought to have responsibilities not only to their
shareholders, but also to their employees, their customers, and to the general public as

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a whole. As a result of this conflicting philosophy, the 'social model' regimes of
continental Europe became associated with the incorporation of concerns of non-
shareholder interest groups into the corporate decision-making process, which was
guided by the interests of shareholders. Despite using different terminology from the
CLR, the CLR addressed the same basic issue in the course of its consideration of what
UK company law should be in the future, irrespective of the terminology used. To
determine a suitable model for the future, the company looked at two options - an
enlightened shareholder value (ESV) approach and a pluralist approach.

Based on the concepts of ESV as presented by the CLR, it was established that the
ultimate aim of limited companies should be to maximize shareholder value as much as
possible. The concept of corporate social responsibility, as well as the role of directors
of companies with regard to it, should be accommodated within that concept. This is
because we progress in thinking about it more and more. To this end, it is imperative to
maintain a balance between the legitimate aim of maximizing shareholder wealth and
the explicit acknowledgement that any company's chances of success are highly
dependent on how effectively it manages all the risks that it faces. As a result of the
concept, it was essentially said that pursuing shareholder wealth from a narrow
perspective, that is, focusing solely on short-term profit at the expense of long-term
value, and not taking into account the interests of suppliers, customers, and other
stakeholders as a whole, cannot lead to creating sustainable long-term wealth. It is
crucial that shareholders are able to expect that the companies in which they invest,
acting through their directors, will pay attention to and address all the issues that are
likely to be relevant to the successful management of the company - and, ultimately, to
their shareholders' interests - in the long run. It is therefore the position of the ESV
concept that shareholder interests will be best served if companies are responsive to a
wider group of dynamics than their single-minded pursuit of profit will enable them to
make a profit.

In contrast, the 'pluralist' approach, on the other hand, extended much further in terms
of extending the responsibilities of companies and their directors in relation to external
matters. This was in terms of a broader range of duties and responsibilities. It makes

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the argument that companies and their directors should be held accountable not only to
their shareholders, but also to other, external 'stakeholder' interests, such as
environmental pressure groups and trade unions, which might include companies as
well as their shareholders. If this approach is taken, directors would be expected to
perform their duties in accordance with a range of interest groups. These matters could
take precedence over the interests of the company's own shareholders as the interests
of one or more of those outside interest groups would require their attention. As a result,
companies and/or their directors could be held liable by those stakeholder groups if they
failed to protect the interests of those groups. A company's character would have been
dramatically changed if this approach had been implemented, because it would have
required the company to play an active role in the pursuit of more broadly-based social
policy goals, in addition to its own business objectives, if it had been implemented.

It is still the directors' discretion to determine what courses of action are right for their
company from a business viewpoint. However, the law is now becoming a more
substantial player in the structure of the decision-making process, which has never
been the case in the past. This updated legislation is intended to ensure that, in making
decisions regarding the long-term success of the company, directors are mindful and
reflective of all factors that may have a bearing on the company's success in the long
run. This is the main aim of legislation in this area.

There are three primary categories of duties that a company director is expected to fulfill
under the law as it existed before the CA 2006 was enacted:

 The fiduciary duty

 The duty of skill and care
 The statutory duties.

The Fiduciary Duty:

As far as the courts are concerned, directors are always considered to be fiduciaries. A
fiduciary is someone who has taken a contractual agreement to act for or on behalf of
another under circumstances that lead to a relationship of trust and confidence

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(Mothew, n.d.). Therefore, as a result of the relationship of trust and confidence
between a director and the company, the director is subject to similar obligations. These
obligations are derived from the same relationship as those that are imposed on
trustees and professional advisers. The most critical thing they have to do is act in good
faith in the long-term interests of their client, in this case their company. They must not
abuse the trust and confidence placed in them by doing so. It is often thought that the
role of a director is similar to that of a trustee, but they are not quite alike. A trustee
must exercise a higher level of prudence in protecting the interests of their beneficiaries.
This is because it would be reasonable to impose on a person in charge of a
commercial company the responsibility of protecting the interests of the beneficiary. Due
to the fact that directors are allowed to take a much higher level of risk, the positions of
the two are comparable.

The Duty of Skill and Care:

The duty of skill and care evolved from the basic fiduciary duty of directors. It was
intended to address the specific implications of the director's position within the limited
company context within which the director operates. Shareholders are entrust directors
with the responsibility of running a business that they have invested capital in. The
money that they are investing will be used to fund the business. Consequently, these
shareholders have a direct interest in how well the board of directors manages the
business. As such, they have a direct interest in the skills of those directors. A further
feature of the limited company environment which played a significant role in the
development of the duty of skill and care was and remains that the concept of limited
liability ensures that the members of a company have the option of limiting their
personal liability to the creditors of the company for the company's debts. As a result, it
has always been necessary for shareholders and creditors to accept significant financial
risks when they deal with the directors of a company. In order to reduce those risks to a
level acceptable to society, the duty of skill and care was established. However,
traditionally, the standards of skill and care that have been expected of company
directors in the UK have not been very high, given the nature of the profession. In large
part, this is due to the fact that Parliament and the courts have not wanted to discourage

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entrepreneurial activity in the marketplace by restricting access to the company format
in the first place. In addition, the courts have acknowledged the fact that, given the wide
range of backgrounds from which directors can legitimately come, it is unrealistic to
assume that the conduct of all directors will be influenced by a single standard, given
the range of backgrounds that directors may come from. Consequently, over the years,
the standards expected of directors have remained modest and have mainly been
concerned with assessing whether the director concerned has lived up to those
standards that can be expected of him or her in light of his or her own experience and
background in the company. There has been a marked change in this situation in recent
years, and the Act will provide an even more significant boost to the trend toward higher
standards of skill and care in the future.

Statutory Duties:

There have long been a number of specific obligations imposed on directors under the
Companies Act (as well as other relevant laws) that have been in effect for many years.
The duties that are imposed on directors by virtue of their status will not only include the
duties that are placed on them, but they will also include a number of others placed on
the company itself. In these situations, directors are, in practice, responsible for fulfilling
these obligations themselves or ensuring that other people fulfill them on their behalf.

References:
2006, C., n.d. [Online]
Available at:
https://www.legislation.gov.uk/ukpga/2006/46/section/1121#:~:text=1121Liability%20of
%20officer%20in%20default&text=(1)This%20section%20has%20effect,company
%20who%20is%20in%20default.

CA_2006, n.d. [Online]

Available at: https://www.legislation.gov.uk/ukpga/2006/46/section/31/2016-03-01

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legislation.gov.uk, n.d. [Online]
Available at: https://www.legislation.gov.uk/ukpga/2006/46/part/13/chapter/2

Mothew, B. &. W. B. S. v., n.d. Bristol & West Building Society v Mothew (t/a Stapley &
Co) [1998] Ch. 1 (24 July 1996). [Online]
Available at: https://uk.practicallaw.thomsonreuters.com/D-000-4863?
transitionType=Default&contextData=(sc.Default)&firstPage=true

Plessis, I. E. a. J. D., 2007. The stakeholder debate and directors' fiduciary duties. SA
Mercantile Law Journal, 19(3).

uk.practicallaw.thomsonreuters.com, n.d. Company Law Review Steering Group.

[Online]
Available at: https://uk.practicallaw.thomsonreuters.com/4-101-0925?
transitionType=Default&contextData=(sc.Default)

www.legislation.gov.uk, n.d. Company Directors. [Online]

Available at:
https://www.legislation.gov.uk/ukpga/2006/46/notes/division/5/28#:~:text=Who%20is
%20a%20director%3F,1)%20of%20the%201985%20Act.

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