Sections 170 to 181: General comments
298.The general duties form a code of conduct, which sets out how directors are expected to behave; it does not tell them in terms what to do. More particularly, the duties address:
the possibility that a director may put his own or other interests ahead of those of the company;
the possibility that he may be negligent.
299.The duties are derived from equitable and common law rules, and are not at the moment written down in statute.
300.The Law Commission and the Scottish Law Commission recommended that there should be a statutory statement of a director’s main fiduciary duties and his duty of care and skill in their joint report Company Directors: Regulating Conflicts of Interests and Formulating a Statement of Duties. The CLR’s main recommendations in respect of directors’ general duties are summarised in chapter 3 of the Final Report.
301.The CLR recommended that there should be a statutory statement of directors’ general duties, and that this should, with two exceptions, described in the next paragraph, be a codification of the current law. In particular they wanted:
to provide greater clarity on what is expected of directors and make the law more accessible. In particular, they sought to address the key question “in whose interests should companies be run?” in a way which reflects modern business needs and wider expectations of responsible business behaviour;
to make development of the law in this area more predictable (but without hindering development of the law by the courts);
to correct what the CLR saw as defects in the present duties relating to conflicts of interest.
The Government has accepted these recommendations.
302.There are two areas, both relating to the regulation of conflicts of interest, where the statutory statement departs from the current law:
under section 175, transactions or arrangements with the company do not have to be authorised by either the members or by the board; instead interests in transactions or arrangements with the company must be declared under section 177 (in the case of proposed transactions) or under section 182 (in the case of existing transactions) unless an exception applies under those sections;
section 175 also permits board authorisation of most conflicts of interest arising from third party dealings by the director (e.g. personal exploitation of corporate resources and opportunities). Such authorisation is effective only if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid even without the participation of the conflicted directors. Board authorisation of conflicts of interest will be the default position for private companies, but public companies will need to make provision in their constitutions to permit this. Board authorisation is not permitted in respect of the acceptance of benefits from third parties (section 176).
303.Both reforms implement recommendations of the CLR, which noted that the basic principles in the current law relating to directors’ conflicts of interest are very strict:
they noted that in practice most companies permit a director to have an interest in a proposed transaction or arrangement with the company, provided that the interest is disclosed to his fellow directors. The statutory statement therefore reflects the current position in most companies;
they also took the view that the current strict rule relating to conflicts of interest in respect of personal exploitation of corporate opportunities fettered entrepreneurial and business start-up activity by existing company directors. The statutory statement therefore provides for board authorisation of such conflicts.
304.These reforms are modified for charitable companies in England and Wales and Northern Ireland by section 181.
