DIRECTORS DUTIES
Directors duty (section) Explanation of duty
Section 171 – Duty to act This general duty is a codification of the fiduciary duty that a
within power director must use his powers for a proper purpose and must
act within the powers conferred by the company’s
memorandum and articles of association.
Section 172 – Duty to The principle underlying section 172 is that the directors
promote the success of the should act in what they consider to be the best interests of
company the company.
- It is intended to make them take their decisions for
the right reasons.
- It is a very flexible principle, as long as they take their
decision for the right reason then the court won’t
intervene.
- Need to take the relevant interests into account.
When considering the s172 duty, directors must have regard
to various factors in s.172(1) (the list is not exhaustive) but
include:
- The likely consequences of his decision in the long
term,
- The interests of the company’s employees.
- The need to foster the company’s business
relationships with suppliers, customers and others,
- The impact of the company’s operations on the
community and environment,
- The desirability of the company maintaining a
reputation for high standards of business conduct and
- The need to act fairly as between members of the
company,
(P.139)
Section 173 – Duty to The duty seeks to ensure that directors act independently in
exercise independent their decision making rather than contracting it out.
judgment - Decision making also needs to be done in good faith.
- There is no prohibition on directors taking advice, e.g.
legal or financial.
Section 174 – Duty to Duty seeks to ensure that directors carry out their functions
exercise reasonable care, sufficiently carefully and competently.
skill and diligence - The required standard set out in s.174(2) is adopted
from case law on the old common law duty.
- The particular standard will vary depending on the
particular functions and responsibilities of the director
and the circumstances of the company. The duty will
therefore be breached if the director is incompetent or
negligent or falls below the required standard of
behaviour.
- Based on a 2 part test:
1) – Section 174(2)(a) CA 2006 sets out a minimum
standard required of a director. It is an objective
requirement that must be met if the director is to
Directors duty (section) Explanation of duty
Section 171 – Duty to act This general duty is a codification of the fiduciary duty that a
within power director must use his powers for a proper purpose and must
act within the powers conferred by the company’s
memorandum and articles of association.
Section 172 – Duty to The principle underlying section 172 is that the directors
promote the success of the should act in what they consider to be the best interests of
company the company.
- It is intended to make them take their decisions for
the right reasons.
- It is a very flexible principle, as long as they take their
decision for the right reason then the court won’t
intervene.
- Need to take the relevant interests into account.
When considering the s172 duty, directors must have regard
to various factors in s.172(1) (the list is not exhaustive) but
include:
- The likely consequences of his decision in the long
term,
- The interests of the company’s employees.
- The need to foster the company’s business
relationships with suppliers, customers and others,
- The impact of the company’s operations on the
community and environment,
- The desirability of the company maintaining a
reputation for high standards of business conduct and
- The need to act fairly as between members of the
company,
(P.139)
Section 173 – Duty to The duty seeks to ensure that directors act independently in
exercise independent their decision making rather than contracting it out.
judgment - Decision making also needs to be done in good faith.
- There is no prohibition on directors taking advice, e.g.
legal or financial.
Section 174 – Duty to Duty seeks to ensure that directors carry out their functions
exercise reasonable care, sufficiently carefully and competently.
skill and diligence - The required standard set out in s.174(2) is adopted
from case law on the old common law duty.
- The particular standard will vary depending on the
particular functions and responsibilities of the director
and the circumstances of the company. The duty will
therefore be breached if the director is incompetent or
negligent or falls below the required standard of
behaviour.
- Based on a 2 part test:
1) – Section 174(2)(a) CA 2006 sets out a minimum
standard required of a director. It is an objective
requirement that must be met if the director is to
