Directors have powers to take majority business decisions on behalf of the companies. As such, it comes as no surprise that various duties are imposed on them to ensure that the companies’ interests are protected.

The Companies Act 2006, which will be fully in place by October 2008, codifies directors’ duties into a statutory statement of seven general duties, some of which take effect from October 1, 2007.

1. Duty to act within their powers - directors should exercise their powers for a proper purpose. A director’s powers are normally derived from the company’s constitution. The scope of a director’s powers may also be affected by the terms of his service contract and other contractual terms such as may be contained in a shareholders’ agreement.

2. Duty to promote the success of the company - the act imposes a duty to act in the way a director considers, in good faith, would be most likely to promote the success of the company. The director is required to bear in mind a list of factors, including the long-term consequence of the decision; the interests of the employees; the relationships with suppliers and customers; the impact of the decision on community and environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly between members of the company.

3. Duty to exercise independent judgement - a director of a company must exercise independent judgement. Here a director must first exercise judgement and, secondly, he must exercise the judgement independently.

4. Duty to exercise reasonable care, skill and diligence - this duty describes the degree of ‘care, skill and diligence’ expected from a director. It means that a director who has more experience, knowledge and skill will have a higher threshold in discharging this duty.

5. Duty to avoid conflicts of interest - this duty applies to a transaction between a director and a third party. The act makes it easier for directors to enter into transactions with third parties when directors’ interests conflict with company’s interests. Such transactions can be authorised by the non-conflicting directors on the board.

6. Duty not to accept benefits from third parties - a director is not permitted to accept a benefit from a third party by reason of (a) his being a director or (b) his doing or not doing anything as a director. Benefits cover both monetary and non-monetary items. A director will not be in breach if the acceptance of such benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

7. Duty to declare an interest in proposed transaction or arrangement with the company - a director must disclose his interest to the board of the company when a transaction is proposed between a director and his company. It requires a director to declare the nature and the extent of the interest to the other directors. Disclosure also extends to a person connected with the director, for example, his wife and children.

These changes will bring benefits to companies. But it may well create confusion and uncertainty in some areas. It may well result in more claims being brought against directors in the short term, as dissatisfied (minority) shareholders, armed with a new statutory right of ‘derivative actions’, could bring test cases. For the record, a ‘derivative right’ is a right of a member of a company to bring a claim on behalf of the company against a director in respect of a director’s breach of duty or negligence.

Christopher Sykes is a senior partner and Peijun Xia a commercial solicitor at Sykes Anderson LLP.