NEWS - COMPANIES ACT - 18.07.2007

New duties from October 1

D-day

The good news, according to the government, is that not much is going to change. All the Act is really going to do is codify the existing duties of directors that are currently set out in case law; to act in good faith and in the company’s best interests; exercise reasonable care and skill; act within the company’s powers; avoid conflicts of interest and not make a secret profit.

But. The reality could be a little different. Although most of the duties remain the same, some changes have clearly been made. New factors have been introduced that you might not have even considered before, so you’ll quickly need to get up to speed with these changes, otherwise you could find yourself on the receiving end of a claim from irate shareholders, whose rights are being strengthened by the Act.

Toe the line

Firstly, it should come as no surprise to learn that you’ll have to act in accordance with the company’s constitution. So make sure that both the board collectively and all the individual directors are entirely familiar with the company’s articles. Things get more tricky with the second duty, that of promoting the success of the company in good faith for the benefit of the members of a whole. You’re obliged to have regard to factors such as the interests of your employees, your suppliers and customers, the long-term consequences of your decisions, the environment and the community.Although this sounds like scary stuff, the reality is that it’s asking you as a director to do no more than act and work for the success of the company as a whole and not for a particular group of shareholders.

Tip 1. It’s easy to get sidetracked by talk of the environment, the community etc., but as a director, your overriding duty at all times is to the company and to promoting its success. To make things crystal clear, make sure that all service agreements include this wording (or something similar): “Directors are to use their best endeavours at all times to promote and protect the interests of the Company in accordance with section 172 of the Act.”

Tip 2. If, as a board, you find yourself faced with a decision where some of the these factors might come into play, e.g. selling the business, it would be sensible to show clearly in the minutes that the relevant factors under the Act have been carefully considered. At least then if there are issues later, you can demonstrate a paper trail of your decision-making process.

Caution

If the company finds itself in financial difficulties there must be a shift away from these considerations because there’s a duty to act in the interests of the creditors. You’ll be expected to exercise independent judgement, so by all means listen to advice, but don’t accept instructions from say, shareholders or be unduly influenced by third parties. As a director, you’re expected to exercise reasonable skill and care. You’ll still have to avoid conflicts with third parties, but the Act has made things easier by saying that you can have a conflict provided you get the board’s OK.

Tip. If you find yourself in this position and need the board’s agreement, make sure that at the board meeting you neither count as a quorum nor vote on the proposal.