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September 2006

The statutory statement of directors' general duties and derivative actions - will more directors be sued?

Roger MasonRoger Mason has carefully scrutinised the content of the Companies Bill which will almost certainly become law by November 2006. It will then be The Companies Act 2006. Roger believes that this new legislation will without doubt fundamentally change how companies operate in the UK. You can quickly understand all the ramifications of this new legislation by attending Roger's seminar, The Impact of the Companies Act 2006.

It is intended that the Companies Act 2006 will include a statutory statement of directors' general duties. This will largely replace the existing duties found in common law which have always made it difficult for people who become directors to understand their legal obligations.

The new statutory statement sets out seven general duties which are clearly explained in the seminar. Briefly directors will have duties:

  • to act within the company's powers;
  • to promote the success of the company;
  • to exercise independent judgment;
  • to exercise reasonable care, skill and diligence;
  • to avoid conflicts of interest;
  • not to accept benefits from third parties; and
  • to declare interest in a proposed transaction or arrangement with the company.

Norton Rose, a leading international legal practice, has an excellent publication on their website which describes the duties in detail.

It is also intended that The Companies Act 2006 will give shareholders the statutory right to bring a derivative action, a right which is currently available under common law but which can only be used in special circumstances. A derivative action is one where a shareholder brings a claim on behalf of and for the benefit of the company in respect of a wrong done to the company. The costs of bringing a derivative action are borne by the company, given that the court grants leave to continue.

click here to see survey One consequence of codifying the general duties of directors could be an increase in the number of directors being sued. This is because a single shareholder could make a claim, at no cost to them, against a director, a concern that was expressed in the findings of a survey conducted by leading law firm Herbert Smith LLP. Many respondents to the survey also considered that this would increase the cost of Directors' and Officers' Liability Insurance and would deter people from becoming directors. Clearly these possible consequences are not the intentions of the Bill. The real intention is to make the actions of directors beyond reproach. It is important that directors and other officers of the company prepare themselves for The Companies Act 2006 which we expect to be on the statute book in November.

Roger Mason has great knowledge of Company Law and has written several books on this and related subjects. He writes and presents many seminars for UK Training and he is well recognised as being a foremost expert in Company Law. The number of times that delegates have heaped praise on Roger are too many to recount, the common message is 'Roger certainly knows his stuff and knows how to put it over'. He has written a seminar which will clearly explain the impact that The Companies Act 2006 will have on UK companies, shareholders, directors, company secretaries, employees and auditors. The seminar will be presented extensively throughout the UK in September, October and November. The demand for places is high and several presentations are already full. To avoid disappointment we suggest you book now.

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