Directors' Duties and Derivative Proceedings

Contact - Jeremy Fraser, Partner

From 1st October the Companies Act 2006 will introduce a number of further changes affecting the management of companies. One of the main changes will be the new statutory statement of directors' duties, which will list a number of the key responsibilities of directors, including the duty to exercise their powers for a proper purpose and a very broad duty to act in good faith to promote the success of the company, for the benefit of the members as a whole.

This latter duty is controversial and may require test cases for interpretation, but many of the duties in the new statement already apply and the basic principle remains that directors' duties are owed to the company and it is the company which enforces them. However it is a useful codification of the key responsibilities of directors.

At the same time new rules will be introduced to allow "derivative" claims or proceedings by shareholders, which will make it easier for a shareholder to raise an action on behalf of the company against a director. Claims could be for acts or omissions by a director or directors involving breach of duty, negligence, default or breach of trust and could be to protect the interests of the company or to obtain a remedy for individual shareholders themselves.

A shareholder will require to obtain prior permission from the court before raising a derivative claim, but despite this there is still some concern that the changes may lead to an increase in tactical litigation by shareholders against directors.

This is most likely to affect banks in an insolvency or other recoveries scenarios and banks will require to consider the potential impact from a credit policy perspective. For example in some cases it could lead to increased pressure to seek security from directors for their personal obligations for the company's borrowings.

The 2006 Act will also abolish the general prohibition on loans to directors (and related criminal penalties) in October, replacing this with a requirement for shareholder approval before such loans can be made. The change will allow loans to directors to be used transparently as part of restructuring and financing arrangements in future.