The Law Months, Part V: s.172 Companies Act 2006

To what extent does the case law prior to the Companies Act 2006 help us to understand s.172 (the duty to promote the success of the company)?

This question is about director’s duties, specifically the duty to promote the success of the company (s.172 CA 2006). In this essay I will look at relevant statute and case law to examine the extent to which case law prior to the CA 2006 allows us to understand and interpret the new duty.

Section 170(1) CA 2006 states that the duties codified in this Act are owed by a director of a company to the company (Percival v Wright). These new duties are based on, and have replaced the old common law duties (s.170(3)). However, we must still understand the old common law to be able to interpret the new duties in ss.171-177 CA 2006 (s.170(4)).

Section 172 was one of the first old common law duties to be codified in the CA 2006. Previous to the duty to promote the success of the company, the common law stated that directors had to act bona fide (in good faith) in the interests of the company. The aim of codifying the duties was to modernise company law and make it more suitable for the 21st Century – and this included changing the language used in the new duties.

The main clause of s.172 is that “a director of a company must act in a way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. This can be broken down into two main parts. Firstly, a director must act in a way that he honestly believes to be in the best interests of the company and most likely to promote the success of the company. This is a subjective test and the court will not intervene to impose what it considers to be best for the company with the benefit of hindsight and expertise (Re Smith & Fawcett Ltd.). Secondly, that the primary aim is to promote the success of the company (Mutual Life Insurance v Rank Organisation) and that of the members, followed by the interests of other stakeholders (ss.172(1)(a)-(f)).

The old case law identified that “the duty imposed on directors to act bona fide in the interests of the company is a subjective one” (Parker J, Regentcrest v Cohen). The main clause in s.172 preserves both the subjective element of the old common law, and requirement of directors to act in good faith. This is an example of the change in language, as the new duty removes the Latin terminology, and instead uses its English translation. Similarly, the new duty also introduced the term ‘to promote the success of the company’ to replace the old term ‘to act in good faith in the interests of the company’.

The main difference between the old law and new law is the inclusion of stakeholder considerations in ss.172(1)(a)-(f) which include; the interests of employees, the impact on the community and the environment, amongst other things. However, there is little case law or guidance from the higher courts as of yet to explain how these sub-clauses will be interpreted by the courts.

In conclusion, I agree to a certain extent that the case law prior to the CA 2006 can help us understand how to interpret s.172. This is because the main clause (which has been explicitly explained by government to be the most important clause of the section) can be satisfactorily interpreted and understood from old common law cases. However, the section is not explained fully as we are yet to understand the extent to which the sub-clauses will be treated by the courts, leaving uncertainty still to be answered.

Click here for a downloadable copy of explanatory notes for each of the cases used in this essay.

Table of Cases

Mutual Life Insurance Co. of New York v Rank Organisation Ltd. [1985] BCLC 11

Percival v Wright [1902] 2 Ch 421

Regentcrest Plc. v Cohen [2001] BCC 494

Re Smith & Fawcett Ltd. [1942] Ch 304 (Court of Appeal)

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Categories: Law

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