The Act did not amend directors' duties and liabilities which are specific to insolvency scenarios (as contained in the Insolvency Act 1986). Directors must therefore ensure they are also aware of their additional responsibilities, already in existence, when a company becomes, or is likely to become, insolvent. In the forefront of directors minds must be that in such situations, their duties have been varied from acting in the best interests of the company to acting in the best interests of the company's creditors. 

Analysis

Speculation about the way in which the new directors' duties will take effect has focused on: (1) the scope of the duty to promote the success of the company; and (2) what steps directors should take to protect themselves from claims for breach of their duties.

(1) Promoting success
This new duty replaces the existing common law duty of directors to act in good faith and in the best interests of the company. However, there is some uncertainty about what directors should actually be doing to comply.

The new duty provides that, each time a director makes a decision, the director should be considering whether the outcome will further the success of the company, having regard to each of the six prescribed factors, together with any other relevant considerations. Parliamentary guidance suggests that in practice:

• the overriding success of a company is generally to be measured by the long-term increase in the value of the company and this is a matter for the directors exercising their judgment in good faith;


• where there is conflict between the prescribed factors, this is, again, a matter for the directors exercising their judgment in good faith, giving proper consideration to the competing factors, to reach their decision; and


• the Act does not require directors to keep a paper-trail as to how decisions were reached.

Immediately several queries arise from the new duty, such as:
Directors make a variety of decisions every day. These may range from informal decisions by a sole director to board-level decisions with far reaching operational impact. Will the nature of the decision necessarily impact upon how a director complies with the duties? 

Contrary to comments made by the former Attorney General, Lord Goldsmith, and the views of various organizations arguing against increased bureaucracy, directors may consider it prudent to keep evidence about how they reach more material decisions, lest they face challenges from shareholders. For example, where a board of directors plans to outsource/offshore a business function with the aim of increasing business productivity they may want a paper trail to show they have considered the conflicting interests which may be inherent in such a decision! Continued...