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Act for long-term business gain

Under the Companies Act 2006 directors have a legal duty to act in the best interests of their business, says Roger Button

Most businesses in the construction industry trade as limited companies. Senior managers are likely, sooner or later, to become directors of their companies. That will normally result in a welcome rise in status.

Less welcome may be the fact that company directors are now subject to new duties under the Companies Act 2006.

A director is now required to act in a way which he considers will promote the success of the company for the benefit of its members as a whole. In so doing, the director must have regard to the following factors:

  • The likely consequences of any decision in the long-term.

  • The interests of employees.

  • The need to foster business relationships with suppliers, customers and others.

  • The impact of the company’s operations on the community and the environment.

  • The desirability of the company maintaining a reputation for high standards of business conduct.

  • The need to act fairly as between members of the company.

Decisions made for short-term financial gain, regardless of other consequences, could be in breach of this duty. The various factors may often conflict with each other, but they must all be given reasonable consideration in coming to a decision.

In the case of major decisions, a written record should be produced confirming this.

Directors must also comply with the company’s constitution and act within their powers.

The correct procedure should be followed in relation to formal meetings of directors ensuring, for example, that at least the minimum permitted number of directors are present. Decisions should be referred to shareholders when required.

A duty to act independently

A director is also required to exercise his judgement independently of others. Thus, a director may not act as the mouthpiece of a particular shareholder unless this is authorised by the company’s constitution. A director may take professional advice provided he exercises his judgement independently.

Finally, a director must exercise reasonable skill and care in carrying out his duties. Directors may face a claim if something goes badly wrong in the business. Shareholders can now claim compensation against one or more directors in the name of the company for the company’s losses. The court has to give permission for the continuance of any action once begun. Various factors are considered, including whether the claim has a chance of success and the attitude of other shareholders.

Directors can protect themselves by recording the reasoning behind important decisions and consulting shareholders to minimise the risk of a claim.

They may wish to obtain indemnities against claims from third parties. Consideration should also be given to the taking out of director’s and officer’s insurance against claims. Existing policies should be
reviewed to ensure that they cover claims under the Act.

Roger Button is a partner in the construction projects department at Shadbolt & Co