S172 of the Companies Act 2006 states that a company director must:

"act in the way he considers, in good faith, is most likely to promote the success of the company for the benefit of its members as a whole"

When it was introduced, this section of the Act created a great deal of concern, was it a step too far in terms of directors' statutory duties?

However, it seems that the controversy surrounding this section was ill-founded, as we have been living with it for years without too much difficulty.

The duty requires directors to have regard to the following matters:

• Long term consequences of a decision
• Interests of employees
• Interests of suppliers, customers
• Impact of the company's operations on the community and environment
• Company's reputation for high business standards
• The need to act fairly between members of the company

Although allegedly ground-breaking the courts have determined that s172, for the most part, simply codified the existing common law position as regards directors' duties.

The relevant issue regarding the items listed above is that directors are free to consider these matters at their discretion, provided they believe, in good faith, that they are acting to promote the company's success. The courts have been reluctant to set any test to confirm whether directors have acted in accordance with s172, saying that it is a matter for directors' judgement. Case law has shown that the courts consider weighing of the above considerations to be a commercial decision which the courts are not equipped to make, except in a clear case - e.g. where it is obvious a director has failed to act in good faith.

The duty to promote the company's success "for the benefit of the members as a whole" does not specifically refer to both present and future members but, applying the logic of the common law prior to the introduction of the Act, it seems that this duty does indeed include future members. This continues the theme of sustainability which runs through the list of considerations above.

In the wake of recent high profile company administrations and banking scandals it is important to remind ourselves of the requirements of s172, which should be borne in mind whenever a board of directors makes a decision.

If you require advice on your duties as a director, or if you are thinking of starting up a new company, please contact our team.