Legal Analysis: Director's Duty within Companies Act 2006 Framework

This report provides an overview of the legal aspects of a director's duty as defined by the Companies Act 2006 in the UK. It primarily focuses on Section 171, which outlines the duty of directors to act within their powers, adhering to the company's constitution and exercising power only for the purposes for which it was granted. The report discusses the sources of directors' duties, including legislation, case law, and the company's articles of association, as well as the implications of these duties, such as the limitations on a director's power to issue shares and the importance of preventing malpractices. The analysis emphasizes the importance of this clause in providing clear guidelines for directors' actions and ensuring accountability in decision-making processes. References to relevant case laws and academic papers are also included to support the arguments.

Legal Aspects of Business
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Task
Duty to act within power
Scope of Company Law
The company law in UK can be traced to the Companies act 2006. This act can be considered as
one of the largest acts in the UK parliament history. This act came as a replacement of the
Corporation Tax act 2009. There are diverse aspects that are traced under this act. One of the key
roles of this act is to provide a detail description of the duties of director. This is the chief topic
of discussion in this act. Apart from the aspect takeover directives and transparency directives
are also part of this. Different provisions of public and private companies are being considered in
this act as well. This act provides a singular law across UK. This act can be considered as
massive because of the fact that majority of the clauses of the Companies Act 1985 is being
replaced by this act. The director’s duties are covered in the sections 171 to 177 (Hood, 2013). In
this particular piece of writing the section 171 is being discussed.
Duty of Director
The section 171 of Companies act 2006 discusses the duty of the director to work within power.
The section 171 has two sub clauses a and b. The subsection (a) of this act states that the director
should act according to the constitution of the company. It is important to mention in this section
that it is important for companies to set its own constitution during the formation of the
company. Once the constitution is formed it is the duty of the director to work according to the
constitution of the company. The second sub section is section (b) this section states that the
director should exercise power only for the purpose of which the power has been given to the
director. These two are one of the key duties of the director according to the Companies act 2006
(Legislation.gov, 2020). The section 171 confides the duty of the director to the set limitations.
To elaborate the statements that have been stated in this section involves the fact that there is a
specific term for which power is being granted to the director so according to the principle of law
it is important that the director should act only for the purpose of which the law has been formed.
Also the purpose should be for any particular situation which is under the consideration of the
scope of the law. Furthermore, it is also stated that the director must conform to the rules and
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regulations stated in the constitution of the company. The purpose of general duties has been
codified in the constitution which comes under the section 257 of Companies act 2006. The
company’s articles also limit the duty of the director as well. The director should follow the
articles of the company as well. It is also stated that a decision taken by the members of the
board can also be considered as the equal to the laws of the company’s constitution (Sykes,
2010). Even when there is a decision that is being taken by the members of the board in an
informal manner can also be considered as an act of law.
Source of Directors duty section 171
The directors and the rules governing them tend to come from varied sources. Apart from the
specific legislation within the Companies act 2006 the different case laws can also provide a
source of duties to the directors of the company. The within power has been elaborated in the
clause which has ensured that there is enough scope for the director to take actions. The article of
association or the constitution of the company is not the only source the different memorandums
that can be issues by the company has also been considered as source of limitations for the
director (Legislation.gov, 2020). The shareholders decisions have also been included. This has
been done because of the fact that the limitation of the power of the director only within the
constitution which is formed during the formation of the company can limit the activities in
several ways. During the course of the duration the power of the director there can be different
situations where the director can face events which cannot be dealt by the already formed
directions that are set in the constitution. Thus it is important to make sure that there are
provisions for dealing with such situations (Adam, 2016). So the aspect of memorandum and
decisions taken by the shareholder has been considered within the section.
Implication of Directors Duty
The management of a company is the job of the manager hence it is only understandable that the
director is likely to need some power. But it is also important to limit their power as they are
employees of the company as well. So to clarify with example it can be stated that the power of
the director to issue shares of the company should only be used by the director for the purpose of
raising capital which should be used by the company only. The issuing of shares by the director
to cronies to ensure that the voting remains in favor of the director can be considered as a
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violation of power on the part of the director (Legislation.gov, 2020). Thus the duties have been
specified through this clause and indirectly the limitation that has been put on the practice of
power has also been stated through this law. Thus it can be stated that the check and balance on
the ability of the director to take decisions and also to ensure that any malpractices are not done
by them has been ensured by law by the implementation of this clause. The subsequent clauses
have also further elaborated on the aspect of individual decision making on the part of the
director. However, this clause can be considered as one of the most vital clauses that provides a
director with clear direction of practices. The power of decision making and the barrier of
execution is both underlying in this clause (formacompany, 2007). The cases of individual
corruption are addressed by the use of this clause.
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Reference List
Adam, Y.C., 2016. corporate governance anD nominee Directors–What Does it
mean?. Management and Accounting Review (MAR), 15(2), pp.171-184.
formacompany, 2007. Companies Act 2006 - Section 171 - 181 - Formacompany.Com. [online]
formacompany.com. Available at: <https://www.formacompany.com/uk/uk-companies-act-
2006/companies-act-2006-notes-171-181/> [Accessed 4 May 2020].
Hood, P., 2013. Directors' Duties Under the Companies Act 2006: Clarity or
Confusion?. Journal of Corporate Law Studies, 13(1), pp.1-48.
Legislation.gov, 2020. Companies Act 2006. [online] Legislation.gov.uk. Available at:
<http://www.legislation.gov.uk/ukpga/2006/46/section/171> [Accessed 4 May 2020].
Sykes, J.P., 2010. The continuing paradox: a critique of minority shareholder and derivative
claims under the Companies Act 2006. Civil Justice Quarterly, 29, pp.205-234.
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