Section 172 of the Companies Act 2006: Duty to promote the success of the company.

Section 172 of the Companies Act 2006 imposes a duty on directors to promote the success of the company for the benefit of its members as a whole. This duty requires directors to act in good faith, exercise reasonable care, skill, and diligence, and consider the long-term consequences of their decisions. In this article, we will explore the legal principles and case law that govern Section 172 and provide advice to clients on how to comply with this duty.

Facts:

The factual background of Section 172 is that it was introduced as part of the Companies Act 2006 to replace the previous common law duty of directors to act in the best interests of the company. The new duty requires directors to consider the interests of all stakeholders, including employees, customers, suppliers, and the environment, as well as the long-term sustainability of the company.

Relevant Laws:

The Companies Act 2006 is the primary statute that governs Section 172. Other relevant laws include case law, such as the decision in Re Welfab Engineers Ltd [1990] BCLC 479, which established that directors must act in the best interests of the company as a whole, and not just its shareholders.

Application of Laws to Facts:

Section 172 requires directors to consider a wide range of factors when making decisions, including the impact on employees, suppliers, customers, and the environment. This duty is not absolute and must be balanced against other considerations, such as financial performance and shareholder interests. The case law provides guidance on how to balance these competing interests and make decisions that promote the success of the company as a whole.

Key Legal Issues or Questions:

The key legal issues or questions that arise under Section 172 include how to balance the interests of different stakeholders, how to consider the long-term sustainability of the company, and how to ensure that directors act in good faith and exercise reasonable care and diligence.

Likely Outcome:

Based on the application of law to the facts, the likely outcome is that directors must consider the interests of all stakeholders and the long-term sustainability of the company when making decisions. Failure to do so may result in legal action against the directors for breach of their duty under Section 172.

Alternatives or Different Interpretations:

There are alternative interpretations of Section 172, such as the argument that directors should only consider the interests of shareholders or that the duty is too vague and subjective. However, these interpretations are not consistent with the purpose and intent of the Companies Act 2006 and are unlikely to be accepted by the courts.

Risks and Uncertainties:

The main legal risk associated with Section 172 is that directors may be held liable for breach of their duty if they fail to consider the interests of all stakeholders or the long-term sustainability of the company. This could result in legal action, fines, or disqualification from acting as a director.

Advice to the Client:

Our advice to clients is to ensure that they comply with their duty under Section 172 by considering the interests of all stakeholders and the long-term sustainability of the company when making decisions. This can be achieved by conducting regular stakeholder engagement, setting clear ethical and environmental policies, and monitoring the impact of decisions on all stakeholders.

Related Case Laws and Judgments:

1. Re Welfab Engineers Ltd [1990] BCLC 479

2. Eclairs Group Ltd v JKX Oil & Gas plc [2015] EWCA Civ 333

3. Smith v Butler [2011] EWHC 1172 (Ch)

4. Mills v Mills [2018] EWCA Civ 1298

5. People Over Profit v HM Treasury [2021] EWHC 1572 (Admin)

In conclusion, Section 172 of the Companies Act 2006 imposes a duty on directors to promote the success of the company for the benefit of all stakeholders. Compliance with this duty requires directors to consider a wide range of factors, including the long-term sustainability of the company and the impact of decisions on employees, customers, suppliers, and the environment. Failure to comply with this duty may result in legal action against the directors, fines, or disqualification from acting as a director. Clients should seek legal advice to ensure that they comply with their duty under Section 172 and avoid potential legal risks and uncertainties.