Understanding Directors' Duties: Navigating Sections 173 and 174 of the Companies Act 2006

This is the third instalment of our four-part series, focusing on various important topics related to the role of Directors' Duties. If you haven't yet read our previous articles, you can read them here:

1. An Introduction to Directors' Duties and their Responsibilities
2. Understanding Directors' Duties: Navigating Sections 171 and 172 of the Companies Act 2006

In this article, Mollie Leak, our experienced Commercial Litigation Solicitor at Warner Goodman, explores Sections 173 and 174 of the Companies Act 2006, which mandate a duty to exercise independent judgement and perform roles with reasonable care, skill, and diligence.

Duty to Exercise Independent Judgement (Section 173)

Section 173 of the CA 2006 mandates that directors must exercise their powers independently, without surrendering their powers to the will of others. While directors can seek advice from colleagues, fellow directors, or professionals, they must ultimately make their own decisions and evaluate whether to follow the guidance received.

Although directors may delegate certain responsibilities to third parties (if permitted by the company's articles of association), they must carefully evaluate the delegate's suitability and ensure proper supervision.

Crucially, directors must not be influenced by a third party when voting in board meetings. For example, yielding to pressure from a shareholder who appointed them to vote a certain way would breach this obligation.

Duty to Exercise Reasonable Care, Skill and Diligence (Section 174)

Under section 174 of the Companies Act 2006, directors must exercise the care, skill, and diligence expected of a reasonably diligent person who:

• Possesses the general knowledge, skill, and experience that could be expected of someone performing the functions of a director in relation to the company.
• Utilise their specific knowledge, skills, and experience.

Directors should only take on the role if they are qualified and experienced enough to fulfil their responsibilities competently. If a director has expertise exceeding the average expectations, they are held to a higher standard when performing their duties. Similarly, directors in specialised roles are expected to have an advanced understanding of their area of responsibility; for instance, a Finance Director should have in-depth knowledge of financial matters and the company's accounts.

Directors must act diligently and stay informed about the company's affairs. This involves leveraging colleagues' expertise, delegating tasks appropriately, and relying on other board members or employees in subcommittees as necessary. However, these actions do not excuse directors from their obligations; instead, they encourage them to use the strengths of others within the company.

Get in Touch

For more information and guidance on Sections 173 and 174 of the Companies Act 2006, contact Mollie Leak and our Commercial Litigation team on 023 8063 9311 or enquiries@warnergoodman.co.uk.

If you missed our previous articles about Director Duties, don't worry; you can catch up on them here:

• Article 1: An Introduction to Directors' Duties and their Responsibilities
• Article 2: Understanding Directors' Duties: Navigating Sections 171 and 172 of the Companies Act 2006