Public concern over the collapse of companies like Maxwell Communications and Polly Peck and the activities by some directors which may have caused or initiated such collapses led to the establishment of the Cadbury committee on the financial aspects of corporate governance, chaired by Sir Adrian Cadbury, and the issue of the Cadbury code.Recent complaints over excessive pay have kept directors and their responsibilities in the news.

The Dti announced in December 1994 that it would be reviewing pt X (directors' dealings with their companies) of the Companies Act 1985 and the general law on directors' duties.

Their consultation document is scheduled for issue before Easter.

In conjunction with this, the Law Commission is reviewing shareholders' remedies and the enforcement of shareholders' rights but is not expected to report before the summer.As it currently stands, the Act does not prescribe a director's functions, although it and various other statutes impose a number of specific statutory duties on directors.

The principal director s' duties - the fiduciary duties - derive from common law, from the director's role as part agent and part trustee for his or her company.

In addition, many directors today are also employees (particularly executive directors) and usually have a service contract setting out their duties.The fiduciary duties comprise the following: to act bona fide (ie honestly and sincerely) in the company's interests; to act for proper purposes; to avoid a conflict of interest and duty; not to make secret profits; not to fetter his or her discretion; and general duties of skill, care and diligence.Directors' fiduciary duties are owed to the company, ie the shareholders as a whole, and not to individual shareholders (or to other companies in the same corporate group).

Shareholders 'as a whole' includes present and future shareholders and therefore the need to balance short term, against long term, considerations and, if there are different classes of shares, to act fairly as regards all such classes.

It is the company therefore which has the right to enforce the duties.

Effectively it is for the majority shareholders to decide whether to pursue an action (although an aggrieved minority shareholder is permitted to sue as an exception to this rule; for example, where irregularities by the directors have been condoned by the majority shareholders).No duty as such is owed directly to employees of the company.

Although s.309(1) of the Act provides that the 'matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company's employees in general, as well as the interests of its members', s.309(2) states that this duty is owed by the directors to the company alone and therefore has to be enforced by the shareholders in the company's name.The directors may also have a duty to consider the interests of a company's creditors, particularly when the company is insolvent.

Once a company is going, or has become, insolvent, the courts have, on occasions, recognised that, in reality, a company's interests are those of the existing creditors alone.Where a company is a subsidiary within a large corporate group, the directors must technically still consider only the interests of their company.

However, if the directors, in considering their company's interests, consider also the interests of the group, that does not mean that they are in breach of duty provided that the directors reasonably believed that the transaction was in their company's interests (and were entitled to take that view - see below).Duty to act bona fideThe duty to act bona fide in the company's interests is primarily a subjective duty but with an objective threshold.

Directors must exercise their discretion and powers honestly and sincerely in what they, and not what a court, may consider is in their company's interests.

However, good faith is not sufficient; if an act or decision is one which no reasonable director could properly have come to, the court may intervene.Proper purposesDirectors' powers must be exercised for the purposes for which those powers were conferred and not for any 'collateral purpose' even if the directors may have honestly believed that they were acting in the company's best interests (for example, issuing shares in an attempt to defeat a threatened take-over rather than for the prime purpose of raising capital).Avoidance of conflicts/secret profitsA director must not put him or herself in a position where personal interests conflict with those as a director.

Closely connected to thi s is the duty not to make secret profits.

This duty is based on the principle that any profit acquired by a director through his or her position as a director must be accounted for to the company unless the director has disclosed the profit and his or her retention of that profit has been sanctioned either by a majority of the shareholders or (more usually) as a result of an appropriate provision in the articles of association.Not to fetter discretionAs a director is bound to exercise his or her functions for the benefit of the company, he or she must not, as a rule, fetter his or her discretion.

However, an outside involvement does not automatically render a director in breach of the duty.

The Cadbury code (see below) encourages such involvement through non-executive directors who 'should bring an independent judgment to bear on issues of strategy, performance, resources, including key appointments, and standards of conduct'.

Nor does the duty prevent a director exercising his or her powers with a view to protecting an 'outsider's' interests (for example, where a substantial minority shareholder has a right to appoint a director to the board).

However, the director must preserve a substantial degree of independence as to how he or she should exercise his or her powers whilst seeking to represent and protect the interests of his or her 'outsider'.Directors can also effectively fetter their discretion if they enter into a contract on behalf of their company which commits the company to a particular future course of action (even if the future commitments turn out to be less beneficial to the company) if, at the time the contract was signed, the directors honestly and sincerely believed the contract, including the future commitments, to be in the company's best interests (Fulham Football Club Ltd v Cabra Estates plc [1992] BCC 863).Skill, care and diligenceRe D'Jan of London Ltd [1993] BCC 646 approved the view that the duty of care owed by a director at common law is accurately stated in s.214(4) of the Insolvency Act 1986, ie it is the conduct of '...a reasonably diligent person having both (a) the general knowledge, skill and experience that may reasonably be expected of the person carrying out the same functions as are carried out by that director in relation to the company, and (b) the general knowledge, skill and experience that that director has'.

Those who undertake a position of trust and responsibility are expected by law to give reasonable attention to the duties of that office.

The courts in earlier years placed a fairly low degree of diligence on directors.

It is unlikely today that the courts would be happy to hold such a relaxed view of company affairs.

A director cannot assume that his or her duties can be left to others although he or she may delegate functions (provided he or she exercises appropriate on-going care and diligence in so doing).

A director is not the agent of his or her co-directors and not therefore liable, as such, for co-directors' breaches of duty.Statute has imposed a number of specific statutory duties on directors.

Many of these effectively extend the common law duties (for example, restrictions on transactions and loans involving directors and disclosure of interests in contracts and arrangements); others relate to good corporate governance (for example, filing documents with the registrar of companies and keeping appropriate books and records).Companies listed on the London Stock Exchange are subject to the listing rules.

The directors must ensure that both they (collectively and individually) and, through them, their company observe the listing rules (para 16.2).

These rules include restrictions on dealings by directors and their connected persons and, in para 12.43(j), the requirement for a listed company to include, in its annual accounts, a statement as to whether or not the company has complied throughout its accounting period with the Cadbury code of best practice published in December 1992 by the Cadbury committee and, if it has not so complied in whole or in part, the reasons for that non-compliance.The Cadbury code is voluntary and does not make any changes, as such, to the law on directors' duties.

It is intended to underpin directors' duties by promoting, and providing guidance on, good corporate governance.

Failure to comply with the code is not a breach of the listing rules provided reasons (whether valid or otherwise) are given for that failure; the real sanction is likely to be the publicity and the market/shareholder pressure that may arise as a result.Various remedies will be available to a company for breach of a director's duties, for example:-- An injunction, particularly where the breach is a continuing breach;-- Restoration of property, for example, where dividends have been unlawfully paid to a parent company with constructive knowledge of the breach;-- Rescission of contracts (but this right may be often lost because, for example, the company delays rescission, third party rights have intervened or the funds cannot be traced);-- Account of profits;-- Damages where the company has suffered loss through the director's breach.Where a particular duty is imposed by statute, the relevant statutory provision may impose a specific remedy or penalty.

One of the grounds for disqualifying a director from acting as such is 'unfitness' to act as a result of breach of duty.Directors may escape liability for breach of duty in several ways.

These include:-- Ratification by the shareholders: some breaches can be ratified by ordinary resolution, some by unanimous consent, if the act complained of is not beyond the powers of the company (eg unlawful financial assistance) and/or does not involve a fraud on its creditors.

Under s.35 of the Act, a breach of duty which consists only of the directors exceeding their powers under the company's memorandum of association can be ratified by a special resolution (or by shareholders' unanimous consent).-- Provisions in the articles: s.310 of the Act makes void any provision (whether in the articles or any contract with the company or elsewhere) exempting any director from, or indemnifying him or her against, any liability arising from breach of duty.

It does not prevent a company from purchasing and maintaining for directors, insurance against those liabilities, nor from indemnifying any director who is a successful defendant in civil proceedings or who successfully applies for relief under the Act.-- Relief from liability by the court: under s.727 of the Act, the court may relieve a director from liability for breach of duty if it is satisfied that the director has acted honestly and reasonably and that, having regard to all the circumstances, he or she ought fairly to be excused.1995