The Companies Act 2006 sets out in statute for the first time the general duties that directors owe to their companies. The majority of these provisions and the new statutory right for shareholders to bring an action against directors on behalf of the company (called a derivative claim) come into force in October 2007.

The codification of directors' duties under the Act, combined with the derivative claim, may lead to an increase in claims against company directors. All companies should therefore review their existing directors' and officers' (D&O) policies to ensure that adequate insurance cover is in place.

The statutory duties set out in the Act, which are owed by a director to the company and not directly to the company's shareholders, are as follows:

- a duty to act in accordance with the company's constitution and only to exercise powers for the purposes for which they are conferred;

- a duty to act in a way that a director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole;

- a duty to exercise independent judgement;

- a duty to exercise reasonable care, skill and diligence;

- a duty to avoid conflicts of interest;

- a duty not to accept benefits from third parties; and

- a duty to declare to the other directors an interest in a proposed transaction or arrangement with the company.

The first four of these are expected to take effect on 1 October, 2007, with the remaining three expected to come into force in October 2008.

The new duty to promote the success of the company for the benefit of its members as a whole is an extension of, and replaces, the common law duty on directors to act in good faith and in the interests of the company. There may, therefore, be an increased risk of claims against directors who cannot demonstrate that they are acting in good faith in promoting the success of the company.

The Act allows a derivative claim to be brought by a shareholder against a current or former director (including a shadow director) for an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director.

However, any such derivative claim must be made on behalf of the company seeking redress for the company, not for the shareholder himself. Any damages awarded would be paid to the company, not to the shareholder bringing the claim. A shareholder can bring a claim in respect of conduct both while he is a shareholder and prior to his becoming a shareholder.

If a claim arises from conduct occurring before 1 October, 2007, the claim will only be allowed to proceed to the extent that it would have been allowed to proceed as a derivative claim under the law in force before 1 October, 2007.

The new right to bring a statutory derivative claim applies in a wider set of circumstances than was the case under the previous common law, meaning that it will be easier for shareholders to take directors to court. However, safeguards have been built into the Act (which have been clarified in the relevant court rules that have now been published) requiring a shareholder to demonstrate a prima facie case and to apply for permission to continue a claim, before the claim can proceed to full trial. Matters to be taken into account by a court at this stage include whether a shareholder is acting in good faith and the views of independent shareholders.

It remains to be seen where the balance will lie, for example, between activist shareholders and special interest groups, which may wish to bring a claim to put directors under pressure, and boards which will wish to see such claims struck out at an early stage where they lack merit.

Since, broadly, the purpose of D&O insurance is to offer protection against the costs of settling claims for actual or alleged wrongful acts and to pay the directors' legal costs in defending such claims, directors will want to ensure that the D&O policy adequately covers them against such derivative actions if they proceed.

Although the D&O policies on offer in the marketplace look broadly similar, David Howden, chairman of the Howden Broking Group, points out that the cover offered by such policies can vary widely, as can wordings, so it is essential to review policies thoroughly to ensure they deliver the level of cover required.

What, then, should directors and officers be looking for in D&O policies to protect them in the light of the changes introduced by the Act?

Generally, it is important for directors to understand whether they are covered against claims by the company itself and/or from other directors covered by the same policy. Many D&O policies exclude such claims to a greater or lesser extent, under what is known as the 'Insured v Insured' exclusion. Given the new derivative claim which can be brought by shareholders on behalf of the company, it is very important that D&O policies from 1 October provide cover against derivative claims brought under the Act as well as providing cover against derivative claims brought by shareholders under the law as it currently stands.

The policy wording should also be looked at carefully to ensure that costs and expenses incurred by directors and officers in defending claims that are later struck out are also covered. Even if the shareholder is refused leave to continue his action, the director may not be awarded all his costs and, even if he is, the director will want the D&O insurance to pay his legal costs in the meantime. Circumstances could also arise in which the company is ordered to pay the costs of the shareholder in pursuing the claim. If adequate D&O cover is not in place, the company could find itself required to pay the costs of the director's defence and the shareholder's action.

The cover provided by the policy should also be checked for situations in which a hostile takeover occurs, given the right under the Act for a shareholder to sue for conduct prior to his acquisition of the shares. The level of cover afforded to the outgoing directors should also be considered.

Directors should also be wary of exclusions in policies for professional services performed by the company or the directors and officers. The wording of the policy should not affect the ability of the policy to respond where shareholders seek to hold directors and officers responsible for the acts of others providing professional services to, or on behalf of, the company.

This is particularly relevant given the ability of auditors to cap their liability, which may lead to claims being brought against directors. A carve-out to the professional services exclusion should be sought so that directors and officers are not held liable for claims alleging failure to manage, appoint or supervise in their capacities as directors and officers.

Howden said: "It is clear that the new codification of directors' duties will have a significant impact on D&O policies in the future. Companies should be discussing their policies now with their insurance brokers to ensure that they have adequate levels of cover in place by the time the Act is implemented."

Vanessa Graham is an associate in the corporate team at Taylor Wessing.