Shaken and Stirred

The Companies Act 2006 is the most far-reaching shake up of company law in England and Wales for a generation. Weighing in at a gargantuan 1300 sections and 16 schedules, it is said to be the largest piece of legislation ever passed by Parliament.

 

The rationale behind the Act was to make company law more accessible, economical and relevant for small businesses. A noble ideal and one that the Act does appear to achieve in parts; however, only time will tell if the Act as a whole meets this objective.

 

Due to its sheer size and the impact it will have on the operation of company law, the Act is being implemented in phases. Some minor changes came into effect in January 2007; however, the first major raft of changes came into force on 1 October 2007. The remaining provisions of the Act will come into force in April and October 2008.

 

Two of the main changes to come in on 1 October relate to Directors’ Duties and Derivative Actions.

 

For the first time, the Act seeks to codify the duties owed by a director of a company. It sets out seven duties (general rules).

 

Many of these duties are simply the bringing together of the existing common law duties already owed by directors. Indeed, the Act specifically provides that the duties are to be interpreted and applied by reference to the current common law rules and equitable principles. This does beg the question as to what the new codification actually achieves in terms of clarification.

 

The most controversial of the ‘general rules’ is the duty to promote the success of the company. The Act specifically lays down the things a director must consider in making any decision. These include the long term consequences, the interests of employees, relationships with suppliers and customers, the impact on the community and the environment, reputation and fairness between members of the Company.

 

Quite how a director is supposed to demonstrate that they have taken into account all these factors is unclear and there has been much speculation as how these provisions will be interpreted.

 

Also in force from October is the concept of Derivative Actions, whereby a shareholder in a company can bring a legal action on the company’s behalf against its directors for breach of duty to the company. The prospect of a minority shareholder bringing legal proceedings against directors for failing to give proper consideration to the impact of a decision on the company’s employees or the environment, for instance, is an uncomfortable prospect for directors.

 

There is provision in the Act to prevent derivative actions being brought where they clearly have no prospect of success. A great deal will also depend on how the courts interpret the new duties that the Act is placing on directors. It is a case of ‘wait and see’ in terms of the actual impact of this provision.

 

For every change that does appear to simplify things there seems to be a change that makes matters more confused or complex. It will be some time before the real impact can be assessed and whether the Act will be judged a success in terms of its goal to make life easier for small businesses.