The New Companies Act 2006 - Friend or Foe? asks Timothy Gray - partner at Bury based legal firm Clough & Willis
Oct 21st 2008
Since it first came into the public arena eight years ago, the Companies Act 2006, one of the largest single pieces of legislation ever enacted, has caused debate and discussion throughout the UK's business and legal worlds. It has and continues to introduce far reaching changes to the existing law for companies - from how they are run to the individual duties placed upon directors.
The latest stage was implemented on the 1st October 2008 and included major clarifications as it was the first time the specific duties that all directors must follow have been set out. The Government claims the Act's overall objectives are to enhance and provide better guidance for directors, to stimulate more effective communication between companies and their shareholders and to ensure both shareholder empowerment and long term investment. These will be achieved by ensuring that all conflicts of interests must be avoided, benefits from third parties cannot be accepted and that interest in proposed transactions must be declared.
The likely problems will start with confusion - one of the most obvious grey areas is between those gifts or benefits that will be acceptable, and those which will not. A hamper once a year may be innocuous, a hamper once a week will not be.but what about once a quarter.This is a very simplistic example but where does it end and what are the parameters?
Many of these new points are similar to current common law duties but the most significant change is the obligation to promote the success of the company. The previous obligation of good faith when acting as a director is still there, but now the new rules state how a director should go about discharging that duty. Briefly put, when taking decisions a director must now actively consider the likely consequence of any provision in the long term success of the company, the interest of the company's employees and the need to encourage the business relationships of the company with suppliers, customers and other organisations.
It all sounds very obvious but do we as businesspeople need good practice actually spelt out to us? I would say not, firstly because these are the types of considerations that most businesses will look at when making decisions anyway. Secondly sometimes those interests will conflict. It may benefit a business to close a branch - at the expense of the employees whose jobs will be lost.
Careful directors will worry and there must be a danger the whole process could simply turn into a box ticking exercise or that directors will start spending too much time making precise records showing they 'followed the rules'. Meanwhile rogues will still be rogues - and a new set of duties will not bother them.
Business decisions are taken in the here and now and need to be both spontaneous and informed. This kind extra burden could hamper that process - will it mean that we need to start keeping copies of newspapers showing the climate in which we were working to justify why a decision was made?
Government claims that the Act will make it easier to set up and run companies and it is hoped that it will encourage entrepreneurs. If it works then great as anything that stimulates economic growth in the current climate should be applauded. However, it is questionable whether or not the Act will achieve this as its main thrust is firmly in the direction of yet more regulation. As the saying goes.'only time will tell'.and I look forward to seeing whether this is the correct approach.
Tim Gray joined Clough & Willis Solicitors in 1994, becoming a partner in 1999. Heading the dispute resolution team, Tim specialises in commercial litigation, corporate and partnership disputes and employment law.