Companies Act 2006 and Insolvency Act 1986

Companies Act 2006 and Insolvency Act 1986

Companies Act 2006 and Insolvency Act 1986

Introduction

It has been said that the underlying reason for the financial crisis of 2007-2009 and the attendant problems connected to it, was the mispricing of risk, and/or the employment of foolish and irresponsible lending practices all the way down the finance chain. Some have focused on the failure to manage risk as the reason for the crisis, while others have identified a broader reason, namely the short-termist pressure placed on directors as a result of the demands of shareholders for unsustainable ever-increasing earnings growth that was possible only by way of the shortcut of over-leverage and reduced investment, and the dangerous route of excessive risk.

Such commentators have emphasized the fact that the stability and financial strength needed to endure economic cycles were sacrificed for immediate satisfaction. Some commentators have identified the complexity of the finance products employed as a key reason for the crisis.

But many commentators have opined that failures in corporate governance in financial institutions caused the crisis, even though it has been shown that the governance of these companies are no worse than companies conducting businesses in other fields. Some might well argue that failures in risk management are themselves failures in corporate governance.8 It is perhaps notable that UBS, the Swiss-based financial services company, linked the two when it provided a frank assessment of its risk management and governance failures to its shareholders. The OECD Steering Group on Corporate Governance has argued that weak governance across the spectrum of companies was a major cause of the financial crisis.

The UK's Treasury Select Committee supports the view that corporate governance problems were a cause of the financial crisis; it stated that it had spotted “important...corporate governance failures in the banking sector.”

The Turner Review stated that improvements in the effectiveness of firm governance are essential. The Walker Review, undertaken in order to consider corporate governance in UK financial institutions, said that: “The need is now to bring corporate governance issues closer to centre stage...These entities [financial institutions] need to be better governed.” It is trite to say that essential to any consideration of corporate governance is the role played by directors of companies. Obviously they are critical to any corporate governance system that exists. As part of this system, directors are made accountable for how they have conducted the affairs of their company, and this is achieved through a number of mechanisms. That is, they are, or may be, called to account in various forms for what they have done or not done. Importantly in this regard certain duties are imposed on how directors act in the managing of their companies' affairs. If they fail to fulfill these duties then the directors may be subject to legal proceedings and they may, ultimately, be held liable by the courts.

The position as far as duties of directors in the UK are concerned is that the law has seen a ...