PFA

The Companies Act 2006

PFA & The Companies Act 2006

Introduction

The Companies Act 2006 affects directors of companies in the UK and will also have some impact on European subsidiaries. The act is due to come into force in October 2008 but as with all legislation there is never any guarantee. Mike Rainford explains all.

The Companies Act 2006 is a piece of primary legislation that, once brought into force, will largely apply to companies directly and govern the duties directors owe to their companies. There are several duties which businesses need to be aware of.

Although the new Companies Act is now five years old, companies, their directors and their advisors are still getting to grips with the changes introduced(Sealy & Worthington, 2010: 141-145).

A shadow director is effectively a person who occupies the position of a director, regardless of whether he is officially named or identified as a director. The definition within the legislation is intended to be broad; and should not be strictly construed. The courts have historically considered that a person must exercise real influence over the company's affairs to satisfy the definition.

There are clearly risks for senior members of management to be identified as shadow directors, but they are not the only people at risk of falling within the definition. In some circumstances, holding companies, major shareholders and even lenders may satisfy the relevant test. The Companies Act contains exceptions relating to professional advisors, but the exception can be lost if the individual goes too far in influencing the decisions of the company.

Duty To Act Within Their Powers

This codifies the common law rule that directors should exercise their powers under the terms that were granted for a proper purpose. Directors' powers are normally derived from the companies' constitution, its memorandum and articles of association.

Duty To Promote The Success Of The Company

This is a new duty developed from one of the heads of the overriding principles of the fiduciary duties (duty of good faith to act in the company's best interest). The act imposes a duty to act in the way a director considers in good faith would be most likely to promote the success of the company (Taylor, 2009: 74-79).

Although this duty is still owed to the members as a whole, when exercising this duty, the director is required to consider a list of factors, including the long-term consequence of the decisions as well as the interest of the employees, the relationships with suppliers customers, and the impact of the decision on community and environment.

Duty To Exercise Independent Judgement

Section 173 of the act imposes a positive duty on a director of a company to exercise independent judgement. There are two elements to this section. The director must exercise judgement and secondly he must exercise the judgement independently.

Prima facie this rule will impinge on so-called sleeping directors who claim no active role in the management and leave decisions to others. This would impact on shadow directors. Arguably if a director is to exercise independent judgement then there will be no ...