The remaining sections of the Companies Act 2006 are due to come into effect on 1 October 2009. It is, therefore, important to be ready for the changes and the impact they could have on your company.
The principal changes, among others, that will come on stream on 1 October will affect the role played by a company’s memorandum and articles of association, the way that share capital is managed and details about directors and secretaries that must be made public.
We outline some of the major new rules and their significance for your company in a free PDF for you to download, CA2006 The Final Push. Make sure you are well prepared for the last implementation date of the Companies Act 2006.
Director’s Legal Duties
The Companies Act 2006 codified directors’ duties for the first time. After a phased implementation timetable, all seven new statutory duties are now in force. We take a look at each of the duties in turn and provide some practical examples.
The following is an extract from ‘The Dutiful Director’, an article by Nigel Miller http://www.freshbusinessthinking.com/articles.php?CID=8&AID=3390:
- To act within the company’s constitution and to only exercise powers for a proper purpose
Constitutional documents include the company’s articles of association as well as any instructions given to the board by shareholders say in a shareholders’ agreement.
An example of when this duty may come into play is a requirement that two directors are present at a board meeting in order for the decisions of the meeting to be valid and the meeting to be “quorate”. This prevents one director making unilateral decisions that could be detrimental to the company and its shareholders.
- To exercise independent judgment
You must exercise your own judgement for the benefit of the company as a whole. A director must not use his or her position to further the interests of a single shareholder or a particular group of shareholders. The duty to exercise independent judgment does not prevent a director from taking professional advice or from using others as a “soundboard”. The director must consider the advice he is given and reach an independent conclusion himself, having regard to the Interests of the company as a whole.
As an example, often, a significant shareholder will have a right to appoint a director to the board of a company. The director will usually report to his appointer and inform the other directors of his appointer’s wishes. It is however important that this nominee director! also acts in the interests of the company as a whole and not just in his appointer’s interests.
- To exercise reasonable care, skill and diligence
There are two tests for establishing whether a director has exercised reasonable care, skill and diligence. Firstly, a director must satisfy the “objective test”, that he has the knowledge, skill and experience that would reasonably be expected of a director. Secondly, a director must show he has used the knowledge, skill and experience that he actually possesses. Where a director possesses a special skill or discipline, the standard expected of that director in relation to his special skill or discipline will be higher.
For example, a director with accounting experience and accounting qualifications, would be expected to exercise his duties with a higher level of skill when considering the finances of the company than other directors with no such experience or qualifications.
- Not to accept benefits from third parties
It is normally considered acceptable for a director to accept an invitation to lunch, paid for by a third party, On the other hand, if the lunch is part of an all expenses paid week in Paris (paid for by a supplier chasing a new contract), that would create a conflict of interest. If you are unsure whether to accept a benefit, discuss it with the other members of the board.
- To declare interests in proposed transactions or arrangements with the company
Usually, this involves a director making a declaration at the board meeting where the proposed transaction or arrangement is to be discussed.
As an example, directors are interested in their own service contract and remuneration arrangements. Most directors would be well advised not to vote in meetings to discuss their own remuneration (even where they may be able to do so under the terms of the company’s constitution).
- To act in good faith to promote the success of the company
Directors must act in the way they consider, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to a range of factors such as the interests of the company’s employees and the impact of the company’s operations on the community and the environment.
An example may be when a company’s board has to decide whether to outsource the production process to an overseas factory. On the plus side it could improve the long term sustainability of the business and reduce damage to the local environment. On the minus side, it could reduce employment opportunities and have a negative impact on the local community.
- To avoid conflicts of interest
The 2006 Act creates a new, positive duty to avoid conflicts of interest unless authorised by the directors. For example, you are a director of Company A which has a supply contract With Company B. Every year there is a negotiation between companies A and B on the terms of the supply. Before the new duty, you could be a director of both Company A and Company B (albeit after disclosing their interest and “sitting out” on all deliberations).
Under the new duty, “sitting out” is not sufficient. It will not be possible to remain as a director of both companies without obtaining proper authorisation from the boards of both companies.
If you would like any help or advice on the new rules, please don’t hesitate to contact us.
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