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Free Essays - Business Essays

Companies Act 2006

This is a 2500 world essay which argues the new Companies Act 2006. It will first of all clarify the Companies Act 2006, demonstrate the main importance and the act goals regarding light touch of regulatory burden, the act promoting shareholder engagement and how the act will encourage a long term investment culture in UK.

The Companies Act 2006 is a piece of primary legislation that largely applies to companies directly. A number of provisions are currently being set out in secondary legislation, mainly through regulations or orders made by statutory instrument.

The Companies Act 2006 is the biggest reform act in UK company law for 150 years, and that bring enormous revised measures on vast range of issues regarding company directors, company communications with shareholders, financial and non-financial reporting. Despite of that the act maintains a primary duty on directors to act in the interests of shareholders. However to fulfilling this duty directors have regard to a number of other matters such as the need foster the company business relationships with suppliers, the interests of company employees, the consequences of any decision in the long term, customers and others and also the impact of the company operations on the community and the environment.

Therefore Companies Act 2006 contains 1300 sections and it is the largest act ever in UK and as a result of that the act intend to be clearer and easier to understand in relation to the previous act. Nevertheless the act 2006 replaces 1985, 1989 Companies Act and 2004 companies (Audit, Investigations and Community Enterprise) act. Nevertheless the government timetable for the final implementation date for the new act will be 1/10/2009, instead of 1 October 2008.

Bona fide was the language which courts used previously to describe the director obligation hence this obligation still in the act and for the benefit of whole members. Nevertheless changes have been made on the act such as the director duties the act prescribe not only What has changed is that the Act now prescribes not only the basics all-purpose symbolic instruction code duty of the director, but how the director must go about discharging that duty. The director must now have regard you the specific matters set out in section 172(1)(a)-(f). While competent directors have previously had regard you these matters, that process is now part of the directors statutory obligation. Therefore in practice that mean before the Act was passed, concern was expressed that setting out the list of matters you which directors were you have regard would lead you all decisions of directors duties as a result of that section 172 (1) include the long term consequence of the decisions as well as the interests of the employees; the relationships with suppliers, customers; and the impact of the decision on community and environment; the desirability of maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company and section 173 Duty to exercise independent judgment (1) A director of a company must exercise

independent judgment. (2) This duty is not infringed by his acting (a) in accordance with an agreement duly entered into by the company that restricts the future exercise of discretion by its directors, or (b) in a way authorised by the company’s constitution and this duty is now set out in the Act, and does not represent a significant change in the law. That mean a director must act in the interests of the company. It will usually be a breach of duty for a director to act in accordance with the instructions of some other person. For example if a company has two shareholders, each of which appoints a director. One shareholder instructs “its” director to vote against the company entering into a particular contract. The director, however, thinks that it would be in the best

interests of the company to do so. Therefore the director must in these circumstances ignore the instruction from the shareholder and vote in favour of the contract. The position may be different if all shareholders give an instruction to the director, but if the interests of creditors are involved the duty in section 173 would override this instruction.

Nevertheless that can be difficult to serve on a board as the nominee of some other person. A person who is appointed on that basis must accept that their obligation to the company cannot be discharged, and may be breached, by accepting instructions from the appointer. A director is allowed to look after the interests of their appointer, but only in so far as that is compatible with the interests of the company. Therefore section 172(3) makes it clear that the statutory duties are subject to certain obligations of directors to act in the interests of creditors; and for many companies, this is a regular issue. The Act does not, however, set out when such circumstances arise. Weighing up the risk to creditors of any course of action is a necessary part of any director’s duty. In a wholly solvent company this may be a matter easily dealt with, but for many companies the task of balancing risk to creditors against profit to shareholders is a constant function of the board. Where the company becomes, or may become insolvent, the risk to creditors becomes acute. At this point it is essential that directors take proper advise Directors must continue to act with reasonable skill and care. If they have special skills or knowledge then they will be expected to exercise them. Otherwise they will be measured against the standard of a reasonable person occupying their position. A private company appoints a qualified accountant as its marketing director and an unqualified person as its finance director. The marketing director will be expected to exercise the skill of a qualified accountant in all aspects of decision making. The finance director will be expected to exercise the skill of a reasonable finance director and will not be excused any lack of skill because they are, in fact, unqualified. Individuals should think carefully before accepting directorships. Do they have the necessary skills to perform the task? Even non-executive directors are expected to have a reasonable degree of knowledge and competence. All directors should give the company the full benefit of their actual experience and knowledge.

However there are other keys effect from the act for all companies, private companies and shareholders:

The new Companies Act 2006 brings 10 key changes and according to Mr. Darling said these changes will bring £250 million saving per year for business that including £100 million for small business. The 10 changes are: (http://www.bytestart.co.uk/content/19/19_1/companies-act-guide.shtml)

• Codification of directors duties, including a new duty to promote the success of the company.

• Giving all directors an option to file service addresses on the public record rather then private residential addresses.

• Promoting shareholders engagement and a long-term investment culture through enhancing the power of proxies and enfranchising indirect investors;

• Simplifying and de-regulating the legal requirements for running private companies through measures such as simplification of capital maintenance provisions, abolishing of the prohibition on financial assistance for private companies purchasing their own shares, etc.;

• Extending rights of shareholders to sue directors for negligence and other defaults and rights to bring derivative claims on behalf of the company in certain circumstances;

• Prescribing a new criminal offence of recklessly or knowingly including misleading, false or deceptive details in audit reports;

• Introducing measures to allow companies to limit the liability of their auditors;

• Simplifying the company formation process including abolishing the requirement for authorised share capital;

• Facilitating e-communications;

• Making it easier for company law to be updated in the future

Therefore the act changes will affect private companies, Directors and shareholders. Following this changes the government approach in reforming 1985, 1989 and 2004 Acts resulted in sweeping changes being brought into the running of the private companies in the Companies Act 2006. As a result of that the private companies don’t need anymore to appoint a secretary for the company unless they want to despite of that if the company appoint one the secretary should have the same rights and responsibilities as now. On the other hand companies must have at least one person as director and that director should be at least 16 years old and other benefit for private companies is those will no longer need to hold an annual general meeting however if that meeting take lace the requirement notice period will be 14 days and also written resolutions will be easier to use however public companies still required to have a annual general meeting which should be held seven months of expired company accounting reference period but will be reduce to six months in April 2008 on the other hand companies will get big help on the way they communicate with shareholders which will be sent and receive electronically meaning they will be able to communicate more often by email and website. Despite of that, individual members can still ask for hard copies and information such as number, company name, registered office and others information will be required to be displayed on business letters and other documents similarly on electronic documents and company website. Therefore with that way of communicate will help companies in cost saving. Regarding articles all companies formed under new act they have the opportunity to choose where they want to have a new model article and the same will affect for the existing companies which is good. Nevertheless the restriction of private companies not to give financial assistance to buy their own shares has been abolished from the act 2006 and for the accounts previously they have file their annual report within 10 months of the year end but that was reduced for nine and medium size group 11. However the preparation consolidated accounts exemption has now been removed. In the other hand private companies have a simple solvency procedure to reduce capital without court approval. The Companies Act 2006 will help company formation and administration become more simple.

Nevertheless the Companies Act 2006 for the first time has introduced a written statement of director’s duties and they are based on the existing on duties already existent. Following this we can see a duty to promote the success of a company for the benefit of its members, and in doing so to have regard to its employees, business relationships and its impact on the wider community and the environment.

Nevertheless talking about Enlightened Shareholder Value the Companies Act 2006 recognise that companies pay appropriate regard to wider matters such as the environment and their employees then directors will archieve long term sustainable success for the benefit of their shareholders. Therefore the act does not ask directors to keep additional records the only thing which the act ask for is the simply requires for their good faith business judgment. On the other hand directors of quoted companies will need to make an effort in making shareholders to understand more the development and performance or even the position of the company by ensuring that they report on contractual, community matters and social, employee and environment as section 417 says, a quoted company must include information in its business review to the extent necessary for an understanding of development, performance or position of the company business. Another important part o the act is the sections knowing as derivative claims which minority shareholders are able to bring actions on behalf of the company against directors if there has been a breach of duty following this the new act give a clearer and also more accessible procedure for bringing such claims while protecting directors against malicious or frivolous actions. Therefore for the first time the auditors will be permitted to enter into agreements with private and public companies to limit their liability to the company relate with statutory audit. However such an agreement will be subject to shareholder approval given in general meeting. Also consider the Listing Rule requirements for circulars to shareholders.

Therefore the act can achieve many things and can help ensure Britain to remains one of the best places in the world to set up and run business and make sure the regulatory burden on business is light touch and also promotes share-holders engagement and will help encourage a long-term investment culture in the UK” because the idea of the Companies Act 2006 is to simplify how companies are formed, managed and wound up. Therefore formation of company involves filing memorandum which now is an agreement to form a company made between the person forming the company and together with new modernized articles of association will suit small private companies on the other hand the intention of the new act is to encourage the formation of private companies by providing them a easy model article to understand and apply. Nevertheless companies in UK are more capable of exercising all they power of an incorporated company under new act because of the act abolished the “ultra vires rules” which could limit the objectives of the company as a result the directors of UK companies have the benefit of codification duties which centres on the directors’ duty to promote the success of the company. However, the directors may become conflicted because while they are obliged to consider the success of the company as their primary objective they must also have regard for the likely consequence of any decision in the long run the interest of employees of the company, the need to foster the company business relationship with suppliers customer and others and the impact of the company operations in the communities and on the environment, Inherent in the codification is the peril of competing responsibilities owed to a variety of persons, including, not least of all, the shareholders. It follows that directors will not be able to issue without shareholders consent however directors of private companies can do that unless the company has only one class of shares and also if the article provide that. The concept of authorised share capital is also being abolished so there will be no limit on new share issues as a result of that most private companies expect to retain full pre-emption rights so that shareholder approval will be needed for any new issue of shares unless they are first offered pro-rata to existing shareholders.  If no pre-emption provisions are included in a company articles, existing shareholders risk dilution, for example, from the issue of employees share options and share for share acquisitions.

Nevertheless the new act has the potential to improve the economy performance by reducing the potential for conflicts of interest to develop between directors and shareholders. Nevertheless as regards the changes made in the act to simplify formation and the internal management of private companies describe the ‘light touch regime and it is probably what UK needed at this time.

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