Overview Of The Companies Act 2006 Key Provisions

Author:Ms Bridgid Breslin
Profession:McDermott Will & Emery
 
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Provisions coming into force on 1 October 2007 will have an immediate impact on businesses' day-to-day operations.

On 1 October 2007 some of the key provisions of the UK Companies Act 2006 (the Act) will come into force, including those relating to part of the new statutory statement of directors' general duties, derivative claims, the business review, shareholder resolutions and meetings. This will have an immediate impact on businesses and how they are run on a day-to-day level. Below we have highlighted in brief some of the main provisions concerned.

Directors

Directors' Duties

Sections 171 to 177 of the Act codify seven general duties of a director: (1) to act within his or her powers; (2) to promote the success of the company; (3) to exercise independent judgment; (4) to exercise reasonable care, skill and diligence; (5) to avoid conflicts; (6) not to accept benefits from third parties; and (7) to declare interests in proposed transactions.

Only codified duties 1 to 4 will come into force on 1 October 2007. The new provisions regarding duties 5 to 7 will not take effect until 1 October 2008. In the interim, the existing common law will continue to govern in respect of the duties to avoid conflicts and not to accept third party benefits (and will of course continue to aid in the interpretation of the other duties going forward). Section 317 of the Companies Act 1985 will continue to apply in the meantime to the declaration of interests in proposed transactions.

The new codified duty to promote the success of the company has led commentators to question how success is to be measured, and whether it is predominantly a financial test or is effectively another way of describing the requirement to act in the best interests of the company. The explanatory notes to the Act indicate that it is envisaged that the purposes of the relevant company will have a bearing on the construction of this duty.

It should be noted that the list of codified duties is not comprehensive. Other duties, such as the duty to act in the best interests of creditors in times of threatened insolvency, remain uncodified.

Board Procedure when Deliberating on the Promotion of the Success of the Company

Section 172 of the Act sets out a list of matters to which the directors must have regard when assessing whether a proposed action would be most likely to promote the success of the company for the benefit of its members as a whole. These matters are as follows:

The likely consequences of any decision in the long term

The interests of the company's employees

The need to foster the company's business relationships with suppliers

The impact of the company's operations on the community and the environment

The desirability of the company maintaining a reputation for high standards of business conduct

The need to act fairly as between the members of the company.

It will not be necessary to record the board's deliberations on each of those issues, but it would be prudent to record the board's conclusions in respect of any of those matters having particular...

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