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Commercial Question

Getting in on the act

updated on 13 October 2009

Question

Will the final implementation of the Companies Act 2006 mean the law is now clearer and more accessible?

Answer

The Companies Act 2006 received royal assent on 8 November 2006, after nearly nine years in the making. With a total of 1,300 sections, 16 schedules and more than 700 pages (and a further 59 pages just for the table of contents), it is the longest single piece of legislation ever to pass through Parliament.

The act is approximately one-third new law, one-third amendments to old law and one-third pure restatement. Implementation was staggered, with the first set of provisions becoming effective in November 2006 and the final raft of provisions coming into force on 1 October 2009. This staggered execution was necessary given the size of the legislation, as implementation on the same day would have been impossible. However, the staggered process has in itself caused confusion - even among lawyers, who need to know which provisions of which act are in force when advising clients. With so many new provisions and changes constantly coming into effect, it has been crucial to ensure that the correct advice is being given.

Time for change

One of the main policy drivers for company law reform was to clarify this area and make it more accessible: modernising and streamlining the regulatory regime for private companies. The reform recognises the fact that the overwhelming majority of companies in the United Kingdom are small private companies limited by shares. Consequently, private companies' decision-making procedures have become more flexible; a company secretary is no longer required; court approval is no longer needed in order to reduce company share capital; and the prohibition on financially assisting the purchase of company shares has been abolished.

Dutiful directors

Undoubtedly, the most debated area has been the significant change in the expression of directors' duties. The act incorporates for the first time a statutory statement of directors' duties, including the duty:

  • to act within powers;
  • to promote the success of the company;
  • to exercise independent judgement;
  • to exercise reasonable care, skill and diligence;
  • to avoid conflicts of interest;
  • not to accept benefits from third parties; and
  • to declare interest in a proposed transaction or arrangement.

Replacing their common law and equitable predecessors, the statutory duties came into force in two stages in October 2007 and October 2008. But the old common law and equitable rules still retain their significance: the act specifically states that the general duties should be interpreted and applied in the same way as common law rules or equitable principles. Accordingly, it will be necessary to consider pre-act case law in order to interpret the duties.

An end to confusion?

After relying on the previous legislation for almost a quarter of a century, the staggered implementation of a mammoth new piece of legislation was never going to be easy for companies and their lawyers to get to grips with. While the old, heavily thumbed editions of the Companies Act 1985 can now be pushed to the back of the shelf, making way for the shiny new 2006 version, this doesn't mean that this area of law has automatically become clear. Understanding the nuances of how the act works will take time and we can certainly expect to see some head scratching over the next few years.

Jane Bell is a trainee solicitor in the banking and finance department at Trowers & Hamlins LLP.