What is the Companies Act 2006?

What Does the Companies Act 2006 do?

The Companies Act 2006 ^[1]LEGISLATION: “The Companies Act 2006” is a piece of legislation, that replaced the Companies Act 1985. It has helped update and simplify company law and one of its most important features was to set out directors’ duties.

The law was enacted on 8 November 2006, and it came into force in stages until 1 October 2009, it covers almost every aspect of how a company should be run, managed, and financed.  It is an exceptionally long piece of legislation, consisting of some 1,300 sections over 760 pages. 

Codification of Company Law

The Companies Act 2006 consolidated and updated the existing company law in the UK, replacing the previous Companies Act 1985 and related legislation. It provides a comprehensive and modern legal framework for the formation, operation, and dissolution of companies.

Formation and Operation of Companies

The Act sets out the rules and procedures for the formation, registration, and operation of different types of companies, including public and private companies. It covers aspects such as the incorporation process, company constitutions, share capital, and the roles and responsibilities of company officers.

Directors’ Duties

The Act outlines the general duties of directors, which are designed to promote good corporate governance and accountability. These duties include the duty to promote the success of the company, exercise independent judgment, exercise reasonable care, skill, and diligence, avoid conflicts of interest, and not accept benefits from third parties.

Shareholders’ Rights

The Act defines shareholders’ rights and responsibilities, such as voting rights, the right to receive information, and the ability to bring derivative claims against directors. It aims to strike a balance between protecting shareholder interests and allowing companies to operate effectively.

Corporate Governance

The Act includes provisions related to corporate governance, such as the requirement for quoted companies to produce a directors’ remuneration report and hold an annual general meeting. These measures are intended to promote transparency and accountability in company management.

Accounts and Reporting

The Act sets out the requirements for companies to maintain accurate accounting records and prepare annual accounts, as well as the rules for auditing and reporting. These provisions are designed to ensure that companies provide reliable financial information to stakeholders.

Insolvency and Restructuring

The Act covers aspects of corporate insolvency, including the appointment of administrators, liquidators, and the rules for voluntary arrangements and company reorganisations. It provides a framework for dealing with companies in financial distress and aims to strike a balance between the interests of creditors and other stakeholders.

Company Investigations and Enforcement

The Act provides powers for the government to investigate companies and their affairs, as well as mechanisms for enforcing the provisions of the Act through civil and criminal penalties. These measures are intended to ensure compliance with company law and maintain public confidence in the corporate sector.

Companies Act 2006 Places an Emphasis on Directors’ Duties

The Companies Act 2006 clarified the duties of company directors for the first time. This included the responsibilities directors have towards their shareholders, employees, and the environment.

It sets out the statutory duties of a director and broadly states that a director must act within powers as set out in the company’s constitution (Articles of Association), exercise independent judgment, reasonable care, skill, and diligence, and avoid conflicts of interest. They should also not accept benefits from third parties and declare interests in transactions or arrangements with the company. The Act contains six factors that directors should  consider when making company decisions: 

• The likely long-term consequences of their decisions
• The interests of the company’s employees
• The need to foster the company’s business relationships with suppliers, customers and others
• The impact of the company’s operations on the community and the environment
• The desirability of maintaining a reputation for high standards of business conduct
• The need to act fairly between members of the company. 

There is also guidance on how directors should behave, as follows:

• Always act in the company’s best interests, taking everything that is relevant into account
• Ensure the company’s constitution is followed and decisions taken under it
• Act with honesty and always be aware that the company’s property belongs to it and not to directors or shareholders
• Be diligent, careful and well-informed about the company’s affairs
• Make sure the company keeps full records of decisions
• Directors remain responsible for the work they give to others
• Avoid situations where a director’s interests conflict with those of the company and if in doubt, disclose potential conflicts quickly
• Seek external expert advice where necessary, particularly if the company is in financial difficulty. 

Personally Liability and the Companies Act 2006

If a director fails to meet their responsibilities under the Act, they may be personally liable, typically if there is a loss to creditors where ‘misfeasance’ has occurred. In the event of the company being liquidated, then there will be an investigation to see if this occurred.

Misfeasance is the act of engaging in an action or duty, but failing to do this correctly – although is not illegal, it is seen as having the intention of doing harm. A limited company offers directors protection, however, they still have a duty of care to the business, the public, and creditors – if they breach this, then they may lose that protection and so face personal liability.

There is also a brief reference to fraudulent trading, with a change to the maximum term of imprisonment from six to 12 months on summary conviction and from seven to 10 years for conviction of indictment.

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

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1. LEGISLATION: “The Companies Act 2006”