Is the UK better for business? - 1 March 2007

The Government promised a radical overhaul of company legislation to improve the UK’s position as one of the most attractive places globally to set up and run a business. The Companies Act 2006, which recently received Royal Assent and will come into force, in full, by October 2008, is the end result. But does it achieve what it set out to?

Constitution
The primary aim is “think small first”, i.e. to minimise the regulatory burden for SMEs, wherever possible. They now have a separate accounting code and reporting requirements. Private companies also have simpler Articles of Association, no longer need a company secretary, nor hold an AGM and can take decisions via written resolutions.

Directors and shareholders
The new Act makes directors’ general duties more accessible and consistent, bringing them into line with modern business practice. Directors will be required to act with reasonable care, skill and diligence to promote the company’s success, to exercise independent judgment and not to accept benefits from third parties. They will also, whilst acting in shareholders’ interests, need to consider the interest of the company’s employees, customers, suppliers and the environment.

The intention is that directors consider the company’s long term prospects. To date, actions against directors have largely centred on short term decisions (e.g. deals) affecting the company. The new Act could well lead to wider-reaching claims against directors.

Shareholders will also have enhanced powers to bring claims against current directors, plus shadow and former directors, for negligence and breach of their duties, without the need (as now) to prove bad faith or financial gain.

Liabilities
Whilst aiming to simplify the law, in many respects, the Act contains enhanced obligations. For example, directors must now sign a “responsibility statement” on annual and 6 monthly financial reports, stating that they give a true and fair view of the company. This will result in greater transparency and will provide increased potential for third parties, such as disappointed investors or unsatisfied creditors, to bring claims against the company for misinformation.

The regime for narrative and financial reporting amounts to an exclusion of liability to shareholders, for honest and diligent directors, provided certain criteria are established. Principally they relate to the directors’ knowledge of the contents of the Business Review and a limitation on liability to investors, to circumstances where the director in question (or other relevant person) knew or was reckless about error or omissions in the report.

For non-quoted companies, the common law principles of directors’ liabilities still apply, i.e. they will be liable to the company and investors, if they have been negligent.

Auditor transparency is increased but, for the first time and somewhat controversially, they will be allowed to limit their exposure via Liability Limitation Agreements (LLAs) to what is “fair and reasonable” – a clause that will no doubt be tested widely in the courts in future!

Conclusion
Some of the less controversial sections of the Act have already come into effect or will do so by April. The Government is now consulting on the more radical elements and we are likely to see further modifications between now and 2008. But, whatever happens, it is clear that the new legislation will continue to ensure that the UK is a favoured location for incorporation in the global market place.