Companies Act 2006: What Directors Need To Know
Written by Simon Taylor
17th December 2023
The Companies Act 2006 is still a extensive piece of legislation that brought increased responsibilities for directors and is the main source of company law in the United Kingdom.
The Companies Act 2006 introduced comprehensive changes in company law ranging from directors' responsibilities, company formation to administration, and financial reporting for both private and public companies.
By clearly outlining directors' duties, streamlining company formation, empowering shareholders, and mandating comprehensive reporting, the Companies Act 2006 has been significant in modernising corporate governance practices. Company directors and shareholders should be well-informed about the legal framework to successfully navigate, below we take a closer look.
What's the impact of the Companies Act 2006?
Under the Act, company directors have several fiduciary duties to ensure they act in the best interests of the company which we discuss in further detail below. Failure to comply with these duties can lead to legal consequences, including personal liability for the directors.
Duty to Act within Powers
Directors must act in accordance with the company's constitution and only exercise their powers for the purposes for which they were conferred.
Duty to Promote the Success of the Company
Directors must act in a way they consider, in good faith, would be most likely to promote the success of the company as a whole. This includes considering factors like the long-term consequences of decisions, the interests of employees, fostering business relationships with suppliers and customers, the impact on the community and environment, maintaining a reputation for high standards of business conduct, and the need to act fairly between interested parties.
Duty to Exercise Independent Judgment
Directors must exercise independent judgment and not be unduly influenced by others.
Duty to Exercise Reasonable Care, Skill, and Diligence
Directors must exercise the care, skill, and diligence that would be exercised by a reasonably diligent person with the general knowledge, skill, and experience that may reasonably be expected of a person carrying out the functions of the director, and the general knowledge, skill, and experience that the director actually has.
Duty to Avoid Conflicts of Interest
Directors must avoid situations in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.
Duty Not to Accept Benefits from Third Parties
Directors must not accept any benefit from a third party conferred because of being a director or doing (or not doing) anything as a director.
Duty to Declare Interest in Proposed Transaction or Arrangement
If a company director is in any way, directly or indirectly, interested in a proposed transaction or arrangement with the company, they must declare the nature and extent of that interest to the other directors. These duties are designed to promote transparency, accountability, and good corporate governance, ensuring that directors act in the best interests of the company and its shareholders.
Understanding the Companies Act is crucial for directors
An understanding of the Act is fundamental for directors to ensure compliance. Legal liabilities for non-compliance, regulatory actions and fines, can potentially be insured under a directors and officers insurance policy.
Legal Compliance: The Companies Act 2006 is the cornerstone of company law in the UK. Directors must understand and comply with its provisions to ensure the legal operation of their companies. Non-compliance can lead to legal penalties, fines, or even disqualification from serving as a director.
Fulfillment of Directors' Duties: The Act codifies specific duties for directors, such as acting within their powers, promoting the success of the company, and avoiding conflicts of interest. Understanding these duties is essential for directors to perform their roles effectively and lawfully.
Risk Management: Knowledge of the Act helps directors in identifying and managing legal and operational risks. An effective risk management process can assist with identifying, evaluating and controlling potential threats to the business.
Corporate Governance: The Act provides a framework for good corporate governance. Understanding it is key to implementing effective internal controls that enhance the company's reputation and stakeholder trust.
Decision Making: Directors make crucial decisions that affect the company's strategy, operations, and financial health. Familiarity with the Act's provisions ensures that these decisions are made within the legal framework, reducing the risk of legal challenges.
Shareholder Relations: The Act strengthens the rights of shareholders and provides mechanisms for their involvement in company decisions. Directors need to understand these provisions to effectively engage with shareholders and address their concerns.
Transparency and Accountability: The Act emphasizes transparency and accountability in corporate affairs. Directors must understand the reporting and disclosure requirements to ensure the company adheres to these principles.
Adaptation to Changes: The Companies Act 2006 was designed to be adaptable to changes in the business environment. Directors who are well-versed in the Act can better adapt to evolving legal and business landscapes.
Ethical Practices: Understanding the legal framework fosters ethical business practices, as directors are more aware of their obligations to stakeholders, including employees, shareholders, and the community.
Why's the Companies Act 2006 important?
Directors are now more accountable to shareholders and must justify their decisions and management strategies. This includes exercising reasonable care, skill, and diligence in their roles.
The Companies Act 2006 requires directors to be more transparent in their dealings, with stringent disclosure requirements regarding personal interests and potential conflicts of interest. The Act provides for increased rights and protections for shareholders, including provisions for shareholder resolutions and meetings, and rights in relation to company management and decision-making.
The Act simplifies the process of forming a company and sets out the rules for company constitutions, including articles of association and memoranda of association.The Act sets out requirements for company record-keeping, filing, and reporting, including the preparation and filing of annual accounts and reports via Companies House.
It also modernises the rules for company communications, including the use of electronic communications. The Act includes regulations on the selection and use of company names, requirements for displaying company information, and rules regarding the location and change of the registered office. It covers the processes for re-registering a company from private to public (or vice versa), converting company types, and restoring dissolved companies to the register.
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About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.