Companies Act 2006 spells major changes for business owners

A leading law firm is urging business owners to pay close attention to the final text of the Companies Act, which has just received Royal Assent and which constitutes the biggest shake-up of business law in over 20 years.

Mace & Jones Corporate Partner Ian Hodgkinson said the Act, which runs to 1,264 clauses, will change the way companies are set up and run and the relationship that directors have with their businesses.

"The Act introduces wide-ranging reforms in a number of areas which will have a significant impact on directors, auditors and shareholders of private, public and quoted companies,' he said. "Given the breadth and scope of the changes we would strongly advise business owners and directors to prepare for the changes as a matter of importance."

Mr Hodgkinson said the key proposals included:

A statutory statement of directors' general duties, which means there is now a statutory requirement for directors to have regard to a specified list of factors in exercising their duty of good faith;
Extended rights for shareholders to sue directors for negligence and other defaults;
The ability for auditors to agree with companies to limit their liability in respect of their audit;
A new criminal offence of recklessly or knowingly causing audit reports to include any matter which is misleading, false or deceptive;
A simpler, more accessible regime for running private companies;
Enhanced rights for indirect investors;
Greater use of e-communications; and
A power for the Government to require institutional investors to disclose how they exercise their vote.

Background to the new changes

The DTI commissioned a fundamental review of Britain's company law in 1998, leading to the Bill which overhauls case law governing how companies are created, run and wound down. It also brings in many new duties for directors.

It imposes on directors a duty to promote the success of the company they run for the benefit of the staff, environment, customers and local community together with investors. Directors that fail to pursue these provisions could become embroiled in shareholder actions. For the first time shareholders can pursue a "derivative action" on behalf of the company if they believe the board has failed in its duty.

Directors must also avoid conflicts of interest and refuse inducements or "benefits" offered by third parties, usually to win contracts. Company reports will have to be more detailed and cover factors likely to affect the company.

Major companies will have to open their dealings with suppliers up to public scrutiny under new controversial measures introduced in the Bill's return to parliament in October.

Margaret Hodge, the industry minister, said the government would toughen its new laws on the social responsibilities of businesses.

A DTI spokesman stressed that companies would not need to offer information that may jeopardise commercial confidentiality. But the measures are likely to anger businesses who complain they are already overburdened with red tape and believe the Companies Bill is simply creating extra work for them.


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