A guide to directors’ responsibilities under the Companies ...

[Pages:134]A guide to directors' responsibilities under the Companies Act 2006

A guide to directors' responsibilities under the Companies Act 2006

John Davies Head of Business Law, ACCA

Certified Accountants Educational Trust, July 2007

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About ACCA ACCA (the Association of Chartered Certified Accountants) is the largest and fastest-growing global professional accountancy body with 296,000 students and 115,000 members in 170 countries. We aim to offer first-choice qualifications to people of application, ability and ambition around the world who seek a rewarding career in accountancy, finance and management. We deliver our qualifications in partnership with many organisations. We operate 18 joint examination schemes with national bodies around the world and work closely with 470 registered tuition providers and nearly 8,500 employers of accountants and finance professionals. We aim to support our students and members throughout their careers, delivering services through a network of nearly 80 offices and centres. We use our expertise and experience to work with governments, donor agencies and professional bodies to develop the accounting profession. We aim to achieve and promote the highest professional, ethical and governance standards and advance the public interest. ACCA's reputation is grounded in over 100 years of providing accounting and financial qualifications. Our long traditions are complemented by modern thinking, backed by a young, dynamic membership.

No responsibility for loss occasioned to any person acting or refraining from acting as a result of any material in this publication can be accepted by ACCA. ? The Association of Chartered Certified Accountants, 2007

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Contents

Abbreviations used in the text

6

1. Introduction

7

2. What is a `director'?

10

3. Eligibility to act as a director

16

4. Appointment and vacation of office

18

5. Powers of directors

25

6. Directors' `general duties' under the Companies Act 2006

28

7. Directors' responsibilities concerning accounting and reporting

47

8. Directors' other statutory responsibilities

61

9. Directors' transactions with their company

71

10. Consequences of breaches of directors' responsibilities

82

11. Ratification of breaches and relief from liability

100

12. Special cases

102

Appendix 1

107

Appendix 2

130

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Abbreviations used in the text

`CA 2006' or `the Act' Companies Act 2006

`CDDA 86'

Company Directors Disqualification Act 1986

CLR

Company Law Review Steering Group

`IA 86'

Insolvency Act 1986

`the Code'

the Combined Code on Corporate Governance

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1. Introduction

1.1

The enactment of the Companies Act 2006 in November of that year was the culmination of a nine-year

project which amounted to the biggest official review of UK company law for over 40 years. The project

comprised a three-year in-depth investigation by a Government-appointed expert group ? the Company Law

Review Steering Group (CLR) ? detailed research on specific issues by the Law Commissions of England

and Wales and Scotland, and extensive public consultations on a wide range of technical matters by the

Government itself. The new Act which has emerged from this exercise consolidates the great bulk of the

pre-existing companies legislation, in the process creating the biggest single statute in UK legal history: the

Act contains 1,300 sections and 16 schedules, with much more material to be issued separately in the

form of regulations to be made under the Act.

1.2

The aim behind the reform process was not, however, just to consolidate the fragmented state of UK

companies legislation but to modernise it where appropriate and thus make it more relevant to the business

conditions of the 21st century. In keeping with this aim, the Act makes changes in the following areas

(among others):

? It streamlines the legal rules for the administration of private companies so as to recognise the fact that, in most such companies, ownership and management is in the hands of the same individuals. Private companies, which form the vast majority of the companies on the register at Companies House, will no longer need to appoint a company secretary, hold an Annual General Meeting or lay accounts before their members in general meeting. The Act also makes it easier for such companies to pass resolutions in writing.

? It brings company law up to date by giving new recognition to electronic forms of communication for the purposes of conveying statutory information. Public companies are required to have web sites and to post specified corporate information on them.

? New measures are introduced to try to improve the accuracy and integrity of company information on the public record at Companies House. The Act also gives the Registrar of Companies the power to insist that any statutory document, including companies' annual accounts, be filed electronically.

? Company auditors will be able to negotiate liability limitation agreements with their clients.

? Shareholders have new powers to intervene in the governance of their companies.

A significant constitutional reform made by the Act is that the separate company law status of Northern Ireland is ended, meaning that the new Act and all the regulations to be made under it will apply for the first time to the whole of the UK.

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Introduction (continued)

1.3

Two fundamental issues were considered during the review process in the context of the need to modernise

UK company law. First, should the law expect from limited companies any wider social responsibilities or

should they simply be left alone to make profits? Secondly, should any new legislation be more specific

about what the responsibilities of company directors should be? The outcome of the lengthy consideration

of these two related issues is that not only have the legal responsibilities of directors been for the first time

`codified' ? in other words set out in statute, rather than left to be addressed by common law principles ?

but they have been in some respects expanded with the aim of ensuring that, in running their companies,

directors take into account a range of wider `environmental' factors that are considered to characterise

responsible corporate behaviour in the 21st century. As well as this important reform to the structure

of the decision-making process, the Act recognises the trend of the courts in recent years by expecting

higher standards of skill and care from company directors. Between them the changes made in these two

areas now form the basis for how directors are expected to operate and account for their actions to their

companies and the outside world.

1.4

The greatest potential impact of these new statutory responsibilities for directors will be felt in large and

listed companies which have complex business activities and large numbers of shareholders and other

stakeholders. In fact, however, the changes apply to all companies, large and small, so it is essential that

all directors familiarise themselves with what is expected of them under the Act.

1.5

The new Act is carefully worded to make clear that, as has always been the case, directors owe their legal

responsibilities to the company alone, and not to outside parties (except in certain exceptional cases).

Thus, there is no question that in carrying out their functions directors will be accountable routinely

to individual shareholders or to third parties. But the rules on directors' accountability to their own

members are reinforced ? shareholders are given new legal rights to initiate company proceedings against

directors for breach of their responsibilities. Thus, the revised rules on directors' duties are backed up by

strengthened provisions for the enforcement of those duties.

1.6

The Act makes a number of other, technical reforms to the rules on eligibility to act as a company director

and to the information that individual directors must provide to their company and place on the public

record. In addition, directors need to be aware of the changes which are made to the legal rules on the

administration of company affairs, since they will be responsible for ensuring compliance with these rules.

1.7

This guide looks at what the Companies Act 2006 means for company directors, with special emphasis on

the reforms to the rules on directors' duties. It is not a comprehensive guide to the Act but to those aspects

of the Act which impact squarely on directors. Much of the content may be familiar in that it refers to legal

requirements which have been carried over from the Companies Act 1985 and other legislation (though the

statutory references have changed), but the new measures introduced by the Act are looked at separately.

Where appropriate, relevant company law principles laid down by the courts are referred to in the text.

The guide also contains a comprehensive table, at Appendix 1, of the statutory duties for breach of which

directors may be criminally liable under the Act, together with a summary of relevant offences under other

legislation.

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