Ruth Mitchell

Company Law Reform - Directors Take Note

With Watson Burton LLP Law FirmThe Company Law Reform Bill promises to be the biggest shake-up of company law since the Companies Act 1985 – company directors need to be aware of it. The Bill, currently in its committee stage at the House of Lords, is large. Currently, it is no less than 885 clauses and 780 pages.

One of the most controversial sections in the Bill relates to directors’ duties. At present, the duty owed by directors is to act bona fide in the interests of the company as a whole. However, clause 156 of the Bill proposes to extend this duty by stating that in promoting the success of the company for the benefit of its members as a whole, the director “must (so far as reasonably practicable) have regard to –(a) the likely consequences of any decision in the long term;(b) the interests of the company’s employees;(c) the need to foster the company’s business relationship with suppliers, customers and others;(d) the impact of the company’s operations on the community and environment;(e) the desirability of the company maintaining a reputation for high standards of business conduct; and(f) the need to act fairly as between members of the company.“This could take directors’ duties into new and controversial territory.

There has been much political debate over clause 156, with the Conservatives claiming that it will discourage people from becoming a director as it is too onerous. A number of other MPs, however, are urging the Government to tighten clause 156 even further. They are concerned that the clause gives too much room for directors to shirk their responsibilities. The words “so far as reasonably practicable” suggest that directors, after careful consideration of the factors in section 156, may legitimately decide that those factors are outweighed by more important factors.Other reforms proposed in the Bill include provisions that will make it easier for shareholders to sue directors by permitting claims on behalf of the company to be made against a director for negligence, default, breach of duty or breach of trust. The Bill also places new obligations on directors to avoid conflicts of interest.

The reforms are expected to be fiercely debated and amended before coming into force in 2007. In any event, it is clear that significant changes are afoot.

If you have any queries relating to this article, please contact David Hankin at Watson Burton LLP (david.hankin@watsonburton.com or 0191 244 4316).

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