Heard the one about the law with 1,300 sections and 16 schedules containing rules that come into force on 1 October? Well, it’s no joke and if you haven’t done so you should be looking at the Companies Act – unless you want a punchline with the words ‘fine’ and ‘disqualification’The whole of the Companies Act is not yet law. As the Act is so large (the largest in history, in fact) and brings in so many changes, it is coming into force in stages. Some of it was applied from January and April 2007, while other parts are becoming law from 1 October 2007, 6 April 2008 and 1 October 2008.

Changes already in force include: documents can be filed electronically with the Registrar of Companies; the information on your company notepaper (company name and number, registered office, place the company was registered) must appear on all electronic communications and websites; companies can communicate with shareholders by electronic means or via a website (if its articles of association allow); and there is no longer a requirement to keep a register of director’s interests in your company books.

New considerations
As of 1 October, the big changes will be new rules on directors’ duties and shareholder meetings, resolutions and rights. Companies will also  need to include a ‘business review’ in their accounts (unless they claim the small companies exemption). These changes are important.

The Act puts into statute seven duties directors owe to their companies: they must act within powers; promote company success; exercise independent judgement; exercise reasonable care, skill and diligence; avoid conflicts of interest; refuse related benefits from third parties; and declare an interest in proposed transactions or arrangements.

Although the last three duties apply under common law already, they will not come into force under the Act until 1 October 2008. The other duties will apply from 1 October 2007. These duties have existed in law in a similar form but now they are written down in a statute. They are a code of conduct which set out how directors are expected to behave.

In terms of day-to-day working, directors must consider the duties when making decisions about how the company is run.

When considering the duty to promote the success of the company, the Act says you should have regard for the likely consequences of any decision in the long term, the interests of the company’s employees and the need to foster the company’s business relationships with suppliers, customers and others. It also states that the impact of the company’s operations on the community and the environment, the desirability of the company maintaining a reputation for high standards of business conduct and the need to act fairly between members of the company should be considered.

But what happens if you do not act in accordance to the duties? Well, the Act says we must rely on rules already established in law. Punishments, then, could include the director paying damages or compensation to the company, or the director having to pay the company for any profit made by him as a result of a breach of one of the duties. You could even be removed from your position as director.

Although there is nothing in the Act that requires companies to have a paper trail for decisions made, be aware of the duties and record where one of them has been considered in particular circumstances.

If the decision that you as directors are making is an important one for the company, it will probably be supported by paperwork. In that case, the paperwork should record that each of the relevant duties has been properly considered.

I’ve covered only some of the key points here but I hope you realise that the UK’s largest piece of legislation is not something to be ignored. Take advice and have a look at www.companieshouse.gov.uk or www.berr.gov.uk/bbf/co-
act-2006 for more information.