The UK’s company law landscape, prior to 2006, resembled a patchwork quilt. Layers of legislation, some reaching back to the 19th century, had created a tangled web for businesses to navigate, especially for fledgling startups.
Recognising the limitations of this outdated system, the government understood the need for change. In a rapidly globalising economy, the UK needed a modern and adaptable legal framework to stay competitive. The Companies Act 2006 emerged as the answer, culminating from extensive consultations and representing the most significant overhaul of company law in over a century and a half.
The Companies Act 2006 is the longest Act in UK parliamentary history, consolidating and reforming nearly all prior company law[1]LEGISLATION: “The Companies Act 2006”.
At its core, it aims to enhance corporate governance, improve transparency, and make the UK a more attractive place to do business.
The Act clarifies the duties of company directors, strengthens the rights of shareholders, and introduces measures to promote corporate social responsibility.
Notable Innovations of the Companies Act 2006:
Director Duties Defined: Clear and concise guidelines are laid out for directors, ensuring responsible decision-making.
Enhanced Shareholder Oversight: Shareholders receive greater power to monitor director activity.
Simplified Company Management: The Act makes starting and running a company less cumbersome.
One-Person Companies Permitted: The requirement for a minimum of two company members is removed.
Embrace of Electronic Communication: The Act recognizes email and other digital methods as legitimate for official company communications.
Broadened Director Considerations: Directors are encouraged to consider not just profits, but also the impact on employees, the environment, and the community.
Increased Transparency: The Act mandates greater openness regarding company information, particularly director compensation.
Key Features: Companies Act 2006
The Companies Act 2006 contained several sections that had a significant impact on UK businesses.
Directors’ Duties (Sections 170-177)
Prior to the Act, director responsibilities were often unclear. The 2006 Act addresses this by establishing seven clear, legally-binding duties:
To act within powers
To promote the success of the company
To exercise independent judgment
To exercise reasonable care, skill and diligence
To avoid conflicts of interest
Not to accept benefits from third parties
To declare interest in proposed transaction or arrangement
These duties provide a much-needed roadmap for directors and ensure greater transparency for shareholders. Particularly notable is the duty to promote the success of the company (Section 172), which requires directors to consider a wider range of stakeholder interests, including employees, suppliers, customers, the community, and the environment.
The Act states in Section 170(4) that these duties “shall be interpreted and applied in the same way as common law rules or equitable principles”, ensuring continuity with existing case law while providing statutory clarity.
Shareholder Rights (Sections 303-305)
The Act strengthens the position of shareholders, giving them more power to hold directors accountable. It improves provisions for calling general meetings and makes it easier for shareholders to propose resolutions.
Company Formation (Sections 7-16)
The Act significantly reduces the bureaucracy involved in starting a company. It allows for single-member companies and simplifies the memorandum and articles of association, making it easier for entrepreneurs to establish new businesses.
Electronic Communications (Sections 308-309)
Recognising the digital age, the Act permits companies to use electronic means for official communications. This includes allowing electronic voting and the use of websites for distributing company information, significantly reducing administrative burdens.
Corporate Social Responsibility (Section 172)
The Act introduces the concept of ‘enlightened shareholder value’, requiring directors to consider the impact of their decisions on employees, the community, and the environment. This marks a shift towards more socially responsible business practices.
Derivative Claims (Sections 260-264)
The Act introduces a clear statutory framework for derivative claims, allowing shareholders to bring legal action on behalf of the company against directors for breach of duty.
This provision strengthens corporate accountability by providing a more accessible mechanism for shareholders to address perceived wrongdoing by directors.
Enforcing the Rules: Penalties for Non-Compliance
The Companies Act 2006 set clear consequences for failing to comply with its regulations.
Fines and Criminal Liability
Many offences under the Act carry criminal penalties. For instance, Section 1112 states:
“A person guilty of an offence under this Act for which no specific penalty is provided is liable on summary conviction to a fine not exceeding level 5 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 5 on the standard scale.”
As of 2021, a level 5 fine can be unlimited in England and Wales.
Disqualification
The Company Directors Disqualification Act 1986, as amended by the Companies Act 2006, allows for the disqualification of directors. Section 6 of the 1986 Act provides:
“The court shall make a disqualification order against a person in any case where, on an application under this section, it is satisfied— (a) that he is or has been a director of a company which has at any time become insolvent (whether while he was a director or subsequently), and (b) that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company.”
Company Wind-Up
In severe cases, the court may order a company to be wound up. This power is derived from the Insolvency Act 1986, but the grounds for winding up can include breaches of the Act.
Civil Liability
The Act also provides for civil remedies. For example, Section 178 states:
“The consequences of breach (or threatened breach) of sections 171 to 177 are the same as would apply if the corresponding common law rule or equitable principle applied.”
This means shareholders can bring derivative actions against directors for breaches of duty, as codified in Sections 260-264.
Compliance Orders
The Act introduces compliance orders as a new enforcement tool. Section 1113 states:
“This section applies where a company has given a person a notice under section 793 (notice requiring information about interests in company’s shares) and— (a) the person fails to give the company the information required by the notice within the time specified in it…”
In such cases, the company can apply to the court for an order directing that the shares in question be subject to restrictions.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
