Introduction to Company Act 2006 - Essay Example

Fiduciary duties of company directors with reference to relevant case law and the reforms that have been brought to such duties and their implementation through the Companies Act of 2006 Introduction Introduction Company Law is available to keep in line or even regulate business issues that are unclear or that exhibit contention. Shareholders are the owners of the company, and upon them is the duty to control how the directors run or manage the business. Shareholders are also advised to set the authority of the company directors both in small and large companies. Directors then are the people who owe their service to the company or organization for the benefit of the members. They form the principle organ of management for any organization and carryout the major roles of ensuring the company is up and running. The United Kingdom Company Law Act 2006, the brought in new regulation redefining the role of the directors. Directors then if not supervised well may overlook their responsibility, and that’s why courts all over define that they hold Fiduciary positions in the company. Directors are deemed as the major body to which the duties of managing general affairs of the company are delegated (John 2006) Introduction to Company Act 2006 Company Act enacted on November 2006, brought about revolutionary changes to the United Kingdom law, which had existed for more than 40 years. For years, the mandate of interpreting the law on companies was left to the courts. The main goal of introducing this law was to modernize the law and make it relevant to the modern businesses and the prevailing conditions of this century. The Act, among other things, tries to streamline and lay the legal requirements for the administration of private companies, which form the majority of the United Kingdom Companies. According to (Law Teacher 2013), the law also introduced new measures to improve the integrity of company information. It also gave the shareholder the powers to intervene in the governance of the companies (Sheikh, 2013). A case by Howard Smith Ltd v. Ampol Ltd, involving the duties of directors brought mixed reactions in courts while defining the extremes directors can use their power. In this case, the directors had issued large numbers of shares, which in turn deprived a specific shareholder the basic right of voting in matters concerning the company. Before the introduction of this crucial enactment, the law of the directors of the companies was a mixed up between common law and the statute law. Directors had for a long period taken to have a fiduciary relationship to their companies. Therefore, the new law brought a codified law that clearly describes the responsibilities of the company directors. The codified law then applies to all directors of a company and not a specific one. Statutory duties of directors according to Company Act 2006 Company directors are supposed to act according to the constitution of the company, they are the ones who defend the constitution of the organization and their duties are well laid by it. The interests of shareholders are to see the company grow in a positive direction. It is thus their obligation to ensure the company succeeds. According to the new law, company directors are entitled and expected to work with all diligence, skill and protect the interests of the company, while avoiding any activities that may elicit conflict of interests. Directors should not benefit from any third parties at the expense of the company. Moreover, they should not declare interest in any transaction or arrangements that directly involve the company. The considerations have been in some ways extended with the goal of making sure that in managing their companies, directors concentrate in a number of environmental elements that are considered to typify responsible corporate conduct in the 21st century (Sheikh, 2013). Even as this crucial reform to the constitution of the decision-making practice, the Act acknowledges the trends of the courts in current years by expecting superior standards of care and skills from company directors. Between them, the reforms made in these two areas build the foundation of how directors are expected to work and account for their decisions to their companies and the rest of the world. All along, the courts have explained the fiduciary duties of the company directors. Company directors All companies are expected to have at least one director because they cannot act on their own and, they need to operate through other people. A company’s directors refer to people whom the law looks to oversee the operations of an organization on behalf of its owners. This is pertinent to the case of small and medium private companies, which may have very few shareholders (Talbot, 2013). In such a state where there are only one or two shareholders, the law will see a procedural division between the interests of the shareholder as the owner of the organization and the roles of the director as the individual who makes decision on its behalf. When establishing whether a person has been a director of an organization, account has to be taken on if a person has been suitably allotted and registered as a director according to the approved procedures. Also, it has to be established if that person is or has been undertaking the actual legal roles of a director and engaging as a full member in the proceedings of making the sort of decisions which directors regularly make (Talbot, 2013). Furthermore, the intentionally wide explanation also enables the law on director’s roles to be applicable to individuals who by any reason fail to legally register themselves as directors of their organizations. Therefore, whether or not an individual is a director of an organization as far as the law is concerned, relies not so much on their title. It is based on the duties he or she undertakes in relation to the organization particularly to its decision-making proceedings. If someone has a title, which consists of director then this would show that the person concerned is actually a director of an organization. Fiduciary roles of company directors according to UK Company Act 2006 A fiduciary refers to someone who has taken on to act on behalf or for another in a particular way in situations which give rise to relations of confidence and trust. The distinguishing compulsion of a fiduciary is the obligation of faithfulness and loyalty. A fiduciary role of a director is a role which is derived from the rule that a director has to be loyal to his organization. Fiduciary roles apply to company directors not only concerning the decisions they take in the meeting room, but also every time a director is acting as a representative of the organization or in relation to the organization’s affairs or assets. Any violation of any fiduciary role will attract an impartial remedy. Impartial remedies are primarily restorative rather than compensatory (Campbell, 2007). In the case of Doe v. Evans, the Supreme Court distinguished the fiduciary relations as follows: a fiduciary link exists between two individuals when one of them has responsibility of acting for, or to offer advice for the gain of another upon issue within the capacity of those relations (Campbell, 2007). The courts have normally considered directors to be fiduciaries and expect them to maintain confidence and trust. Therefore, the director is subject to comparable obligations arising from the relations of confidence and trust as those that are obliged on professional advisers and trustees. Most significantly, they are expected to act in good faith in the unsurpassed interests of the company they represent, and not to misuse the confidence and trust placed on them. While the responsibility of director is normally comparable to that of a trustee, they are not similar because the trustee is supposed to observe a superior standard of discretion in safeguarding the interests of his beneficiary (Campbell, 2007). Maybe the most renowned description of the responsibility of loyalty is by Judge Benjamin Cardozo in Meinhard v. Salmon (Campbell, 2007). A company director has a role of care and skill evolving from the fundamental fiduciary function. In addition they must comply with the specific implications of the director’s position in the limited company milieu. In this milieu, shareholders delegate to directors the obligation to run a business, which is financed by the capital the shareholders have invested. Those shareholders, then, have a primary interest in the level of skill with which the directors oversee the business (Campbell, 2007). The role of care and skill evolved as a way of limiting those risks to a tolerable level. Conventionally, though, the standards of care and skill that have been expected of directors in the UK have not been too high. This is in big part because the courts and parliament have not wanted to dishearten entrepreneurial activity by limiting access to the company structure (Campbell, 2007). The courts have also acknowledged that, given the extensive range of backdrops from which directors can legally come, it is impractical to expect the manner of all directors to be reviewed by a single benchmark. In the case of West Indies Network-I, LLC v. Nortel Networks (CALA), Inc., West Indies sued Nortel for violation of fiduciary duty. West Indies argued that Nortel did not undertake a contract to attain equity financing for West Indies to build and operate a cable telecommunication network. It originally predicated the presence of a fiduciary relation on a claim of a partnership with Nortel that required Nortel to obtain financing for West Indies (Campbell, 2007). For this reason, the principles expected of company directors have, over time, been self-effacing and have focused hugely on considerations of if the director concerned has followed or maintained standards that may be projected by reference of their own experience and background. This condition has, however, been varying in the current years and the Act offers a further enhancement to the trend towards the projection of higher standards of care and skill (Campbell, 2007). Another responsibility of company directors is to promote the accomplishment of the company. This is the most basic prerequisite of the statement of general functions and is imperative to the performance of director’s role under the new legislation (Pearce & Barr, 2014). According to Companies Act 2006, directors have to act in a way that they deem, in good faith, would be most liable to promote the accomplishment of the company for the good of its members in general (Pearce & Barr, 2014). Furthermore, there is a responsibility to practice independent judgment. The responsibility of exercising independent judgment is not contravened if the director acts according to the agreement suitably entered into by the organization, which limits the potential exercise of prudence by the directors. Also, the role is not contravened if the directors act in a way that sanctioned by the company’s structure. These two stipulations allow company’s shareholders, if they see fit, to put forth some level of control over the director’s authority of discretion (Pearce & Barr, 2014). It is also the responsibility of company directors to steer clear of conflict of interest. Directors ought to avoid a state where they have or can have indirect or direct interests that clashes or probably may clash, with the interests of the organization. This provision devotedly incorporates the ancient common law principle that directors, have to respect the confidence and trust placed in them and ought not to do anything that would abuse or undermine that confidence and trust (Pearce & Barr, 2014). The practical impact of the principle is that where company directors find themselves in any state where their own individual interests conflict, or may cause conflict with the interests of their organization, they must put the interests of the organization first. Directors should strive to make sure that situations where they could be expected to make such decisions do not come up in the first place (Pearce & Barr, 2014). A good example of this director’s role is the case of Heinl-v-Jyske Bank(Gibraltor) Limited concerned a ex- bank manager of the bank who had managed to draw off nearly 7.1 million pounds from the bank for more than two years (Pearce & Barr, 2014). He did so largely by allegedly making loans on behalf of the bank to firms that were created by himself and his colleagues. The bank manager and one of his associates had shifted some of the bank’s money via Ireland and retained the complainant to help in the management and investment of the money. The complainant had been held by the judge to have acted fraudulently under the knowing support head of constructive trust. Conclusion One of the results of the company law reform was the codification of the guidelines of directors’ roles under the common law. This specific reform has been powerfully supported Law Commissions of Wales, England, and Scotland. They all deliberated that it would enhance the general perspective of the law in this field: setting out the predetermined law regarding directors’ roles in statute would simplify the law to be followed by non-specialist. This would, therefore, help reduce avoidable legal costs especially for small companies. The requirements on directors’ duties do not limit them to an easy re-statement of present common law guidelines. Not all the available rules have been codified, and in some noticeable respects, the statement adds utterly new aspects to the law on directors’ roles. It would be just to say, thereby, that the requirements of the Act in this field not only codify the most basic elements of the predetermined law on directors’ roles, but develop them further. There are two main roles of company directors and they include statutory and fiduciary roles. This paper has however concentrated on only fiduciary duties. Directors have normally billed a common law fiduciary role to organizations they manage. Sections between 171 and 177 of the Companies Act 2006 embarked to codify with superior precision what those roles were and what the impact of a director violating them might be. Essentially, the responsibility of good faith is the obligation to act in the best interest of the organization at all times. This means that the company director should not make profits or obtain a benefit at the expense of the organization. List of References Campbell, S. 2007. International Liability of Corporate Directors [2007] I.Lulu.com Paolini A. 2014. Research Handbook on Directors’ Duties. Northampton: Edward Elgar Publishing. Pearce R.& Barr. W. 2014. Pearce & Stevens Trusts and Equitable Obligations. London: Oxford University Press Sheikh S. 2013. A Guide to The Companies Act 2006. London: Routledge. Talbot L. 2013. Progressive Corporate Governance for the 21st Century. London: Routledge Read More