Inherent Changes Brought about in the UK Company Law - Coursework Example

THE CODIFICATION OF DIRECTOR’S DUTIES Introduction One of the major responsibilities for the directors of a corporate entity are associated with the powers bestowed upon them that allow them to make some of the most critical and path breaking business decisions that affect the performance, operation and outlook of the organization. Such decisions are made by directors on the behalf of the company and as such it is true to believe that such responsibilities and powers are provided to them in an effort to ensure that the interests of the company are looked after, protected against any vulnerabilities and disturbances and advanced to higher levels with a view to taking the business to greater heights. Under the provisions of current rules under company law, the duties of a director range from acting with the intention to upkeep the good faith in the company to maintaining the interests of the company as required to help it stay competitive and healthy. Directors are further have the responsibility to not profit independently by way of their offices and responsibilities and are supposed to give due credence to skill and expertise. All provisions in this regard can be found under the common law rules as also the equitable principles in addition to legislations such as the Companies Act 1985, which has been subsequently amended by the Companies Act 1989 (Ewan MacIntyre, 2008). However, beginning the early 2000s, the UK government was beginning to believe that the provisions under the existing company act, though established over a long period of time and having been accepted as a standard legislation in corporate practice, lacked a sense of certainty and not accessible in times when needed. On several occasions, directors have been forced to seek advice and consult experts in this area in order to verify that they had not breached any provision or duty as outlined by this law. The government has therefore been convinced that the codification of directors’ duties was a new approach that would help make all areas of law dealing with the corporate environment more unified, consistent and most importantly accessible. The new provisions were meant to provide more clarity and certainty in comparison to previous laws. The Companies Act 2006, which was formalized on 8th November, 2006 helps codify the duties of the directors of a company that takes into account the long running fiduciary responsibilities in addition to the duty to care and perceive skill. Geoffrey Morse (2007) observes that the result has been the standardization of related measures as seven clearly defined duties. The Companies Act 2006 helps put practices that have been continuing for more than 200 years to rest and help establish a regimen that required directors to look beyond wealth maximization of shareholders and include many more important objectives from an organizational perspective. It has been perceived that the codification of directors’ duties will help bring in an additional £30 to £100 million on an annual basis as it is believed that directors will no longer feel the need to consult external sources on related areas. The current paper is an attempt to highlighting the seven general duties that constitute the new codification rules and aim to highlight the inherent changes that have been brought about in UK company law. By doing so, the discussion will aim to establish clear parallels between challenges faced by directors of a firm and contrast them with the provisions of the new legislation against the facilities offered by earlier rules under company law. Provisions under the new codification The first and the foremost provision under the duties defined by the codification of directors’ duties established the need to directors to act within their powers and exercise decisions under the terms that grant permissions to do so for a specific purpose. The powers of a director are supposed to be derived solely from the constitution of the firm such as its articles of association or the memorandum. This provision clearly highlights the fact that a director is restricted to the extent to which they may operate and decisions made by them can be re-assessed and necessary actions initiated to correct improper decisions. Under section 172 of the Companies Act 2006, the prime duty of the director is to act in good faith in the best interests of the company. this provision imposes the duty to promote a firm’s success such that when exercising this duty while initiating decisions, a director is required to possess information of a wide range of factors and parameters associated with an organization which have been clearly defined under the section. Such a provision necessitates decision making to be based predominantly on the long-term consequences in addition to an overview of the benfit extended to the employees by way of the decision. The power to make a decision is also required to be based on the resulting relationships with customers and suppliers and the impact and outcome of the decision on the market, economy and the environment. As such, the primary objective of the second provision is to enable and motivate the decision makers of a firm to consider all major aspects affected by the decision to be considered appropriately and in an exhaustive manner (Alistair Alcock, 2007). As such, this provision emphasizes the prominent role played by corporations in the area of corporate social responsibility. In fact, the act outlines that success for a commercial establishment is based on an increase in its overall value in the long term. As such, it is interesting to examine the way in which directors would be able to balance their conflicting interests with the larger issues of the firm, which has been discussed in the following section. in all these cases, the director is required to maintain the same intensity, attention, care and diligence in decision making and use them in a proper combination to arrive at the best possible solution available at hand. The Companies Act 2006 has also recognized the importance of an impartial and independent judgment on the part of the director, which is essential to help a company be governed by the most suitable decisions. As such, in addition to making a decision, a director is supposed to exercise this decision in an independent fashion. This provision also stresses the need to differentiate between active and ‘sleeping’ directors, where the latter group does not have any influence on the decision making process. As such, in the event of independent judgment, a sleeping director would have no role to play. Additionally, directors are required to enter into an agreement that prevents any infringement of duties as a result of this measure (Alan Steinfeld, 2007). In line with the preceding argument, the directors of a firm also have the responsibility to ensure that their duties are carried out with the appropriate diligence and a sense of dedication and appreciation. Section 174 of the Companies Act 2006 codifies the rule of duty that adheres to the consideration of care and skill and determines the extent to which these qualities are required for a director. The amount of experience, knowledge and skill that a director possesses is important against the backdrop of a company\s expectations and must be in tune with the roles and duties that are performed by an individual as a director (Ewan MacIntyre, 2008). This is also in tandem with the dual test imposed under the 1986 insolvency test that works in the context of dubious trading by a director. These estimations are subjective in nature that requires a director to perform requisite duties with the required knowledge and skill and possess a minimum threshold that is required to deliver on a specific set of duties. It is also required for directors to address and resolve conflicts of interest that may arise in the eventuality of colliding interests and aspirations among directors. Earlier provisions under the Companies Act 1985 were found to be quite cumbersome and the newer approach aims to simplify and amend provisions that make it more accessible in the eventuality of a conflict thereby assisting businesses in a better manner. It is also to be noted that a transaction involving a director and an external party is also given due consideration and dealt through a separate set of rules that require every such interaction to be reported and documented appropriately. The act also makes it simpler for directors to enter into deals with external parties even in the event of a conflict of interest that may arise among directors. Earlier legislations required that such a move be approved by shareholder vote. Changes to the act since October 2008 have ensured a faster and prompt decision making by directors with a non conflicting interest in addition to certain other requirements that are specified under section 175 of the Companies Act 2006. It is however feared that such a rule might impact a director who presides over the boards of several companies and discourage them from holding any position with active voting rights. However, this is still widely considered to be a safer provision as it allows authorization only by non-conflicting directors thus ensuring the decision in the best interests of the firm (Verlag Goyang, 2008). It is also the primary responsibility of the director to restrain from accepting any kind of benefit from a third party that involved both monetary and non-monetary transactions. However, a director is exempt from this regulation as long as it is believed that any such contribution would not result in a dilution on the non-conflicting interest on the part of the director. The last major guideline under the Companies Act 2006 states requires that the director declare their interests prior to assuming the role of directorship in the company thereby reducing the incidence of conflicts within the board thus paving the way for early resolution and arrival at a common understanding. Earlier rules in this regard required that disclosures be made only between the director and the company. in order to avoid any kind of misunderstanding within the members, the codification of directors’ duties outlines that any such declaration must be conveyed to each member of the board. Resolving conflicts In several occasions, boardroom meetings are bound to result in conflicts whenever a situation arises where the director of a company begin to act as a corporate trustee. Additionally, conflicts also arise over issues where directors receive certain benefits such as compensation, stock and pension benefits, which are always in contention for debate and evaluation. Despite all these possibilities where there is a predictable amount of friction and conflict of interests among directors, the onus rests with the directors to try their best to avoid conflicts of any kind. Beginning the first day of October, 2008, the director of a company is obliged by the statutory duty to avoid any conflict of interest be it potential or actual in nature. The obligation under this regulation covers all possible areas that are under the influence and control of a director and restricts company directors from exploiting any situation in their control be it concerning assets, property, corporate structure, information or any future strategies and alternatives that are currently within the control, implemented or being planned in the interest of the company. the director has to refrain from gaining any advantage in all these aspects despite the fact that the company may stand to gain advantage from it. Additionally, the new statutory requirement under the Companies Act of 2006 differentiates between conflicts and is not applicable to issues arising with any transactions and arrangements with the company. In case of any issue under consideration, pending the matter being subject to approval by the board, a conflict of interest with any board member does not have any influence on the decision and a director is expected to fulfill their responsibilities. The new legislation, according to Alexander Loos, Miguel de Avillez Pereira (200&), allows directors to resolve conflicts and approve related decisions provided such a decision finds consent amongst a majority of the members and supplements the powers of members to be able to sanction conflicts. Companies are allowed to determine if its appropriate for directors to have the required powers to approve conflicts and in case the company has existed prior to 1st October, 2008, the members are allowed the provision to pass a normal resolution that enables the board to approve any related conflicts. However, companies that undertake this procedure need to ensure that their decision does in no way conflict the constitution of the firm thereby preventing an invalidation of such authorization from occurring (Peter Loose, Michael Griffiths, David Impey, 2008). Companies formed on or after 1st October, 2008 are exempted from this requirement to pass a resolution that allows firms under this category to take advantages of recent statutory provisions. Peter Loose, Michael Griffiths, David Impey (2008) highlight that directors are required to fully and thoroughly understand the provisions under the Companies Act 2006, which clearly outlines the scope and jurisdiction under which individual conflicts can be considered, evaluated, argued and resolved. The Companies Act further provides adequate provisions for both potential and ongoing cases of conflict and attempts to ascertain the constitution of the company in an effort to ensure that the authorization can never go invalidated. The provisions require that the board determine the members who are eligible to vote in case of a consensus and establish a quorum that allows grouping the eligible candidates. What do the new guidelines provide? The Companies act 2006 is also better suited in the scenario where there exists a conflicting director as it provides for such stakeholders to be excluded from the above mentioned quorum through a decision by a meeting of the directors, which if effected would also exclude the director with conflict from voting. Additionally, a director does not have the permission to approve a conflict after the conclusion of the event. The directors are also required to exercise their decision and voting rights with a sense of independent and individualistic judgment, which can only be possible with the existence of reasonable skills, faith and a thorough understanding of the requirements of the organization. Authorizations are also required to be subjected to constant review in order to provide for identifying any changes, which may require under a few circumstances to revoke the power of authorization. Authorizations are required to be enacted specifically in relation to the facts as and when they exist at a given instant of time. As they change and evolve over time, there is an ongoing need to review them and enact additional authorizations if deemed necessary (Alistair Alcock, 2007). In some cases, companies may find it necessary and favorable for its directors to have the power and wherewithal to approve conflicts that need not be subjected to the ordinary resolution that grants the power of authorization. However, such firms may not be in a position to take advantages of the new provisions under the statutory authorization procedures. In contrast, such companies continue to depend upon the authorization by its members to approve conflicts that are resolved in a traditional manner on a case by case basis. Also, this position is bound to differ from private corporate entities to those firms registered as charities (Chris A. Mallin, 2007). Directors governing public companies may be allowed to resolve conflicts provided the legislation and guidelines of the company allows them to do so. Otherwise, it would be required that the entire issue be put to vote and resolved thereafter. In such a scenario, it is required by the directors to understand the constitution of their duties under the new statutory regulations that clearly demarcate potential conflicts from ones that currently exist. The new regulations allow for the establishment of procedures that help identify new and emerging conflicts. Identification of the conflicts relevant to the interests of the company and approving them for further argument is also specified along with the requirement to exclude directors found to be having a stake or conflicting interests with respect to the case. Changes that may require new provisions and revocation of a few guidelines in response to evolving situations are also handled appropriately. However, the new legislation was received with favorable reactions, especially from the GC100 as well as the CBI, which comprise the legal representation of the FTSE100 companies. Many had expressed concern that the earlier legislations that motivated the drive towards promoting success as the single largest determinant had increased the bureaucracy in the firm, thereby rendering the decision making process quite cumbersome and difficult to follow or practice. it also led to increasing the potential liability on the part of the directors (Chris A. Mallin, 2007). Ben Pettet (2005) has however been arguing that a majority of decisions that a company made earlier on a daily basis was quite delayed and was in need of a speedy process. The previous act in 1989 seems to have provided added an element of delay by creating a process that prevented more delegation outside the confines of a formal board meeting. The new regulations have therefore prompted an reduced emphasis on maintaining records as had been mentioned previously. Apart from allowing informal discussions to take place among directors, this has also resulted in speeding up and reducing the delay on the part of the directors to study the environment and factors and arrive at an ultimate decision. In case of discrepancies, the directors are required to substantiate their stand on the basis of their analysis of the various business parameters, thus subjecting them to more accountability. The codification rules were also subject to an extended debate in the House of Lords, where it has been commonly agreed that it was not entirely necessary for directors to document every aspect on paper and they could demonstrate their adherence to all procedures and prove that they had taken everything into consideration through other means as well. The provisions under the codification of directors' duties as part of the Company Act 2006 have been praised for initiating a shift in corporate culture and governance. According to Margaret Hodge, a former UK minister for Industry, the new rules have succeeded in representing the idea that the aspirations of the company are tied to the aspirations of the employees and the society. Additionally, it is also believed that it is not required for companies to make major changes in their working structures in order to comply with the new guidelines, which makes the revised company law much more attractive and easier to follow (Ramon Mullerat, Daniel Brennan, 2005). Conclusion The discussion has shown that the UK government has made several prominent changes to the Companies Act 1989 in an effort to improve the existing legislations under company law. One of the primary areas that have been given due importance as part of this initiative has been aimed at addressing issues concerned with directors and the decisions through which they influence the company in the long run. The new initiative identifies that human aspect of corporate boardrooms and aims to address several issues apart from the drive to enhance the monetary shareholder value, which can go a long way in fulfilling several additional objectives. All points associated with the new codification of directors’ duties have been discussed elaborately, which go to show that the role of a director is quite simplified and demarcated, which can go a long way in helping British companies benefit with a more justified approach. References 1. Chris A. Mallin, Corporate Governance. Oxford University Press, 2007. 2. Alexander Loos, Miguel de Avillez Pereira, Directors' Liability, A Worldwide Review. London, Kluwer Law International, 2006. 3. Peter Loose, Michael Griffiths, David Impey, The Company Director, Powers, Duties and Liabilities. New York, Jordans, 2008. 4. Ben Pettet, Company law. London, Pearson Education, 2005. 5. Ramon Mullerat, Daniel Brennan, Corporate Social Responsibility, The Corporate Governance of the 21st Century. London, Kluwer Law International, 2005. 6. Ewan MacIntyre, Business Law. New York, Pearson Education, 2008. 7. Geoffrey Morse, Palmer's company law, annotated guide to the Companies Act 2006. Manchester, Sweet & Maxwell, 2007. 8. Alistair Alcock, Companies Act 2006, The New Law. London, Jordans, 2007. 9. Alan Steinfeld, Blackstone's Guide to the Companies Act 2006. Oxford University Press, 2007. 10. Verlag Goyang, Companies Act 2006. Nottngham, Books on Demand, 2008. Read More