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A New Companies Act


November 30, 2006


Robert J. Brant
Richie Clark

Following the first major review of United Kingdom company law in some 20 years, the Companies Act 2006 has received Royal Assent, with most of its provisions coming into force by October 2008. The Act significantly amends the existing law so as to make it easier to understand and more flexible, particularly for small companies. It repeals and restates, in simpler language, almost all of the Companies Acts 1985 and 1989. New provisions have been included to effect various European Union Directives, including those relating to take-overs and disclosure of information.

Among the many changes, the following will be of interest to those outside the United Kingdom.


The Act includes a statutory statement of directors’ general duties, both to clarify these duties and to change the law to bring it into line with modern business practice. Although it largely codifies and replaces the existing statutory and common law duties to which directors are presently subject, these amendments have attracted the most controversy.

Directors will be required, when carrying out their duties, to exercise the "care, skill and diligence that would be exercised by a reasonably diligent person with (a) the knowledge, skill and experience that may reasonably be expected of a person carrying out the functions carried out by the director in relation to the company; and (b) the general knowledge, skill and experience which he has," being both an objective and a subjective standard. Currently this duty is a common law duty developed by the English courts in case law.

Directors have always had a common law duty to act in the interests of the company and its shareholders, but the additional considerations to be taken into account imposed by the Act when assessing those interests means that a greatly expanded range of stakeholders has been imported. The duty to take into account the interests of creditors where there is a risk of insolvency remains in the Insolvency Act 1986.

A director’s core duty will be to "act in the way he considers in good faith would be most likely to promote the success of the company for the benefit of its members (shareholders) as a whole," but the statement of directors’ duties will also require directors, in deciding how to fulfil that duty, to have regard, among other things, to:

  • the likely consequences of any decision in the long term;
  • the interests of the company’s employees (currently a statutory requirement in the Companies Act 1985);
  • the need to foster business relationships with suppliers, customers and others;
  • the impact of the company’s operations on the community and the environment;
  • the desirability of maintaining a reputation for high business standards; and
  • the need to act fairly between shareholders.

Other Provisions

Companies and auditors will be permitted to agree to a cap on auditors’ liability to the company, subject to annual shareholder approval. A liability limitation agreement will have to be approved annually by ordinary resolution of shareholders. The cap may apply to negligence, default, breach of duty and breach of trust. For a discussion of the topic of limiting auditors’ liability in Canada, the United States and the United Kingdom.

The somewhat unusual requirement for the filing of annual accounts for private companies remains.

The prohibition against providing financial assistance to potential or actual shareholders will be abolished for private companies.

Companies will not have to restrict the total number and nominal value of the shares that the directors are authorized to allot. The presumption of pre-emptive rights of existing shareholders of private companies to subscribe for issuances of additional shares remains.