How will company directors be affected?

Our briefing on changes to directors’ duties explains how the new statutory statement of directors’ duties affects directors. This briefing outlines other major provisions in the Act that affect directors.

New procedure for shareholders to sue

The Act introduced, from 1 October 2007, a new procedure for shareholders, subject to the Court’s consent, to bring a derivative claim on the company’s behalf against a director who is in breach of his duties or who has been negligent. The old common law rules allowed such claims only in limited circumstances. Damages awarded are payable to the company, rather than to the shareholders themselves. The new procedure is used for all claims commenced on or after 1 October 2007 with transitional arrangements in place for claims arising before this date. See our briefing on Derivative claims by members against directors.

Fair dealing provisions rewritten

The rules governing fair dealings between a company and its directors have been rewritten. Less onerous approval procedures have been introduced for substantial property transactions and loans, and new procedures will apply to conflicts of interest. 

  • From 1 October 2007 companies have been able to enter into substantial property transactions with a director, conditional on shareholders’ approval, rather than obtaining the prior approval of shareholders.
  • On 1 October 2007 the prohibition on loans to directors was abolished. A new provision has been introduced enabling companies, subject to obtaining shareholder consent, to make loans to directors or directors of the holding company (or persons connected with them).
  • Where a conflict of interest in a director’s dealings with a third party arises on or after 1 October 2008 then the conflict can be authorised by the independent directors rather than requiring shareholder approval.

For private companies incorporated on or after 1 October 2008, independent director authorisation is possible provided that their constitutional documents do not prohibit it. For private companies incorporated before 1 October 2008, shareholders must agree, by ordinary resolution, that independent director authorisation can be given. Public companies need an express provision in their articles allowing independent director authorisation.

  • From 1 October 2008 where the conflict is between a director and the company itself, the interested director must declare the nature and extent of his interests to the other directors before the deal is done. Where the company has already entered into the deal, he must make such a declaration as soon as reasonably practicable after he becomes aware of the conflict and failure to comply will be a criminal offence.

Company secretaries optional for private companies

From 6 April 2008 private companies will no longer have to appoint a company secretary (subject to their constitutional documents), but the Act gives statutory recognition to those retained after the Act comes into force. The directors of private companies that elect to dispense with a secretary need to be aware that the tasks that a secretary commonly undertakes will remain for the most part. So those directors need to ensure they continue to be dealt with, either themselves or, from 1 October 2009, by a person authorised by them. Consequently larger privates may decide to retain a secretary. Public companies will still have to appoint one.

Age restrictions to change

The restrictions on companies appointing directors of 70 and over were repealed in April 2007. A new minimum age restriction of 16 is to be introduced on 1 October 2008.

One director must be a natural person

From 1 October 2008 every company, whether private or public, will have to have at least one director who is a living individual. Therefore a company can no longer be the sole director of another. Companies that use corporate directors will have to consider whether extra directors will need to be appointed.

There is a grace period until 1 October 2010 for any company which did not have at least one director who was a natural person and was complying with the 1985 Act requirements as to the number of directors on 8 November 2006 (when the Act received Royal Assent).

Home addresses – protection from disclosure

The Act sets out new provisions for protecting all directors (not just those at risk of violence or intimidation as at present) against disclosure of their usual residential address.

Instead from 1 October 2009 only a service address will be made public (although certain bodies carrying out public functions and credit reference agencies may still be permitted access to usual residential addresses).

Sadly the protection is not retrospective. However, draft regulations have been published, that are intended to apply when the new protection provisions come into force, clarifying the circumstances in which it will be possible to apply to remove the usual residential addresses of some directors and shareholders (broadly those at serious risk of violence or intimidation) from historic company records from 2003 onwards (when Companies House began holding records electronically rather than on microfiche).

Fears have been voiced that unscrupulous directors will be able to hide behind service addresses, thus facilitating the operation of phoenix company scams, where new companies are formed from the remnants of failed companies, to the detriment of creditors.

Is it in force?

The Companies Act 2006 received Royal Assent on 8 November 2006 and is being introduced via a staggered timetable. Some provisions were introduced in January and April 2007. A substantial part, including some of the more controversial provisions relating to directors’ duties and the new shareholders’ derivative action, went live on 1 October 2007. The remainder was expected to be phased in on 6 April and 1 October 2008. Whilst some provisions will still come into force on those dates, full implementation will not now occur until 1 October 2009. BERR (formerly DTI) has published a revised table of commencement dates taking into account the delays.

Link to more briefings on the Act

More briefings are available on the Companies Act 2006 page on our website.