How will company directors be affected?

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

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.

The Government intends to provide a grace period until October 2010 for any company which did not have at least one director who was a natural person when the Act received Royal Assent on 8 November 2006.

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 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 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.

New procedure for shareholders to sue

The Act introduces 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. Current common law rules allow such claims only in limited circumstances. Damages awarded will be payable to the company, rather than to the shareholders themselves. The new procedure will be 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.

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.

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 by someone authorised by them. Consequently larger privates may decide to retain a secretary. Public companies will still have to appoint one.

Fair dealing provisions rewritten

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

  • From 1 October 2008 where there is a conflict of interest in a director’s dealings with a third party then, provided the constitutional documents of a private company do not prohibit it, the conflict can be authorised by the independent directors rather than requiring shareholder approval.
  • 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.
  • From 1 October 2007 companies will be 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 is to be abolished. A new provision is to be introduced enabling companies, subject to obtaining shareholder consent, to make loans to directors or directors of the holding company (or persons connected with them).

Is it in force?

The Companies Act 2006 received Royal Assent on 8 November 2006. Some provisions were introduced in January and April 2007. A substantial part of the Act comes into force on 1 October 2007, more on 6 April 2008, with the remainder going live on 1 October 2008. BERR (formerly DTI) has published a detailed table of commencement dates.

Link to more briefings on the Act

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