Reforms Provided by the Companies Act of 2006 and How they Affect the Meaning of Company Directors (Term Paper Sample)

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Animal rights
Companies Act 2006
Before the companies Act 2006 was formulated, issues were usually addressed by jurisdictions that were functioning within established principles over the previous years. The 2006 legislation on companies made massive shifts by taking critical common law principles and setting them down into legislation. The Act made fundamental shifts to the existing laws with intentions of making the law more accessible to everyone. The new duties outlined in the law are:
 Directors ought to exercise independent judgment
 Directors should exercise reasonable skill, care as well as diligence
 Directors should avoid conflict of interest
 Directors must avoid accepting benefits from third parties
 Directors should state interest in any proposed arrangements or transactions.
 Directors should operate in ways that will enhance the success of their respective companies. In acting so, they should also take into consideration of the consequences that might result from their actions, the desires of the stakeholders of the company as well as the consequences of the actions of the firm to surrounding environment.
Apart from modifying the pre-existing common law affecting directors’ obligations, the Act vested shareholders with new powers enabling them to enforce the regular director’s duties.
Introduction.
The formulation the Act, in 2006, was a result of nine years of official review of the United Kingdom of the laws the affected companies over the last four decades. The new Act that has emerged as a result of detailed research on issues affecting companies as well as extensive public involvement on a broad range of various issues affecting company’s law in the wake of 21st century. The made aim of this legislation was modernize and make it more responsive to the prevailing business situations of the 21st century.
Despite companies being seen as a distinct legal entity, each and every function of a certain company are usually executed by human beings. Despite companies being treated as having the power to own property, enter into contracts sue and get sued and so forth, it cannot type an email, post a letter or pick up a telephone, In simple language, human beings- directors, must be in conduct with to ensure that the daily activities of companies run effectively. Directors of companies are entrusted with the management affairs of respective companies. The director’s powers and responsibilities bestowed by the newly enacted Act will analyzed in this paper. This article looks at the technical reforms provided by the companies Act of 2006 and how they affect the meaning of company directors. Particular interest will be based on the changes made on the new duties of company directors and if the Act of 2006 takes into considerations the new emerging shifts of the courts in the present times by demanding company’s directors to uphold improved standards of skills and care.
The codification of directors
The 2006 Act plays an educational role by making directors to be well informed and updated of what will be demanded of them in the course of their duties. This has resulted to higher compliance of directors with the requirements outlined in the new law. In enacting the Act, the codification of directors’ obligation has not only entitled re-writing the pre-existing governing law but considerable approach was channeled to the key issue of the scope of limited companies in the 21st Century (Deakin, 2011). The issue at hand was whether the law ought to recognize social responsibilities by limited companies, or whether these entities should be left to function on the sole traditional avenue of making to generating profits to enrich their respective shareholders?
To that end, the new Act recognizes they is a progressive shift in the duties of companies directors rather than the traditional role that only focused on generating significant dividends for the shareholders. This new insight has a propounding impact on how directors functions in the modern day. The current law now demands improved standardized care and skills to their respective companies. The new law also provides a clear map on how directors should act and diligence regarding their functions projected towards a particular company as well as their interaction with the rest of the world. It is worth noting that the new guidelines are applicable to all directors regardless their operating in the private sector or the public sector, big company or small company. The outlined guidelines are applicable uniformly to all company directors. Similar rules applies for the proceedings brought against directors as a result of non-compliance or misconduct- civil and criminal penalties. From this case, any person acting as a director of an individual firm should be in his or her own interest be well informed of what the law expects of him or her as well as the situations in which he or she may be required to take special care (Richard, 2013).
The Act has been precisely worded to make it clear that directors should show their legal responsibilities to their respective company rather than to third parties unless under specific cases. Hence, questions should be raised that if in executing their duties directors will routinely accountable to respective third parties or shareholders. Shareholders under the current law have been given the power to reinforce the rules guiding the accountability of the directors to their respective companies. Shareholders have been vested with legal responsibility to bring company proceedings against directors whenever directors violate the scope of their responsibilities. Hence, newly enacted doctrines on directors’ duties and responsibilities are reinforced by the newly vested powers vested to shareholders (Duzer, 2012).
Director’s duties in Companies Act 2006
Sections 170 to section 177 of Act outlines the codified obligations of directors commonly referred to as, the general duties" of the directors. Section 170 boldly provides that obligations directed to companies directors should be owed to the respective company a director is operating at and not to third parties. This statement tends to concentrate the minds of directors with the interest of the company which they ought to satisfy and to which they are accountable. Section 171 outlines two key issues. First, directors are required to show respect and function as outlined in the constitution of their respective company. Indicating that directors ought to function within their powers as well as observe restrictions that have been outlined in their company’s articles of association. Secondly, this section provides that directors should use their powers to carry out good actions. To that end, the powers bestowed upon the directors by the shareholders are solely meant at benefiting the company. What is significant with section 171 is that the set obligations guide directors to act according to guidelines constituted by their respective companies and to apply their powers effectively. However, the burden lies on how to identify an offensive use exercise of power in a court of law. In this case the court will be tasked with the role of identifying if or not the director acted honestly while exercising his or her power. Improperness of the actions of the director is usually based on the opinions of his or her master's opinions, by whether or not it resultant to detrimental to the firm. However, a director might act in good faith while exercising his or her power but nevertheless lead to a loss. In this case, under the new Act, the approach is whether or not, the functions of the director’s actions were in pursuit of that purpose or if he or she was in pursuit of other goals. Hence, it not justifying that a particular director was acting honest but rather he or she ought to been acting within the scope of the powers provided by the constitution of his or her company regarding the subject matter in question (Ashraf, 2010).
In reference to this, in Colin Gayer & Associates Vs. London Wharf Ltd, the court held that that the defense of the directors had failed to show with behold reasonable doubt that the personal interests of the directors did not influence their acts owed to the company. In this case, the claim that the directors functioned within the best interests of their firm ought to be analyzed very keenly. Literally, if an honest and intelligent person could be put into the director’s position, would he have reasonably acted and claimed that the actions would be beneficial to the firm?
Consideration of the "best interest" aspect of a particular company is analyzed in broad in section 172. Section 172 is arguably the vital element of the statement of duties. The section first points out that director ought to show good faith in his or her actions in efforts to promote the success of the company. Hence, every director is entitled to the legal obligation of acting in a manner which, the director’s considered judgment will result in "success" to the company. While directors are entitled to freedom of making their decisions as well as using their business expertise in running their respective companies they, section 172 requires them to considers the following factors:
 the interests of the company’s employees
 The likely consequences of any decision in the long-term,
 The need to promote the company’s business relationships with suppliers customers well as other stakeholders.
 The impact of the operations of the company on the community and the environment
 The desire of the company to maintain a reputation...