Companies Act 2006

COMPANIES ACT 2006: Impact on Restructuring and the Insolvency Market.

Parts of the Companies Act 2006 (the 'Act') came into force on 1 October 2007 and will impact the restructuring and insolvency market.

DIRECTORS' DUTIES

Codification

For the first time the Act provides a statutory code of directors' general duties which replaces the previous common law and equitable rules. The purpose of these provisions is to make the law in this area more clear and accessible and to affirm best boardroom practice. It is not to impose a series of obligations which are wholly new.

The Act identifies 7 duties with which directors of all companies must comply. the following statutory duties came into force on 1 October 2007:

to act within directors' powers (s.171)
to promote the success of the company (s.172)
to exercise independent judgment (s.173)
to exercise reasonable care, skill and diligence (s.174)

The remaining statutory duties will come into force on 1 October 2008:

to avoid conflicts of interest (s.175)
not to accept benefits from third parties (s.176)
to declare any interest in a proposed transaction or arrangement (s.177)

DUTY TO PROMOTE THE SUCCESS OF THE COMPANY

Particular attention has focused on the duty to promote the success of the company for the benefit of its members as a whole. This enshrines in statute the concept of 'Enlightened Shareholder Value'. Essentially this means that directors must have regard to a range of stakeholder interests when taking decisions affecting their company, including the 6 factors listed in the Act:

likely long term consequences
interests of employees
need to foster business relationships with suppliers, customers and others
impact of company operations on the community and the environment
desirability of maintaining a reputations for high standards of business conduct
need to act fairly between members

Reference to these factors (where relevant) and the underlying statutory duty is likely to be made in board minutes and briefing papers as evidence that the directors have acted appropriately. However, the list is not exhaustive and simply reciting factors from it in minutes will not be enough. Directors must continue to exercise their commercial judgment in decision-taking.

IMPACT ON DISTRESSED COMPANIES

The Act preserves the common law rule that, in circumstances of actual or threatened insolvency, the focus of the directors' duties shifts from promoting the interests of the company for the benefit of its members to acting in the best interest of its creditors. In the absence of specific guidance in the Act, exactly how and when this change of focus should occur so as to allow directors to discharge their duties properly and avoid personal liability will continue to be the subject-matter of detailed professional advice in each case - thus underlining the importance of directors retaining complete and accurate records of events, including the boards' decision-making processes and receipt of professional advice.

RESOLUTIONS AND MEETINGS

Certain changes have now been introduced which aim to streamline the manner in which shareholders can pass resolutions. These should assist the speeding implementation of proposed insolvency and restructuring strategies.

Most notably, written resolutions no longer need the agreement of all shareholders. If an ordinary resolution is to be passed, a majority of the shareholders need to indicate their approval and, if it is a special resolution, only 75% of the shareholders must now approve. The notice period for a meeting to pass a special resolution has also been reduced from 21 days to 14 days.

In addition, the concept of extraordinary resolutions in not carried forward in the Act and references to extraordinary resolutions in the Insolvency Act in Section 84 (commencement of voluntary liquidation) and 165 (liquidators powers) are now replaced by the requirement for a special resolution.

FUTURE CHANGES

In addition to the changes set out above which have now come into force, a number of other changes of relevance to the restructuring and insolvency market will come into force of the coming 12 months.

DISSOLUTION AND MEMBERS VOLUNTARY LIQUIDATION

As from 1 October 2008 an application for restoration of companies to the register in all cases must be brought within 6 years from the date of dissolution. The distinction between the time limits for the restoration of a company dissolved by way of MVL (2 years) and a company declared defunct and struck off the register by the Registrar (20 years) will be removed.

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