Companies Law Act - Essay Example

When the primary plans were announced for company law reform, many envisaged drastic overhauls and prepared to applaud the fresh face of company law. The introduction of the original bill was decorated with promising aspirations for the ‘new look’ of this old law. Lord Salisbury listed invigorating objectives for the new law, including the enhancement of “shareholder engagement...better regulation…providing flexibility” (Hansard HL Debate 2006, col. 182). Apart from this, the main “underlying approach…has been to simplify…the drafting of the law to make the language more accessible” (Hansard HL Debate 2006, col. 182). This was almost definitely an aspiration of the Company Law Review Steering Group who stated the basis of the Bill to be a “simple, efficient and cost effective framework for carrying out business activity” (CLRSG Final Report 2001, App. A). It seems that the main aim was to maintain a balance between assigning much wanted freedom to companies while at the same time being able to effectively protect their interests. The task of redefining this intertwined web of principles and legal decisions would be no easy feat, however. Indeed, it could be suggested that to provide freedom for companies whilst ensuring their protection is to reconcile factors at the opposite ends of a scale. It has been suggested that “flexibility encourages tinkering which increases the complexity facing those setting up and running companies” (Alcock 2006, p. 243). This arguably creates the potential for the need to increase court intervention to ease the complexity and the problems it can cause. With flexibility follows abstract language and with abstract language follows the need for deliberation. Could it be that the drafters of the Bill were slightly ambitious in their aspirations? The most drastic changes made by the Companies Act 2006 have been in the area of directors’ duties. The Reform Bill (Company Law Reform Bill 2005) recognised that the case law within this area is random and complicated making it difficult for directors to ascertain exactly what their duties entail. Thus the most pressing issue was acknowledged as the need to make duties more comprehensible and consistent, thus reducing the occurrences of fraud. The Bill (CLRB 2005, Ch. 3) recognised that the duties are a fundamental basis of company law and thus that there was a need to codify them. It could ne suggested that this is not the exact outcome of the reform. The need to refrain from imposing “impractical or onerous requirements which stifle entrepreneurial activity” (CLRB 2005, p. 6) was recognised, because codification would “not in itself prevent the abuses which caused these provisions to be enacted” (CLRB 2005, p. 7). Despite the fact that existing case law is riddled with holes of uncertainty, there are strong undertones to suggest a reluctance to codify this area due to concerns about losing the flexibility that is a crucial characteristic of fiduciary duties. Acquiescence to codification was inevitable but nonetheless diluted through broadly drafted provisions. Contained in sections 170-180 of the new Act, directors’ duties are categorised as due care and skill and to promote the success of the company for the benefit of the company as a whole in good faith. It would seem that, because the principles are embraced in the Act, there would be no need to refer to case law. Interestingly so, sections 170(3) and 170(4) state that the duties are based on ‘certain common law rules and equitable principles…[and]…shall be interpreted and applied in the same way’. This retains the need to refer to case law and equitable principles in order to conduct interpretations, which severely questions the overall level of simplification. The use of the term ‘certain’ rules suggests that rules and principles not stated in sections 171 to 177 remain intact. The legislature realised that it could not codify all rules and principles stemming from the common law. The result is the remaining need to refer to previous legislation, despite and because of the simplification of the statute. Although this provision allows for the discretionary development of directors’ duties, in this circumstance it seems that flexibility has compromised simplicity; although it is arguably unavoidable. The main consolation is that at the very least, it is unlikely that court intervention will be increased. It could be argued that the courts’ degree of intervention has been reduced; some clarity is inevitable in codification. It appears that it is as simple as is possible in an area of law that is enmeshed in and sentimentally tied to years of development. The previous law cannot be completely discarded, for the whole basis of the Act depends upon its very principles and would fail miserably without it. By virtue of section 171 of the Act, the duty to act in accordance with the company constitution and exercise powers for the purpose which they were conferred remains. This duty did not feature to a large extent in common law cases; it was not considered to be a primary duty. Through codification it has been distinguished clearly from the primary duty to act in the interests of the company. The meaning of the term ‘constitution’ is necessarily broad; its inclusion of articles, resolutions and decisions will increase the need for the director to be constantly aware of the company’s functioning; awareness is crucial. Problems could arise as a result of the fact that the provision does not define the extent to which a purpose must depart from appropriateness in order to be classed as improper. It seems that the determination of what proper purposes consist of is “left to be worked out in particular cases” (Alcock 2007, p. 144). Another compromise of certainty in favour of flexibility is evident here, but given the broad range of circumstances and companies in existence, it seems unavoidable. It would be impossible - and more sacrificial than beneficial – to provide for every circumstance, though some minor provisional guidance is arguably needed to minimise court intervention and increase certainty. The duty to promote the success of the company for the benefit of the members as a whole replaces the common law duty to act bona fide in the interests of the company. The provision reflects the previous, (Gore-Brown 2004, Ch. 15) with the difference that company interests were regarded to be those of the shareholders. The duty is accompanied by a list of factors the director must regard, contained in section 172(1). It would be thought that such a list is highly beneficial, for what could be simpler? In many respects it is simpler – insofar as a list of duties can establish clarity and certainty. But there are concerns as to how these duties will operate in practice. There is nothing to rebut the position that directors will be expected to have regard to all of the factors in every decision made, and the Act makes it clear that this list is not exhaustive. Although there is some degree of clarity, there is no guidance as to how much weight should be given to each duty. Indeed, some interests will conflict with each other and some will be irrelevant; in these circumstances, directors may encounter problems as to which should be given a higher degree of priority. Another concern surrounds the extent to which a director may need to investigate a consideration. These problems will inevitably arise in case law; indeed the court will need to intervene to deliberate on matters regarding such issues. However, once the courts have made primary decisions as to the actual extent of the duties’ application, it is likely that ‘teething problems’ will settle. It would be beneficial to remember that it is highly rare to ‘get it right the first time’. Indeed, it does not require a genius to see that company law in general is extremely complex, due to the vast nature of companies it encompasses. In response to such complexity, we must keep in mind that there will be aspects far short of perfection, but let us not raise our standards impossibly high. Simply because we have departed from the previous situation does not mean that the law will leap to the height of perfect clarity and application. In relation to the main current issue of director fraud, it seems that the law remains lacking – recent cases show that director fraud is still very much a problem. The landmark case of Enron (Enron Europe Ltd (in administration) v Revenue and Customs Comrs [2008] SWTI 390) is a clear indicator of the extent to which director’s fraudulent behaviour can still ‘slip through the net’ on a very large scale. Essentially, it portrays, even if on a rather extreme level, how executives ‘looted their companies and lied about corporate profits and assets to keep the stock price up long enough for them to sell their shares.’ (Blair 2003, p. 889). If the legislation had been appropriate, it is arguable that this could have been avoided. Yet, as has been shown above, the balance is difficult to maintain between flexibility and certainty. It is flaws in this balance that could allow such fraudulent acts to succeed. Of course, the saving grace of this incident is that directors were made personally liable. This was similarly the case in the Freddie-Mac incident. Yet it could be questioned that the stage of personal liability attributed to fraudulent directors is too late. Should they have been able to proceed so far in their fraudulent behaviour? Of course, the answer is negative; yet again one is brought back to the issue that the law may only stretch so far. To allow companies to function freely and effectively is in direct contrast to the tight legislative controls required to further prevent such fraudulent behaviour. It is extremely easy to underestimate the difficulty of codification, especially within areas of law that are rich in content and complex in relevance. One could argue that, because case law has to a large extent maintained relevance, the courts are on familiar ground. Here one can see the intense conflict between certainty and flexibility; a theme that runs throughout the codification process. On the one hand, we desire simplicity and clarity in order to understand and know the duties we are subject to and the rights we are afforded. On the other hand, we must understand that flexibility is paramount in company law; the vast array of circumstances creates a vast and profound chasm of possibilities and situations to which the Act applies. We cannot have both to a high degree, but we can aim for a balance. It seems that the accompanying case law will, and must be relevant in current practice. The Act has not been revolutionary; this was never the intention of the drafters, but it should have at least aspired to decrease the chances for directors to commit fraud. The legislators did not begin from the start; there was a great deal of case law to build on; this could be seen as an advantage or a hindrance. Indeed, there has been a constant need to diverge from case law in order to comply with EU requirements; suffice it to say that such codification was necessary. In addition, suffice it to say that the law can only regulate as far as is possible director’s duties and behaviour. Nothing can promise to prevent such behaviour with certainty, without being intensely optimistic. For now, drafters have recognised that at the very least a clearer code can prevent ‘gray areas’ and thus reduce the opportunity for fraudulent behaviour. This must be better than the previous stance. Bibliography Alcock, Alistair; Birds, John; Gale, Steve. Companies Act 2006: The New Law. UK: Jordan Publishing, 2007 Blair, Margaret M. Directors Duties in a Post-Enron World: Why Language Matters. Wake Forest Law Review, Vol. 38, 2003. Cheffins, Brian; Berwin, S.J. Corporate Governance Reform: Britain as an Exporter in Corporate Governance and the Reform of Company Law. Hume Papers on Public Policy: Volume 8 No. 1, Edinburgh University Press, 2000 Cockerill, Alan; Mendelsohn, James. Directors and The Missing ‘Articles’. 152 Solicitors Journal 2: 20, 2007 Davidson, Robert. The Companies Act 2006: Directors’ Duties and Promoting The Company’s Success. Journal of International Baking and Financial Law, Vol.22, 11:631, 2007 Department for Business Enterprise and Regulatory Reform. The Companies Act 2006: Regulatory Impact Assessment. January 2007 Dine, Janet; Koutsias, Marios. Company Law. 6th edition, Palgrave Macmillan, 2007 Ferran, Ellis. Company Law Reform in The UK. University of Cambridge, 2001 French, Derek ed. Blackstone’s Statutes on Company Law. New York: Oxford University Press, 2007-2008 French, Derek; Mayson, Stephen; Ryan, Christopher. Company Law. 24th edition New York: Oxford University Press, 2007 Gore-Brown, Sir Francis. Gore-Brown on Companies. 44th edition, Boyle, A; Sykes, Richard eds., Bristol: Jordan Publishing, 2004 House of Lords. Company Law Reform Bill – The White Paper, House of Lords Bill 34, 2005 House of Lords. Hansard HL Debate. Volume 677, Ser 5, 11 January 2006 Steiner, Eva. Codification in England: The Need to Move from an Ideological to a Functional Approach - A Bridge too Far? Statute Law Review 25 (209), 2004 Read More