Analyzing The Companies Act 2006

First of all, what the director is should have clarified. When refering from Section 250 of the 2006 Act, it provides that “director” can be anyone without the concern of what his/her title is.[1] Directors roles and duties defined by Common Law, the Articles of Association of the company and statute. They are seen to be the agents of the company. Without an exact meaning of directors, it can be also similarities about duties between trusteeship and managing partner. Directors may be employees of the company and may also enter into service contracts governing employment relationships. In some cases, companies may be directors of other companies. All companies, whether public or private; they must create a position that includes the director’s job description. This principle is also mentioned in Ferguson v Wilson (1866). “The company cannot represent itself individually or within its members. Therefore they need the presence of directors.”[2]

The Companies Act 2006 (2006 Act) was a long time in gestation. An important stage in formulating proposals that eventually became part of the 2006 Act was the creation by the then Department of Trade and Industry (DTI) of a Company Law Review Steering Committee (CLRSG) in 1998.[3]  The Law Review Steering Group (CLRSG) was in favor of a behavioral change to encourage directors[4]. A new formulation was needed to enable directors to access tasks more easily. In order to achieve the purpose of providing benefit to shareholders together with this formulation, it is necessary to set up a successful business, to determine a certain time schedule and also to pay attention to relationships and reputation[5].

Directors are not indebted to the company and individual shareholders. But in general they are obliged to act according to the interests of the shareholders.[6] The principle of directors to act on behalf of the company is their main duty. and for this cause, the same should consider the benefit of the company rather than the self.[7] [8] As stated in Section 170, directors only owe to the company. Its sole purpose is to show that the directors do not have any debts to any person such as shareholder or shareholder. Secondly to show those who have the authority to represent the company; can only fulfill their duties and responsibilities.[9]This rule and principle is set forth in Multinational Gas and Petrochemical Services Ltd (1983) case. Should not be confused that in common law, the director’s sole responsibility is for its company not to someone else.[10]

The duties of the directors’ are covered by the Companies Act 2006 (Law) stipulating the following seven general duties:

1. to act with the powers included;
2. promoting the company’s success;
3. to experience self-sufficient critism about company;
4. to effect the society via company’s operations;
5. to avoid conflicts of interest;
6. not to accept benefits from third parties; and
7. declaring an interest in a regulation or process[11]

When looking (a) to (f), which is the sub-clause of S. 172, the director must be able to support and manage his company’s interests[12]. At the same time, it should be able to promote its employees within the scope of workforce and develop good relations with other stakeholders such as suppliers and customers.[13] The obliged parties described in this article should consider the company as a company with an impact on the society and the environment, which is generally referred to as Corporate Social Responsibility. The director must also consider the company’s reputation and standards.[14]

Under the law, most companies should prepare an independent strategic report (in addition to the report of their directors). This will inform company members and help managers assess how they perform their duties in accordance with Section 172 (ie to increase the company’s success).

The main purpose of the entry into force of this Law is to make comparison according to the common law and to introduce regulations in this context in a legal framework. The law itself states that the duties assigned are based on the common law and equity principles and thus come into force.[15] This should be interpreted and should also be applied in the same way[16]  While this paradox defends a new inclusive concept; it also strengthens the position of stakeholders. On the other hand, section 172 strengthens the position of stakeholders and also avoids the shareholder-centered approach.[17] In the case of rigidity of the law article; The article of law is open to flex rather than rigidity. Especially with the “good faith” recognized by the law, it provided a wide area of the directors to allow movements to easily transcend their job descriptions and duties. It should be seen before opening 172 CA 2006 for discussion; Section 170 CA 2006 contains substances to ort he common law functional. S170 (3) and (4) contain general responsibilities of directors according to the common law. Similarly, statutory duties which are implemented by Act in s170 (4), were interpreted and regard shall be given to relevant common law and equitable principles. It is clear that legislators have not made any significant changes in implementing these provisions.[18]

Starting from the mentioned discussion, the scope of S.172 was enacted on the basis of fairness and common law. In other words, the provisions of this law may be referred to in the judicial provisions in accordance with the principles of common law. But at the same time, due to the broadness of the concept of good faith, the director’s activities also expanded in good faith. This detection in some cases leads to negativity. Even if the director has acted in good faith, the company may incur losses or he may make a decision that exceeds his authority. When examining this issue, the Court takes into account whether the director was in good faith. If the failure after the decision has not changed the company’s business decisions; if the director acted in good faith, even if he did not consider one of these vital factors mentioned before, he would not be held responsible.[19] It may subject the director to a subjective or objective test in the determination of this fact. But in the end the court does not put itself in the position of the director and does not calculate what to decide. Instead he examines the issue around the good faith of the director and decides on it. The Court may find the director’s statement insufficient and may require him to submit evidence. The director may be exempted from a compensation or penalty even if he or she has damaged the shareholders or the company if it successfully proves to be in good faith in their actions. When the court examining director’s acts which includes good faith or not; they concentrate the point that under the same conditions, whether an intelligent and honest person will behave in the same way and it will be in the interest of the company.[20]

In any case, after this law came into force, it was subjected to many criticisms because of the reasons mentioned above. The principle of goodfaith increased uncertainties. With Companies Act 2006, corporational interests and maximizing profit were tried to be balanced with the common  law but these two liabilities balance has not been achieved. CA 2006 tried to encode the common law and equity principles ort he functions of governance, but failed to provide a full explanation of those tasks. In short, it did not bring any specific rights other than protecting the interests of the stakeholders, but it was only found that the directors extended their discretion.[21] Therefore, it is difficult to talk about the rigidity of the mentioned article. İnstead it can be said that it is a state that can be stretched by the directors and this has negative consequences.

[1] Companies Act 2006 S. 250

[2] Ferguson v Wilson [ 1866] 2 CH App 77: 15 LT 230

[3] ‘Corporate Governance Report: Modern Company Law – For A Competitive Economy [Proposals For A Fundamental Review Of UK Company Law] Department Of Trade And Industry, London, March 1998’ (1998) 6 Corporate Governance p. 22-25

[4]Robert Monks, ‘Modern Company Law For A Competitive Economy: The Strategic Framework’ (2000) 8 Corporate Governance p. 13

[5] Roman Tomasic, ‘Company Law Modernisation And Corporate Governance In The United Kingdom’ (2013) 1 Victoria University Law and Justice Journal p.54

[6] A. A. Berle, ‘Corporate Powers As Powers In Trust’ (1931) 44 Harvard Law Review p. 44

[7] Ibid,  p.45

[8] Dawson International plc v Coats Paton Plc [ 1989] SLT 854

[9] L. C. B Gower and B. G Pettet, Principles Of Modern Company Law (Stevens 1988) p. 506

[10] Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd [ 1983] Ch 258

[11] Stephen W Mayson, Derek French and Christopher Ryan, Company Law (Oxford University 2010) p. 486-487

[12] Companies Act 2014 s 228( 1)( a)

[13] E. Merrick Dodd, ‘For Whom Are Corporate Managers Trustees?’ (1932) 45 Harvard Law Review, p.45

[14] Ibid, p.47, 50.

[15] Companies Act 2006, s 170(3).

[16] ibid S 170(4).

[17] Simon Deakin, ‘The Coming Transformation Of Shareholder Value’ (2005) 13 Corporate Governance p.14-18

[18] Elaine Lynch, ‘Section 172: A Ground Breaking Reform of Directors’ Duties, or the Emperor’s new Clothes? (2010) 33(9) Company Lawyer  p.196

[19] Alistair Darling, ‘Reforms in pursuit of enlightened shareholders value’, Financial Times, 2006.

[20] Sarah Worthington, ‘Reforming Directors’ Duties’ (2001) 64 Modern Law Review p. 439,

[21] Andrew R. Keay, ‘Moving Towards Stakeholderism? Constituency Statutes, Enlightened Shareholder Value And All That: Much Ado About Little?’ [2010] SSRN Electronic Journal p.35.