Companies Act 2006

A leading Yorkshire lawyer is warning the region's directors to look at their companies procedures to make sure they are ready for new legislation coming into force a year earlier than planned on October 1.

Chris Jones, a Partner in the insolvency and recoveries team at national law firm Irwin Mitchell based at its offices in Queen Street Leeds, says many businesses in the region are not up to speed with aspects of the Companies Act 2006, which is one of the longest pieces of legislation to ever be passed in the UK with 1,300 clauses. However, the fact it now starts coming into force in less than three months time injects even greater urgency into the situation.

The act introduces sweeping changes to simplify and improve present law, to make it easier to understand and more flexible. However, it also adds important new obligations for directors, which take effect from 1 October 2007. The full statute, will be implemented by October 2008.

Mr Jones said: There are new and confusing aspects of the act coming into force this autumn, which Yorkshire businesses need to take into account, so they don't fall foul of them. Previously, directors duties and obligations were based on concepts like good faith, negligence and acting reasonably, but now they are set out in particular detail in the act.

If directors fail to meet their obligations they may well find themselves personally liable for any adverse consequences suffered by the company's various stakeholders, such as shareholders, creditors and employees, as well as the wider community.

The act puts into writing the relevant duties of directors previously developed in case law. Currently, they must ensure they don't breach their duties to the company and its shareholders or, if the company is in financial difficulty or insolvent, trade to the detriment of creditors.

However, in addition, directors will now have a specific duty to act in a way which they consider most likely to promote the success of their company. In doing so, they must take into account the long-term consequences of their decisions; the interests of all stakeholders (including employees); fostering of businesses relationships with customers, suppliers and others; and the company maintaining a reputation for high standards of business conduct.

Mr Jones added, directors in the region would also have to take into account the impact of the company's operations on the community and the environment. For example, if a business was to make a large number of redundancies, it must be able to show that it considered the full effect on the local community. Previously, this would have been a moral issue for companies to consider, but with no legal consequences.

He said: There is a desire to keep standards of business conduct high and for business culture to be more ethical and responsible. But, how exactly businesses in the region will have to operate in some respects is still pretty uncertain and is only likely to be shaped by cases brought after the act comes in.

In the meantime, directors will need to make good faith judgements regarding issues governed by the new legislation and if in doubt, take professional advice.

Mr Jones added that directors need to start preparing now by ensuring they consider and review their decision making processes, procedures and policies, and carefully record the reasons behind decisions, showing each has been made in the light of their statutory obligations.

Any business concerned about the Companies Act 2006 can call the Irwin Mitchell team on 0370 1500 100.