Too Much Of British Company Law Frustrates, Inhibits, Restricts And Undermines. It Is Over-Cautious, Placing Too High A Premium On Regulation And Avoidance Of Risk. The Company Remains The Choice Of Corporate Vehicle For Over A Million Businesses, And The
Essay Preview: Too Much Of British Company Law Frustrates, Inhibits, Restricts And Undermines. It Is Over-Cautious, Placing Too High A Premium On Regulation And Avoidance Of Risk. The Company Remains The Choice Of Corporate Vehicle For Over A Million Businesses, And The
Report this essay
The Company law is one of the most discussed subject areas over the past decades. In the United Kingdom is currently undergoing a major reform under the Company Law Review, which seeks mainly to modernise the legal framework in which companies operate. The Company law for nearly 150 years has served our economy well but significant parts are outmoded or have become redundant, and they are enshrined in law that is often unnecessarily complicated and inaccessible.
Therefore, in July 2001 the Company Law Review Steering Group published a Final Report called “Modern Company Law for a Competitive Economy” which aim was to provide a legal framework for all companies which reflect the needs of the modern economy and to ensure that framework can be kept up-to-date in the future. A White Paper, “Modernising Company Law” was presented in July 15th 2002 by the Secretary of the State for Trade and Industry setting out the Governments proposals for simplifying and modernising Company law.
The present framework over UK Company law was not the product of judge-made common law but mostly the result of parliamentary reform mechanisms, of committees and of political and commercial pressure groups. Though, these alterations took place through a series of partial reviews and piecemeal changes, making it a lot complicated. It is written in a way which makes it particularly difficult to identify those provisions which apply to smaller companies.
According to that, the Government followed the path of the Review that a more appropriate way forward is to tailor the core of the Company law to fit the smallest companies which are mostly private and in extent add extra safeguards where necessary for public companies. Having in mind that the law needs to be clearer, more certain and more accessible the government draw up proposals, and examined carefully the scope for simplification of the current law.
The DTIs main objectives as stated in the report of the Steering Group behind the proposed reforms focus on:
Simplifying and modernising the law for smaller companies;
Providing a legal framework for all companies which reflects the needs of the modern economy, combining streamlined procedures with greater transparency and accountability; and
Ensuring a flexible and responsive institutional structure for rule-making and enforcement.
In a more detailed analysis some of these proposals refer to rules directed at improving governance which include codification of directors duties under the general law, updating Part X of the Companies Act 1985 (CA), improving the procedures for shareholders meetings and requiring most PLCs and larger private companies to publish an Operating and Financial Review as part of their annual report.
The duties of directors in accordance with the present case law and statute make it unclear even for the justice system to decide whether directors have complied with rules of honesty and good faith. This is due to the subjective test of a display of good faith. In the case of Re Smith & Fawcett Ltd. [1942] Lord Greene argued that directors are required to act “Ðbona fide in what they consider Ð- not what a court may consider Ð- is in the interest of the companyÐ….” It is for the directors to decide what is in the interest of the company. The court plays a little role into this area and for that reason it is hard to show a breach of duty by the directors.
A complex and inaccessible case law covers the general rules about directors propriety of conduct and standards of skills and care. For that reason, in 1999 a survey was conducted to the members of the Institute of Directors which showed that many of them were not clear enough about what their general duties were or to whom they were owed . Furthermore, in paragraph 3.3 of the White Paper it is stated that the basic goal for directors should only be the success of the company in the collective interests of shareholders. For that reason and in accordance with the Final Report of the Company Law Review Steering Group, the government is taking steps to codify in statute all the general duties of the directors. The implementation of such a statutory statement of directors duties will mean that directors must take into account all consequences of their actions . Moreover, they should also recognise the importance of relations with stakeholders other than just shareholders. It worth to point out here that the White Paper has adopted the same approach as the case law. It was in the case of Norman v. Theodore Goddard [1991] where the court evaluated the directors duties of care, skill and diligence which is to be assessed objectively.
However, two saving clauses are expressed by the White Paper in relation to insolvency matters. The Government believes that this argument goes against incorporating into the statutory statement a duty based on s.214 of the Insolvency Act 1986 . Directors have obligations under other areas apart from Company law and therefore the Governments opinion is that it is not appropriate to single out one requirement from insolvency law and include it within the codification which will unhelpfully conflate Company and Insolvency law.
In order to make Company law more accessible to the directors, the Government has proposed that in the future, new directors will receive a detailed guidance summarizing the legal requirements placed by the Company and Insolvency legislation. Moreover, it is argued that is better to create two different versions of guidance, one for the directors of smaller private companies and another one for the directors of public companies .
Another important issue which was stated in the White Paper the Government published in 2002 is directors conflicts of interest. Part X of the Companies Act 1985 contains the guidelines which controls directors fiduciary duties to their contract by regulating potential conflicts of interest. The aims of these provisions were introduced in order to prevent abuse which the law failed to prevent. There is not only one way which these interests are being regulated. There are transactions with directors which are prohibited in any way and other which require the prior approval of the general meeting .
Various recommendations were made in order to update Part X of the Companies Act 1985. It was proposed that the maximum permitted period of directors employment contracts should be reduced to three years, than five which was before, for initial terms of employment and to one year thereafter. According to that it would become