Concerns over incoming Companies Act

Described as the most radical reform of UK company law in over 20 years, the Companies Act 2006 received Royal Assent on 8 November 2006, although its provisions will not all be in force until October 2008.

Key new provisions include a statutory statement of directors' general duties, and a right for shareholders to bring claims against directors for negligence and other defaults. The statement aims to clarify what is expected of directors and requires directors to: act within the company's power; use their own powers for their proper purpose; promote the company's success; exercise independent judgement; exercise reasonable care, skill and diligence; avoid conflicts of interest; not accept benefits from third parties; and declare interests in proposed transactions or arrangements.

While these duties should be familiar to directors, as worded they go beyond current common law duties. Their precise application remains uncertain and interpretation of these provisions could well form the basis of extensive litigation.

Another part of the Act is dedicated to auditors' liability. Currently auditors cannot limit their liability for negligence. However, the new Act permits agreed liability limitations for audit work (including liability caps and proportionate liability), subject to shareholder approval.

The Act also introduces a new criminal offence, punishable by an unlimited fine, of knowingly or "recklessly" including misleading, false or deceptive information in an auditor's report. Initial commentary suggests a high threshold for "recklessness".

The Act is not revolutionary, it modernises existing law and simplifies procedures. Nevertheless, new ground is broken by the statement of standards and statutory duties for directors and auditors. Professional advisers need to come to terms with the new duties, both for themselves and to understand how they affect clients.

Insurers and brokers alike can expect to see a shift in the way claims are framed. Risk management will remain key as both companies and auditors plan for the Act's implementation. Further, brokers will need to take a more active role in maintaining claims records and making enquiries, not only into claims made against an auditor, but also into any 'reckless' allegations. Criminal fines are excluded from an auditor's professional indemnity cover. However, on renewal, brokers should advise on the cover provided for the costs of defending criminal charges.

Directors without D&O insurance cover may wish to look into this now, especially until the extent of their duties becomes clear.

- Mike Willis and Lindsay Bowskill, Partner and Solicitor, Beachcroft LLP.