New legislation means directors are more likely to be sued, it was claimed yesterday.
As the Company Law Reform Bill starts its passage through the committee stages, and is expected to take effect by late 2006, a West Midlands corporate litigation expert has warned that this will add to directors' legal responsibilities and make them more likely to face litigation.
"While the main aim of the much vaunted Bill may have changed to bring it into line with the Government's deregulation agenda, it will extend the scope of directors' duties," said Mark Elder, an associate in the dispute resolution and litigation department of Black Country law firm George Green.
"The 1985 Companies Act already imposes numerous separate obligations on directors, with default being typically punishable by a fine or even imprisonment, and may also result in the commission of a criminal offence.
"Although the new Bill promises to 'restructure those parts of company law most relevant to small businesses making it easier for them to understand what they need to do', it also extends directors' duties, beyond just 'acting in the interests of the company'."
Under the proposed new law they will be expected to have regard to the principle of 'enlightened shareholder value' which will involve considering the longer term consequences of a decision, the interests of employees, suppliers, consumers, the environment and the need to act fairly as between members.
Mr Elder, based in the Cradley Heath office, went on: "The Government promises that by simplifying certain aspects of company law, such as removing the need for a company secretary and providing simpler rules for form-ing companies, that small businesses as a whole will save more than #100 million a year, but unfortunately that does not amount to much for each company, and most of the savings will come in time, rather than cash.
"Yet they will add further burdens to the holders of the estimated five million directorships in the UK.
"While becoming a director of a limited company is widely regarded as a privilege and perk to which nearly all employees aspire, it is going to be even easier, if they do not understand the law, for directors to find themselves in all sorts of difficulties."
According to Mr Elder, directors need to understand that at present they owe a duty to the company as a whole, not to individual shareholders or creditors.
"There are a number of exceptions to this general rule, however, and over the life of the business, there may be a change in emphasis in the duties owed by directors. For example once a company becomes insolvent or is in danger of becoming insolvent, added weight should be given to the interests of creditors as a general body.
"Directors should behave in accordance with general legal principles which have evolved over the years. These are acting in good faith and proper p urpose, not exceeding authority and acting with no conflict of interest.
"They are also obliged to exhibit a certain degree of competence of that expected from a 'reasonably diligent person'," said Mr Elder.
A statutory statement of directors' general duties will largely replace the existing ones which have been built up over the years in case law.
This will include a new duty to act in a way which a director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.
It is unclear what "success" for the benefit of the members as a whole means and how it will be judged.
The statutory statement sets out further general duties, all broadly based on the existing case law, which will require directors to act within their powers; exercise independent judgment; exercise reasonable care, skill and diligence; avoid conflicts of interest; not to accept benefits from third parties; and declare an interest in a proposed transaction with the company.
The duties are cumulative obligations; directors must comply with each one that applies to a particular case.
As under the current law, the duties will be owed to the company and it follows that, as now, only the company will be able to enforce them.