Companies (Directors Duties) Bill

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amend the Companies Act 2006 to provide that the duty of a director of a company is to promote the purpose of the company, and operate the company in a manner that benefits the members, wider society, and the environment, and for connected purposes.

BE IT ENACTED by the King’s Most Excellent Majesty, by and with the advice and consent of the Lords Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows —

Section 1: Amendment to Section 172 of the Companies Act 2006

(1) The Companies Act 2006 is amended as follows.

(2) For section 172 substitute—

Section 172: Duty to advance the purpose of the company

(1) A director of a company must act in the way the director considers, in good faith, would be most likely to advance the purpose of the company, and in doing so must have regard (amongst other matters) to the following considerations—

(a) the likely consequences of any decision in the long term,

(b) the interests of the company's employees,

(c) the need to foster the company's business relationships with suppliers, customers and others,

(d) the impact of the company's operations on the community and the environment,

(e) the desirability of the company maintaining a well-deserved reputation for trustworthiness and high standards of business conduct, and

(f) the need to act fairly as between members of the company.

(2) The purpose of a company shall be to benefit its members as a whole, whilst operating in a manner that also—

(a) benefits wider society and the environment in a manner commensurate with the size of the company and the nature of its operations; and

(b) reduces harms the company creates or costs it imposes on wider society or the environment, with the goal of eliminating any such harm or costs.

(3) A company may specify in its Articles a purpose that is more beneficial to wider society and the environment than the purpose set out in subsection (2).

(4) The duty imposed upon directors by this section―

(a) has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company; and

(b) is owed solely to the company and not to any other interested parties.

(5) Where or to the extent that the purposes of the company consist of or include purposes other than those listed in subsections (1) and (2), subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.

(3) Before subsection (6)(a) in section 265, insert—

(za) any right of an interested person defined in Part 11A to bring proceedings under that Part,

(4) After Part 11, insert—

## Part 11A: Derivative claims and proceedings by interested persons

269A. Interpretation

(1) In this Part—

“cause of action” means the actual or proposed act or omission in respect of which derivative proceedings are raised;

“derivative proceedings” means proceedings raised under section 269B(1);

“interested person” means a person who has sufficient interest in a relevant breach;

“relevant breach” means an actual or proposed act or omission by a director that has caused or would cause the company to fail to pursue its purposes under section 172(2)(a) or (b);

“remedial order” has the meaning given in section 269E.

(2) In this Part—

“director” includes a former director; and

a shadow director is treated as a director.

269B. Derivative claims

(1) An interested person may raise proceedings in respect of a relevant breach in order to protect the purpose of the company specified in section 172(2)(a) or (b) and obtain a remedy on its behalf.

(2) An interested person may raise such proceedings only under subsection (1).

(3) Proceedings may be raised under subsection (1) against the director who actually commits or proposes to commit the relevant breach.

(4) It is immaterial whether the relevant breach in respect of which the proceedings are to be raised or, in the case of continuing proceedings under section 269D, are raised, arose before or after the person seeking to raise or continue them became an interested person.

(5) This section does not affect any right of a member to raise proceedings under Part 11.

269C. Requirement for permission, leave and notice

(1) Derivative proceedings may be raised by an interested person only with the permission (in Scotland and Northern Ireland, leave) of the court.

(2) An application for permission or leave must—

(a) specify the cause of action, and

(b) summarise the facts on which the derivative proceedings are to be based.

(3) If it appears to the court that the application and the evidence produced or filed by the applicant in support of it do not disclose a prima facie case for giving permission or leave, the court—

(a) must dismiss or refuse the application, and

(b) may make any consequential order it considers appropriate.

(4) If the application is not dismissed or refused under subsection (3)—

(a) the applicant must serve the application on the company,

(b) the court—

(i) in England and Wales and Northern Ireland, may give directions as to the evidence to be provided by the company,

(ii) in Scotland, may make an order requiring evidence to be produced by the company, and

(iii) may adjourn the proceedings on the application to enable the evidence to be obtained, and

(c) the company is entitled to take part in further proceedings on the application.

(5) Permission or leave must be dismissed or refused if the court is satisfied that a person acting in accordance with section 172 would not seek to raise the proceedings.

(6) In considering whether to give permission or leave the court must take into account, in particular—

(a) whether the person is acting in good faith in seeking to raise in seeking to raise the proceedings, and

(b) the importance that a person acting in accordance with section 172 would attach to raising them.

(7) On hearing the application, the court may—

(a) grant the application on such terms as it thinks fit,

(b) dismiss or refuse the application, or

(c) adjourn the proceedings on the application and—

(i) in England and Wales and Northern Ireland, give such directions as it thinks fit;

(ii) in Scotland, make such an order as to further procedure as it thinks fit.

(8) The Secretary of State may by regulations—

(a) amend subsection (5) so as to alter or add to the circumstances in which permission or leave is to be dismissed or refused,

(b) amend subsection (6) so as to alter or add to the matters that the court is required to take into account in considering whether to grant permission or leave.

(9) Before making any such regulations the Secretary of State must consult such persons as they consider appropriate.

(10) Regulations under this section are subject to affirmative resolution procedure.

269D. Application to be substituted for another person pursuing derivative proceedings

(1) This section applies where an interested person (“the claimant”)—

(a) has raised derivative proceedings,

(b) has continued derivative proceedings under this section.

(2) Another interested person (“the applicant”) may apply to the court for permission (in Scotland and Northern Ireland, leave) to be substituted for the claimant in the action on the ground that—

(a) the manner in which the proceedings have been commenced or continued by the claimant amounts to an abuse or process of the court,

(b) the claimant has failed to prosecute the proceedings diligently, and

(c) it is appropriate for the applicant to be substituted for the claimant in the proceedings.

(3) If it appears to the court that the application and the evidence filed or produced by the applicant in support of it do not disclose a prima facie case for granting it, the court—

(a) must dismiss or refuse the application, and

(b) may make any consequential order it considers appropriate.

(4) If the application is not dismissed or refused under subsection (3)—

(a) the applicant must serve the application on the company,

(b) the court—

(i) in England and Wales and Northern Ireland, may give directions as to the evidence to be provided by the company,

(ii) in Scotland, may make an order requiring evidence to be produced by the company, and

(iii) may adjourn the proceedings on the application to enable the evidence to be obtained, and

(c) the company is entitled to take part in the further proceedings on the application.

(5) On hearing the application, the court may—

(a) grant the application on such terms as it thinks fit,

(b) refuse the application, or

(c) adjourn the proceedings on the application and—

(i) in England and Wales and Northern Ireland, give such directions as it thinks fit;

(ii) in Scotland, make such order as to further procedure as it thinks fit.

269E. Remedial orders: general

(1) The court may make a remedial order on a director if it finds that they have committed or proposed to commit a relevant breach.

2) The order may specify that the director takes or refrains from taking one or more actions.

(3) The court must not make an order unless it is satisfied that the requirements of the order—

(a) will ensure the company acts in furtherance of its purposes under section 172(2), and

(b) are proportionate to the significance of the relevant breach in obstructing the company from pursuing its purposes under section 172(2).

269F. Remedial order: breach

(1) A person (“P”) commits an offence if—

(a) P is subject to a remedial order;

(b) P knows or ought to know about the requirements of the remedial order; and

(c) P fails to meet the requirements of that order.

(2) In proceedings for an offence under this section, it is a defence for P to show that—

(a) they took all reasonable steps to comply with the order, or

(b) they had a reasonable excuse for not complying with the order.

(3) A person who commits an offence under this section is liable—

(a) on summary conviction, to a fine not exceeding the statutory maximum;

(b) on conviction on indictment, to imprisonment for a term not exceeding six months, or a fine, or both.

Section 3: Extent, commencement and short title

(1) This Act extends to the whole of the United Kingdom.

(2) This Act comes into force on the day on which it is passed.

(3) This Act may be cited as the Companies (Directors Duties) Act.

This Bill was Submitter by u/Waffel-lol on behalf of the Liberal Democrats

Referenced Legislation:

Companies Act 2006, S172

Opening Speech:

Whilst a relatively small change to section 172 of the UK Companies Act 2006, this would have a transformative impact on company law, directors’ duties, corporate governance, businesses and, ultimately, the economy, society, and the environment. Our amendment to the 2006 Act changes the focus of the director's duty set out in Section 172 from being a duty "to promote the success of the company" to being a duty "to advance the purpose of the company". These provisions of the original Act have led to shareholder primacy and a mindset in some boardrooms that shareholder profits are to be maximised at all costs, or at the cost of other interests, which directors may have regard to but decide to discount.

This mindset is something we consider no longer viable in the modern world we live in today. The wording of the Section has become an anachronism and no longer reflects the realities companies now face. Global crises such as climate change and biodiversity loss, and multiple other urgent environmental and social challenges are forcing a great rethink about the role and purpose of companies, and how factors of profit and people should be balanced in addressing these issues. What ‘success’ means for business is being re-imagined. Traditional ideas of success should not solely be measured in profit maximisation which as mentioned can come at the expense of environmental and social considerations.

This bill would change the default position for all companies so that directors would be empowered to advance the interests of shareholders alongside those of wider society and the environment. In situations where a director has to choose between the company’s intention to create positive social or environmental impacts and the interests of shareholders, the directors would no longer be compelled to default to prioritising shareholders. For companies with a holistic approach, which already recognise the benefits to all stakeholders of long-term responsible and sustainable business over maximising short-term shareholder profits, the change to s172 will formalise their current behaviour. However, we strongly believe that the urgency of environmental and social challenges is driving the conversation that ‘purpose-led’ and ‘sustainable’ business must be not only values-based, but become rules-based to oblige all companies to operate in a manner which benefits all stakeholders and ensures a fair and level playing field. Something that the Liberal Democrats are key champions in building a free and fair economy and society. The change to Section 172 will help bring British company law into alignment with the broadly recognised imperatives for businesses to work towards the UN Sustainable Development Goals and Agenda 2030, and facilitate the economy decarbonising to meet Paris Agreement goals on climate change.

This division ends on Friday 22nd September at 10pm BST.