Companies Act passed, but don't panic yet

The Companies Act of 2006 was passed last week. It is the longest piece of legislation ever to be passed in the UK and overhauls the regime governing companies and their directors, though much of the law does not come into force for two years.

In 1,500 clauses the new Act pulls together and replaces all the previous Acts that constituted company law.

The legislation clarifies exactly what directors' duties are, allows shareholders to sue directors if the company is not run in the best interests of shareholders, and forces companies to disclose information about its suppliers.

"Most of the Act does not come into force until 2008, so there is no immediate panic," said Martin Webster, a company law expert at Pinsent Masons, the law firm behind OUT-LAW. "But companies should be preparing for it now."

The Act demands that directors of companies give some consideration to how their decisions affect the interests of the community, the environment and suppliers.

The clarification of a director's role is a crucial part of the legislation, said Webster, but may not result in as clear-cut a situation as was planned.

"The codification of the directors' duties means that we don't have to look back at the law of 150 years' worth of judges decisions, we can open the statute book and see it in a couple of pages," he said. "Except that when you look at the statutes and see how we are to interpret them it says go back and look at all the old case law."

"It is quite well drafted, though, and is a consolidating statute, which means we can throw away the 1985 Act, because this is all in one Act," he said.

Business strenuously objected to the late insertions of clauses requiring that companies list suppliers. The move is designed to increase the social responsibility of companies by making it more difficult to pass problematic activity – such as pollution, environmental damage or poor work practices – down the supply chain.

The government appeared to back off slightly under the weight of the objections, saying that the law did not require a full and exhaustive list of suppliers. Some firms were worried that the lists would open them up to protests from animal rights campaigners. It was partly to thwart such action that the law no longer requires directors to supply their home addresses.

A copy of the Act is not expected to be available online for approximately two weeks