Model law

Companies Act 2006 (Amendment) Responsible Business Bill

Lucas' Law

Directors will be required to advance a (newly defined) purpose of the company, with a strengthened requirement for this to be the interests of members, all stakeholders, society and the environment.

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Why use this?

This uses the same frame as current s172, but strengthens the duty of directors to take wider interests into account in running the company. It creates a basic corporate purpose and invites companies to go beyond it.

It will change the basis of decision making creating the space in which directors can make decisions which take into account the interests of all stakeholders, becoming constructive corporate citizens and developing more positive relationships with all those stakeholders.

How it promotes a net zero future

The proposed legislation will remove the excuse directors and investors have that they cannot hamper their ability to make profits if it reduces the value of the company.

It creates a level playing field for companies to make profits in the context of being socially useful entities.

The law

Companies Act 2006 (Amendment) Responsible Business Bill

A BILL TO

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.

BE IT ENACTED by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Spiritual and Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:

  1. Amendment to s172 of the Companies Act 2006

Section 172 of the Companies Act 2006 shall be amended and replaced in its entirety as follows:

172 Duty to advance the purpose of the company 

(1) 172 Duty to advance the purpose of the company

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 and its impact on future generations,

(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, taking into account in particular the impact on climate heating and biodiversity loss,

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

(f) the success of the company for the benefit of its members as a whole and 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) Where different interested parties view the considerations set out in subsection (1) differently, a director must seek to act fairly as between those interested parties.

(4) 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).

(5) The Secretary of State shall make provision by regulations as to the form and content of the accounts and reports that a company must prepare to account for:

(a) how it benefits wider society and the environment, and

(b) the harms it creates or costs it imposes on wider society and the environment and, separately, the actions it is taking to reduce or eliminate those harms and costs.

(6) The Secretary of State may prescribe by regulations that certain accounting and reporting requirements provided for by regulations under sub-section (5) shall apply―
a. only to companies which have a total turnover of not less than a prescribed amount, or

b. otherwise in a manner that is commensurate with the size and complexity of the company.

(7) 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 to the company and to any other interested parties directly affected by the actions of the company.

  1. Remedies for unconscionable breach

Where it appears to the Secretary of State that a company has acted fundamentally, systemically or consistently in breach of its purpose, it may (i) if it considers it is expedient in the public interest that a company should be would up, present a petition for it to be wound up if the court thinks it just and equitable for it to be so, or (ii) remove its right to limited liability.

  1. Amendment to s414CZA of the Companies Act 2006

Section 414CZA of the Companies Act 2006 shall be amended and replaced in its entirety as follows:

414CZA Section 172(1) statement

(1) A strategic report for a financial year of a company must include a statement (a “section 172(1) statement”) which describes how the directors when performing their duty under section 172:

(a) have advanced the purpose of the company, and

(b) have had regard to the matters set out in section 172(1)(a) to (f).

(2) Subsection (1) does not apply if the company qualifies as medium-sized in relation to that financial year (see sections 465 to 467).

  1. 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 Act 2006 (Amendment) (Company Purpose) Act 2020.