THE COMPANIES ACT 2006
The Companies Act 2006 received Royal Assent on 8th November 2006.
The provisions of the Act are expected to come fully into force by October 2008 with the majority of the provisions in place a year earlier.
The intention of the Act is to simplify and modernise existing legislation and to incorporate into legislation a lot of non-statutory rules. Another very important aim of the legislation is the deregulation of administration procedures expected to save businesses millions of pounds over the years.
The Act, with 1,300 sections plus 65 pages of schedules is the longest piece of legislation to pass through parliament. The purpose of this short briefing is to highlight those areas of legislation most likely to be of interest to our clients. The content of the briefing is of a general nature and, as the legislation is lengthy and complex, clients should not take any action without full professional advice.
DIRECTORS
We are updating our "GUIDE TO THE RESPONSIBILITIES OF A COMPANY DIRECTOR" and hope to publish this shortly.
The Act sets out the duties of directors in a statutory code, incorporating existing common law rules.
Directors must: -
- Act in accordance with the company’s constitution and only exercise powers for the purposes for which they are conferred;
- subject to director’s duties under insolvency provisions) promote the success of the company for the benefit of its members as a whole;
- exercise independent judgment;
- exercise reasonable care, skill and diligence, including such as would be exercised by a reasonably diligent person with the general knowledge, skill and experience of the particular director;
- avoid conflicts of interest;
- not accept benefits from third parties conferred in connection with their directorship; and
- declare an interest in a proposed transaction or arrangement.
In promoting the success of the company for the benefit of its members, the Act sets out six factors which must be regarded in carrying out this duty: -
- the likely consequences of any decision in the long term;
- the interests of the company’s employees;
- the need to foster the company’s business relationships with suppliers, customers and others;
- the impact of the company’s operations on the community and the environment;
- the desirability of the company maintaining a reputation for high standards of business conduct; and
- the need to act fairly as between members of the company.
Directors require to provide their residential and service (e.g. company registered office) addresses with only the service address being made public. Private addresses already registered will not be removed.
SHAREHOLDERS’ REGISTER
The Act changes the rules on inspection of a company’s register with the aim of protecting directors against unwanted attention from, for example, extremist animal rights activists.
SHAREHOLDERS’ RIGHTS
The Act introduces provisions allowing: -
- shareholders in private and public companies to nominate someone else to exercise their shareholder’s rights, provided that right is contained in the company’s articles;
- registered shareholders of listed companies may nominate the beneficial holder of the shares access to "information rights" (company documents, information, notices, reports etc.
- shareholders may sue directors for negligence and have the right to bring derivative claims on behalf of the company in certain circumstances including, in Scotland, without seeking the leave of the court.
COMPANY ADMINISTRATION
There is a clear attempt to simplify the administration process including recognition of the growth in electronic communications.
New provisions include: -
- there will no longer be a statutory requirement for private companies to hold an AGM;
- it will no longer be necessary to have unanimous consent to pass a written resolution. A simple majority will be sufficient. Special written resolutions (required to alter the articles, to reduce share capital etc.) will require a 75% majority;
- companies cannot now use non-statutory written resolution procedures contained in their articles;
- on incorporation, a company will now have a single constitutional document instead of the Memorandum and Articles previously necessary.
The constitution will comprise: -
- articles;
- resolutions adopted.
In the absence of specially produced articles, private companies will operate with model articles appropriate to their type of company. These model articles will take the place of Table ‘A’. Separate model articles will be prepared for companies limited by guarantee (mostly charities). Drafts have already been published.
COMMUNICATIONS
The Act has responded to the electronic age by permitting electronic communications by and to companies in all relevant contexts but shareholders and recipients consent is required unless provision is included in the constitution.
Website publication, which must also be authorised in the constitution, will in effect become a default position, with the Act placing a positive obligation on shareholders to request hard copy documents.
THE COMPANY SECRETARY
Private companies will no longer require to appoint a company secretary. However, the duties remain and, in the absence of a company secretary, will have to be met by a director. Clients may wish to use the secretarial services of Whitelaw Wells for this purpose if they are not already doing so.
ARTICLES OF ASSOCIATION
As the Act has introduced many alterations to the administration procedures of most private companies, many will wish to redo their current Articles of Association to permit them to take advantage of the changes. For example, the ability to dispense with the need for an AGM or the appointment of a company secretary may seem attractive. Please contact us if you would like to consider this course of action.
THE MEMORANDUM OF ASSOCIATION
New companies will no longer require this document and there is no longer a requirement to have an ‘objects’ clause. A company’s objects will now be unrestricted.
FILING
The time limit for filing annual reports and accounts at Companies House is reduced by one month to 9 months for private companies and 6 months for public companies.
SHARE CAPITAL AND CAPITAL MAINTENANCE
The requirement to have an authorised share capital has been abolished for both private and public companies but shares must still be issued with a nominal value.
Importantly for private companies, the Act removes the prohibition on giving financial assistance for the acquisition of their own shares. This removes the need for the commonly referred to ‘whitewash procedure’. Private companies may also reduce share capital on the basis of a director’s declaration of solvency without seeking court approval.
AUDITORS
Companies may now agree a limit on auditor’s liability arising from the audit for the financial year specified in the agreement. The agreement can only apply to one year end and requires shareholder authorisation in public companies. Shareholders in private companies may waive the need for approval. The waiver must be renewed each year.
The limit of liability must be ‘fair and reasonable’ and the existence of such an agreement must be disclosed, probably by means of a note to the annual accounts or in the directors’ report.
The Act aims at increasing the auditor’s independence and requires the naming of the lead auditor as well as the audit firm.
Small companies are exempt from audit.
There is a new criminal offence of recklessly or knowingly including misleading, false or deceptive information in audit reports. It is also an offence to give an auditor a statement, oral or written, that conveys information, or an explanation which is misleading, false or deceptive.
ACCOUNTING
A company qualifies as ‘small’ if it satisfies two or more of the following requirements: -
- 1. Turnover Not more than £5.6 million
- 2. Balance Sheet total Not more than £2.8 million
- 3. Number of employees Not more than 50
For a medium sized company, the corresponding figures are: -
- 1. Turnover Not more than £22.8 million
- 2. Balance Sheet total Not more than £11.4 million
- 3. Number of employees Not more than 250
Every company must keep adequate accounting records sufficient: -
- to show and explain the company’s transactions;
- to disclose with reasonable accuracy, at any time, the financial position at that time, and
- to enable the directors to ensure that the accounts comply with the requirements of the Act.
The records must be capable of recording all money received and expended, the assets and liabilities of the company and be able to record stock movements and year-end stock levels.
TIMING
January 2007
Companies are required to state certain particulars on their publications, their web-sites and various electronic communications i.e. company name, place of registration, registration number and the address of the registered office.
The Act permits companies to deliver documents which require to be submitted to the Registrar of Companies, electronically. Individual shareholders will still be able to request continued communication on paper.
A statutory basis for directors’ liability to the company for false or misleading statements in the directors’ report is introduced. Directors will only be liable if such statements are made recklessly, or if there has been dishonest concealment of material facts.
Powers to make secondary legislation under the Act.
October 2007
A number of provisions are scheduled to come into force including some of the provisions relating to company directors, resolutions and meetings, exercise of members’ rights, derivative claims and proceedings by members, control of political donations and expenditure, contents of directors’ report, fraudulent trading, unfair prejudice and company investigations.
April 2007
The maximum age limit of 70 years for the appointment of directors to public companies is repealed.
April 2008
The provisions relating to company secretaries, accounts and reports, audit, private and public companies, certification and transfer of securities, distributions, arrangements and reconstructions, mergers and divisions of public companies and statutory auditors come into force.
October 2007
The expectation is that most of the Act will be operational by this date.
October 2008
The Act expected to be fully in force.