The Companies Act 2006
Commercial Updates
The Companies Act 2006
How Will It Affect Your Business?
The Companies Act 2006 (“the Act”) is the largest piece of legislation ever produced and since 1st October 2007 further changes to company law procedure have begun to take their effect on companies throughout England and Wales. A common aim of the changes was to reform company law by simplifying company procedure to allow those involved with a company to concentrate on making the business successful.
How Will These Changes Affect Directors?
Since 6th April 2007 there has no longer been a maximum age limit for directors of PLC’s. Also, directors of all companies no longer need to provide details of their interests in shares or debentures in the relevant company or its group, nor are they now required to disclose their interests in shares in the directors’ report of the annual accounts for reports signed on or after the 6th April 2007.
For the first time in company legislation part 10 of the Act formally sets out the following directors’ duties:
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Duty to act within powers (S171);
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Duty to promote the success of the company (S172);
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Duty to exercise independent judgement (S173);
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Duty to exercise reasonable care, skill and diligence (S174);
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Duty to avoid conflicts of interest (S175);
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Duty not to accept benefits from third parties (S176);
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Duty to declare interest in proposed transactions or arrangements with the company (S177).
In respect of a director’s duty to promote the success of the company section 172 of the Act requires that a director must in exercising his/her duties consider the following six factors:
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The likely consequences of the decision in the long term;
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The interests of the company’s employees;
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The need to foster the company’s business relationship with suppliers, customers and others;
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The impact of the company’s operations on the community and the environment;
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The desirability of the company maintaining a reputation for high standards of business conduct;
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The need to act fairly as between shareholders of the company.
Most of the directors’ duties set out in the Companies Act 2006 have stemmed from a combination of the directors’ fiduciary duties in the Companies Act 1985 and existing common law duties. A fiduciary duty in respect of a company’s directors means the relationship between the director and the company which gives rise to an obligation of loyalty, trust and confidence on the part of the director. Having their duties set out under statute, should help directors understand more fully the scope of their obligations to the company.
A likely consequence of the duties set out in part 10 of the Act is that directors may find themselves more open to claims for not performing their duties, particularly with respect to the factors set out in section 172. Fastidious care will need to be taken by directors to ensure that each individual duty is fully considered before making decisions and implementing subsequent actions. Directors should therefore seriously consider changing the Articles of the company to fully indemnify themselves in respect of such claims or they could risk having to fund significant financial penalties with no chance of recouping such sums.
Since the 1st October 2007 access to the Register of Members has been restricted in respect of all external requests to view the Register. If a request is made to see the Register the company can now ask for the applicant’s name and address, or if an organisation, an individual’s name and the purpose of their request. The company must either comply with the request immediately or alternatively apply to the courts to restrict access to the Register.
In respect of company accounts, the directors’ report in the annual accounts must now contain a business review which will apply to all accounts with reporting periods beginning on or after the 1st October 2007. The business review should provide a balanced and comprehensive analysis of the development and performance for the company, with a description of the principal risks.
Since April 2008 private companies have no longer had to appoint a company secretary unless they choose to do so. If it is decided that the company should have a secretary, the secretary will have the same authority and responsibilities as before April 2008 and will continue to be registered at Companies House. In the absence of a company seal, it is important to note that if a company has one director and no company secretary, any documents to be executed need to be executed by the sole director in the presence of a witness.
How Will These Changes Affect Shareholders?
How decisions are taken by shareholders has been affected by Part 13 of the Act. Written resolutions no longer need to be signed by all the shareholders and now a simple majority of eligible voting shares will be required for authorising ordinary resolutions with 75% of eligible voting shares required for special resolutions. These changes together with the new directors’ duties are found in the new Table A, which is a statutory back-up precedent for many companies’ Articles of Association.
Provided shareholders agree, companies can now make use of electronic methods to make decisions by circulating resolutions by email or on websites. This should be advantageous to businesses by allowing shareholders’ decisions to be made more quickly.
Private companies now no longer need to hold an annual general meeting. Shareholders can nevertheless demand a meeting if shareholders holding at least 10% of the voting rights (5% if it is more than 12 months since the shareholders last met) still want an annual general meeting. For private companies only 14 days notice needs to be given for all shareholder meetings, unless different arrangements are specified in the Articles of Association. Importantly, in the absence of an annual general meeting, shareholders still have the right to receive copies of the accounts.
Forthcoming Changes to Company Law
The final parts of the Act will be implemented in October 2009. The changes to company law in 2009 will this time have more of a direct impact on directors than shareholders.
The following changes to existing company law were originally due to come into force in October 2008. However, the government announced by written statement on 7th November 2007 that most of the provisions of the Act due to be implemented in October 2008 will now come into force in October 2009.
From October 2009 all companies will have to have at least one actual person as a director and cannot solely have companies acting as directors. Also, the minimum age of a director will be set at 16, with all existing underage directors ceasing to hold their directorship when the legislation comes into force.
From October 2009 directors will be required to file a service address on the public record at Companies House, which may be their company’s address rather than their private home address. Details of a director’s private home address will still be required at Companies House but will however be held as protected information with third parties only able to access this information in very limited circumstances.
As an alternative to the current process requiring court approval, private companies can from October 2009 choose to reduce their capital by special resolution supported by a solvency statement by each of the directors. Such a procedure is similar to that already used when a company redeems or purchases its own shares out of capital. In respect of a private company wishing to give financial assistance for the purchase of its own shares the previous statutory rule for giving financial assistance was repealed on 1st October 2008. The new arrangements should make transactions easier with the relaxation of previous formalities aimed specifically at aiding smaller businesses.
Under current company law, directors have always had a duty to avoid a situation in which they have an interest which conflicts or may conflict with the company’s interest, unless the matter has been duly authorised. At present, only the shareholders can provide such authority. However, from October 2009 it will be possible for those directors who do not have an interest in the matter to provide authority where a conflict of interest arises or may arise provided this is specifically permitted by the company’s Articles.
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Whilst we endeavour to ensure that the information in the Update is accurate, complete and up-to-date, we make no warranties or representations in respect of such information as it is for general interest only and does not constitute legal or professional advice. As the application of the law can vary widely depending on the facts and circumstances of a particular matter, you should always take specific legal advice before taking or refraining from taking any action which may have legal consequences. We accept no liability for any loss suffered as a result of your use of any information provided in the Update.
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