The Companies Acts 2006

March 2008

Introduction

The Companies Act 2006 (“the Act”) is the latest attempt to codify and simply UK company law, and at the same time, to promote enterprise, investment and growth for businesses and companies in the UK.

The registered company was introduced to Scotland in 1856 by the Joint Stock Companies Act. Despite the great advances in trade and industry since then, company law has developed in a rather piecemeal fashion. In 1985, after a consultation with the Law Commissions, it was decided to consolidate the various company law acts and produce a single main act: the Companies Act 1985, which was later amended by the Companies Act 1989.

However, despite the continued aim to produce a single act, modern company law was still to be found in a number of acts, such as the Insolvency Act 1985, the Financial Services Act 1986, the Criminal Justice Act 1993 and several Statutory Instruments.

In 2002 the Government published a Company Law Reform White Paper, detailing a number of company law reform proposals and giving a sign of what was to come in the future. After a period of 4 years of consultations, the reforms were set out in the Companies Bill 2006, and on 8 November 2006, the Companies Act 2006 received Royal Assent and was brought into force.

The rationale behind the Act

The Act was born out of a reform ideology supporting enterprise, investment and growth for businesses in the UK. The Act is one of the longest UK Acts of Parliament, with four clear themes:

1. Make the incorporation and running of a company easier
2. Motivate shareholder involvement
3. Enable flexibility for the future, and
4. Give clearer regulation and improve governance

The desire to simplify the running of a company (it should be noted here that the Act eases the burden on private companies more so than public companies) will, if achieved, result in considerable financial savings for companies, particularly as directors or other office holders will potentially not have to seek advice on any particular matter.

Implementation of the Act

The commencement timetable for the Act has, after some alteration and change, been finalised, in terms of a Government written statement on 13 December 2007.

It is important to remember, especially when considering the following points in relation to the Act, that the commencement dates are subject to change, and we are relying on the Table of Commencement Dates available at the time of writing.

At present, there are four commencement dates:

1. 1 October 2007
2. 6 April 2008
3. 1 October 2008, and
4. 1 October 2009

It is not possible here to discuss every provision that has come into force, and we have selected those we feel will be of interest to our clients.

1 October 2007 commencement

Directors’ Duties (Part 10 of the Act)

Directors are the key players in any company, and they are already subject to the Act’s sections on director’s duties. The principal benefit of Part 10 of the Act is that it codifies what was previously an area of company law largely based on common law.

Although the codification is welcome, when the issue was first raised in Parliament it was hotly disputed. In any codification, there are justifiable concerns as to what provisions will be included; it will only be through the test of time that we will see if the aim of certainty and clarity of director’s duties is achieved.

There are 7 general duties set out in Part 10 of the Act, most of which are not surprising, such as the directors’ duty to act within their powers’; duty to promote the success of the company for their members’ benefit; and a duty to exercise reasonable care, skill and diligence.

Given the extent of the duties, it would seem prudent for minutes of director’s board meetings to specifically state that they have considered their duties in terms of the Act.

A reasonable concern has been raised by some that the codification of directors’ duties may lead to directors facing a notable increase in breach of duty claims if they have not considered every duty, including in particular the subsidiary interests with regard to the duty to promote the success of the company (such interests being, amongst others, the long term consequences of a director’s actions; the interests of the company’s employees; and the effect of the company’s operations on the community and the environment). The Government, not agreeing with the above concern have, however, amended the statutory derivative claims procedure (a claim brought by a shareholder on behalf of a company) to make it easier for Courts to prevent frivolous or vexatious actions.

Loans to Directors

The previous company law regime prevented a company making a loan to a director. The Act has changed this so that companies can make loans to directors provided there is shareholder approval.

Small loans to directors (the threshold for small loans has been increased from £5,000 to £10,000) do not require shareholder approval.

Substantial Property Transactions

Before the Act, a company could not, without the approval of the general meeting, enter into a transaction with a director involving the transfer of a “non-cash asset”, e.g. property, if the value of the asset exceeded £100,000 or 10% of the company’s net assets, provided the asset is not less than £2,000.

The Act now provides that companies may enter into an arrangement conditional on shareholder approval being obtained.

The £2,000 threshold has been increased to £5,000

Resolutions and Meetings (Part 13 of the Act)

Resolutions and meetings of company are extremely important to a company, as this is the way it makes decisions. The Act simplifies the way in which private companies make decisions – either at meetings or by written resolution.

One of the marked changes is that the notice period for all extraordinary general meetings (there is now no requirement for private companies to hold annual general meetings) is 14 clear days – regardless of the type of resolution to be considered at the meeting. This helps simplify the process of convening meetings of a company.

Another noted change is in regard to written resolutions. Written resolutions are no doubt the most popular way of passing resolutions in smaller private companies as there is no requirement for an actual meeting to be convened. Before the Act, in order for a written resolution to be passed, all members entitled to vote had to agree and sign the resolution. The Act now allows for ordinary written resolutions to be passed by a majority of the shareholders signing, and special written resolutions may be passed by a minimum of 75% of the shareholders entitled to vote signing.

A written resolution requires to be circulated to all shareholders, although there is no need to get a signature if a shareholder’s agreement is signified in writing in some other way, such as an e-mail. This positive change allows much greater use of written resolutions and effectively means that a private company may rarely ever have to call an EGM again. As a result, private companies can make quicker decisions without the worry of complying with any notice period for meetings. A real step forward in modernising company procedures.

Directors Reports and Business Reviews (Part 15, section 417)

All companies, with the exception of small companies, are now required to produce a review to inform members as to how the directors have performed with regard to their duty to promote the success of the company.

This requirement applies to director’s report for the financial year beginning on or after 1 October 2007.

Future changes

There are many changes to company law in terms of the Act that have yet to be implemented. It is beyond the scope of this paper to deal with them, although we shall update you nearer the relevant commencement dates.

The next commencement date (6 April 2008) will see the introduction of another substantial change to the existing company law: private companies will no longer require a company secretary.

Conclusion

Company law is changing; as a result, companies, directors, shareholders and anyone else with an interest in a company has to keep up-to-date with the implementation of the Act.

We shall publish information in due course to help you as other important provisions are brought into force.