How does the Companies Act Affect Your Business?

The final provisions of the Companies Act 2006 (‘the Act’) came into force on 1^st October 2009. The purpose of this document is to provide a very brief overview of the changes contained within the Act’s 1300 sections and how these affect private companies. Please note that this document does not consider the position of public companies under the Act.

 

There are a number of provisions contained within the Act that relax the previous provisions of the Companies Act 1985, but many of these require the company to take action in order to benefit from the relaxations.

 

References to sections within this document are to sections within the Act.

 

The purpose and form of the Memorandum of Association is fundamentally different under the Act.

 

From 1^st October 2009 any new company incorporated will be provided with a new form of Memorandum, which is a historical statement of who the subscribers to the company are, that they wish to form a company and that they agree to become members and to take at least one share each.

 

For companies incorporated before 1^st October 2009, the Act has the effect of moving any provisions previously contained in the old style Memorandum into the Articles. So, by way of example, the objects clause in an old style Memorandum stating what a company can and cannot do, will now be deemed to have transferred to the Articles as a restriction as to what the company may and may not do.

 

A company now does not need to have a declaration of its objects, it can in effect be unrestricted and therefore the company can remove the restriction from its Articles by way of special resolution, but it must also file notice of the removal at Companies House pursuant to section 31(2) of the Act.

 

There are now new model articles that are fully compliant with and compliment the provisions under the Act. There are 3 forms of Articles for: private companies limited by shares; private companies limited by guarantee; and public companies. The format of these articles is available on the Companies House Website

 

Under the Act a company is no longer required to have an Authorised Share Capital. For new companies incorporated after 1^st October 2009 this concept will not exist. For existing companies pre 1^st October 2009, the Authorised Share Capital will continue to exist, but was automatically deemed to have moved from the Memorandum to the Articles, where it will continue to remain as a restriction preventing directors from allotting new shares above the stated limit unless the company removes the restriction by special resolution.

 

The Act now permits directors of private companies with only one class of shares to allot new shares without needing to obtain the authority of the shareholders, unless the Articles prohibit them from so doing (section 550). This power is only exercisable by companies existing pre 1^st October 2009, if the company passes an ordinary resolution authorising the directors to so act.

Under the Act it is easier for a company to change its name. Previously a special resolution was required to change the name. The default position remains that a special resolution is required, but the Articles can now provide for a different method, for example allowing the directors to change the name by board resolution (section 77).

Companies have long since been required to include their details on letters and hard copies of documents. However, a company is now required to display its full name, registered office address, place of registration and its registration number on all business correspondence and documentation including websites and emails. Failure to do so is an offence by the company and its officers.

 

Under the Act a company must keep its registers available for inspection either at the registered office or at a “single alternative inspection location” (SAIL). If the company utilises a SAIL then it must notify Companies House.

 

The Act provides greater confidentiality for members. Any person wanting to inspect a company’s register of members must tell the company the reason why the information is required and whether they intend to disclose the information to anyone else (section 116). The company then has five working days within which to comply with the request or to apply to the Court for an order that it need not disclose on the grounds that the information is not being requested for a “proper purpose”.

 

The Act now requires companies to keep two separate registers of directors. A general register of directors (section 162) and a private register of director’s residential addresses (section 165). The former register is open to the public and a director may now stipulate in this register a service address, which may be the company’s registered office address.

 

A director’s residential address is now “protected information” under the Act 2006 and is only disclosed in certain limited circumstances. However, this is not retrospective and Companies House will only remove a director’s residential address from historic filed documents in limited circumstances.

 

If a company has a secretary, it must have a register of secretaries, which includes an address for the secretary, although this no longer needs to be the secretary’s residential address, it can be a service address (section 275).

 

The Act has now provided a statutory codification of directors’ duties, which previously was to be found in case law. A director’s duties to the company are now:

§                     to act within their powers (section 171) – within the company’s constitution and for a proper purpose

§                     to promote the success of the company (section 172) – a director must act in the best interests of the company and in good faith taking into account six factors of “responsible business behaviour”: the likely long term consequences; the interests of employees; business relationships with third parties; any impact on the environment; maintaining reputation; and acting fairly between members.

§                     to exercise independent judgment (section 173) – but directors can still be bound by an agreement that restricts the director’s discretion

§                     to exercise reasonable care, skill and diligence (section 174) – there is an element of subjectivity in this test in that if the director is specialised in a particular area (e.g. financial) then this will be taken into account in assessing the director’s actions

§                     to avoid conflicts of interest (section 175) – the board of directors may ratify a conflict provided that nothing within the Company’s Articles prevents them from so doing. However, for companies existing pre 1^st October 2008, the company must first pass an ordinary resolution granting the directors the power to ratify such conflicts of interest. Careful consideration should be given to companies having only one director as it is unlikely to be possible for the company to ratify any situations where the director is conflicted. Whilst it may not be an immediate problem in small owner/managed companies, as it is unlikely that the company (through its members) would ever take action against the directors, but consider the position if the company encounters financial difficulties and an administrator is appointed. The administrator may decide to take action against the director personally as a method of regaining monies for the creditors, if procedures have not been followed properly.

§                     not to accept benefits from third parties (section 176) – it is yet to be seen whether this will have an impact on hospitality received by directors! Unlike conflicts of interest, the board are not able to ratify the acceptance of benefits from third parties.

§                     to declare any interest in a proposed and actual transaction or arrangement (section 177) – the director must declare the interest before the transaction is entered into stating the nature and extent of the interest.

 

Under the Act it remains the position that a private company may exist with only one director, but it must now have at least one director who is a natural person (section 155). Companies that had only corporate directors as at 8^th November 2006 have until 1^st October 2010 to appoint at least one natural director.

 

The Act does not impose any upper age limits for directors and therefore there are no longer special provisions for directors over the age of 70. However, directors must now be at least 16 years old (section 157).

 

Under the Act, since April 2008, a private company no longer needs to have an appointed company secretary, but it may have one if they choose to (section 270). However, the company must still comply with statutory filing requirements and therefore it would be sensible for someone to be responsible for this task, whether or not they are formally appointed as such.

 

The requirement for a private company to hold an AGM has now been removed. A company can of course still choose to hold an AGM and if the Articles specifically provide for this then the Company must hold and AGM unless the provision is removed.

 

The minimum amount of notice for private companies to call meetings has now been reduced to 14 days (previously 21 days). If the Articles require longer notice then this must be observed unless the restriction is removed.

 

For a private company to call for a general meeting to be held on short notice, it requires only the agreement of 90% of its members, rather than the previous requirement of 95% of the vote. Again, if the Articles provide for different requirements then the Articles must be followed, until they are amended.

 

There is now a statutory procedure (sections 288-300) in the Act for private companies to pass resolutions in writing without need for a formal meeting. Written resolutions do not require unanimity of members’ votes and can be passed on the usual majorities, simple majority for ordinary resolutions and 75% for special resolutions. There are specific provisions that must be followed in order to take advantage of this procedure and it can only be used where the requirement for the resolution is pursuant to the Act and it cannot be used where the requirement is resultant of an alternative procedure laid down solely in the Articles.

The filing requirements have been tightened and a private company is now required to file its accounts within 9 months (previously 10 months) of the end of its relevant accounting date (section 442).

 

This area is covered in our separate article “Execution of Documents”.

 

o       Ensure that all directors are fully aware of their statutory duties and obligations.

 

o       Consider whether amendments are required to the articles to regularise the position to remove restrictions transferred across from the old Memorandum relating to the objects of the company and the authorised share capital.

 

o       Consider adopting the new model Articles, which will be compliant with the new Act and will avoid the conflicts between the old Table A Articles and the new provisions.

 

o       Consider passing resolutions required to take advantage of the relaxations introduced by the Act (e.g. authorising directors to allot shares; and allowing the board to ratify conflicts of interests).

 

o       Consider group structures and whether there are subsidiary companies without any natural directors.

 

o       If you choose not to have a company secretary, consider who should be responsible for ensuring that Companies House filing is carried out when required.

 

o       If your company uses the written resolution procedure, ensure that your templates are now compliant with the new procedures under the Act.

 

o       Ensure that the company’s registers are compliant and that there is separation (if required) of directors’ service and residential addresses.

 

o       Consider the location of the company’s registers and whether a SAIL notification to Companies House is required.

 

o       Ensure compliance with the obligation for the company to disclose its statutory information on all hard copy documents, emails and websites. It is not necessary to repeat the information on each and every website page, but it must be prominent.