Companies Act 2006 and private companies – key points

The Companies Bill, formerly called Company Law Reform Bill, received Royal Assent on the 8th November 2006. The Companies Act 2006 (‘the Act’) consists of 1300 sections and is the single largest piece of legislation ever made. Here, a legal expert looks at the main changes contained within the Act.

The Act is a comprehensive code of company law. It restates and replaces most of the Company Law provisions of the 1985, 1989 and 2004 (Audit, Investigations and Communities Enterprise) Acts and also introduces a wide range of changes to a number of areas such as the formation of company, directors’ duties and liabilities, shareholders’ rights, share capital maintenance, etc.

Key changes introduced by the Act

The key changes are as follows:

1. Codification of directors’ duties, including a new duty to promote the success of the company;

2. Giving all directors an option to file service addresses on the public record rather than private residential addresses;

3. Promoting shareholders’ engagement and a long-term investment culture through enhancing the power of proxies and enfranchising indirect investors;

4. Simplifying and de-regulating the legal requirements for running private companies through measures such as simplification of capital maintenance provisions, abolishing of the prohibition on financial assistance for private companies purchasing their own shares, etc.;

5. Extending rights of shareholders to sue directors for negligence and other defaults and rights to bring derivative claims on behalf of the company in certain circumstances;

6. Prescribing a new criminal offence of recklessly or knowingly including misleading, false or deceptive details in audit reports;

7. Introducing measures to allow companies to limit the liability of their auditors;

8. Simplifying the company formation process including abolishing the requirement for authorised share capital;

9. Facilitating e-communications;

10. Making it easier for company law to be updated in the future.

It is with changes to the private companies this article will now turn to.

Changes to private companies

A private company is defined in the Act as “any company that is not a public company”.

The government’s “Think Small First” approach in reforming the Companies Law Acts 1985, 1989 and 2004 has resulted in sweeping changes being brought into the running of the private companies in the Companies Act 2006.

The main changes to the private companies are set out below:-

1. New Model Articles for private companies

Articles are rules governing the internal affairs of a company. Model articles have been provided since Victorian times for certain types of companies, for example Companies Act 1985 Table A provides model articles for companies limited by shares. However, through the passage of time and in spite of several revisions, Table A has failed to take account of the changes in law and has become to a large extent irrelevant for companies, especially small private companies, who adopt it as their default articles.

In light of this and with a view of simplifying the legal framework for small private companies, separate sets of model articles for private and public companies limited by shares will be provided. In addition, for the first time, there will be a separate set of model articles for companies limited by guarantee.

Find out more about the Articles of Association, and the model articles here.

2. A private company will no longer be required to have a company secretary

Previously all companies are required to have a company secretary. The Act provides that private companies no longer are required to have a company secretary. However, if a private company decides to appoint a company secretary, then the authority of a private company secretary will be the same as that of a public one. Therefore, the appointment of a company secretary to a private company must be notified to the registrar of companies and be recorded in the company’s register of secretaries.

Find out about the company secretary role here.

3. Simplified decision- making process

The decision-making process of the private companies will be simplified by removing the statutory requirement of holding AGM and making it easier to take decisions by written resolutions.

Under the 1985 Act, private companies can resolve to use the elective regime to dispense with some of the formalities such as holding AGM, laying accounts, etc. The Act sets the elective regime as a default position for the private companies. To put it another way, no AGM will need to be held unless the company makes a positive decision to do so. It must be noted, however, members holding 10% of the voting rights can request a company to hold an AGM.

Previously, written resolutions must have unanimous consent of the members. The Act provides that the normal rule for special and ordinary resolutions will apply to written resolutions; in other words, a simple or 75% majority will be suffice to pass a written resolution.

4. Simplifying capital maintenance provisions through abolishing prohibition on financial assistance for private companies purchasing their own shares and introducing a simpler mechanism for capital reductions.

The Company Law Review (CLR), which was set up in 1998 to review the core company law with a view of modernising company law and making it more accessible and less bureaucratic and costly, concluded in its Final Report to the Secretary of State on 26th July 2001 that the capital maintenance provisions are largely irrelevant to the vast majority of small private companies given that the majority of small private companies have an issued share capital of £100 or less.

The 1985 Act recognised this by carving out a number of exceptions to the capital maintenance rules for private companies, but, because the relevant provisions are drafted as exceptions, private companies have to understand the rules and then identify the exceptions. In addition, the exceptions are not drafted in a simple, user-friendly language.

Furthermore, it is generally accepted that the rules are capable of catching potentially beneficial or innocent transactions. As a result, companies spent disproportionate amounts of time and money in structuring the transactions in order that they do not fall foul to these rules. CLR therefore recommended abolishing financial assistance provisions and simplifying capital reductions regime.

The Act implements the recommendations of CLR by introducing a number of deregulatory measures to remove rules which appear unnecessary and disproportionate for private companies including the financial assistance rules. Private companies will be able to give financial assistance for the purchase of their own shares subject only to the restriction or prohibition in their articles.

The Act introduces a new regime whereby a private company may now avoid the necessity of going to the court by utilising a new procedure under which share capital can be reduced through a special resolution of the members supported by a solvency statement made by the directors.

The Act also removes the shareholders’ approval for allotment of shares and empowers the directors to allot shares as they see fit subject only to the pre-emption rights and on condition that the company will have only one class of shares after the proposed allotment.

Other changes introduced in the Act such as simplifying the formation of company etc. are applicable to both private and public companies which will not be covered in this article.

It is designed that the changes in the law will not oblige the existing companies to do anything. However, companies, especially private companies that wish to take advantage of the benefits of new provisions in the Act will need to act accordingly. For example, if a private company wishes to have no AGM or no secretary as the default, then it will need to amend its constitution.

More information about the authors

If you need any advice on any aspect of the Companies Act 2006, please contact Sykes Anderson’s company commercial department, Senior Partner, Christopher Sykes, chris.sykes@sykesanderson.com; or Chris’s assistant, Commercial Solicitor, Peijun Xia, Peijun.xia@sykesanderson.com.

Please note that this area of the law is a complex subject and you should not take or refrain from taking any step without full legal advice on your particular circumstances. The content of this article is of a general nature and no liability is accepted in connection with it or if any reliance is placed on it.