Corporate Focus- November 2009

Getting our Act together

The Companies Act 2006 (“the 2006 Act”) is the result of the biggest overhaul of company legislation in the UK in the last hundred years. The provisions of the 2006 Act have come into force in stages over the past two years, but the final provisions came into force on 1 October 2009. The new legislation aimed to completely overhaul company procedure and requirements, in most cases serving to deregulate and simplify procedures in favour of smaller owner-managed businesses. This update is a practical overview of some of the key changes and their effects.

Constitution

For companies incorporated after 1 October 2009, the constitutional documentation has changed. Although the articles of association remain the main governing document, the memorandum of association now plays a much lesser role. The memorandum of association is now a much shorter document containing only a statement that the subscribers wish to form a company and they agree to become members and take at least one share each. It cannot be amended post-incorporation and it serves, in fact, as just a source of information as to the position of the company as at the date of incorporation.

For companies incorporated before 1 October 2009, any part of its existing memorandum that goes beyond the new requirements will be treated as part of the company’s articles; the company will therefore be bound by such provisions unless the articles are specifically altered by a special resolution. This includes the objects clause and the statement of authorised share capital.

Under the 2006 Act, a company’s objects can be unrestricted and so therefore the objects clause is no longer required. The concept of an authorised share capital has also been abolished under the 2006 Act and the amount of share capital will therefore be unrestricted unless the articles provide otherwise. To take advantage of such changes, however, pre-1 October 2009 companies will need to amend their articles accordingly as the changes do not automatically override other provisions of existing articles of association.

The Companies Act 2006 provides new model articles for private companies limited by share, guarantee and also public companies incorporated after 1 October 2009. A company can be incorporated using the model articles, if they are felt to be sufficient for the company’s purposes, or it can use bespoke articles, or a combination of the two. Legal advice should be sought to make sure that your proposed articles contain the correct provisions to help you run your business effectively and efficiently.

Companies incorporated before 1 October 2006 would also be advised to take legal advice as to the way in which their existing articles may be changed to take advantage of the new, often simplified, procedures or, where appropriate, to include appropriate shareholder/investor protections.

Changes for directors and secretaries

Directors

The 2006 Act sets out the general duties a director owes to the company. This statement of duties replaces the common law and equitable principles derived from case law and puts directors’ duties onto a statutory footing for the first time. Directors will be personally liable for breach of their statutory duties and it is therefore very important that they make themselves aware of their obligations in this regard.

Directors’ duties under the 2006 Act include:

Duty to act within powers.
Duty to promote the success of the Company.
Duty to exercise independent judgment.
Duty to exercise reasonable care, skill and diligence.
Duty to avoid conflicts of interest.
Duty not to accept benefits from third parties.
Duty to declare interest in proposed transaction or arrangement.

In addition, the requirements as to who can be a director have slightly changed. A private company still needs only one director, although a public company must still have at least two, but there is a new requirement for all companies that at least one director must be a natural person. Those companies which previously had only corporate directors will have until 1 October 2010 to make the necessary changes in order to meet this new requirement.

Also in respect of directors, the retirement age for directors has now been removed, however a new minimum age requirement of 16 years of age has been brought in by the 2006 Act.

Secretaries

Private companies are no longer required to have a company secretary under the new 2006 Act although they may still have a company secretary if they wish to. A company’s articles must reflect the company’s chosen position; if your articles require you to have a company secretary then you must either have a company secretary or amend your articles accordingly.

It should be noted though that the role of the company secretary will still need to be fulfilled regardless of whether you appoint a company secretary or not. Someone must therefore be responsible for filing documents at Companies House, updating internal registers and so forth. A failure to meet a filing requirement, for example, may incur a penalty by the Company. It may therefore be wise to either retain/appoint a company secretary or delegate that role to a specific person or persons so as to avoid an inadvertent failure to comply with such responsibilities.

The new Act does allow for a sole director to be appointed and has provided for new signatory provisions accordingly; however if there are any provisions in the company’s articles requiring the action or authorisation of both a director and company secretary, this cannot be carried out by the same person. A company must check its articles for such contradictory provisions if it wishes to remove the company secretary, and have just a sole director.

General corporate housekeeping

Change of name

It will now be easier for a company to change its’ name as this can still be done by special resolution, however it will also be possible to change the company name by any other method specified in the articles. When informing Companies House of the change you must, however, also file either a copy of the special resolution or a statement confirming that the change was made pursuant to the provisions set out in the articles.

Execution of deeds

In addition to existing methods, a company can now validly execute a document by signature of a single director, provided that the deed is signed in the presence of a witness.

If you want to ensure that deeds are only ever signed by two directors then you must amend your articles accordingly to provide for such restriction.

Registers

The 2006 Act makes new provision for the privacy of directors’ residential addresses. A director must still provide details of his residential address to the registrar, but he may also now provide a different service address (which can be the company’s registered office or any other UK address, other than a PO Box number). The service address will then be placed on the public register in place of his residential address, which will only be disclosed on request to certain authorised organisations as specified in the 2006 Act.

A company must now keep a separate register of the directors’ residential addresses which must be made available for inspection at the company’s registered office, or at a “single alternative inspection location). Companies House must be notified of the location that the register is held at.

Resolutions and meetings

The procedure for private companies to pass written resolutions has now changed. Passing a written resolution no longer requires unanimity; now it just requires the same percentage of votes as the same resolution would require if passed during a general meeting i.e. 50% plus one for an ordinary resolution or 75% for a special resolution.

Under the new Act there is no longer a requirement for a private company to hold an annual general meeting (AGM) at all. However if a company’s existing articles certain an express requirement for an AGM held, then the company must comply with this, unless the articles are amended accordingly.

Accounts and filing requirements

The directors of a private company have until nine months after the company’s year end in which to file the annual accounts and reports at Companies House. It should be noted, however, that they no longer have to produce the accounts at a general meeting beforehand unless required to do so by the articles.

Conclusion

The Companies Act 2006 is the result of a long-overdue review and overhaul of company law. Private companies in particular will benefit from the deregulatory reforms, which will go some way towards easing the administrative burden which has complicated procedures under previous company legislation. For public companies the changes will have a less dramatic impact. As with all new legislation, the full effect of the new provisions will, however, only be seen with the emergence of case law.

If you want to know more about the changes effected by the Companies Act 2006 and the potential implications for your business, please contact Lynne Rathbone on 0151 243 9833.