24 Sep Companies Act 2006 Provisions/Director’s Duties
You may be aware that in late 2006 the Companies Act 2006 became law although it did not become fully effective until late 2009. This Act is said to be the largest single piece of legislation ever enacted in the UK with some 1300 sections and 16 schedules. The purpose of this letter is to highlight the key issues arising from the Act and its impact on the day-to-day operation of a private company.
In principle, the Act represents the result of a consolidation/codification exercise in which many existing provisions have simply been carried over into the new Act with little, or no, change. However, there is increasing evidence that the Department of Business is taking a stronger line in considering whether directors have complied with their Companies Act 2006 statutory duties of office (see below), particularly where companies have failed. In 2009 the number of director disqualifications was more than in the whole of the previous three years. Historically directors’ duties were mainly common law obligations but Companies Act 2006 now places such duties on a statutory basis and therefore it is perhaps easier to show that breaches have occurred. The main circumstances which can lead to a director disqualification order are where companies have continued to trade whilst insolvent, companies have operated to the general detriment of creditors, there has been a failure to keep proper books and records, file accounts, pay taxes when due or deal with other compliance obligations.
In view of the above, it is clearly important to ensure compliance with all the Companies Act requirements and the remainder of this letter outlines the recent key changes which are likely to affect private companies.
Electronic Communications (Effective date 1 January 2007)
All electronic communications (principally e-mails but also applicable to text messages etc) must include details of the company’s full name, place of registration, registered office and registered number. Similar provisions apply to company websites. Limited liability partnerships are also bound by these requirements, breach of which will incur a fine of up to £1,000.
Directors’ Shareholdings (Effective 6 April 2007)
There is no longer a requirement to maintain a register of directors’ (and their close relatives’) shareholdings or to disclose such shareholdings in directors’ reports signed after 6 April 2007 (although transactions with directors will continue to be disclosed usually as a note to the accounts).
Annual General Meetings/Written Shareholder Resolutions (Effective 1 October 2007)
There is no longer any requirement to hold an annual general meeting or indeed any other meeting at which shareholders are physically present, except in respect of resolutions to remove a company director or the company auditors. Most resolutions to be considered by shareholders are now able to be passed by written resolution. Written resolutions require the approval of a simple majority (ordinary resolutions) or 75% (special resolutions) of those eligible to vote.
Effective 1 October 2007 except the statutory duty to avoid conflicts of interest which became effective 1 October 2008
Perhaps the most significant change is that the duties of directors which have built up over the years via case law have been clarified, expanded and codified as statutory obligations as follows such that directors:-
- Must only act within the appropriate authority, i.e. in accordance with the company’s Articles of Association and decisions taken by the company’s members.
- Must promote the success of the company for shareholders’ benefit.
- Exercise independent judgment and use reasonable care, skill, and diligence.
- Must avoid conflicts of interest and in particular personal benefits should not be accepted from third parties and personal interests in proposed transactions or arrangements with the company must be declared. Note that directors will not be deemed to have breached the first or second of these duties (conflicts of interest/personal benefits) if authorization has been provided by independent directors or the shareholders, nor will a director be deemed to have breached the third duty (declaration of personal interest in proposed transactions) if the other directors were already aware of the interest.
- Must consider long-term consequences of any decision, the interests of the company’s employees, the impact of the company’s operations on the environment and community, the need to act fairly as between the members, the need to maintain high standards of business conduct, the interests of creditors and the need to foster (positive) business relationships with suppliers, customers, and others.
The Act also eases the procedure for action to be taken for breaches of the above duties. One relaxation, however, is that the previous prohibition on loans to directors is removed provided such loans are approved by the shareholders. (NB This relaxation does not extend to the adverse tax implications of loans to directors which continue to apply unchanged and also note that for accounting periods beginning on or after 6 April 2008 considerable detail must be disclosed in the notes to the accounts in respect of individual transactions on overdrawn balances.)
Accounting Records (Effective 1 October 2007)
The requirement under the Companies Act 1985 to keep “proper” accounting records has been replaced with a requirement to keep “adequate” accounting records. A new statutory duty is also imposed on directors to approve only accounts that give a true and fair view of the company’s assets, liabilities, financial position and profit or loss (thus clarifying the previous legal position under which company accounts had to be prepared to show a true and fair view or be prepared in accordance with International Accounting Standards).
Group Accounts (Effective 1 October 2007)
The previous exemption for medium-sized companies from the requirement to produce group accounts has been abolished and all companies except those which are small will have to include a business review as part of the directors’ report.
Accounts Filing Deadline (Effective date 6 April 2008)
The accounts for private companies (with a start date on or after 6 April 2008) need to be filed at Companies House within nine (previously ten) months of the balance sheet date and from 1 February 2009 accounts filed late incur higher levels of late filing penalties than was previously the case with additional penalties where accounts are late for two consecutive years. Where the balance sheet date is, say, 30 June the filing date will, however, be 31 March the following year rather than 30 March, as was the case previously under the “corresponding date” rule. The exact format and content of both full accounts and abbreviated accounts are similar to those previously in use and apply to account periods commencing on or after 6 April 2008. However, one significant change is that full details of all loans and advances to a director made at any time during an accounting period must now be disclosed in the company’s annual accounts.
Company Secretary (Effective date 6 April 2008)
There is no longer a requirement for a company secretary, although the position may be retained if so desired. Retaining the position of company secretary may be useful if the individual concerned holds 5% of the ordinary share capital but is not a director or employee and wishes to secure entrepreneurs’ relief for capital gains tax. Also retaining the position of company secretary may be appropriate where there is a sole director and the company secretary can be another person who could act in the best interests of the company if the sole director were incapacitated.
Company Constitution Matters (Effective date 1 October 2008)
The ability of private companies to repay issued share capital has been simplified and now involves a statutory solvency declaration by the directors rather than the need for court approval and the requirement for an auditor’s report for providing certain types of financial assistance has also been removed. Both new and existing companies will only be able to appoint directors aged 16 or over and will have to have at least one natural (i.e. living) person as a director, so it will no longer be possible to avoid director’s responsibilities through sole corporate appointments or the appointment of minors although there were transitional arrangements until October 2010 for some existing appointments.
Company Constitution Matters (Effective date originally 1 October 2008 but deferred until 1 October 2009)
Companies have been incorporated under the 2006 Act with effect from 1 October 2009. Such companies do not need to have a “Memorandum of Association” in the previous sense (the 2006 Act “Memorandum” simply consisting of the names of the subscribers), the need for Authorised Share Capital and Company “objects” has disappeared and new simplified model “articles” will apply automatically unless tailor-made articles are specifically adopted. Existing companies are able to adopt, via a special resolution, the new structure should they so desire although it should be noted that the common condition included in the past in the articles of private companies which gave the unfettered right to directors to refuse to register a share transfer for any reason has been outlawed by Section 771 C.A. 2006 which requires reasons to be given in all cases..
In conclusion, there are significant company law issues to consider as a result of the Companies Act 2006 which should not be overlooked. If there are any specific matters you wish to discuss then please do not hesitate to contact me accordingly.