The Companies Act 2006 – Company law reform is almost complete

Wednesday 7th January 2009

In my article in Strategic Direction Vol 24 No 5 2008 p 40, I dealt with the codification of the duties of directors.  Since then, the implementation of the 2006 Act has progressed and 1 October 2008 has seen the introduction of other major provisions, some of which are examined in this article. The article refers to private companies, as public companies retain some wider regulatory requirements that space here does not permit me to comment upon in detail.

The main provisions coming into force are these:

·         New company and business names rules will set out the way in which numbers, letters and symbols may be used in a company’s name, to take account of the increasing use of internet-style manifestations of company identity. Rules providing for appointment of an adjudicator of company names will make fairer the resolution of disputes between companies over their respective names and styles.

·         The company will no longer be able to have a single corporate director (a provision designed to prevent directors’ duties being assumed by a single corporate “shell” entity and thus unenforceable); and a requirement that directors must be 16 or over – perhaps surprising, given the number of early- age entrepreneurs these days.

·         The abolition of the need for shareholder addresses to appear on the company’s annual return. Annoying, as it was a useful source of this information.

·         The abolition of the restriction on private companies in relation to financial assistance given by the company for the acquisition of its own shares – and the final demise of the much-hated need for a “whitewash” of procedural documentation in many banking transactions.

·         New rules relating to reduction of share capital by companies, of particular benefit to private companies, and clarification of the accounting treatment of reserves which arise from a reduction of capital, the vast majority of which can now be carried out without the need for a costly and time-consuming application to the Companies Court.

·         Implementation of rules – alluded to in my previous article mentioned above – which affect directors’ duties to avoid a possible conflict of interest between the director’s own and the company’s interests.  These rules may have impact on such matters as accepting hospitality from customers and suppliers and will certainly require companies and their advisers to examine the regular process of declaration of interest at board meetings by directors.  For the first time, a private company will be able to give power to its board to authorise conflicts – although this will not obviate the need for directors to draw the attention of their board colleagues to potential conflict situations.  This will, however, prevent the need to call a shareholder meeting to authorise an otherwise conflicting situation.  These powers may only be exercised providing the company’s own articles of association permit board authorisation – which many currently do not.

This emphasises a point and constitutes only one example of why many smart companies and their advisers are now spending time in reviewing the company’s constitutional documents to make sure they will comply with the 2006 Act and – importantly – are entirely relevant to the company’s own current situation. It ought to be said that Parliament’s intention to simplify company law will only be justified if individual companies ensure they can fully take advantage of these provisions, by removing from constitutional documents those elements that, if not removed, will continue to impede adoption of the 2006 Act’s new codes.  This is because the 2006 Act specifically says that in such cases, restrictions in the company’s own constitutional documents will still take precedence over the broader authorisations conferred by the Act.

What remains to be implemented?  1 October 2009 will see, for company law practitioners at least, some changes in company structures with which they will feel most unfamiliar:

·         One of these will be the new Table A, which for newly-formed companies (though not existing ones) will be the default regulations that will apply to the company unless the company decides to adopt its own form of articles of association.  The new Table A replaces that established in 1986, which has been a familiar friend, and sees the introduction of a plain English version of Table A – some will say not a moment too soon.

·         Another major change next year and again a voyage into unfamiliar territory for practitioners, will be the abolition of the (admittedly archaic) distinction between authorised and issued capital.  For most purposes, it is only issued capital that has mattered for many years now and we have all struggled with the requirement for a company to possess sufficient authorised capital to meet its capital issue requirements.  After 1 October 2009, the form of capital that will matter will be issued capital, doing away at a stroke with the need to increase authorised capital to permit further issues of shares. 

·         At the same time, readers will begin to notice a fundamental change in the format of company constitutional documents, as the 19th century Memorandum of Association will be abolished for new companies, leaving them with a single governing document in the form of Articles of Association. This will include powers and objects as well as a company’s regulations capital being recorded in an updatable statement of capital filed with the Registrar of Companies. 

·         The final opening-up of the rules on a purchase of its own shares by a private company will also have to wait until 1 October 2009, completing the simplification of procedures for corporate restructuring, at least within private companies and groups.

All these changes will go some way to satisfying Parliament’s objective in codifying company law, which was to simplify company administration and remove unnecessary regulation. Nonetheless, corporate advisors will no doubt retain their jobs, as the new Act, having introduced its own new chapters of byzantine provisions, will give us an honest living for many years to come.