Companies Act 2006


The Companies Act 2006 is an act of the Parliament of the United Kingdom which forms the primary source of UK company law.
The act provides a comprehensive code of company law for the United Kingdom, and made changes to almost every facet of the law in relation to companies. Its key provisions were:
The bill for the act was first introduced to Parliament as "the Company Law Reform Bill" and was intended to make wide-ranging amendments to existing statutes. Lobbying from directors and the legal profession ensured that the bill was changed into a consolidating act, avoiding the need for cross-referencing between numerous statutes. The act was brought into force in stages, with the final provision being commenced on 1 October 2009. It largely superseded the Companies Act 1985: ministers suggested that one third of the Act simply restated the Companies Act 1985, one third modified it, and one third was completely new.
It is the single, longest piece of legislation passed by Parliament, totalling 1,300 sections and 16 schedules.

Implementation

A small portion of the act, including section 43 which transposed the EU Transparency Directive into UK law, came into effect on royal assent in November 2006. The first and second Commencement Orders then brought further provisions into force in January 2007 and April 2007. The implementation timetable for the remainder of the Act was announced in February 2007, by Margaret Hodge, Minister for Industry and the Regions. The third and fourth Commencement Orders brought a further tranche of provisions into force in October 2007, and the fifth, sixth and seventh in April and October 2008. The eighth commencement order, made in November 2008, brought the remainder of the Act into force with effect from October 2009.
The staggered timetable was intended to give companies sufficient time to prepare for the new regime under the act, rather than implementing all 1,300 sections of the act on one day.
Another reason for the staggered implementation is that, despite the act's size, a great many sections provide for subsidiary legislation to be brought in by Secretary of State, which required time to draft.
Implementation of the act was the responsibility of the Department for Business, Innovation and Skills.

Directors

The act replaced and codified the principal common law and equitable duties of directors, but it does not purport to provide an exhaustive statement of their duties, and so it is likely that the common law duties survive in a reduced form. Traditional common law notions of corporate benefit have been swept away, and the new emphasis is on corporate social responsibility. There are seven statutory duties placed on directors which are as follows:
  1. s.171 to act within powers – to abide by the terms of the company's memorandum and articles of association, and decisions made by the shareholders;
  2. s.172 to promote the success of the company – directors must continue to act in a way that benefits the shareholders as a whole, but there is now an additional list of non-exhaustive factors to which the directors must have regard. This was one of the most controversial aspects of the new legislation at the drafting stage. These factors are:
  3. # the likely long term consequences of decisions;
  4. # the interests of employees;
  5. # the need to foster the company's business relationships with suppliers, customers, and others;
  6. # the impact on the community and the environment;
  7. # the desire to maintain a reputation for high standards of business conduct; and
  8. # the need to act fairly as between members.
  9. s.173 to exercise independent judgment – directors must not fetter their discretion to act, other than pursuant to an agreement entered into by the company or in a way authorised by the company's articles
  10. s.174 to exercise reasonable care, skill, and diligence – this must be exercised to the standard expected of
  11. # someone with the general knowledge, skill, and experience reasonably expected of a person carrying out the functions of the director and also
  12. # the actual knowledge, skill, and experience of that particular director
  13. s.175 to avoid conflicts of interest – methods for authorising such conflicts by either board or shareholder approval are also to be introduced
  14. s.176 not to accept benefits from third parties – minor gifts which cannot be reasonably regarded as giving a rise to a conflict of interest may be accepted by the director, but this must be looked at contextually.
  15. s.177 to declare an interest in a proposed transaction with the company – there are to be carve outs for matters that are not likely to give rise to a conflict of interest, or of which the directors are already aware. There will be an additional statutory obligations to declare interests in relation to existing transactions.
Although the changes to directors' duties were the most widely publicised feature of the legislation, the Act also affects directors in various other ways:
  • s.239 The shareholders' ability to ratify any conduct of a director is regulated by the statute, although s.239 leaves the door open for common law principles, previously the only guide on this. Under the Act, directors who are also shareholders, or persons connected to them, are not entitled to vote in relation to any ratification resolution concerning their actions; they may, however, attend, be counted towards the quorum, and take part in the proceedings at any meeting at which the decision is considered.
  • Existing restrictions on companies indemnifying directors against certain liabilities were relaxed to permit indemnities by group companies to directors of corporate trustees and occupational pension schemes.
  • ss.261–263 gave shareholders a statutory right to pursue claims against the directors for misfeasance on behalf of a company, although the shareholders need the consent of the court to proceed with such a claim.
  • Certain transactions between the company and its directors which were previously prohibited by law have become lawful subject to the approval of shareholders
  • The Act requires at least one director on the board of the company to be a natural person, although corporate directors are still permitted.
  • The current age restriction of 70 for directors of public companies has been abolished. A new minimum age of 16 has been introduced for all directors who are natural persons.
  • Directors will have the option of providing Companies House with a service address, which will in future enable their home addresses to be kept on a separate register to which access will be restricted.

    General provisions

The Act contains various provisions which affect all companies irrespective of their status:
  • Company formation – the procedure for incorporating companies was modernised to facilitate incorporation over the Internet. It is now possible for a single person to form a public company.
  • Constitutional documents – a company's articles of association are its main constitutional document, and the company's memorandum is treated as part of its articles. New model articles for private companies to be made under the Act are intended to reflect better the way that small companies operate, and will replace the existing Table A. Existing companies will be permitted to adopt the new model articles in whole or in part.
  • Corporate capacity – under the new Act a company's capacity is unlimited unless its articles specifically provide otherwise, thus greatly reducing the applicability of the ultra vires doctrine to corporate law and removing the need for an excessively long objects clause in the memorandum of association.
  • Execution of documents – Formalities for execution as a deed are further revised, so that a single director can execute a document as a deed on behalf of the company by a simple signature in the presence of a witness.
  • Share capital – the requirement for an authorised share capital is abolished. Companies can redenominate their share capital from one currency to another without an order of the court.
  • Distributions in kind – The Act addresses the previous uncertainty in the law in relation to the transfer of non-cash assets by a company to a shareholder, and whether this should be treated as a distribution.
  • Shareholder meetings – The Act enables shareholder meetings to be held more quickly. Special resolutions now require only 14 days' notice unless proposed at an annual general meeting.
  • Shareholder communications – The Act made it easier for companies to communicate electronically with their shareholders by express agreement.
  • Auditor's liability – auditors are now permitted to limit their liability for claims in negligence, breach of trust or breach of duty so long as:
  • * the shareholders have approved the limitation in advance.
  • * the court considers the limitation of liability to be "fair and reasonable".
This change was made after intensive lobbying by the accounting profession in the United Kingdom.
  • Company Names Adjudicator – Section 69 of the Act provides for the appointment of a Company Names Adjudicator. A Company Names Tribunal was established on 1 October 2008 through which the Company Names Adjudicator will administer his powers via the UK Intellectual Property Office under the tribunal. Section 69 expanded the grounds under which any person can object to a conflicting company name registration under the Act.