Companies Act 2006 - A New Year's Resolution For Private Companies
With the October 2007 changes now behind us and in the wake of the recent announcement that many of the provisions of the Companies Act 2006 (the New Act) that we had expected to come into force in October 2008 will now be delayed until October 2009, Irwin Mitchell have created a quick reference guide.
Our guide looks back at some of the main reforms which took effect during 2007 as a result of the implementation of the New Act, highlights some of the more noteworthy changes that will take effect in Spring 2008 and assesses whether together these will provide a new year's resolution to the administrative and regulatory burden faced by those who own and run smaller private limited companies.
New Provisions in 2007
The New Act has formally recognised that more and more of us are happy to send and receive information and documents electronically; that we are willing, and often prefer, to view and download documents from websites, rather than relying on the postal system to deliver documents in hard copy.
Since January 2007 it has provided a new set of rules which companies must follow if they want to start sending and receiving documents and information in electronic form (by fax, email or on a disk) or by means of their website. The new regime should prove to be helpful for all types of company but it is clearly the larger public companies which will see the most significant savings in the form of reduced publishing and printing costs.
Companies wanting to take advantage of these reforms may need to amend their articles, obtain members' approval (by way of a written resolution or in general meeting) and must seek the consent of individual members before doing so. They should therefore seek legal advice.
It is also worth noting that, alongside these new provisions, came regulations that required companies to include specific corporate information in their emails and on their websites as well as on their paper stationery. Companies should already have reviewed their business letters, order forms, electronic communications and websites to ensure compliance.
Written Resolutions of Members
As all members of a private limited company no longer need to sign a written resolution (the relevant majority is all that is required and this is depends on type of resolution being proposed) it is not surprising that we are seeing more written resolutions being passed by such companies and fewer general meetings being called. But it should be remembered that the following new requirements also apply to such written resolutions:
- They should state the date on which they are first sent to members (because in most cases they will lapse if not passed within 28 days of that date).
- Signatures will also need to be separately dated (so that the date that the resolution is passed can be ascertained).
- They must now contain or be accompanied by a statement explaining how members can agree to the resolution and the date upon which it will lapse.
Written resolutions still can't be used to remove directors or auditors from office.
Meetings of Members
Under the New Act, private limited companies no longer need to hold annual general meetings (AGMs) but again, they may need to change their articles before they can take advantage of this relaxation and so should seek legal advice before they stop holding them. The statutory minimum notice period for all meetings of members of private companies has changed to 14 days, but a company's articles may state a longer period.
Under the New Act all members have the right to appoint a proxy and this right cannot be excluded by a company’s articles. Members of companies with a share capital can appoint more than one proxy with each proxy being able to exercise rights in relation to different shares. Proxies have the right to attend, speak and vote at meetings. Proxies appointed to vote may also demand or join in demanding a poll. Notices of general meetings must now contain new statements regarding these enhanced proxy rights.
In its most recent Commencement Order the Government has taken the opportunity to resolve the two issues detailed below that were proving problematic for Corporate Lawyers and their clients after the October 2007 implementation date.
AGMs and Elective Resolutions
Before the requirement for private limited companies to hold AGMs was removed in October 2007, some private companies (which had provisions in their articles requiring AGMs or incorporated the 1948 Table A) had passed and were relying on elective resolutions which dispensed with the need to hold AGMs.
After the October changes took effect, it was not clear whether their elective resolutions were still effective. It has now been confirmed that such companies do not need to hold AGMs if their elective resolutions were in force immediately before the October 2007 changes took effect.
Casting Votes at Meetings of Members
The October 2007 changes also cast serious doubt on whether a Chairman's casting vote could be used to pass a resolution in general meeting. It has now been confirmed that provided that a company's articles, immediately before 1 October 2007, included a provision giving the chairman of a general meeting the right to a casting vote in the event of an equality of votes (so that an ordinary resolution could be passed), that provision remains effective.
New Provisions 6 April 2008
From 6 April 2008, there will be no statutory requirement for private limited companies to have a company secretary, although they can have one if they choose to.
This may seem attractive but the tasks which have historically fallen to be performed by the company secretary (maintaining up to date registers, preparing and circulating information to members and filing returns and forms at Companies House) will not disappear with the role and so directors will need to perform these tasks themselves or make alternative arrangements to ensure compliance in these areas.
If private companies have specific provisions in their articles which expressly require the company to have a company secretary, they will need to amend their articles before taking advantage of the change. The Government's view is that Table A does not require a private company to have a company secretary.
Execution of Deeds
Because, after 6 April 2008, some private companies will have a sole director and no company secretary, from that date, one director will be able to validly execute a deed on behalf of a company in the presence of a witness.
This will make life easier for companies but significant documents must still be considered by the board of directors (when companies have more than one director) and approved in line with their new statutory duties (which came into force in October 2007) and their remaining common law duties.
Accounts and Reports
In October 2007, the New Act brought a new requirement for the directors' reports of companies that do not fall within the small companies' regime to include a business review. 6 April 2008 will bring the following further changes in relation accounts and reports for periods beginning on or after that date:
- Private companies will need to circulate copies of their accounts and reports (to members, debenture holders etc.) by the deadline for delivery to Companies House or, if earlier, the date that they are delivered to Companies House. The period for circulation is no longer linked to the date of an AGM as private companies no longer need to hold AGMs under the New Act.
- Private companies will be required to deliver their accounts and reports to Companies House within 9 months after the end of the relevant accounting reference period (reduced from 10 months). Different periods apply for first accounts.
From 6 April 2008, the New Act will allow auditors to limit their liability by agreement with a company which is authorised by its members. However, such agreements will not be effective if they are not fair and reasonable. It will also introduce the new concept of a senior statutory auditor who will need to sign the audit report in his or her own name on behalf of a firm of auditors. Although the ability to limit their liability is a significant win for audit firms the New Act will also create a new criminal offence, punishable by fine, in relation to audit reports which include any matter which is misleading, false or deceptive.
Transfers of Shares
From 6 April 2008, directors must either register a transfer of shares in a company or give notice of their refusal to register the transfer (which is only an option if the articles provide a power of refusal) together with the reasons for such refusal as soon as practicable and at the latest within 2 months of the transfer being lodged.
Since 1989, the decision in the case of Aveling Barford v Perion, has caused problems when companies have wanted to transfer assets within groups at less than their market value. If such transfers were distributions under the Companies Act 1985, how should the amount of the distribution be calculated? This was important as the transferor company needed to have distributable profits of an equivalent amount at the time of the transfer if the distribution was to be lawful.
From 6 April 2008, the New Act will confirm that where the transferor company has positive distributable reserves, the amount of any distribution arising from transfer by a company of a non-cash asset to a shareholder should be calculated by reference to the asset's book value.
This will mean that, where a company which has distributable profits transfers an asset at a book value which is less than market value, the amount of the distribution will be zero and the distribution will be lawful. If the asset is transferred for less than its book value, the amount of the distribution will be the difference between its book value and the consideration paid for it and this amount must be covered by the company's distributable profits.
Although the vast majority of UK companies are small private companies, company law has traditionally been written with larger companies in mind. One of the aims of the New Act was to address this problem by finding ways to lighten the regulatory load for smaller private companies making it easier for them to thrive.
Several of the provisions highlighted in this guide will, subject to a little investment in ensuring proper implementation, be helpful to many private companies and go some way towards achieving that aim. They should:
- Encourage such companies to open new lines communication with their members;
- Facilitate speedier and more cost effective decision making; and
- Allow for such companies to operate under the direction of a single officer (the sole director).
But we will need to wait until October 2009 when the New Act will be in full force and we will see the first companies registered under the New Act being incorporated at Companies House (with unrestricted objects and simpler constitutions) before we can see the full picture and properly assess whether the Government has succeeded in getting the balance right.