Companies Act 2006 - New Provisions April 2008
From 6 April 2008 a private company no longer has to have a secretary (but it may still decide to have one). Public companies must still have a qualified secretary.
The change for private companies has no automatic impact on secretaries of private companies in office on 6 April 2008 who will continue in office until their appointment ends in the usual way (eg. by resignation or removal). Bear in mind that resignation or removal may have employment consequences and the administrative tasks previously performed by the secretary will need to be reassigned.
Before a secretary resigns to take advantage of the change it is important that the company's articles are reviewed and we can help with this. The review is needed because if a private company's articles immediately before 6 April 2008 expressly required it to have a secretary it must continue to have a secretary until its articles are amended to remove the requirement.
This can be achieved by passing a special resolution in general meeting or as a written resolution before the resignation takes effect. Provisions in the articles which require or authorise things to be done by or in relation to a secretary, or as to the manner in which, or terms on which, a secretary is to be appointed or removed are not provisions expressly requiring the company to have a secretary. The Government's view is that Table A does not require a private company to have a secretary.
After 6 April 2008, where a private company does not have a secretary:-
- anything authorised or required to be done by the secretary may be done by another officer of the company.
- paragraphs in Board Minutes which have traditionally recorded that the secretary be authorised and instructed to perform tasks such as circulating resolutions, filing forms at Companies House, issuing share certificates etc. will need to be amended so as to refer instead to any director or a named director.
Execution of Deeds
Under the Companies Act 1985, a simple contract can be made by a company or on behalf of a company by any person (for example, a director) acting under its authority (express or implied) but special requirements apply to deeds. Deeds must be executed by a company in one of two ways:
- by affixing the company's seal (if the company has one). A company's articles may specify that extra formalities apply when the seal is used; or
- by a director and secretary of the company or two directors each signing the document and by the document being expressed to be executed by the company.
Under the Companies Act 2006 these requirements will change. Although the change has come about largely because after 6 April 2008 some private companies will have neither a seal nor a secretary and may have only one director, the change will apply to all companies.
From 6 April 2008, a company will still be able to execute a deed using its seal (if it has one) but it will also be possible for deeds to be validly executed if signed on behalf of the company:
- by two authorised signatories (directors and secretaries are authorised signatories); or
- by a single director in the presence of a witness.
The new rule allowing a single director to sign in the presence of a witness applies in relation to documents executed on or after 6 April 2008. Execution clauses in deeds executed on behalf of companies may therefore need to be amended where it is proposed that they be executed under the new rule. Significant documents should still be considered by the board of directors and approved by resolution of the directors before execution in proper performance of the directors' duties.
Accounts and Reports
Classification of Companies: Under the Companies Act 1985 some companies qualify as "small companies" and as such are allowed to file abbreviated accounts. Some small companies and dormant companies are also exempt from audit. Other companies are defined as "medium-sized companies."
From 6 April 2008:-
- The thresholds defining small and medium-sized companies will be increased (see table below).
- Changes have been made to the ineligibility criteria which can exclude some companies from taking advantage of the small companies' regime.
- The thresholds used to determine eligibility for an exemption from statutory audit will also change. Small companies will still be able to choose to have their accounts audited if they consider it beneficial to do so and shareholders will have a right to request an audit.
New regulations specify the form and content of the accounts and directors' report of small and medium-sized companies under the 2006 Act.
Accounts Exemption Thresholds for companies with accounting periods starting on or after 6th April 2008
To be a small company, at least two of the following conditions must be met:
- Annual turnover must be £6.5 million or less
- The balance sheet total must be £3.26 million or less
- The average number of employees must be 50 or fewer
To qualify as small, a group of companies must meet at least two of the following conditions:
- Aggregate turnover must be £6.5 million net (or £7.8 million gross) or less
- The aggregate balance sheet total must be £3.26 million net (or £3.9 million gross) or less
- The aggregate average number of employees must be 50 or fewer
("net" means after certain set-offs and adjustments made to eliminate group transactions and "gross" means without those set-offs and adjustments).
Total Audit Exemption
To qualify for total audit exemption, a company must meet all of the following conditions:
- It must qualify as small
- It must have a turnover of not more than £6.5 million
- It must have a balance sheet total of not more than £3.26 million
To be a medium-sized company, at least two of the following conditions must be met:
- Annual turnover must be £25.9 million or less
- The balance sheet total must be £12.9 million or less
- The average number of employees must be 250 or fewer
Medium Sized Group
To qualify as medium-sized, a group of companies must meet at least two of the following conditions:
- Aggregate turnover must be £25.9 million net (or £31.1 million gross) or less
- The aggregate balance sheet total must be £12.9 million net (or £15.5 million gross) or less
- The aggregate average number of employees must be 250 or fewer
True and fair view
From 6 April 2008, the Companies Act 2006 underpins the true and fair view requirement by imposing a specific obligation on the directors of a company who are responsible for the preparation of the accounts not to approve the accounts prepared unless they are satisfied that the accounts give a true and fair view of the assets, liabilities, financial position and profit or loss:
- in the case of the company's individual accounts, of the company; and
- in the case of the company's group accounts, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.
Publication and filing: From 6 April 2008:-
- The time for a private company to distribute its accounts and reports is no longer linked to the date of a general meeting and instead is linked to the actual delivery of the accounts to the Registrar of Companies.
- Quoted companies are required to put accounting information on their websites.
- The period for filing accounts is reduced from ten months from the end of the relevant accounting reference period to nine months for private companies and from seven months to six months for public companies.
The most significant change here relates to the ability of auditors to limit their liability.
Under the Companies Act 1985 a company is generally prohibited, subject to some specific exceptions, from exempting its auditors from, or indemnifying them against, liability for any negligence, default, breach of duty or breach of trust in relation to the company. However, a company is permitted to purchase and maintain auditor insurance against such liability.
From 6 April 2008, this position changes and auditors will be able to enter into "liability limitation agreements" with their audit clients which will limit their liability to them for negligence, default or breach of duty or trust in relation to the audit of the accounts. Such agreements:-
- will not be effective to limit the auditor's liability to less than such amount as is fair and reasonable in all the circumstances of the case having regard to the auditor's responsibilities, the nature and purpose of the auditor’s contractual obligations to the company, and the professional standards expected of him;
- must be approved by ordinary resolution of the company's shareholders (private companies may resolve to waive the need for this approval); and
- must be limited to one financial year's audit and specify the year to which they relate.
The general prohibition on indemnities will continue, subject to limited exceptions, but there is no specific mention of a company's ability to purchase insurance.
From 6 April 2008, new Regulations will require disclosure of such arrangements in a company's accounts.
Other changes are:
- The deemed re-appointment of an auditor in office in the case of a private company and the right of members to prevent such automatic reappointment.
- The power for the Secretary of State to require the disclosure of terms of appointment of auditors.
- The introduction of the concept of a senior statutory auditor who will sign the audit report in his or her own name on behalf of a firm of auditors.
- A new criminal offence, punishable by fine, in relation to an inaccurate auditor's report.
- New rights for shareholders of quoted companies to raise audit concerns in relation to accounts to be laid at forthcoming meetings and issues relating to the departure of auditors and which can require companies to publish statements on their websites.
Intra-Group Transfers of Assets
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 is important as the transferor company needs to have distributable profits of an equivalent amount at the time of the transfer if the distribution is to be lawful.
From 6 April 2008, the New Act confirms 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.
The 2006 Act does not confirm that a transfer of an asset to a company controlled by the transferor's parent constitutes a statutory distribution, but this remains the accepted view.
Transfer of Shares
From 6 April 2008, companies must register transfers of shares or provide the transferee with reasons for its refusal to do so. A company must register or give its reasons "as soon as practicable" and, in any event, within two months of the transfer being lodged with the company. Refusal is only an option if the company's articles provide for it.
Information about interests in shares
On 20 January 2007, provisions in the Companies Act 1985 which gave public companies a right to request information from third parties about the beneficial ownership of their shares were replaced by equivalent provisions in the Companies Act 2006.
Public companies that issue such requests are required to keep a record of the information they receive in response to such requests in a "register of interests disclosed". Any person is entitled to inspect the register or to be provided with copies of entries on the register and to do so must make a formal request.
From 6 April 2008 the following provisions apply in relation to such requests:-
- A person who asks to inspect the register or to be provided with a copy, must provide specific information in his request, including the purpose for which the information is to be used.
- The company will have a right to apply to court for relief from the obligation to allow inspection of the register or to provide a copy of the register where the request has not been made for a "proper purpose."
From 6 April 2008, the following changes will apply in relation to debentures (including debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not):-
- Companies that allot debentures must register the allotment within two months of the allotment date.
- A company that refuses to register a transfer of a debenture must provide the transferee with reasons for its refusal (see earlier).
- A person who asks to inspect the register of debenture holders or to be provided with a copy, must provide specific information in his request, including the purpose for which the information is to be used.
- The company will have a right to apply to court for relief from the obligation to allow inspection of the register or to provide a copy of the register where the request has not been made for a "proper purpose".
So, what is the net effect of these changes?
On the plus side some private companies will prefer not to have a secretary despite the fact that another officer will need to take on some extra administrative tasks, all companies will have a new simpler method of executing of deeds, more companies should now qualify as small companies under the 2006 Act and thereby benefit from less onerous accounting and reporting requirements and more will be entitled to dispense with the requirement to have their accounts audited.
On the negative side, accounts will need to be produced and filed within shorter periods and the negotiation of a liability limitation agreement is likely to form part of a company’s annual engagement of an audit firm.
We will update you on the next raft of changes, due in October 2008.