Companies Act 2006 - New Provisions October 2007
Guide to provisions to be implemented on 1 October 2007
The Companies Act 2006 (the “Act”) received Royal Assent on 8 November 2006. It is the largest piece of legislation ever passed in the United Kingdom and it aims to consolidate the pre-existing Companies legislation.
A significant number of provisions will take effect from 1 October 2007 and companies should familiarise themselves with these provisions. A summary of some of the most relevant provisions is set out below:
Changes to Exercise of Members Rights
Under the new Act, a company’s articles may expressly provide for another person to be nominated to exercise some or all of the rights of a registered member. However the nominated rights may only be enforced by the registered member.
Private companies will still only need one director. Public companies will be required to have two. Members will still have the statutory right to remove directors under a special notice procedure in both private and public companies alongside any procedures set out in the company’s articles.
Directors’ duties have been codified under the Act but common law will still be relevant for the interpretation of these duties. The new general duties of directors, effective from 1 October 2007, are as follows:
- to act within their powers;
- to promote the success of the company for the benefit of its members;
- to exercise independent judgement;
- to exercise reasonable care, skill and diligence; and
- to declare their interest in a proposed transaction or arrangement with the company.
The Act introduces a statutory regime enabling shareholders to sue directors in the name of the company for loss suffered by the company as a result of negligence, breach of duty or breach of trust by one or more of the directors (a “derivative claim”). Proceedings can be brought against directors against a wider range of circumstances than is currently permitted under the common law including negligence and breach of the new general duties.
Relief from Liability
Provisions relating to directors’ liabilities and ratification of their actions now state that shareholders can ratify, by ordinary resolution, a director’s conduct amounting to negligence, default, breach of duty or breach of trust in relation to the company. This decision must be taken by the members without reliance on the votes in favour by the director or any connected person.
Provisions relating to directors’ indemnities remain substantially similar to previous provisions. However, companies will now be permitted to indemnify directors of a company that is a trustee of an occupations pension scheme against liability incurred in connection with action as trustee of that scheme.
Loans to Directors
Loans to directors will now be lawful when shareholder approval has been obtained. This requirement for approval covers loans to a company’s director or to the directors of its holding company or to any connected persons of such directors.
Public companies or companies associated with a public company will also have to obtain shareholder approval in relation to ‘quasi-loans’ made to a director (or his connected persons) and ‘credit transactions’ entered into for the benefit of a director (or his connected persons).
The definition of connected persons is broader under the Act. A connected person can include a director’s spouse, civil partner, children (now including adult children) parents, certain partners (and their children under the age of 18 living with the director) and certain bodies corporate, trustees and business partners.
However, there are a number of exceptions to the general requirement to obtain shareholder approval which include:
- Loans by non UK-registered companies or companies which are wholly-owned subsidiaries;
- Expenditure in connection with the company business (maximum threshold increased to £50,000);
- The current exception for loans or quasi-loans of small amounts will be extended from £5,000 to £10,000 and for minor credit transactions from £10,000 to £15,000; and
- Intra-group transactions – this exception will be substantially the same as under the 1985 Act.
Shareholder approval for directors’ service contracts (being contracts of employment, contracts for services and letters of appointment) is required for contracts where the term is, or may be, longer than 2 years (rather than 5 years under the 1985 Act).
Without shareholder approval the contract is deemed to contain a term that the company may terminate it at any point on the giving of reasonable notice. Members will have the right to inspect such contracts (and where there are no contracts, they will have the right to view a memorandum of terms) and these rights continue to apply until the end of one year before termination or the expiry of the contract.
Resolutions and Meetings
Private companies will be provided with the ability to pass written ordinary resolutions by a simple majority of those eligible to vote and written special resolutions with a 75% majority of those eligible to vote.
This simplifies the current position which requires unanimity for all types of written resolution. As the electronic communications provisions came into force on 20 January 2007, it is also possible for electronic communications to be employed for written resolutions.
The requirement for public companies to hold AGMs remains in place. However, AGMs are now optional for private companies unless the company’s articles specifically require it. Members can, however, demand an AGM.
Records of general meetings, resolutions passed other than at general meetings and decisions of a sole member must be kept for at least ten years.
In summary, directors should be aware of their new duties under the Act to ensure that they are complying with the new regime. In addition, directors need to protect against liability by ensuring that they are covered for the cost of dealing with and defending any derivative claims.
However, apart from this new risk of being subject to a derivative claim, the risk attached to being a director is unlikely to substantially increase with the introduction of these new provisions.
Further elements of the legislation will come into effect periodically over the coming year with the legislation due to be in force in its entirety by 1 October 2008.
This Guide is only intended to provide a summary of the new legislation and companies are advised to review the new legislation in more detail in order to familiarise themselves with the new provisions. If you have any queries or wish to discuss how the Act will affect you or your business then please do not hesitate to contact Kevin Cunningham or Laurence Gavin on 0370 1500 100.