What is the Companies Act 2006?

The Companies Act 2006 ^[1]LEGISLATION: “The Companies Act 2006” is a modernising piece of legislation, that replaced the Companies Act 1985. It has helped update and simplify company law and one of its most important features was to set out directors’ duties.

The law was enacted on 8 November 2006 and it came into force in stages until 1 October 2009 and it covers almost every aspect of how a company should be run, managed, and financed.  It is an exceptionally long piece of legislation, consisting of some 1,300 sections over 760 pages. 

Focus on SMEs

The Companies Act 2006 has particular relevance for smaller firms. Efforts were also made to draft the Act in straightforward language – although, given its length, many directors will not have the time to study it in detail. So, what parts of the Act should you be particularly aware of? 

Emphasis on Directors’ Duties

The Companies Act 2006 meant duties of company directors were clarified for the first time. This included the responsibilities directors have towards their shareholders, employees, and the environment.

It sets out the statutory duties of a director and broadly states that a  director must act within powers as set out in the company’s constitution (Articles of Association), should exercise independent judgment, reasonable care, skill, and diligence, and avoid conflicts of interest. They should also not accept benefits from third parties and declare interests in transactions or arrangements with the company. The Act contains six factors that directors should  consider when making company decisions: 

• The likely long-term consequences of their decisions
• The interests of the company’s employees
• The need to foster the company’s business relationships with suppliers, customers and others
• The impact of the company’s operations on the community and the environment
• The desirability of maintaining a reputation for high standards of business conduct
• The need to act fairly between members of the company. 

There is also guidance on how directors should behave, outlined  as follows:

• Always act in the company’s best interests, taking everything that is relevant into account
• Ensure the company’s constitution is followed and decisions taken under it
• Act with honesty and always be aware that the company’s property belongs to it and not to directors or shareholders
• Be diligent, careful and well informed about the company’s affairs
• Make sure the company keeps full records of decisions
• Directors remain responsible for the work they give to others
• Avoid situations where a director’s interests conflict with those of the company and if in doubt, disclose potential conflicts quickly
• Seek external expert advice where necessary, particularly if the company is in financial difficulty. 

Emphasis on simplification

The Act contains other changes that typically are aimed at reducing the administrative burden. It simplified the incorporation process and meant that firms could now be run by one director. It also introduced the right for directors to use a service address, rather than have to show their main residence on the register.

It also updated company naming rules, allowing in some circumstances, a business to register a name that is the same as an existing one if in the same group.

Further, companies can use the model Articles of Association as provided by Companies House and must also adopt a Memorandum of Association when forming a company. It also encouraged greater use of email – most company duties and submissions can be completed electronically.

There was a specified duty to maintain accounting records and the filing dates for the delivery of company accounts were reduced from 10 to nine months for all limited companies.

Other measures included:

•  Company Secretary

Private companies no longer need to have a Company Secretary, however, their duties such as making Companies House filings and taking meeting minutes are still necessary.

•  Financial Assistance

The ban on a private company giving financial assistance for the purchase of its own shares is to be abolished, although it remains for public companies.

•  Annual General Meeting

There is no longer a requirement for a private company to hold an AGM unless this is in the articles.

• Authorised Share Capital

The requirement for a company to have an authorised share capital is removed. If a company’s Articles do not restrict the number of shares that can be issued, the only manner in which the shareholders can control this is by passing a special resolution to amend the Articles.

•  Written Resolutions

Previously unanimous approval was required for a private company to pass a resolution, under the Act private companies will be able to pass an ordinary resolution with only a simple majority of those eligible to vote and a special resolution with a majority of 75% of those eligible to vote.

New Procedure for Derivative Claims

A derivative claim is brought by a shareholder against a director on behalf of the company. Previously, there was reliance on common law and the Act introduced a wider range of circumstances in which a derivative claim may be brought by a shareholder, such as through an omission involving negligence, default, breach of duty, or breach of trust by a director of the company. It is not necessary for the shareholder to show that those directors who carried out the wrongdoing control the majority of the company’s shares.

The 2006 Act introduced a new two-stage process for members who wish to bring a derivative claim against a company’s directors or another person (or both).

Personally liability and the Companies Act 2006

If a director fails to meet their responsibilities under the Act, they may be personally liable, typically if there is a loss to creditors where ‘misfeasance’ has occurred. In the event of the company being liquidated, then there will be an investigation to see if this occurred.

Misfeasance is the act of engaging in an action or duty, but failing to do this correctly – although is not illegal, it is seen as having the intention of doing harm. A limited company offers directors protection, however, they still have a duty of care to the business, the public, and creditors – if they breach this, then they may lose that protection and so face personal liability.

There is also a brief reference to fraudulent trading with a change to a maximum term of imprisonment being raised from six to 12 months on summary conviction and from seven to 10 years for conviction of indictment.

References

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

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1. LEGISLATION: “The Companies Act 2006”