The Companies Act 2006

Monday 28th January 2008

This Act with 1,300 sections is the longest ever enacted by Parliament. Most of the Act is now in force but other important provisions are due to become law in October 2008. The Act also provides for a lot of delegated legislation which is yet to be published let alone enacted. As if the piecemeal introduction of the Act were not complicated enough it also represents a missed opportunity to simplify the law relating to companies.

Formation of a Company

Formation has been slightly simplified so that all that is needed to form a company is a prescribed form memorandum of association (but there will be no need for an objects clause) together with an application form stating some basic information. It is envisaged that these documents will be filed online and a certificate of incorporation issued by the Registrar of Companies within a matter of hours.

Model articles of association will be available and these are likely to be simpler than the current Table A. A novel idea of “entrenched” regulations will be introduced so that some elements of the articles of association cannot be altered. This will be vital for charities so that the charitable purposes of the company can never be altered. This will also be useful for shareholder protection although the need for shareholder agreements will remain.

Directors’ Duties

For the first time the obligations of directors are set out. They are broadly based on the general duties that currently exist under common law and include a duty to promote the success of the company, a duty to exercise independent judgment with reasonable care, skill and diligence, a duty to avoid conflicts of interest and not to accept benefits from third parties. However, except in certain circumstances, only the company can enforce these duties. Therefore, aggrieved shareholders still face difficulty in taking action against directors. It is likely that the Courts will take time to interpret these new duties but at Winterbothams we are of the opinion that in the medium to long term directors are going to be more accountable to shareholders and are going to be more open to personal liability for their conduct. Directors should also be aware of the recently passed Corporate Manslaughter and Corporate Homicide Act.

Resolutions and Meetings

There is significant change in respect of shareholder meetings. Private companies will no longer be required to hold an annual general meeting and it is likely that in future most shareholder decisions will be taken by written resolution rather than in meetings.

Conclusion: overall the Companies Act may have marginal benefits for shareholders and the wider business community. However, bearing in mind the enormity of the Act, things could have been done a lot better. For example, better protection for minority shareholders could have been introduced.

Worryingly the Secretary of State is empowered to make regulations to amend, repeal or revoke any part of the Act so it is open to the Government to effectively rewrite any part of the Act as it sees fit (including for party political reasons) at any time without the full scrutiny of Parliament. This removes certainty and consistency which is essential to the world of business.

 

 

 

January 2008