Companies Act 2006: What's Working for SME's?

January 28, 2010

The Companies Act 2006 (the "2006 Act") was a mammoth piece of legislation in fact it was the largest statute ever passed by parliament. The last major implementation date of 1 October 2009 has now passed and companies and their lawyers can look forward to a period of relative calm (if only from a legal perspective) as the changes are allowed to bed down. One of the driving forces behind the 2006 Act was a desire to streamline the running of small and medium sized companies. So, with the 2006 Act now fully in force for a number of months, what appears to be working and what is proving to be a headache?

Shareholder Decision Making

One area in which the Companies Act 2006 has greatly improved matters is the passing of shareholders' resolutions by private companies. Under the Companies Act 1985 (the "1985 Act") the position was that shareholders could only pass resolutions in writing (which is typically far more convenient than holding a shareholders’ meeting) if all of the shareholders signed the resolution. This meant a single dissenting shareholder could force companies to hold a meeting, where the very same decision could be passed by an appropriate majority. The 2006 Act permits written resolutions of private companies to be passed by the same majority which could pass the resolution at a shareholder meeting. Written resolutions, already popular, are now the normal way for shareholders to make decisions.

With a surprising amount of forethought, the 2006 Act looks to the future of corporate decision making and permits companies to choose to make more use of electronic methods of communication. For example, resolutions can be circulated by email or posted on websites, with shareholder agreement.

Further simplifying matters, the default position is that private companies are now no longer required to hold annual general meetings, reducing hassle and cost.

Although some shareholders may have appreciated the previous system for imposing checks and balances on majority shareholders, our view is that the benefits in speeding up decision making will, for the vast majority of SME's, be of great benefit.

Fox Williams' Verdict: Success

Company Secretaries

The 2006 Act abolished the requirement for a company to have a company secretary. Our experience to date is that not many companies have taken advantage of this often because there is little practical reason to do so if the individual is also a director, but also because removing the need for the role was not matched by any reduction in the amount of work a company secretary must do to keep the company’s filings up-to-date. Although Companies House forms are subject to change and may become simpler in future, the experience so far is that forms are longer and more complicated. Online filing of Companies House documents is also relatively difficult and not all forms can be submitted electronically. In some areas the 2006 Act has added to the regulatory burden, such as the new requirement for companies to submit a 'statement of capital', which will need to contain, amongst other things, a precise explanation of the voting, dividend and capital rights of shares. The position of company secretary is, therefore, far from redundant and the 2006 Act has not had the desired effect of reducing complexity in this time-consuming area of company administration.

Despite the above, many newly-formed companies are choosing not to appoint a company secretary, placing responsibility for administrative tasks on the directors. Directors of SME's without company secretaries will need to be clear as to who among them will take responsibility for company filings, or seek outside assistance (for example, Fox Williams provides company secretarial services for a modest annual fee). Removing the legal requirement for a company secretary without reducing the amount of work that company secretaries must carry out seems like a pyrrhic victory for simplifying company administration.

Fox Williams' Verdict: Missed Opportunity to Tackle the Real Issue

Directors' Home Addresses

One welcome change for directors who are concerned about their privacy is that they are no longer required to show their home addresses on the public register. Instead, a service address can be shown (which could be the company’s registered office). Directors still have to disclose their home address to Companies House, but this information will not be publicly available (although it will remain available to certain agencies, such as the police, credit reference agencies and HMRC).

However, the forms filed by current directors who were appointed before 1 October 2009 showed only their home address and will remain accessible by the public. Updating details to a service address will therefore not ensure privacy unless the director has moved house since filing the Form 288a, or if (as is rarely the case) they are the subject of a confidentiality order preventing disclosure of their home address.

Fox Williams' Verdict: Partial Success

Directors' Duties

Previously it was common law (i.e. unwritten law, based on past court cases and established legal principles) that imposed a general duty for directors to act at all times in the best interests of their company and defined many of the other duties to which directors are subject. The 2006 Act makes these duties more accessible, by confirming in statute what the existing case law had established. It is now easier for directors to understand what their obligations are when taking decisions, as they are written down in a statute, rather than being derived from a sometimes ambiguous body of law. Prior to the commencement of the statutory duties, concern was expressed over the factors which directors are required to consider in applying the duty to promote the success of the company for the benefit of its members as a whole. These factors include taking into account the impact of the company's actions on the community and the environment, which may easily sit unhappily with the directors' obligations to maximise returns for shareholders. That said, this duty has yet to cause serious problems for directors, but it will be interesting to see the first examples of judicial interpretation of this duty, as the first cases under the new statutory duties come to court.

A possible issue with the codification of directors' duties under the 2006 Act is that, although they provide a useful aide memoir, they do not give the complete picture the case law surrounding the obligations of directors remains applicable and, in any case, a director cannot rely entirely on compliance with the statutory list of duties to be sure that they are not breaking the law. It would not, for example, be helpful to rely on the list of duties contained in the 2006 Act when a company is facing insolvency, as in those circumstances insolvency law will require the directors to act in the interests of the company’s creditors. Still, on balance, statutory guidance is better than no guidance at all.

Fox Williams' Verdict: Largely Successful

Company Constitution

A company's articles of association govern the relationship between a company, its board of directors and its shareholders. Given the inherent complexities in putting rules in place to govern this tripartite relationship, past Companies Acts have provided template articles of association for companies to use the so-called 'Table A' articles of association. Although far from perfect, this template has provided a default set of rules for companies which gave answers to questions such as 'does the chairman of the board get a vote' or 'how is a dividend approved'. The 2006 Act replaces Table A with a new set of model articles, but these are half the length of the Table A from the 1985 Act, partly due to some provisions moving to the main body of the 2006 Act and partly due to the general simplification of the articles. Although some of the provisions have been updated to reflect the latest modern practice (including, for example, much more informal decision making at board level), it will remain the case that most entrepreneurs will need legal advice when they form a new company as to what their company’s articles of association should contain.

More helpfully, companies no longer need to maintain a memorandum of association. Crucially, the 2006 Act has removed the requirement for companies to state their objects, so companies are by default not restricted in what they do (although shareholders can choose to restrict a company’s objects if they so wish). Also, the concept of an authorised share capital has been abolished, removing a potentially burdensome administrative step when issuing shares.

Overall the changes to the default constitution of a company should be of benefit to most SME's, but it remains to be seen whether the new model articles will stand the test of time as well as Table A from the 1985 Act.

Fox Williams' Verdict: To Be Determined

Overall there is much to commend the 2006 Act to SME's. But the pace of change in company law seems likely to continue. European law may become a driving force in future years the concept of a European private company is already in prospect for introduction in July 2010. It seems doubtful that the 2006 Act will survive in its current form for the 21 years of its predecessor.


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