The New Companies Act 2006 and Private Limited Companies

A new Companies Act has been introduced. Who will it apply to? When will it apply? What are the changes? Do you need to do anything? Why is the change?

A detailed report (over 80 pages long) has been published answering the above queries. I shall attempt to answer them here however in a much shorter space.

Background

If your business already operates as a limited company, you are probably aware that the relevant legislation which is governed primarily by the Companies Act 1985 is very onerous and you must often feel that it creates obstacles to ways your company wants and needs to operate.

A "Company Law Review" committee was formed and was given the task to consider how core company law could be modernised in order to provide a simple, efficient and cost effective framework for British business in the twenty-first century.

The main recommendations that stem out of the committee report were that the law governing companies should be as simple and as accessible as possible for smaller firms and should avoid imposing unnecessary burdens on the ways companies operate.

The Act will not be fully implemented until October 2008, however there were earlier implementations in April 2007 and October 2007 and some are due in April 2008.

Key Changes

A one person company

Under the new Act, a single person will be able to form any sort of company (not just a private company) and there is no longer the requirement for a private company to have a company secretary. However, a company may appoint a secretary if it so wishes in which case the authority of a private company secretary will be the same as that of a public one. Therefore, such appointment will have to be notified to the registrar of companies and be recorded in the company's register of secretaries.

Memorandum-a historic snapshot

One of the prime changes relate to the Memorandum of Association. The new memorandum will be a document of historical status only, providing a "snapshot" of the membership of the company on its formation. All it will do, is to evidence:

• the intention of the subscribers to form a company;
• the intention of the subscribers to become members on formation;
• the members' agreement to take at least one share each in the company.

It will not be possible to amend or update the memorandum of a company formed under the Act. Accordingly, the new memorandum will look very different from that of a company registered under the 1985 Act.

Articles-main constitution

The premise of the 2006 Act is that a company's constitution should as far as possible be contained in a single document, that is the Articles of Association. To date, the only model articles available were those contained in Table A. However, with the aim of simplifying the legal framework for small private companies, a new set of model articles are now provided.

Shareholders

The Act also remove the shareholders' approval for allotment of shares and empowers the directors to allot shares as they see fit subject only to the pre-emption rights and on condition that the company will have only one class of shares after the proposed allotment. In addition, the Act Promotes shareholders' engagement and a long-term investment culture by providing greater power of proxies and liberate indirect investors.

Directors

The new Act enhances the rights of shareholders to bring a legal action against directors for negligence and other defaults. It also regulates the duties of directors, such as adding a new duty to promote the success of the company.

Under the 1985 Act, when forming a company directors have to provide their residential address. A new administrative change was provided by the Act according to which directors have the option to file service addresses on the public record rather then private residential addresses.

Shares & Share Capital

The Company Law Review committee concluded in its report that the current capital maintenance provisions are largely irrelevant to the vast majority of small private companies, given that the majority of small private companies have an issued share capital of £100 or less. The committee therefore recommended the simplification and de-regulation of the relevant capital maintenance provisions. This recommendation was accepted and the following changes have been implemented:

Authorised share capital-Currently a limited company is required to state the amount of the share capital with which the company proposes to be registered (normally 100) and the nominal amount of each share (normally £1). This is known as the "authorised share capital" and acts as a ceiling on the amount of capital which can be issued (although this limit can be increased by ordinary resolution). Under the new Act the requirement for authorised share capital is abolished.

Financial assistance-Currently a limited company cannot assist in financing the purchase of its own shares. Under the new Act, private companies will be permitted to do so subject only to the restriction or prohibition in their articles

Reduction of share capital-Private company may now avoid the necessity of going to the court by utilising a new procedure under which share capital can be reduced through a special resolution of the members supported by a solvency statement made by the directors.

Company formalities (AGM, Resolutions, etc.)

Another welcoming change (which is in force as from October 07)is the one dealing with formalities imposed on the decision making process of companies:

AGM-Under the new 2006 Act, the statutory requirement of holding AGM has been removed. A company will have no obligation to hold an AGM. If the company wishes to have an AGM it will need to make a positive decision to do so. As a layer of safety, members holding 10% of the voting rights will have the right to request the company to hold an AGM.

Resolutions-Currently decisions can to be made either by holding meetings with set time notices to be provided in advance or, alternatively, by a written resolution which permits a decision to ba made in writing without a meeting but requires unanimity. Under the new 2006 Act decisions will still be made in the same way, but written resolutions can be passed by a simple majority (50%) or 75% majority.

What to do next?

The act does not require existing companies to make any changes. However, if you wish to take advantage of the benefits of new Act offers and avoid the current burdens existing by the current legislation, some changes will have to be made.

You will be able, if you so wish, to alter or update provisions which are currently in the company's memorandum by amending the company's articles to reflect changes to the law made by the Act.

Before you spend any time and money assessing your position or making any amendments, Acumen Business Law has set up a "Companies Act Helpline". We will have an initial telephone conversation with you and a meeting if you felt necessary to help you assess your position.

Please contact us either by email or by telephone on 08458 678 978.

At Acumen Business Law we do not charge for initial consultations.

This article is subject to our disclaimer