The aim of the Companies Act 2006 is to revamp a host of legislation. Andrew Harvey weighs up the pros and cons


The Companies Act 2006 repeals, and restates or replaces, virtually all of the 1985 and 1989 Companies Acts and the Companies (Audit, Investigations and Community Enterprise) Act 2004, leaving in those pieces of legislation only that which is not pure company law.



The Act is said to be the largest ever, at 1,300 sections, with about one-third of its provisions regarded as genuinely new.



Royal Assent was received on 8 November 2006. Nevertheless, much of the Act may not come into force until October 2008 because there remains considerable work to be done on delegated legislation &150; more than 70 statutory instruments are anticipated. Also, there will be regulations on how changes should apply to existing companies.



Certain provisions are commenced earlier than October 2008. With effect from Royal Assent, the Financial Services Authority was empowered to make rules implementing the Transparency Obligations Directive (which had to be implemented by 20 January 2007).



Provisions that allow increased use of electronic communications between companies and their members were commenced by 20 January 2007, with provisions on takeovers scheduled to begin from 6 April 2007, superseding the Takeover Directive (Interim Implementation) Regulations 2006. A full consultation on the timing of implementation will start this month.



The memorandum of association will change and become no more than the current 'subscription clause', whereby the subscriber(s) state their intention to form a company and agree to take at least one share (each). In forming a company, the other matters currently required in the memorandum will be assigned to a separate 'application for registration' and associated documents, except that the 'objects' clause and the 'authorised share capital' clause will no longer be required at all.



The Act provides for the replacement of table A by three sets of model articles of association which will operate as default articles. The draft private company articles have been kept as short and simple as possible, consisting of just 27 articles compared with the 118 regulations of table A. This is achieved partly by the Act granting, as the 'default' position, authorities currently in table A (for example, private company buy back of shares out of capital). The draft public company articles extend to 98 articles, covering everything that is in table A except for matters covered by the Act. Draft articles for a company limited by guarantee have yet to be published.



Private companies will no longer be required to appoint a company secretary. All companies, whether public or private, will be required to have at least one director who is a 'natural person', and there will be a minimum age of 16 years for directors. In response to concerns over abuse of unrestricted public access to directors' residential addresses, all directors will be able to file a service address that is different from their residential address. The latter will become 'protected information', with its disclosure by the registrar and company restricted.



There are many deregulatory changes that are designed to make it simpler to run a company, although companies can choose that such changes shall not apply. For example, the Act provides for the 'elective regime' to become the 'default' position for private companies.



The case law on directors' duties is codified, making it easier for directors to appreciate what in the law is applicable to them. Of seven 'general duties', two are particularly noteworthy. First, directors owe a duty to their company to promote the success of the company for the benefit of the members as a whole. Giving effect to 'enlightened shareholder value', directors must have regard (among other matters) to the likely long-term consequences of their decisions, the impact on the community and the environment, and the desirability of maintaining a reputation for high standards of business conduct.



Second, changing the current position on conflicts of interest, the Act will allow directors to be personally interested in transactions with their company provided they disclose the interest to the board; also, personal exploitation of corporate opportunities will be allowed, if authorised by the board without the votes of that director. More specifically, whereas currently loans to directors are generally prohibited, these will become permissible with the authority of an ordinary resolution.



There is some concern that the changes may expose directors to increased litigation by or on behalf of the company. Apart from the statutory statement of directors' duties, two other changes fuel this concern. First, the directors' report must contain a business review, whose partial purpose is to inform members and help them to assess directors' performance of their duty to promote the success of the company.



Second, the Act empowers members to bring proceedings against wrongdoing directors by way of a derivative action. While giving statutory effect to the rule in Foss v Harbottle (1843) 2 Hare 461, 67 ER 189, the Act extends the right to commence proceedings beyond situations of 'fraud on the minority'. Provided the member can establish a prima facie case, proceedings can be commenced; permission of the court is then needed for the action to continue.



In a private company with only one class of shares, directors will be assumed to have authority to allot &150; there will be no need for an authorising ordinary resolution. This power may be removed or restricted by the articles.



As an alternative to a court-approved capital reduction, private companies will be allowed to reduce capital using a new 'solvency statement procedure', requiring a special resolution and a solvency statement made by all of the continuing directors. The provisions for private companies to buy back shares out of capital are aligned with this solvency statement procedure.



The prohibition of companies providing financial assistance for purchase of their own shares will apply only to public companies. Hence, the provisions for the 'whitewash procedure' are to be repealed.



Auditors will be enabled to make agreements that limit their liability to companies in relation to the audit. An agreement can only apply to one year's audit, and must be authorised by ordinary resolution. The liability limit must be fair and reasonable; otherwise the court will substitute what is fair and reasonable.



Where shares are registered in the name of a nominee, the articles of any company can allow the registered shareholder to nominate the beneficial owner to enjoy members' rights. For registered shareholders in quoted companies (not including those companies on AIM), the Act gives power to nominate the beneficial owner to enjoy 'information rights', such as receiving communications from the company.



The possible types of members' resolution are to be simplified by abandonment of extraordinary and elective resolutions &150; resolutions will be either ordinary or special resolutions. Private companies are expected to make greater use of written resolutions as a result of a change whereby unanimity will no longer be required; depending on whether an ordinary or a special resolution would be required, a written resolution is effective when a bare majority or 75% of members entitled to vote signify their agreement.



Solicitor Andrew Harvey specialises in corporate and commercial training courses. He is one of the authors of Companies Act 2006: A Guide to the New Law, to be published in April by Law Society Publishing. The book can be pre-ordered before

14 February direct from Marston Book Services for the discounted price of £49.45 (full price £54.95 plus p&p), tel: 01235 465 656