Companies Act 2006 - What does it do and why?

What is the 2006 Companies Act?

The 2006 Companies Act is the main act now regulating British company law. It replaced the Companies Acts of 1985 and 1989.

The 2006 Companies Act was a long-awaited reform of company law, and emerged only after two solid years of deliberations and drafting. Its effects have been to simplify the rules that companies adhere to, as well as to clarify the duties of Directors and introduce protections for minority shareholders.

The Act is said to be the longest piece of legislation approved by Parliament.

The main changes brought about by the 2006 Companies Act included the abolishment of certain previous requirements, such as the need to appoint a company secretary and to hold an Annual General Meeting. The Act also loosened other requirements such as lowering the level of support required to pass a written resolution. Additionally, the Act allows directors to submit a service address to public records instead of their home address, and only requires one director to sign deeds instead of two.

Why was the Companies Act introduced?

The Companies Act 2006 brought together the different aspects of UK company law into a single, comprehensive piece of legislation, uniting Great Britain and Northern Ireland’s systems. It modernised the existing legislation, much of which was old, adapting it for a 21st century economy.

A significant issue with the previous system around Company legislation was its bureaucracy, and the obstacles that created for small businesses, in turn discouraging them to set up as a limited company. This, along with the recognition that the vast majority of companies in the UK are small, inspired the ‘Think Small First’ approach driving much of the 2006 Companies Act.

Companies listed on the London Stock Exchange face tighter restrictions under the 2006 Companies Act than smaller firms.

Main Provisions of the 2006 Companies Act

The below constitute the main changes brought about by the 2006 Companies Act:

Company’s Articles
These are rules agreed upon when a company is set up by the shareholders and directors, to regulate how the company will be run. The 2006 Act made the articles of association a company’s main constitutional document and greatly simplified their requirements, for example by allowing the use of plainer language.

Incorporation Process
This was simplified by the Act. Companies can now be formed online, and by a single person.

Company Secretary
Previously a compulsory requirement, the 2006 Act has established that private companies do not need to have the formal role of company secretary. For some larger companies this changes little since the position was a useful one, and thus one they have voluntarily kept, but for small businesses, the change made their affairs easier.

Shareholders
Minority shareholders are better protected under the 2006 Companies Act through a provision which allows them to apply to a court if their interests are unfairly disadvantaged by the way the company is run. Shareholder meetings are able to be held more quickly, and communication between the company and its shareholders is allowed to take place online, such as through email, rather than entirely via letters.

Share Capital
Following the 2006 Companies Act, firms no longer need to have an authorised share capital. Furthermore, companies will be able to make some changes to the authorisation of their share capital without an order of a court:, for example private companies are now allowed to reduce their share capital.

Financial Assistance
Private companies are now allowed to offer financial assistance to those who purchase their shares. This has had the effect of simplifying transactions that previously involved a complex process to avoid infringing the law. Restrictions on this practice for public companies remain.

Political Donations
For public and listed companies, the 2006 Act clarifies rules around political donations and similar expenditures.

Transparency Obligations Directive
In order to implement what was originally an EU Directive, the Companies Act made it compulsory for companies on the London Stock Exchange’s main list to disclose information relating to their finances, major acquisitions and disposal of their shares.

Annual General Meetings
Compulsory Annual General Meetings (AGMs) for private companies were eliminated under the 2006 Companies Act. This has simplified matters for smaller companies which were previously forced to hold them despite not needing to. A public company listed on the London Stock Exchange, however, is still required to hold an AGM, and will have to do so and file their accounts in the first half of the financial year.

Written Resolutions
Private companies no longer require a unanimous decision in order to be able to pass written resolutions, which again has the effect of speeding up business.

Filing of Accounts
Accounts for private companies must now be filed within a shorter time limit (nine months instead of ten), and the penalty for exceeding that filing deadline has been increased.

Auditors
In cases of claims of negligence and breaches of trust and duty, under the Companies Act auditors are now allowed to limit their personal liability. This limitation must be believed to be ‘fair and reasonable’ by the court and have been approved by shareholders before the claims were made.

Director’s Duties
Previously laid out by confusing and contradictory common law, the 2006 Companies Act codified the role and responsibilities of a company director. It did not significantly change these duties but clarified them.

Under the Companies Act 2006, Directors have seven general duties.

Firstly, they must fulfil their Directors duty as laid out in the company’s constitution, but not go beyond the powers they have been officially assigned.

Secondly, Directors are expected to make decisions in good faith, choosing the path they believe will be ultimately the most beneficial to the company. This includes keeping in mind the interests of ‘stakeholders’: a general term which includes employees, customers, the community and the environment as well as shareholders.

Thirdly, Directors must make their own decisions and act with care, skill, and diligence. The last three general duties concern conflicts of interest: they must be avoided when possible, and if not, any interest needs to be declared to the rest of the company leadership. In an attempt to improve corporate governance, Directors must also not accept benefits from third parties as a result of exploiting their position in the company.