Briefings

Business: Companies Act 2006 - Key changes as of 1 October 2008

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September 2008

Certain provisions of the Companies Act 2006 will come into force on 1 October 2008. In summary, the main changes are as follows:

1. Financial assistance for private companies - abolished. Do you need to refinance an acquisition?
2. Reduction of share capital for private companies - no longer necessary to get court approval. Do you need to remove accumulated losses/dividend traps?
3. Directors' duty to avoid conflicts of interest is now codified but where shareholder approval was previously required board approval may now suffice. There are also changes to the rules for declaration of interests by directors in transactions.
4. New procedure to facilitate the ability for anyone to object to company names.
5. New regulations about the trading disclosures that companies must make.
6. Directors will now have to be at least 16 years of age.
7. Companies will now need to have at least one director who is an individual.
8. Regulation of donations to political parties and organisations will extend to cover independent election candidates.
9. A new form of annual return for companies to complete.
10. New accounts and audit provisions will apply to LLPs.

The remaining sections of the Companies Act 2006 will come into force on 1 October 2009.

Removal of the prohibition on financial assistance for private companies

The position before 1 October 2008

Until now, companies have been prohibited from providing financial assistance for the purchase of their (or their parent company's) shares. Financial assistance can include, for example, providing a loan, granting security over a company's assets or giving a guarantee to enable a buyer to buy shares in the company.

There are severe penalties for breach of this prohibition - a fine for the company and a fine/term of imprisonment for directors in default.

To avoid being caught by these provisions and to enable companies to provide such assistance, there is currently a statutory "get-out", known as the "whitewash" procedure. All the directors of a company have to swear a statutory declaration as to the company's solvency, which has to be supported by an auditors' report, and sometimes a special resolution. It can be a complicated and expensive procedure, and cause transactions to be delayed.

The position after 1 October 2008

The prohibition on financial assistance will be repealed for private companies with effect from 1 October 2008. Consequently there will no longer be any need for private companies to comply with the whitewash procedure, which will also therefore be abolished. The restrictions will continue to apply to public companies and to private companies that provide financial assistance for the purpose of acquiring shares in their public parent company.

Consequences

The positive effect of this development is that directors do not have to worry any more about the threat of criminal liability for breach of the provisions. Also, without having to carry out the whitewash procedure, transactions should be more straightforward. This should reduce the length of time and the costs of some transactions.

Issues

The repeal of the prohibition on financial assistance is a welcome development for private companies. The time and expenses taken up, particularly collating the supporting financial information from the auditors, can now be dispensed with. However, there are still issues to consider.

Directors have a statutory duty to act in a way that they consider to be most likely to promote the success of the company for the benefit of its members as a whole. Therefore, before carrying out a transaction that would previously have qualified as financial assistance, directors should consider whether it would actually benefit the company. They should also consider the interests of creditors, if insolvency is an issue, and also comply with general company law in relation to capital maintenance, e.g. to ensure that dealings with shareholders do not constitute unlawful capital reductions.

In practice, companies may still be prohibited from providing financial assistance if any relevant restrictions in their memorandum or articles of association are not changed, lenders may still look for some comfort regarding a company's solvency (which may mean that the auditors still have a role), and directors may still prefer the comfort of obtaining shareholder approval for the transaction.

Reduction of share capital

There will be a new solvency statement procedure for private limited companies wishing to reduce their share capital, as an alternative to the court-approved procedure, which remains in place.

Private companies will be able to reduce their share capital by special resolution if all of the directors sign a statement in the required form as to the solvency of the company over the next twelve months having regard to both contingent and prospective liabilities; i.e. that there is no ground on which the company could be found to be unable to pay or otherwise discharge its debts. A director making a solvency statement without reasonable grounds for the opinions expressed in it commits a criminal offence. The directors must sign the statement on the same day but they need not be in the same location. The solvency statement must also be made not more than 15 days before the date of the special resolution. Both the resolution and the solvency statement (together with a statement of capital) must be registered at Companies House whereupon the reduction will take effect.

A specific authorisation in a company's articles to reduce its share capital will no longer be required. However, a specific prohibition or restriction in its articles will still be effective.

The reserve created on the reduction of share capital can be treated as a realised profit (provided there is nothing contrary to this in the memorandum or articles of association) and so can be set off against realised losses. It is therefore possible not only to eliminate an accumulated loss but also to create immediately distributable profits. Share capital for these purposes includes the share premium account and any capital redemption reserve. Also note that at least one non-redeemable share must remain after the reduction and so cancellation schemes will still require court approval.

This is a potentially very helpful de-regulatory step for companies and will enable companies to return cash to shareholders much more quickly and cost effectively. Furthermore, under the solvency statement procedure creditors have no right to object. Directors will, of course, still need to consider the creditor position and cash flow solvency of the company very carefully and will want at the very least to consider up to date management accounts and may even require some assistance from its auditors.

Duties of directors relating to conflicts of interest and declarations of interest by directors

Most of the provisions implementing directors' duties came into effect on 1 October 2007. However, the provisions relating to the duties to avoid conflict and to declare interests will come into force on 1 October 2008. These duties are:

• The duty to avoid a situation in which the director has, or can have, a direct or indirect interest with a third party that conflicts, or possibly may conflict, with the interests of the company
• The duty not to accept a benefit from a third party conferred by reason of his being a director, or his doing (or not doing) anything as director
• The duty to declare beforehand the nature and extent of an interest in a proposed transaction or arrangement with the company and
• The obligation to declare the nature and extent of an interest in an existing transaction or arrangement with the company.

A key point to note regarding the no-conflict duty is that for private companies the independent directors can approve a conflict of interest (provided the articles don't prohibit this) and the independent directors of a public company can do the same provided the articles expressly empower the board to give such authorisations (which will require most public companies to amend their articles). Previously, such third party conflicts would usually have required shareholder approval if the matters was not already covered by the articles of association.

The new no-conflict duty only applies to situations arising on or after 1 October 2008 but because a conflict may arise post this date but relating to a situation in existence pre this date the safe course of action is for companies to ascertain prior to 1 October what potential conflicts its directors might have and to authorise these at the outset. Directors' potential conflict is something that will now need to be proactively managed by companies (and not just when new directors join the company or are appointed to other boards).

As regards the directors' declaration of interest, the familiar references in board minutes to declaring interest under section 317 of Companies Act 1985 will need revising as will some of the procedures for declaring these interests.

Objection to company names

From 1 October it will be possible for anyone (not only a company) to object to a company's name. Objection can be made by an applicant on the ground that the name is the same as a name associated with the applicant in which he has goodwill, or that it is sufficiently similar to be misleading. Goodwill includes "reputation of any description".

The objection must be made to a company names adjudicator. It is then for the company (together with its members or directors, if joined as respondents) to show that certain circumstances apply, so the name should stand. For example, the company could argue that the name was adopted in good faith or that the interests of the applicant are not significantly adversely affected by the company's use of that particular name. The name, however, would not stand despite the above, if the applicant could prove that the main purpose of the respondent(s) in registering the name was to obtain money from him or to prevent him registering the name.

New rules will govern the proceedings before a company names adjudicator. An adjudicator can direct a company to change its name and set a deadline for such change. If the name is not changed by the deadline, the adjudicator may determine a new name for the company.

The new law should make it easier to prevent the opportunistic registration of company names.

Trading disclosures

There will be new regulations, which consolidate and replace existing rules in relation to the trading disclosures that companies must make. The regulations set out where and how a company's registered name, office and other details must be displayed and how to respond to enquiries about company records. A company will have to respond within 5 working days to written queries from any person it deals with in the course of business, about where its records can be inspected.

Under-age directors

Directors will now have to be at least 16 years of age (the upper limit of 70 was removed on 6 April 2007). Any director aged under 16 on 1 October 2008 will automatically cease being a director on that date.

Corporate directors

Companies will now need to have at least one director who is a natural person (individual), so a company cannot have all corporate directors. There is, however, a grace period until October 2010 for any company which did not have at least one director who was a natural person at the time when the Companies Act 2006 received Royal Assent (on 8 November 2006).

Control of political donations and expenditure - independent election candidates

A company will need to have prior shareholder approval before making political donations to political parties, political organisations or independent election candidates, or incurring political expenditure in relation to them. Regulation of donations to political parties and organisations came into effect on 1 October 2007 but will only extend to cover independent election candidates from 1 October 2008. This extra time was given to companies to enable them to pass appropriate resolutions, as the previous law did not apply to independent election candidates.

Annual returns

There will be a new form of annual return for companies to complete. A distinction is made between traded and non-traded companies for the purposes of determining the (reduced) information about shareholders to be disclosed in annual returns made up to a date on or after 1 October 2008. New regulations provide that for traded companies, the annual return must include the names and addresses of all shareholders who hold at least 5% of the issued shares at any time during the return period, and that for non-traded companies, the annual return must include the names of all shareholders (but not the addresses).

Accounts and LLPs

Most of the accounts and audit provisions contained in the Companies Act 2006 have come into effect for companies for financial years beginning on or after 6 April 2008. They will apply to LLPs with modifications from 1 October 2008.

The remainder of the Companies Act 2006

The remaining sections of the Companies Act 2006 will come into force on 1 October 2009.

IMPORTANT: This briefing note is only intended as a general statement of the law and no action should be taken in reliance on it without specific legal advice. Release Date: 29 September 2008