Companies Act 2006 - key changes from 1 October 2008

16/09/2008

A new procedure has been introduced whereby private companies will be able to reduce their share capital by way of a special resolution supported by a solvency statement made by the directors. This will not require the support of an auditor's report and any advertising to creditors or waiting period will not be applicable (other than the time it takes to register the papers at Companies House). This is an alternative to the court approved procedure under the 1985 Act which will remain in place.

The directors must have enquired into the company's state of affairs and have formed the view that the company is able to pay its debts and will be able to pay its debts as they fall due in the subsequent twelve months. Each director must make the statement, which must be in the prescribed form and delivered to the Registrar. Such statement does not constitute a guarantee for the payment of debts. If a director does not have reasonable grounds for the opinions expressed in the statement, he will be guilty of a criminal offence.

The reserve created by the reduction of share capital will be treated as realised profit.

Three further director duties (to complement the general duties that were implemented on 1 October 2007) will come into force on 1 October 2008. They are as follows:

[1] Duty to avoid conflicts of interest

For the first time, directors have a statutory duty to avoid a situation in which they have (or can have) a direct or indirect conflict of interest with the company. The duty is not breached if the situation cannot reasonably be regarded as giving rise to a conflict or if the matter has been authorised by the directors. For private companies, the board can authorise a matter provided nothing in the articles invalidates such authorisation.

[2] Duty not to accept benefits from a third party

Section 176(4) clarifies that the duty is not infringed if acceptance of the benefit cannot reasonably be regarded as likely to give rise to a conflict of interest.

[3] Duty to declare an interest in a proposed transaction or arrangement

As per section 137 of the 1985 Act, essentially this involves an obligation on the director to notify the board of the nature and extent of any interest, direct or indirect, in a proposed transaction or arrangement with the company. The articles are likely to prohibit the director from voting on the particular matter, although this is not a requirement under the 2006 Act.

Whilst not technically part of the general duties, provisions relating to declarations of interest in existing transactions or arrangements (sections 182 to 187) will also come into force on 1 October 2008. These sections will not apply if or to the extent that the interest has already been declared under section 177 (duty to declare interest in proposed transaction or arrangement).

A welcome provision of the 2006 Act is the abolition of the prohibition on private companies giving financial assistance for the acquisition of their own shares or those of another company. The whitewash procedure therefore becomes irrelevant. The law does, however, remain unchanged for public companies: the relevant provisions of the 2006 Act (Chapter 2 of Part 18) will come into force on 1 October 2009. In the meantime, sections 151-154 of the 1985 Act continue to apply to public companies.

A new right is introduced whereby any person (not just a company) may object to a company names adjudicator if a company's name is the same as a name associated with the applicant in which he has goodwill, or where the name is sufficiently similar to such a name that it would be likely to mislead. The objection will be upheld if the respondent company (and its members or directors if joined as respondents) is/are unable to show that any of the circumstances listed in section 69 apply. Even if certain of the circumstances do apply (for example, the company was formerly operating under the name and is now dormant) the objection will be upheld if the applicant shows that the main purpose of the respondents in registering the name was to obtain money (or other consideration) from him or to prevent him from registering the name.

Section 155 introduces a new requirement for companies to have at least one director who is a natural person. There will be a grace period until 1 October 2010 for any company which did not have at least one director who was a natural person at the time when the 2006 Act received Royal Assent (8 November 2006).

Contact: ritapadam@city-law.net

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