Article

Companies Act update

The existing rules that deal with how companies are set up and run in the United Kingdom are currently undergoing a major overhaul. The changes will apply to all companies, whether they are small or large, private or public. Even foreign companies with a place of business in the United Kingdom will be affected.

The Companies Act received Royal Assent on 8 November 2006. It will not replace all existing law relating to companies. It will replace the 1985 and 1989 Companies Acts, by absorbing and amending them. It will also convert certain court decisions into statutory law, particularly in relation to director's duties and auditor's liability.

Stated Aims - The common thread running through all press releases and guidance issued by the dti is that it should be easier in the United Kingdom to set up and grow a business. The existing rules were aimed at larger companies, but the majority of companies in the United Kingdom are small, private companies. The result was the combination of complex rules and language that have made the running of smaller businesses unnecessarily complicated.

One of the goals for the Companies Act is to make the language of the rules simpler. In common with all regulatory change at the moment, the hope is to translate complex definitions, language and procedures into "plain English". Another goal is to reduce the complexities involved in running a company, where they have been proved to be unnecessary.

Administrative Changes for Private Companies - There are many worth noting:

= It will become possible to incorporate a company online through Companies House and to deal more efficiently with company affairs using the internet and email.
= Model articles of association for private companies will be written to create concise and clear rules by which private companies can be governed, if the company chooses to adopt them.
= A company's constitution will, in effect, be set out in its articles of association alone with the memorandum of association becoming a nominal document.
= There will be no requirement to hold an annual general meeting or for accounts to be presented and auditors reappointed, unless the company chooses to hold a
meeting.
= Written resolutions will require only a 75% majority for special resolutions and 50% for ordinary resolutions. The current rule is that the vote must be unanimous.
= The notice period for all private company shareholder meetings will be 14 days, although 90% of shareholders can authorise a meeting at short notice, which is down
from 95%.

Directors Duties - The law as it relates to the obligations owed by a director to the company has developed through cases that have reached court. The legislators have taken this opportunity to codify important court decisions. The Companies Act sets out a statement of seven general duties for directors including the duty:

= To promote the success of the company for the benefit of its members.
= To exercise independent judgment.
= To exercise reasonable care, skill and diligence.
= To avoid conflicts of interest.
= To declare interests in proposed transactions with the company.

Auditor Liability - A new offence has been created in relation to audited accounts. It will be a criminal offence for an auditor to knowingly or recklessly cause an audit report to be misleading, false or deceptive in a material respect. This will mean that claims against auditors will no longer have to be based on the law of negligence, which has been shown to be lacking in relation to auditor liability. However, to balance this out, auditors will be allowed to limit their liability with corporate clients, subject to shareholder approval. The inevitable result is that limitation agreements will become the norm but they will still be subject to the legal requirement to be "reasonable" limitations of liability.

Officer Liability - The new law clarifies the meaning of "officers" who are currently liable under most Companies Acts offences. The definition states that the officers are:

= the directors,
= people acting as directors,
= secretaries,
= any other person treated as an officer of the company in relation to the subject
matter giving rise to the liability.

Business Dealings - In order to simplify the making of contracts there is a new concept of "authorised signatory". This would be a person authorised by the company to bind it legally, for example, the company's solicitor. A list of authorised signatories will need to be kept at Companies House. In addition, the rule against a private company giving financial assistance in relation to the purchase of its own shares will be abolished. This will affect the financing of management buy-outs by making financing options easier and removing the need for the complex "whitewash" procedure by which the rule could
be circumvented. The rule remains for public companies.

Public Companies - Although the focus of the changes is on smaller, private companies, there are some changes affecting public companies. One of these is a new requirement to hold its AGM within six months of the end of its financial year. Changes to the rules relating to auditor liability and directors' duties will apply to public companies as well as private. Most significantly, the new law aims to make it easier for shareholders in the larger public companies to be more involved.

The Companies Act has, understandably, been the subject of extensive debate so far. As always, whether these changes will achieve their stated aim is not something that will be known immediately. The administrative changes for private companies will certainly assist smaller companies to focus more on business. The changes affecting public companies are relatively limited but it will be particularly interesting to see if shareholders take this opportunity to voice more of their opinions, for example, in
relation to director's salary and emoluments.

For further enquiries please contact James Partridge (view full profile) on 01892 701280 or email james.partridge@ts-p.co.uk.

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