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Companies Act implementation update

November 2008 - Corporate & Commercial. Legal Developments by Kingsley Napley.

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October saw a number of steps along the path to full implementation of the Companies Act (CA) 2006. A number of outdated provisions have been repealed and a range of new legislation introduced.

Repealed provisions

The following provisions of CA 1985 were repealed on 1 October 2008:

Financial assistance (ss151-153)

The prohibition of the giving of financial assistance by a private company for the purposes of the acquisition of shares in itself or another private company.

The financial assistance prohibition on public companies and their subsidiaries remains in force under CA 1985 until 1 October 2009, when similar provisions will be introduced under CA 2006.

Whitewash procedure (ss155-158)

The procedure used by private companies to sanction the giving of financial assistance, involving, among other things, a special resolution approval, a directors’ solvency declaration and an auditors’ report.

Despite the repeal of these provisions, private companies still need to be mindful of a number of concerns before proceeding with the giving of financial assistance:

  • Does the company have the capacity to give financial assistance in its memorandum and articles?

  • Is the transaction consistent with a director’s duty to act in good faith and promote the success of the company for the benefit of its members as a whole?

  • Directors should consider the cash-flow and net-asset positions of the company to ensure there are no solvency issues. If there is any doubt as to the company’s solvency, the directors should consider the interests of the company’s creditors and financial assistance should not be given by the company.

  • A transaction may no longer be prohibited by financial assistance rules, but it may still infringe maintenance of capital rules and should be analysed from that point of view also.

new provisions

The following provisions of CA 2006 were implemented on 1 October 2008:

Objection to company names (ss69-74)

A new right has been introduced allowing any person (not just a company) to register an objection with a company names adjudicator if a company’s name is the same as a name associated with the objector, in which the objector has goodwill, or where the name is sufficiently similar that it is likely to mislead. 

If an objection is upheld, the adjudicator can direct a company to change its name to one 

that does not raise an objection and set a deadline for such a change. The adjudicator may also choose a new name for the company. See IHL164, p48 for further details on the Company Names Adjudicator Rules 2008.

Trading disclosures (ss82-85)

These sections introduce a new set of regulations regarding the disclosure of company details. The regulations clarify the locations and communications in which a company’s registered name must be displayed. Additional information must be disclosed on a company’s business letters, order forms and websites. 

Minimum age and natural person requirements for directors (ss155-159)

At least one director must be a natural person. Although this requirement came into force on 1 October 2008, there will be a grace period until October 2010 for any company that did not have at least one natural person as a director when CA 2006 received royal assent on 8 November 2006.

A minimum age of 16 has also been set for the appointment of a natural person as a director. 

Duties of directors in conflicts of interest (ss175-177)

A director must avoid situations in which they have or can have a direct or indirect interest that conflicts with or may conflict with the company’s interests. In particular, this applies to the exploitation of property, information or opportunity. 

Directors must not accept any benefits (including bribes) given by third parties because of being a director or for doing or not doing anything as a director. 

Directors must declare to the other directors both the nature and extent of any direct or indirect interest in a proposed transaction or arrangement with the company. A director need not be party to the transaction for the duty to apply and such declarations should be made prior to the company entering into the transaction. Should a declaration become inaccurate or incomplete, a further declaration must be made if the company has not yet entered into the transaction or arrangement when the director becomes aware of the inaccuracy or incompleteness. No declaration is needed if the director is not aware of the interest or not aware of the transaction in question (although directors will be treated as being aware of matters of which they ought reasonably to be aware).

Directors’ declaration of interest in existing transactions or arrangements (ss182-187)

A director must declare the nature and extent of their interest, direct or indirect, in an existing transaction entered into by the company. This provision does not apply if the interest has already been declared under s177. 

The declaration can be made at a board meeting, by notice in writing, or by general notice. When an earlier declaration becomes inaccurate or incomplete, a further declaration must be made. 

No declaration is needed if the director is unaware of the conflict of interest or unaware of the transaction or arrangement in question, although a director is to be treated as being aware of matters of which they ought reasonably to be aware.

There is also no need for a director to make a declaration of interest if the other directors are already aware of it or if it concerns the terms of the director’s service contract that have been or are to be considered at a board meeting or board committee.

Reduction of share capital (Part 17)

Private limited companies may reduce their share capital with a special resolution supported by a solvency statement. The special resolution must make all necessary amendments to the company’s memorandum by reducing the amount of its share capital and of its shares.

Share capital cannot be reduced to zero under the new procedure. At least one member of the company must be holding shares (which are not redeemable shares) following the capital reduction. 

A private company need not be authorised in its articles before it can reduce its capital. Permission for capital reduction will be present unless this is strictly prohibited in the company’s articles.

The solvency statement must be made by all the directors. Thus if one or more is unwilling to make the statement, the company will need to use the court-approved reduction of share capital procedure (unless the relevant directors resign before the making of the statement).

The solvency statement must confirm the following: 

  • as regards the company’s position at the date of the statement, there are no grounds on which the company could be found unable to pay or discharge its debts;

  • if an intention exists to wind up the company within 12 months of the statement being made, the company will be able to pay its debts in full within 12 months of the commencement of winding-up; and

  • the company will be able to pay its debts as they fall due during the year immediately following the statement.

Other provisions implemented

Part 14, concerning control of political donations and expenditure.

Certain provisions of Part 15 (accounts), Part 16 (audit) and Part 42 (statutory auditors) will apply to limited liability partnerships for financial years beginning on or after 1 October 2008.