Archive material - Passage and implementation of the Companies Act 2006

Under section 155 of the Companies Act 2006, all companies (even dormant companies) must have at least one natural director from 30 September 2009.

Section 155 of the Companies Act 2006 took effect from 1 October 2008 but companies incorporated before that date were granted an extension if, on 8 November 2006, they had only corporate directors. The deadline for these companies is 1 October 2010.

If a relevant company misses this deadline it will be subject to penalties including fines up to £5,000 (for both companies and directors in default).

• A new criminal offence for auditors, punishable by an unlimited fine.
• Auditors will be able to contract annually with shareholders to limit their liability to a "fair and reasonable" amount.
• The "senior statutory auditor" must be named in and sign reports.
• Changes to the resignation statements regime.
• Minor changes to the eligibility/independence regime.

• Audit-related provisions

The Act contains a statutory statement of directors' general duties. These new codified directors' duties came into force from 1st October 2007, replacing the existing 'common law' rules arising from decisions made by the courts. In codifying directors' duties, the Government's intention was for the most part not to change them but to establish good business sense for companies to embrace wider social responsibilities.

• Directors' duties and derivative actions

Part 23 of the Act came into effect on 6 April 2008 and applies to distributions made on or after that date. There were no substantive changes in the law on distributions made by the Act although some changes of wording have been made.

ICAEW, jointly with ICAS, has produced TECH 1/09 Guidance on the determination of realised profits and losses in the context of distributions under the Companies Act 2006, which contains consolidated guidance on realised and distributable profits under the Companies Act 2006. It identifies, interprets and applies the principles relating to the determination of realised profits and losses for the purposes of making distributions under the Act.

When developing TECH 01/09, ICAEW gave consideration to some additional issues where there appeared to be a demand for additional guidance. It was not possible to develop full proposals at that time without unduly delaying the publication of TECH 01/09. Such proposals were subsequently developed and set out in TECH 3/09 Proposed additional guidance on realised and distributable profits under the Companies Act 2006 including foreign currency share capital and linkage (including consideration of Cash Box Placings). This material may be amended in light of comments received. Subject to this, ICAEW intends to update the text of TECH 01/09 for the proposals, including any necessary consequential amendments and publish the complete revised text later in 2010.

TECH 1/09 runs to 131 pages and so, to provide some practical guidance for UK directors on the determination of distributable profits and the risks of unlawful distributions, the Financial Reporting Faculty produced the "UK Distributable Profits" factsheet. This factsheet provides a summary of the law and related guidance on the payments of dividends by UK companies, and highlighting some of the common issues that arise in practice.

The introduction of the new 'enlightened shareholder value' duty has been controversial. From 1 October 2007 it broadly replaced the old duty to act in the company's best interests, but requires directors to have regard to the longer term and to various 'corporate social responsibility' factors. These included the interests of employees, suppliers, consumers and the environment.

However, it is important to note that this is a single duty to work for the benefit of shareholders, rather than a separate set of duties in relation to the stakeholders represented in the list of factors. Directors will only be liable to the company (or its shareholders on behalf of the company) for breach of this duty and if the company can demonstrate that it has suffered loss as a result of the breach.

There has also been concern that directors will need to document every decision to protect themselves from law suits brought by activists. However, the courts will be reluctant to interfere with business decisions unless there is clear evidence of bad faith. Directors should not be encouraged to leave a paper trail showing they have considered all of the listed factors in making every decision; they should instead encourage a culture where the wider consequences of decisions are routinely considered.

The Government has issued guidance for directors on what these duties mean, based on the Government statements made in Parliament:

• BERR (formerly the DTI) - Duties of company directors

From 1 October 2007, the controversial 'enlightened shareholder value' duty in the Companies Act 2006 requires directors to have regard to various 'corporate social responsibility' factors including the interests of employees, suppliers, consumers and the environment. 

However, the courts will be reluctant to interfere with business decisions unless there is clear evidence of bad faith, and directors should therefore not be encouraged to leave a paper trail showing they have considered all of these factors in making every decision. 

This useful paper sets out the GC100's best practice guidelines on how directors should comply with this new duty.

The Department for Business Enterprise and Regulatory Reform's website has links to the Act and Explanatory Notes, more detailed information on when the various provisions are coming into force, with links to guidance notes on implementation including FAQs. It also has links to guidance for private companies, summarising the key areas of change which private companies will want to think about:

• 'Companies Act 2006 - A summary of what it means for private companies'
• 'Companies Act 2006 - Private Company Information'

Also available here is the DTI consultation issued on 28 February 2007 on transitional issues, and policy regarding regulations to be made under the Act.

• New provisions on auditor liability, directors' duties and narrative reporting.
• Company websites and emails must now include company information, including registration number and registered office.
• Easier for companies to communicate electronically with shareholders.
• Easier for indirect/beneficial shareholders to be informed and exercise governance rights in the company.
• Directors and shareholders can file service addresses rather than private addresses.
• The company names regime will be simplified and there are changes to a company's constitutional documents.
• Directors of corporate trustees of pension schemes can now be indemnified.

• Measures affecting all companies

A new statutory liability regime (s 463) was introduced from 20 January 2007, effectively incorporating a safe harbour for information in directors' reports and directors' remuneration reports. The requirements for a business review in the directors' report were revised as from 1 October 2007 (s 417) and - for quoted companies only - the content requirements extended significantly. These now include, for example, information on environmental impacts and the main factors likely to affect the company's future business (the 'enhanced business review').

In addition to the measures described above for all companies, the Act includes some measures applicable to all public companies, including removal of upper age limit for directors and the deadline for accounts is shortened to six months.

• Measures affecting quoted PLCs, including those applicable to all PLCs
• Measures affecting unquoted PLCs, including those applicable to all PLCs

In addition to the measures described above for all companies, the Act includes the following measures applicable to private companies.

• Deregulatory measures, including scrapping the requirements for AGMs and company secretaries, and making it easier to pass written resolutions.
• A new procedure for making capital reductions supported by a solvency statement instead of by court order, with surpluses arising on capital reductions treated as realised.
• The deadline for filing accounts will be reduced from ten to nine months.
• Removal of the specific medium-sized group exemption from preparing group accounts.
• SMEs will continue to be able to file abbreviated accounts, but the Government's intention is that the regulations require them to disclose turnover.

• Specific legislative changes affecting private companies

BERR has issued guidance on what the Act means for private companies:

• 'Companies Act 2006 - A summary of what it means for private companies'
• 'Companies Act 2006 - Private Company Information'

Existing companies may need to make amendments to their articles to take advantage of some of the deregulatory measures.

Most of the provisions of the Companies Act 2006 that were due to be commenced on 1 October 2008 will now be commenced on 1 October 2009. The delay in implementation results from the need to ensure that the necessary changes to the Companies House systems and processes are in place.

Certain provisions were still commenced on 1 October 2008. These include the general duties of directors in respect of conflicts of interest, the new procedure for private companies to make capital reductions supported by a solvency statement instead of by court order, and the repeal of the restrictions under the Companies Act 1985 on financial assistance for the acquisition of shares in private companies. The law society has issued some guidance for directors regarding these share capital reforms.

The finalised timetable was announced in December 2007.