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Final stage of implementation of Companies Act 2006 1st Oct 2009

Practical implications for your company

On 1st October 2009 life changed forever, at least for anyone involved at whatever level with the administration of a company, when the final parts of the Companies Act 2006 still outstanding came into full force.

As I am sure you are all aware when, the Companies Act was given royal assent on 8th November 2006 it was the most substantial Act of Parliament to date relating to Company Law, consisting of a huge, 1,300 sections. Since then the Act has been implemented in a number of stages, and indeed a number of provisions originally due to come into force in October 2008 were delayed until October this year – largely to give Companies House adequate time to make necessary changes to deal with the new Act.

It is obviously impossible to cover the whole Act in the time I have today and in any event as there has been a year since the last changes came into force I would anticipate that most of those have now had time to have been considered and/or implemented by you. In particular I am thinking of the statutory provisions codifying directors duties and also directors conflict of interest provisions. Each of those merits its own talk but there has been considerable publicity about those matters. If by any chance it has passed you by please feel free to have a chat later on.

So, the purpose of today’s talk is to address the latest provisions to come into force and to comment on some of the likely practical implications of their introduction.

Changes to Company’s Constitution

From 1st October the Memorandum of Association of a company has lost its fundamental importance. To that date the Memorandum was the part of a company’s constitution that contained its powers and objects (purposes).

For companies incorporated after 1st October 2009 the Memorandum will simply comprise a statement that the subscribers
(a) wish to form a company
(b) agree to become members and
(c) will each value a specified number of shares.

The memorandum is therefore no longer part of a company’s constitution.

For an existing company, from 1st October the Memorandum will be split into two parts. The details in the new Memorandum (details of subscriber shares) will be treated as the Memorandum and the rest of its provisions (including the objects clause) will be treated as provisions of the articles of association.

The effect of this is that existing companies will have their existing objects clause transferred into their articles where it will operate as a limitation on the directors’ authority. This will probably not be a problem if the company already has “general trading” objects (which will generally be the case if the company has been incorporated within the last few years) but may need to be removed if a company has a more specific, restricted objects clause.

If indeed your company does have a restrictive objects clause the problem can be remedied by removing any unwanted or inappropriate restriction by shareholder resolution, as with any other change to a company’s articles. Indeed, the transferred memorandum can be removed in its entirety (thus reflecting the default position under the Act whereby a company has unrestricted objects).

However, a note of caution. As with other provisions which were previously contained within the memorandum of association, for existing companies, the statement of liability within the memorandum of association will be deemed to now form part of the articles. There is concern that when deleting provisions of the memorandum that are no longer required under the 2006 Act, a company may inadvertently delete the statement of liability, thus reverting to unlimited status. In order to avoid this, the statement of liability should be expressly stated in the articles.

On the other side of this particular coin, there may be particular reasons why it may be appropriate for a company to include restricted objects in its articles – for example a company incorporated for a very specific reason. So, if you have a post 1st October Company, restrictions might need to be added in to its articles.

In either case, when changes are made to the articles of a company, it has always been the case that a complete set of new articles should be lodged with the Registrar of Companies. In practice, unless the changes were major this has not necessarily been strictly complied with! However, from 1st October, there is now an incentive – if on a change to articles a complete set of articles is not lodged within 15 days of any change, however small, a penalty of £200 will be payable.

For many generations of corporate lawyers the default articles of association have been the relevant Table A (albeit in several amended versions) – a document we have all known and in varying degrees loved. Instead, now we have three sets of new model articles being Model Articles for Private Limited Companies, Public Limited Companies and Companies Limited by guarantee.

Although very few companies were incorporated with Table A un-amended, in the vast majority of cases Table A was the bedrock of the company’s constitution, particularly after the 1985 version which took into account a number of issues which had previously had to be covered by derogation from or addition to previous versions of Table A.

The new model articles are expressed in simple language and do not repeat provisions already provided for in the Act. They are shorter. We have lost for example, provisions dealing with liens over shares and forfeiture of shares. They are aimed at owner managed companies which only need a basic, simple structure but may need considerable amendment for private companies with a more complicated share or ownership structure.

Model Articles points to note

To pick out some interesting features of the new model articles (if you incorporate after 1st October:-
• Regulation 15 provides that directors must ensure a company keeps records of the decisions of the directors for at least 10 years. This reflects a new provision in the Act (section 248) whereas the 1985 Act was silent on this point – the new section applies regardless of when your company was incorporated although it only relates to meetings held after 1st October 2007. Also, note that the Act provides that accounting records should be kept for 3 years in the case of a private company.

• The new model articles do not provide for directors to retire by rotation (that is, the longest appointed director automatically retires (or is retired) each year – unless the company remembered to reappoint the automatic retirement provisions in the past not uncommonly resulted in unwary companies actually ending up with no appointed directors). It is rare that directors do actually retire by rotation these days. This is a reflection of the new model articles reflecting current practice.

• The new model articles only provide for fully paid shares to be issued and do not provide for partly paid shares. It is quite unusual to see partly paid shares now, but there are some circumstances in which they are used, for example, in employee share schemes and if as a post 1st October company you are considering putting a scheme in place you may need to look at this and amend your articles if necessary.

• The new model articles do not make provision for an AGM. This assumes that the company wishes to take advantage of the provisions of the 2006 Act, which permits private limited companies to no longer hold an AGM. This was brought into force on 1st October 2007. However, some private companies will wish to continue to hold AGM’s as a way of keeping their shareholders informed and involved. If this is the case, an amendment to the model articles would be required.

• The new model articles do not require a company secretary to be appointed. Again this reflects that from 6th April 2008, private limited companies no longer have to appoint a company secretary. However, many private companies will still want a company secretary to be appointed to deal with general company administration rather than delegating the functions to a director.

Share Capital

As of 1st October, companies limited by shares are no longer required to have an authorised share capital. For companies incorporated after 1st October the default position is that a company will not have an authorised share capital unless it expressly chooses to do so. The effect of this is that the directors (assuming they have the authority of the members) can allot shares without limit (and therefore shareholders wishing to restrict the amount of shares that can be issued will need to insert a suitable provision into the articles to that effect).

For pre-existing companies the authorised share capital currently stated in their articles (by transfer from the memorandum as mentioned earlier) constitutes a restriction or ceiling on the number of shares that may be allotted. This restriction can be removed by an ordinary resolution amending the articles – again remember the need to file a complete set of new articles to avoid a fine.

Directors of post 1st October private companies with only one class of shares will no longer need shareholders prior express authority to issue shares (that authority was previously usually found in the articles on incorporation or as amended or extended by subsequent resolution) – unless, of course, the articles state otherwise. For pre-existing companies this is not an automatic power. The members must first resolve (by ordinary resolution) that the directors should have the power going forward. Therefore once the authority is granted it can only be resolved by amending the articles.

Note that if your company has more than one class of shares (and this is not uncommon even in owner managed companies for example A and B shares allowing different dividends to be paid or voting/non voting shares) prior authorisation is still needed and the Act largely reproduces previous legislation in this respect, including the five year time limit.

The underlying message is therefore that it is at least sensible and probably highly desirable that every company reviews and revises its Articles of Association over the coming weeks. The purpose is to remove unnecessary restrictions and obligations, remove out of date references to sections of the
1985 Act and to take advantage of the new provisions of the 2006 Act. It is also important to ensure that the implementation of the 2006 Act on 1st October this year does not affect the validity of any of the existing provisions of the Articles of Association.

A few changes in relation to company names.

First, from 1st October a company will no longer require a special resolution of its members to change its name (although that will still be possible). Instead, a name change will be able to be made by any method provided for in the articles, such as a resolution of the directors.

Interestingly, the new proactive approach of the Registrar is shown in relation to company names. It has always been the case that a name which is the same as a registered company would be rejected, but there were many ways round this by adding other words or symbols to differentiate. From 1st October the Registrar can now ignore certain keywords (such as “UK” “GB” or “.com” “service” or “international” when considering a name.

The exception will be if the written consent of the other company or companies is received which allows group companies to have similar names. The application for the proposed name must include a copy of a statement in which the existing company consents to the adoption of the proposed name and confirms it will be part of the same group.

The “same as” rules are contained in The Company Limited Liability Partnership and Business Names (sensitive words and expressions) Regulations 2009 (s1 2009/2015) which came into force on 1st October. These regulations also restate a comprehensive list of sensitive words that will require consent from the appropriate body or government department.

Directors Residential Addresses

Directors have always been required to file details of their residential address at Companies House. These details have until now then been made available on public record. The only way that a director could keep his residential address off the public record came with the introduction of confidentiality orders in 2002. It was hoped that these orders would resolve the problem of, for example, the many cases of, say, animal rights activists obtaining directors’ residential addresses from companies house records. They were generally only available where the director was (or those living with him were) subject to a serious risk of violence or intimidation. By October 2006 there were nearly 7000 such orders in force and it was clear that further action was needed.

As from 1st October, under sections 240 to 246 of the Act, the detailed workings of which are set out in the Companies (Disclosure of Address) Regulations 2009) a director must in respect of each directorship file two addresses at Companies House. One is the usual residential address (which is protected information) and the other is a service address (which could be the usual residential address, the company’s registered office or any other sensible, accessible address) and this service address will be the address which appears on public record. The default position for existing directors is that, until a different service address is notified the already registered home address will also be the service address.

The new rules are not retrospective and there is therefore no automatic removal of residential addresses already on public record. However in certain circumstances directors may apply to have their home addresses removed from the public register.

Note that the information remains protected even after the person has ceased to be a director.

Although Directors will still need to file their residential address, Companies House may only disclose it in very limited circumstances, namely to certain specified public authorities and credit reference agencies. However, a director who is at risk of violence or intimidation or who has been employed by or provided goods or services to certain organisations (including the Security Office and police force) will be able to make an application requiring the Registrar to refrain from disclosing his residential address to credit reference agencies. Directors who already have the benefit of a confidentiality order under the existing regime will automatically receive this higher level of protection. Existing directors will as mentioned already also be able to make this new application to take advantage of the new rules. The procedure is not particularly complex but as part of it the Registrar has the right to refer to a relevant body (police force. Security office etc) for an assessment of the nature and extent of the risk of violence or intimidation.

To avoid potential abuse of the new system the Registrar will have the power to put a director’s home address on the public register if the Registrar has not received a response within a specified time to a communication sent to the director or where it is obvious that the service address is not a suitable place for serving documents or bringing them to the director’s attention. In those circumstances the director may not register a service address for 5 years.

Similar obligations of confidentiality are placed on the company in relation to its use of directors’ residential addresses and the company must keep a new, separate register of directors’ usual residential addresses which will not be open to public inspection. If the home address and the service address are the same it is possible to note this in the register of residential addresses – this will not apply if the service address is the company’s registered office address. The company cannot disclose a director’s home address without his consent unless they are communicating with the director or complying with the filing requirements of the Act or a court order.

The “main “ register must show the service address – which can of course be the usual residential address, registered office address or a different address. It must also state the country, state or part of the UK where the director is normally resident. It is no longer necessary to keep details of past directorships.

As of 1st October companies are obliged to inform any person who asks to inspect or obtain a copy of its register of members whether the information in the register is up to date and if it is not, the date to which it has actually been made up. Non-compliance can lead to a fine. Further, where a person asks to inspect the register of members, the company must make the register available for inspection for a period of at least 2 hours between 9 am and 3 pm on the day specified in the persons notice. It must be a working day, and the notice must allow 10 working days notice.

Every company should therefore take a little time to consider and implement appropriate procedures for responding to a request to inspect their register of members.

Annual returns

The annual return form (form AR01) will now be much longer than under the 1985 Act – we have 14 pages rather than 4, although the information that is required has not changed significantly. What is new is the separate statement of capital setting out the current issued share capital.

Private companies must provide the following information in their annual return:
1. Names of every member not including addresses;
2. The number of shares of each class held by all members at the date the return is made up to;
3. The number of shares of each class transferred during the return period by each such member, or former member, and the dates of such transfer;
4. If the names of the members are not in alphabetical order, a list must be annexed to the annual return which enables entries related to any given person to be easily found.

Looking at the statement of capital in more detail – for a company with less than 20 shareholders, the first provisional shuttle annual return form will after 1st October automatically include the required information, and will only need to be checked and if necessary updated. Addresses of members are excluded so this is not very onerous. For companies with more than 20 shareholders the shuttle return will not include the member’s information and these companies will therefore need to modify their own procedure to ensure members addresses are excluded from annual returns.

If the annual returns for the previous two years (previously three years) have listed the above particulars, a company is then required only to provide information in respect of persons ceasing to be members during the period and any shares transferred.

When you get your next annual return you will see reference to director’s service addresses now included and also reference to SAIL (single alternative inspection location). A company could now possibly be required to keep up to 13 registers which should be available for inspection. These should be held at the Registered Office Address or at a Single Alternative Inspection Location (SAIL). Companies House should be notified when a company sets up a SAIL address or if it moves. In addition, Companies House should be notified as and when some or all of the registers are moved to the SAIL address once it has been set up.

Share buy-backs

Share buy backs – not uncommon in owner managed companies as a means of facilitating an exit in a tax efficient manner.

Although the provisions which came into force on 1st October largely replicate the 1985 Act provisions – looking at detail on slide there are some key changes:-

1. A company’s articles do not now need expressly to authorise the purchase – unless the articles contain a restriction or prohibition, a company is permitted to buy its own shares;
2. In submitting the form (SH03) it must be accompanied by a statement of capital;
3. The previously required director’s statutory declaration on the financial position of the company is replaced by a statement – so £5 cheaper! Note it remains an offence for directors to make the statement without having reasonable grounds for the opinion expressed in it;
4. In making the statement the liabilities to be taken into account are wider than under the 1985 Act. The directors must take into account liabilities including confident or prospective liabilities.

Registrar of Companies

In respect of documents delivered on or after 1st October 2009, the registrar is empowered to accept, correct and register a document which appears to be incomplete or inconsistent. Anyone wishing to take advantage of this provision must first agree to be contacted and to give the registrar what instructions are needed to correct the document – (this is done by applying for an authorisation code). Instructions can only be given by the company or the person who delivers the charge. Informal correction currently only applies to documents in respect of the registration of mortgages and changes – this is because there are statutory constraints on the delivery of such documents.

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