All UK public and private companies and their directors.
What do you need to do?Assess the impact of the changes on your company, in particular ensure directors are aware of their new duties. Consider whether you need to amend the company’s articles and implement new policies for directors' conflicts of interest.
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Robert Hanley
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Hal Bolitho
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Emma Malkin
The UK Companies Act 2006 is being implemented in stages. In previous Alerts on the Act we outlined some of the provisions that came into force on 1 October 2007 and 2 April 2008. This Alert briefly describes the most significant changes coming into force on 1 October 2008.
Most of the provisions originally due to come into force at this point have been delayed until 1 October 2009 to allow Companies House adequate time to make necessary changes to deal with the new Act. The provisions which are being implemented on 1 October 2008 are those which will not have any impact on Companies House’s procedures.
Abolition of financial assistance prohibition for private companies
The Act will abolish the prohibition on most private companies giving financial assistance for the acquisition of shares and remove the “whitewash” procedure as set out in the Companies Act 1985.
Public companies and their subsidiaries (even if the subsidiary is a private company) will continue to be bound by the financial assistance restrictions and there is no procedure available to “whitewash” this financial assistance for either any public company or a private subsidiary.
Commentators feared that the removal of the prohibition on financial assistance might revive old case law which prohibited some forms of financial assistance but the Department for Business, Enterprise and Regulatory Reform issued confirmation that the Act would not have this effect. However, the directors of any private company giving lawful financial assistance must still be mindful of their duties to act in the best interests of the company. The duties of directors have been codified by the Act and a summary of the codified duties was set out in our Alert in relation to the provisions of the Act being implemented on 1 October 2007.
If lenders have concerns about the solvency of the borrower, they may require solvency certificates and/or auditors’ reports before allowing the giving of lawful financial assistance but in normal circumstances neither lenders nor their advisers have indicated that they will require additional measures to replace the “whitewash” procedure in relation to lawful financial assistance.
As a final point, it should be remembered that even though no longer constituting unlawful financial assistance, a transaction could still be prohibited if, for example, it was held to be a transaction at an undervalue.
Directors’ duties to avoid conflicts of interest
Most of the new codified directors’ duties are already in force; the remaining statutory duties, to avoid conflicts of interest, not to accept benefits from third parties and to declare interests in proposed transactions come into force on 1 October 2008. Shareholders of private companies can consent to board authorisation of directors’ conflicts, but companies formed after 1 October 2008 and public companies will require their articles to provide for authorisation of conflicts of interest.
The new duty not to accept benefits from third parties applies to financial and non-financial benefits but allows directors to ignore a de minimis benefit. Only shareholders may authorise a director to accept benefits.
The existing requirement to notify an interest in a proposed transaction involving the company has been split; there is now a separate obligation to declare an interest in an existing transaction. Another change is that the notification must now include both the nature and extent of the director’s interest. A sole director no longer has to notify him or herself of an interest.
These statutory duties, along with those already in force, are owed to the company, and the company (and in some circumstances individual shareholders enforcing the rights of the company) can take action for breach. Such actions might include termination of office, action for damages or to account for profits. Failure to declare an interest in an existing transaction is a criminal offence punishable by fine.
New capital reduction procedure for private companies
A private company wishing to return capital to its shareholders will be able to use a new simpler method to get approval for a reduction of share capital. Instead of purchasing the shares out of capital or getting court approval for the reduction, the company can make the reduction by passing a shareholders special resolution and by the directors making a solvency statement.
This is a statement that each of the directors has formed the opinion that the company is able to pay its debts at the date of the statement and will remain able to pay its debts for the next twelve months. This is a very similar statement to that required of directors under the outgoing financial assistance “whitewash” procedure, but in this situation, no supporting auditors’ report is required.
Other changes and further information
This Alert is only a brief summary of some of the provisions coming into force on 1 October 2008. There are a number of other provisions of the Act coming into force which include provisions relating to:
- a requirement that companies have at least one director who is a natural person,
- a new minimum age for directors of 16, and
- new provisions to allow an applicant to object to a company name where the applicant can show the name was chosen with the principal intention of preventing the applicant from registering a name which has already acquired a reputation or goodwill.
For further information and advice, please contact our London office.