What benefits really exist for small companies now the new company regime is in place?

1 October 2009 marked the date when the painful transitional implementation of the Companies Act 2006 (Act) came to an end and the Act finally came fully into force. The key aim of the Act was to simplify the regulation of private companies and, to a degree, this has been achieved. The problem is that a lot of the improvements do not apply automatically and, to benefit from the changes, action needs to be taken. This means that the articles of association (Articles) of the company in question need to be amended; if the old articles refer to the old regime, the old regime will apply and you will not be able to enjoy the benefits of the new streamlined system.

While any major update of legislation may seem to just be relevant to lawyers, there are certain key changes that have been made under the Act which businesses should bear in mind. With October 2009 now upon us, it’s a good time to summarise some changes which affect directors and company administration.

• Directors’ duties have been codified for the first time. When making decisions, directors need to take into consideration the effect that each decision will have on the employees, shareholders, reputation, business relationships and long term prospects of the company, as well as the effects decisions may have on the community and environment. Use of detailed board minutes are the obvious solution here.
• A director has to be careful that he declares the nature and extent of any personal interest he may have in a transaction which the company enters into. The Articles will need to be changed to reflect these new provisions
• With directors’ duties having been codified and the rules on directors’ interests having been tightened up, directors have to be careful that their decisions stand up to the scrutiny of shareholders, or they may face what is known as a derivative claim as a result of a negligent or wrongful act. Directors’ indemnity insurance can be taken out to protect directors.
• Companies no longer need to have a company secretary, unless the Articles refer to one.
• Newly incorporated companies will no longer have an authorised share capital when formed. Irregularities in this area have frequently resulted in shareholder disputes or difficulties when companies have gone through a sale process. Existing companies will also be able to dispense with this requirement following certain procedures, but again, the Articles will need to be amended.
• The prohibition on a company making a loan to a director has now been abolished, provided that shareholder approval is obtained. The Articles may still prevent this, so they will need to be reviewed to ensure that the more favourable provisions in the Act still apply.
• The witnessed signature of a single director is all that is needed for the company to sign a document as a deed, although where there are two officers of a company, they can together still sign a document as a deed for a company. The Articles may contain specific signing requirements, so they may need updating to benefit from what is one of the best changes brought in under the Act; how often have people had to run around to get a second signature for a document?!
• The administration relating to general meetings (AGMs and EGMs) has been overhauled and the procedure for passing written resolutions has been simplified. AGMs are no longer required and notice periods have been shortened, unless of course the old Articles say otherwise.
• Companies can communicate formally with shareholders by email or through a website (if the shareholder has consented). This can make the sending of general meeting notices and written resolutions a lot easier. The Articles need to allow for this though.
• Director service contracts of two years or more (previously five years) need shareholder approval.

On the whole, the changes brought in by the Act are positive in that they do streamline and simplify company administration. The Act seems to have addressed the main areas where company administration has fallen down in the past. Normally the business operations of a company are fine, but when the company administration/corporate governance is analysed in depth (during the course of a due diligence exercise on the sale of a company or business), these are the gremlins that crop up. While they may seem inconsequential, they can be incredibly expensive and stressful to rectify at the time that the deal is going through. With this in mind, it makes sense for all companies to review their Articles; it’s not often that the law is relaxed these days, so everyone should take full advantage of this!!

For further information or advice about this, please contact Ben Madden on 01689 887845 or email him at ben.madden@cwj.co.uk