What is the Companies Act 2006?

The Companies Act 2006 is a complex piece of legislation that took eight years of lengthy consultation before agreement could be reached on the final provisions. The new Act, which became law in October 2009 and contains more than 1,300 sections, replaces the 1985 Act. It aims to modernise company law, simplify legislation, enhance the rights of shareholders, ease the administration burden for companies, and codify the duties of company directors.

Many reforms included in the new Act have been welcomed by the business community, while others have caused a fair amount of controversy, in particular the codification of directors’ duties.

Some commentators have said the latter could result in excessive minuting of all directors’ decisions, and could actually inhibit directors from getting on with running their business.

Others claim the changes will make it easier to track the decision-making process. In response, the government has said decisions on business tactics and strategy will continue to be taken by directors and not be subject to interference by the courts.

So, what’s changed?

Whether you think the reforms make your life as a limited company director easier or not, the Act is here to stay. Here, we look at some of the main components of the new legislation, starting with company directors’ duties.

The duties of UK company directors have been codified for the first time and include a lengthy list of obligations and responsibilities. This includes a duty to act in good faith so as to promote the success of the company for the benefit of all members. The director must also consider the long-term consequences of any decisions he or she takes; take into account the interests of the company’s employees, and consider how the company’s operations impact on the environment and community as a whole.

The code also states the need for directors to act fairly, maintain high standards of conduct in business. Directors should act within a director’s powers, namely in accordance with the constitution of the company and exercise powers for a proper purpose. The code states directors have a duty to exercise independent judgement, skill, care and diligence, and to avoid conflicts of interest. Directors also have a duty not to accept benefits from a third party and should declare an interest in any proposed arrangement or transaction with the company.

Some other components of the Act

  • Under the new Act, many company submissions and duties can be done electronically. This includes communicating with shareholders in regard to company matters.
  • Nominee shareholders can choose to receive all relevant company information electronically instead of by letter.
  • Indirect shareholders have been granted more rights by the new Act, including the right to sue company director (s) if they believe fraud has been committed or that the directors have been negligent in carrying out their duties.
  • New legislation means limited companies can now be run by a single serving company director and there is no longer a need to appointing a company secretary. Companies can still choose to appoint a company secretary, provided they submit the appropriate form to Companies House, as before.
  • Company directors can elect to keep their residential address out of the public record by providing a service address instead. This can be the registered office address of the company, or another address, as long as it’s a real address and not, for example, a PO box. Directors still have to provide their residential address to Companies House.
  • The incorporation process for all new companies has been simplified.
  • Rules on share capital for private companies have been simplified.
  • Private companies are no longer required to hold an annual general meeting, but may still choose to do so.
  • Naming rules for companies have been simplified and upgraded.
  • Companies can now opt to use Companies House model Articles of Association to form a limited company.

The above list is far from exhaustive and as stated above, the new legislation has over 1,300 separate sections. It’s important to note that the 2006 Act supersedes the 1985 Companies Act. To access the new Act online, go here.

Tax-efficient protection for directors

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