Companies Act 2006 update: the October 2008 changes

The Companies Act 2006, will, by the time it is fully implemented on 1 October 2009, replace the majority of the Companies Act 1985 and bring about the most fundamental changes to UK company law in over 20 years. The "headline" changes involve:

• the introduction of new statutory duties for directors in relation to conflicts of interest;
• the relaxation of the rules affecting private companies providing financial assistance for the acquisition of their own shares; and
• the introduction of a new procedure for private companies wishing to reduce their share capital (to, for instance, set off large accumulated losses against the reserve arising on a reduction of share capital or share premium account to enable them to pay dividends out of future profits).

Conflicts of interest

The remaining three general statutory duties of directors will be implemented on 1 October 2008. To some extent these are consistent with the existing rules on conflicts but there are significant differences:

• directors will no longer just be able to deal with conflicts when they arise, usually by not participating in relevant board discussions. Instead, directors must actively avoid any situation which is likely to give rise to a conflict (for example, being a director of a competitor company) unless the situation is authorised in advance by the board;
• a director must not accept benefits from a third party given because he is a director or by reason of his doing (or not doing) something as a director. The board cannot authorise the acceptance of benefits;
• directors must declare the nature of their interest in any transaction or arrangement which they propose to enter into (or have entered into) with the company.

None of the duties is breached and no declaration of interest is required if the relevant situation cannot reasonably be regarded as likely to give rise to a conflict.

The new provisions apply to direct and indirect conflicts or interests and therefore catch directorships or substantial shareholdings held by a husband or wife in a competitor or major supplier.

The board of a public company will be able to ratify conflicts if the articles of the company are amended to permit this. The shareholders of private companies formed before 1 October can authorise the board to ratify conflicts. The board of a private company formed on or after 1 October will have an automatic right to ratify conflicts, subject to anything to the contrary in the company's articles. In all cases, only directors with no interest in the conflict can be counted as part of the quorum for the purposes of a meeting to authorise a conflict.

In order to avoid negative publicity and unintended resignations, companies should be taking steps now to review their own conflicts procedures and be working with their directors to identify their outside interests.

Changes to financial assistance

The general prohibition on a private company giving financial assistance for the acquisition of its own shares will be abolished on 1 October 2008. The "whitewash" procedure will also be abolished, which means that:

• the directors of a private company wishing to give financial assistance will no longer have to swear a statutory declaration as to the company's solvency; and

• the auditors will not have to prepare a statutory report as to the reasonableness of the directors' declaration.

It should be simpler, quicker and cheaper for a private company to give financial assistance. The prohibition will remain in place for public companies and their subsidiaries.

Although the administrative burden will be eased, directors, advisers and lenders will still need to consider substantially the same legal issues as before to determine whether or not a company is able to provide financial assistance for the acquisition of its own shares. Industry-wide standards among lenders are still to develop in terms of whether an alternative procedure will be adopted in substitution for the "whitewash".

It is likely to be the case that following 1 October 2008 there will be an increased emphasis on companies preparing detailed board minutes to record the directors' consideration of their duties where financial assistance is being given and their assessment of the financial impact on the company of providing the assistance.

New capital reduction procedure for private companies

Subject to the shareholders passing a special resolution approving the reduction and all of the directors swearing a solvency statement, private companies will have an alternative to the court procedure for reducing their share capital. Creditors will have no right to object to the reduction but it will be a criminal offence for directors to make a solvency statement without having reasonable grounds for the opinions expressed in it.

Trading disclosures

Provisions dictating the trading disclosures which companies must make will come into force, relating principally to the places and manner in which a company must disclose its registered name and other company details. These consolidate the existing rules, but there are certain additions. For example, the information must be given in all emails and on all websites. Companies must also disclose the address of any place where the company records are retained to any person dealing with the company in the course of business who requests the information in writing.

Appointment of directors

A company must have at least one director who is a natural person and every company director must be at least 16 years old. Companies which did not have a natural person as a director on 8 November 2006 have until 1 October 2010 to make any necessary changes.

Objecting to company names

A new right will exist to object to the name of another registered company. This change is intended to prevent company name "squatting" where a company name is registered for the purpose of selling that name to a company with a genuine reputation or goodwill in it.