Companies Act 2006 - Article 02

Links
Companies Act 2006 Article 1 (the first 7 parts of the Companies Act 2006)
Companies Act 2006 Article 1 (parts 12 and 13 of the Companies Act 2006)
Text of the Act on IPSO website
Provisions already implemented at April 2007
Provisions implemented in October 2007
Proposed timetable for implementation
A list of all parts and chapters
Company Law Club new legislation section (for commencement orders, etc)
DTI website

Intro
This is the second of a series of articles about the new Act, giving an account of Parts 8 9, and 10. It does not claim to be a comprehensive account of all the legislative provisions, but highlights those areas where the law has changed. It also emphasises the areas that are of practical concern to those who run owner-managed companies, and their advisors. Some areas, judged to be primarily of academic interest or concerning only public, and especially listed, companies will not receive detailed treatment.

In this article, the terms 'old' and 'new' are used to denote the law under the 1985 Act (and related statutory instruments, etc.) and the 2006 Act, etc. respectively.

The areas covered are:

Part 8: A company's members
The members of a company (sec112)
Register of members (sec113 - sec128)
Prohibition on subsidiary being member of its holding company (sec136 - sec144)

Part 9. Exercise of members' rights (sec145 - sec153)
Exercise of rights where shares held on behalf of others (sec152 - sec153)

Part 10. Directors (sec154 - sec259)
Requirement to have directors (sec154 - sec161)
Under age directors
Register of directors, etc (sec162 - sec167)
Protection from disclosure of residential addresses (sec240 - sec246)
Removal of a director (sec168 - sec169)
Directors' general duties (sec170 - sec181)
Declaration of interest in existing transaction or arrangement (sec182-sec187)
Approval of directors' service contracts (sec188)
Substantial property transactions (sec190 - sec196)
Loans, quasi-loans and credit transactions to directors, etc. (sec197 - sec214)
Payments for loss of office (sec215 - sec222)
Disclosure of directors' service contracts (sec227 - sec230)
Contracts with sole members who are directors (sec231)
Provisions exempting directors from liability and indemnities (sec232 - sec238)
Ratification of acts giving rise to directors' liability (sec239)
Provision for employees on cessation or transfer of business (sec247)
Records of meetings of directors (sec248)
Definitions

Part 8: A company's members (all coming into effect October 2008)

The members of a company (sec112)
The provisions of sec22, 1985 are replicated with the slight amendment that it is specifically stated that the subscribers become members on incorporation of the company. They must be entered on the register of members. As under the old law, entry on the register of members is the crucial act making a person a member. Sec112(2) provides that every other person who agrees to become a member , and whose name is entered on the register of members, is a member of the company.

Register of members (sec113 - sec128)
The provisions relating to the keeping of a register of members are largely unchanged. There are, however, substantial amendments to the rights to inspect the register. It remains open to any member of the company without payment, and to anyone else on payment of the prescribed fee. (No regulations have yet been made.) Copies can also be obtained on payment of a fee.
By sec116 - sec117, the new requirements are that the request for inspection or copies must contain the following information:
· the name and address of the person making the request and the name of the organization they are acting for
· the purpose for which the information is to be used
· whether the information will be disclosed to any other person and, if so, their identity, and the purpose for which they will use the information.

When a company receives such a request, it must comply within 5 working days or apply to the court, notifying the applicant. If the court is satisfied that the request was not made for a 'proper purpose', it must direct the company not to comply with it and may order that the applicant is liable for the company's costs. It may also order that the company may not comply with any similar requests (even made by other persons). Alternatively, it may order the company to comply with the request.

If the company does not comply with a request for access to the register or obtain an order not to, it and any officer in default may be fined. The company must also inform the person given access of the most recent date on which alterations were made to the register 'and there were no further alterations to be made' (sic): sec120(1). If the index is inspected, the company must state any alterations to the register that are not reflected in the index: sec120(2).

By sec119, it is an offence for a person knowingly or recklessly
· to make a statement that is misleading, false or deceptive in a material particular in a request under sec116, or,
· having obtained information from the share register, to do anything that results in the information being disclosed to another person, or
· to fail to do anything with the result that the information is disclosed to another person, knowing, or having reason to suspect that that person may use the information for an improper purpose.

These extraordinary provisions clearly alter substantially the position of a company's register of members as being a document in the public domain. The new law will have the effect of intimidating applicants, and will put them at risk of being liable for the company's costs of an application to the court. Further, there is no guidance as to what a proper purpose for seeking this information might be.

Sec122 restates the old law on share warrants, and sec123 does the same for single member companies.
Treasury shares are covered in sec124. Where a company buys its own shares as treasury shares under sec724, the shares need not be entered in the register if they are cancelled immediately after purchase.

Other provisions of the old law that are re-enacted are:
· Rectification of the register: sec125
· Trusts not to be entered on the register: sec126
· The register is prima facie evidence of the matters properly in it: sec127

There is a new provision that any liability incurred by a company from making or deleting an entry in the register, or failing to do so, is subject to a 10 year limitation period (unless some shorter limit would otherwise apply: sec128)

Prohibition on subsidiary being member of its holding company (sec136 - sec144) (October 2008)
These provisions broadly re-enact those of sec23 of the 1985 Act (as amended). They provide that, subject to the two exceptions below, a body corporate cannot be a member of its own holding company and any allotment or transfer of shares in a company to its subsidiary is void (sec136(1)).
The exceptions are where the subsidiary is acting as a personal representative or trustee (sec138) and where the subsidiary is an authorised dealer in securities (sec141). Certain residual interests under pension schemes are also disregarded (sec139 and sec140).
Note that these provisions apply to companies not limited by shares (i.e. unlimited companies and companies limited by guarantee) when references to shares must be read as references to the interest of its members as such (sec143), and that the provisions apply to a nominee acting on behalf of a subsidiary as to the subsidiary itself (sec144).

Part 9. Exercise of members' rights (sec145 - sec153) (October 2007)
In practice, these provisions will mostly apply to quoted companies, where the shares are registered in one name on behalf of another person. The key section is sec145, which applies where there is provision in a company's articles enabling a member to nominate another person or persons as entitled to enjoy or exercise all or any specified rights of the member in relation to the company. In such case, anything required or authorised by the Companies Acts to be done by, or in relation to, the member shall instead be done by, or in relation to the nominated person, as if that person were a member of the company (sec145(2)).
Sec145(3) gives examples, such as the rights to notice of general meetings, of written resolutions, appoint a proxy, circulate resolutions, be sent a copy of the annual accounts, etc.
Sec146 - sec151 are detailed provisions relating to the similar rights of nominated persons to information in respect of traded companies. As they are not applicable to private companies, these provisions are beyond the scope of this website.

Exercise of rights where shares held on behalf of others (sec152 - sec153)

Exercise in different ways (sec152) (October 2007) (except sec163(4) & sec164(d) October 2008)
Where a member holds shares on behalf of more than one person, the rights in respect of those shares need not all be exercised, and need not all be exercised in the same way, provided the company is informed.

Members' requests (sec153)
This section applies to the statutory rights of at least 100 members to request certain things from a company. These are sec314 (circulation of a statement), sec338 (circulation of resolution at AGM of public company), sec342 (independent report on a poll) and sec527 [came into force 6th April 2007] (website publication of audit concerns). The effect of the section is to allow non-members for whom shares are held by another to participate in the request.

Part 10. Directors (sec154 - sec259)
(Partly coming into effect October 2007, and partly in October 2008 - see individual sections)
Much of this Part replicates the provisions of the 1985 Act. The following highlights the new provisions.

Requirement to have directors (sec154 - sec161) (October 2007, except as stated)
As under the old law, a private company must have one and a public company at least two directors (sec154), but a new requirement (from October 2008) is that a company must have at least one director who is a natural person, though this may be a corporation sole (sec155, in force 1 October 2008). This will prove to be a very inconvenient provision for commercial solicitors and company registration agents who routinely form companies on behalf of clients using corporate nominees.
The Secretary of State may direct a company to remedy any breach of sec154 or sec155 (sec156).

Under age directors (October 2008) (except sec160 & sec161)
Another new provision is that (from October 2008) a person under the age of 16 may not be appointed as a director (sec157), though regulations can be made for exceptions from this rule (sec158). Existing under-age directors will cease to be directors and the company should alter its register of directors, but need not notify Companies House (who will already have the director's date of birth): sec159 .
Sec160 replaces sec292 of the old Act that the appointments of public company directors must be voted on individually.
Sec161 modifies the old sec285, by providing that a director's acts are valid notwithstanding that it is afterwards discovered that there was a defect in his appointment, or that he was disqualified from holding office, or had ceased to hold office and was not entitled to vote.

Register of directors, etc (sec162 - sec167) (October 2008)
While the basic requirement for a company to keep a register of directors remains unchanged (sec162), there are some significant changes in detail. The first is that the register must be kept at the registered office or at a place to be specified in regulations (none yet made), with notification to Companies House if the latter.
As under the existing law, the register is open to inspection by any member without charge and to any one else on payment of the prescribed fee. Failure to allow inspection is an offence and the court may compel immediate inspection. Notice that the more restricted rights applicable to the register of members (above) do not apply here.
There are changes to the particulars to be registered. The most significant is to the director's address (sec163). As from October 2008, this is a 'service address', rather than the director's residential address, and can be specified as 'The company's registered office'. Note, however, the new requirement to keep a separate register of directors' residential addresses (below). An additional requirement is that the register must note the country or state (or part of the UK) in which the director is usually resident. This change has been brought in because of the unsatisfactory protection for directors from harassment, etc provided by confidentiality orders. Protection from disclosure is covered by later sections of the Act, below.
As under the old law, the register must also contain details of any former name, nationality, business occupation and date of birth. The definition of former name is changed to any name by which the director was formerly known for business purposes, and does not apply to the former usual name of a peer or titled person, nor to any name that was changed or disused before the director was 16 or which has been changed or disused for 20 years or more (sec163(4)).
In the case of corporate directors, the details required are extended to include the legal form of the company, the law by which it is governed, and its registration details (sec164(d)).

Register of directors' residential addresses (sec165) (October 2008)
This is a new provision, requiring every company to keep a register of directors' residential addresses. Even if the director's residential address is shown in the register of directors as his service address, this register must still be kept, but an entry in the register to that effect will suffice. There are no rights of inspection in respect of this register, either for members or non-members. The company must notify Companies House of any change in the entries on its register of directors or register of directors' residential addresses.

Protection from disclosure of residential addresses (sec240 - sec246) (October 2008)
Neither the company nor Companies House may disclose a director's residential address or the fact that the registered office is his residential address (all 'protected information'). The company may only disclose the address under court order (sec244) and may use the address only for communicating with the director.
Companies House may disclose protected information if a court order is made, or to a public body specified in regulations (not yet made) or, somewhat surprisingly, to a credit referencing agency (sec243). There is provision for regulations to be made with regard to the latter.
Companies House may also put a residential address on the public register if the registrar has not received a response from the director required within a certain time, or if it appears that sending documents to the service address is not sufficient to bring them to the director's notice. The director and the company must be notified of a proposal to put the residential address on public file and that the change has been made. The company must then record the change in its own register of directors and register of directors' residential addresses. A director whose residential address is substituted in this way may not use a service address other than his residential address for five years (sec246). Protection from disclosure in these provisions will be very limited for existing directors, as Companies House is not required to protect the information contained in documents already registered when the rules come into force, nor is it bound to check whether the residential address appears in any document other than the forms notifying the registrar of the residential address.

Removal of a director (sec168 - sec169) (October 2007)
Sec168 provides that a company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding any agreement between it and him. Notice the differences between this and the wording of the equivalent 1985 Act provisions (sec303). The words 'at a meeting' reflect the fact that a director cannot be removed by written resolution. Much more significant is the omission of the words 'notwithstanding anything in its articles'. The result is that the great reform of 1947, getting rid of lifetime directors, has been repealed, and it will be possible to have provisions in the articles for permanent directors, etc. This has, in practice, been achieved in many circumstances by use of a 'Bushell v. Faith clause', making it impossible to remove a director who is also a shareholder. As before, the section operates subject to any rights to compensation or damages the removed director may have (e.g. under a service contract).
The director has rights to protest against removal (sec169). As under the old law, a resolution to remove a director under sec168 requires special notice (sec168(2)), and the provisions on special notice are almost unchanged (there is a change from 21 to 14 days) and are to be found in sec312. They will be covered in a later article.

Directors' general duties (sec170 - sec181) (October 2007) (except sec176 & 177)
The well-established common law and equitable duties of directors are put on a statutory basis by these sections. Sec170(3) states that these duties are based on the existing rules and principles and have effect in place of them. They are to be interpreted and applied in the same way as their predecessors.
While these provisions will doubtless provide university students and their tutors with much to discuss, the change to a statutory basis will have little or no practical effect on the day to day running of private companies, and so only a quick summary of their scope is provided here.
The statutory duties cover a requirement to act within the company's constitution and for proper purpose (sec171), to promote the success of the company (sec172), to exercise independent judgment (sec173), to exercise reasonable care, skill and diligence (sec174), to avoid conflicts of interest (sec176), not to accept benefits from third parties (sec176) and to declare any interest in a proposed transaction or arrangement (sec177) (see below). The consequences of any breach are to be the same as they are at common law or in equity (sec178). Transactions where there is a conflict of interest or the director has an interest can be consented to by ordinary resolution (sec180). There are special rules for charities (sec181).

Declaration of interest in an existing transaction or arrangement (October 2008)
Note that there are two sections requiring directors to declare interests in transactions. Sec177 requires a director to declare any direct or indirect interest in a proposed transaction or arrangement with the company to the directors. Compared with the old law (sec317 of the 1985 Act) there are some quite significant changes in detail. It is now a specific requirement that the declaration be made before the transaction or arrangement is entered into, and the notice may be given at a board meeting or by written notice (sec184) or by means of a general notice under sec185. If the declaration proves to be, or becomes, incomplete, a further declaration must be made.
On the other hand, a director is not under a duty to make a declaration of an interest of which he is not aware, or if he is not aware of the transaction or arrangement (though he is treated as being aware of matters of which he ought reasonably to be aware).
Also, a director need not declare an interest if it cannot reasonably be regarded as likely to give rise to a conflict of interest, or if the directors are already aware of it to the extent that it concerns terms of his service contract that have already been considered.
Sec182 covers the situation where a director is interested in a transaction or arrangement that has already been entered into by the company. In this case, the declaration must be made as soon as is reasonably practicable (unless, of course, the interest has already been declared under sec177). Other details are as for sec177. Note, however, that breach of sec182 is an offence (sec183) whereas breach of sec177 may only give rise to a civil liability. Where the company only has one director the declaration under sec182 must still be made in writing (sec186). A shadow director is also required to declare a sec182 interest (sec187).

Approval of directors' service contracts (sec188) (October 2007)
The main change from sec319 of the 1985 Act is that directors' fixed term service contracts must be approved if they are for more than two years instead of five years.

Substantial property transactions (sec190 - sec196) (October 2007)
This section broadly re-enacts sec320 of the old Act, that a substantial property transaction in which a director is interested must be approved by ordinary resolution. The main change is that the exemption for transactions under £2,000 is increased to those under £5,000, but otherwise 'substantial' is still defined as being in excess of 10% of the company's net assets, or £100,000.Note, also, that if an arrangement involves more than one asset, the values of all the assets concerned must be aggregated to determine whether the section applies. Though somewhat redefined, broadly the same exceptions to the old sec320 apply, as do the civil consequences of failure to comply with the section, unless the transaction is affirmed by the members within a reasonable time.

Loans, quasi-loans and credit transactions to directors, etc. (sec197 - sec214)
The big change is that, whereas loans, etc. were prohibited under the old law (subject to certain exceptions) under the new Act, they are prohibited unless approved by an ordinary resolution of the members. As under the old legislation, the rules on loans apply to all companies, whereas the more complex rules on quasi-loans and credit transactions apply only to public companies and companies associated with public companies (e.g. a private company that is a subsidiary of a public company).

Loans to directors (sec197) (October 2007)
(Subject to the exceptions below) a company may not make a loan to a director of the company or of its holding company, or give a guarantee or provide a security for such a loan, unless the transaction has first been approved by a resolution of the members. If the director is a director of the holding company, the transaction must also have been approved by the members of the holding company (sec197(2)), unless the company is wholly-owned subsidiary (sec197(5)). A memorandum stating the nature of the transaction, the amount of the loan, its purpose and the extent of company's liability under any transaction connected with it (e.g. if the company gives a guarantee or security) must be supplied to the members. If the resolution is passed as a written resolution, the memorandum must be supplied to each member. If the resolution is passed at a general meeting the memorandum must be available at the registered office for 15 days before the date of the resolution and at the meeting itself (sec197(3)). (The 15 days' requirement seems to apply even if the meeting is held on short notice.)
Note, also sec203 which requires 'related arrangements' to loans to be approved in the same manner. A related arrangement is where the company (or a related company provides some benefit to another person for making the loan, etc. to the director.

The main exception is that approval of a loan, etc is not required where the value of the transaction does not exceed £10,000 (sec207). Others are expenditure up to £50,000 which is required for the purposes of the company, or to enable the director to perform his duties to the company, or to enable him to avoid making such expenditure (sec204) and expenditure on defending proceedings (sec205), subject to certain conditions, or in connection with regulatory action or investigation (sec206), intra-group transactions (sec208), money-lending companies (sec209).

Quasi-loans and credit transactions (sec198 - sec203) (October 2007)
Thankfully, these dreadful provisions apply only to PLCs and companies related to them, and so will be given the cursory treatment they deserve in this article. The definitions of 'quasi-loan' and 'credit transactions' are the same as under the old law. The key difference is that such transactions, in favour of a director or a director's connected person are not prohibited (as under the old law) but require approval by the members, as are related arrangements.

Civil consequences only (October 2007)
If the loan, quasi-loan, credit transaction or related arrangement is not approved in advance by the members then the transaction may be voidable at the instance of the company (subject to the usual exceptions), and the parties to the transaction and any director who authorised it may be liable to account for any gain or indemnify the company against any loss it incurs (sec213), unless the company subsequently affirms the transaction (sec214). Unlike under the old law (for PLCs and related companies) there are no criminal penalties.

Payments for loss of office (sec215 - sec226) (October 2007)
The simple provision in sec312 of the 1985 Act is replaced by seven long sections in the 2006 Act.
These provisions apply to any 'payment for loss of office', which has a much wider definition than hitherto. It includes not only a payment made to a director (or past director) as compensation for loss of office, or as consideration for or in connection with his retirement from office as director of the company, but also in connection with any other office or employment in the management of the company's affairs, or those of a subsidiary company. It also covers non-cash benefits, payments to connected persons and payments made at the direction, or for the benefit, of a director or connected person (sec216).
All such payments must be approved by a resolution of the members, who must have received details of the payment (including its amount): sec217.
There are also provisions covering payments for loss of office received by a director in connection with the transfer of the company's undertaking or property (sec218) or on a takeover (sec219) made by any person. These must also be approved by the members.
The provisions above seem watertight, until the exceptions are considered. These include where the payment is made in discharge of an existing legal obligation (i.e. one not entered into in connection with the loss of office, sale of undertaking or takeover), or by way of damages for breach of such an obligation. Nor is approval necessary where the payment is compensation for termination of office or employment, or as a pension (sec220), and payments up to £200 are excluded.
If a payment is not approved in breach of these provisions, it is held by the recipient on trust for the company, and any director who approved the payment is liable to compensate the company for any loss resulting from it. If, however, the payment was made in connection with a takeover, it is held on trust for those who sold their shares on the takeover offer, and the expenses incurred by the recipient in distributing the money is to be met by the recipient of the payment (sec222). If the company is a charity, approval by the Charity Commissioners will also be required (sec226, amending sec66 of the Charities Act 1993).

Disclosure of directors' service contracts (sec227 - sec230) (October 2007)
These sections require directors' service contracts to be available for inspection by members. This applies to all such contracts and not, as under sec318 of the 1985 Act, only to those with an unexpired term of not less than 12 months. The definition of 'service contract' is also widened to cover not only a contract under which a director undertakes personally to perform services (as director or otherwise) for the company or a subsidiary of it, but also where such services are made available by a third party. (This would apply, e.g. where the director is employed by another company, which enables the director to serve, or where the director arranges to be paid through his own company for tax reasons.)
A copy of every such contract (or memorandum of its terms, if not in writing) must be kept at the registered office or other place notified to Companies House, and must be retained for at least a year after the contract has expired. Members are entitled to inspect the contract and (on payment of the prescribed fee) to be provided with a copy (sec229). These provisions apply also to shadow directors (sec230).

Contracts with sole members who are directors (sec231) (October 2007)
Where a company with only one member, who is also a director, enters into a contract with the member (other than in the ordinary course of the company's business) then, if the contract is not in writing its terms must be set out in a written memorandum, or be recorded in the minutes of the first directors' meeting after the contract is made. Failure to do so is an offence but the validity of the contract is not affected.

Directors' liabilities (sec232 - sec239) (October 2007)

Provisions exempting directors from liability and indemnities (sec232 - sec238)
This section in essence restates the provisions in sec310 of the 1985 Act. Sec232(1) provides that any provision in the articles, or a contract or otherwise that purports to exempt a director (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void. Sec 232(2) provides that any provision by which a company directly or indirectly provides an indemnity (to any extent) for a director against any such liability is also void, except as specifically permitted by the following sections.
Sec233 permits a company to buy insurance for a director against the liabilities mentioned in sec232. Sec234 exempts third party indemnity provisions, and sec235 does the same for pension scheme indemnities. Both such indemnity arrangements must be disclosed in the directors' report (sec236), and copies must be available for inspection by members (sec237 - sec238).

Ratification of acts giving rise to directors' liability (sec239) (October 2007)
This section provides that ratification of a director's conduct amounting to negligence, default, breach of duty or breach of trust in relation to the company must be done by ordinary resolution of the members, and the votes of the director concerned cannot be counted.

Protection from disclosure of residential addresses (sec240 - sec246) (October 2008)
See above

Provision for employees on cessation or transfer of business (sec247) (October 2007)
Directors' powers include a power to make provision for the benefit of current and past employees of the company or its subsidiaries in connection with the cessation or transfer of the business, notwithstanding the general duty to promote the success of the firm in sec172, and even if the company is a charity.
The power can only be exercised if sanctioned by an ordinary resolution, or by resolution of the board if this is permitted by the articles. The directors cannot sanction payments benefiting directors, former directors or shadow directors.

Records of meetings of directors (sec248) (October 2007)
Minutes must be made of directors' meetings and kept for at least ten years.

Definitions (sec250 - sec256) (October 2007)
Sec250 defines 'director' and sec251 defines 'shadow director'. Persons connected with a director are defined in sec252 and members of a director's family in sec253 - sec256)