Philip Wild, a Partner in the Company & Commercial Department at Kidd Rapinet’s London Office, gives his personal Top Ten…
Now that the Companies Act 2006 has been fully in force for over 3 months (since 1 October 2009), it seems a good time to review whether it has really achieved its aim of removing red tape for small to medium sized businesses.
Here is a Top Ten of reforms it has made. Note we are talking about private companies only (not PLCs).
- Financial Assistance allowed
Section 151 of the Companies Act 1985 prohibited a company from giving financial assistance in connection with a purchase of its own shares. Private companies could “whitewash” financial assistance by an elaborate procedure involving a declaration of solvency. This has all been repealed for private companies.
The trouble with s151 was it was so wide that it potentially caught all sorts of corporate transactions, resulting in whitewashes being carried out where there was no real detriment to creditors. This reform gets No. 1 as it is a big help in simplifying and speeding up transactions, which are often quite complicated enough without having to consider financial assistance as well.
- No more AGMs
If ever there was an example of unnecessary red tape, it was minuting paper Annual General Meetings for companies with a small number of shareholders who had no real need to hold them. Many companies never bothered anyway – until we had to write up their company books when they came to be sold.
Those companies who want to hold them (for example residents’ property management companies) are continuing to do so on a voluntary basis without having to watch the statutory time limits.
- Written Resolutions don’t require 100% majority
The requirement to obtain the signature of all shareholders to a written resolution, even if it could be passed by a 51% or 75% majority at a general meeting, resulted in general meetings having to be called (with resultant delay if you couldn’t get 95% consent to short notice – reduced to 90% by the 2006 Act). Now you just need the same majority for a written resolution as you would if it was proposed at a general meeting. So the majority shareholder(s) can in effect sign a written resolution and send a copy to the minority shareholder(s), without having to wait and see if they will sign it.
Again this helps speed up transactions. It risks prejudicing minority shareholders, but they would have been outvoted at a meeting anyway. If there is real unfair prejudice to them, they still have the remedy of a s994 petition.
- One Director can sign Deeds
This can also be a timesaver in transactions. Previously two officers had to sign deeds. Often you only have one Director to hand at a completion meeting, and despite the best planning you can easily find you need another deed signed which hasn’t been circulated for signature in advance.
- Memorandum of Association reduced to a signature page
The abolition of the objects clause (after a number of previous botched attempts) and of the authorised capital (which in my view had been pointless ever since the requirement to authorise the Directors to allot shares came in) were long overdue reforms.
It’s a shame this reform is a bit of a mess for existing companies. The detailed provisions of their old Memorandum are now deemed to be part of their Articles, with the old objects and authorised capital clauses now operating as restrictions on their powers and on the number of shares that can be allotted. I can see this was necessary to protect companies for whom these restrictions mattered (e.g. charitable companies), but the rest have to pass resolutions to get rid of the restrictions, or just carry on as before.
If you adopt new Articles for a pre-2006 Act company, take care to ensure you’ve still got a clause limiting the shareholders’ liability, as this is another provision of the Memorandum which has been automatically moved into your old Articles. The clause is in the new Model Articles, but you’ll need to include it if you’re drafting custom Articles.
- Service addresses for Directors
Previously to avoid a Director’s home address going on the public record, you had essentially to prove there was a risk because (for example) the company was targeted by animal rights campaigners. Now all Directors can file a service address, such as their business address. Companies House still have to be given the residential address (so they can threaten the Directors with criminal prosecution if they don’t file accounts), but it doesn’t appear on the public record.
If you were a Director before 1 October 2009 and want to take real advantage of this, you’ll have to move house – as your address will still be on the old forms on the public record.
- Articles simplified
The statutory default Articles of Association (called “Table A” since 1862, but now just the “Model Articles”) have been rewritten to simplify them and put them into plainer English. This is a good thing, and the Model Articles for Private Companies will be fine for one-man and husband and wife companies – but they never read them anyway.
Most of the companies for which we draft Articles are partnership or joint venture companies, which still require custom Articles, as the Model Articles are just too simple and don’t include any minority protection rights. A set of statutory Model Articles for a partnership company with provisions such as basic pre-emption rights on transfers would have been a really useful reform.
- Reduction of Capital without a court order
Private companies can now reduce their share capital on the basis of a Directors’ statement of solvency, rather than having to obtain Court approval. A number of companies have used this already, and it is potentially a useful reform in a limited number of cases.
- Filing of Accounts tightened up
Reducing the time limit for filing accounts from ten months to nine and increasing the late filing penalties must seem to a lot of Directors to be a bad thing. But from the point of view of doing due diligence on target companies and debtors, this should help make more up-to-date financial information available on searches. Nine months should still be quite long enough, and those Directors who are going to leave it to the last minute will do so whatever the time limit is.
- No need to have a Company Secretary
I’ve put this one last not because I do a lot of company secretarial work and it will do me out of fees, but because that work still has to be done, regardless of whether someone is formally appointed to the role of Company Secretary or not.
On the plus side, it does at last enable the true one-man (or one-woman) company, which must be handy for the lonely entrepreneur.
My worst reform…
At the other end of the list, I just want to have a moan about the new annual return forms.
The new Statement of Capital takes us right back to the sort of complexities about share capital in the old pre-1985 forms. The BIS (formerly BERR, formerly DTI) have admitted there are problems, and will be consulting on simplifying it. At least Companies House have now provided some proper guidance on how to complete the thing (in prompt response to my letter of complaint – and no doubt those of others).
The requirement when filing online returns to say in which country each Director is resident, even when they have an address with a UK postcode, and which generates an automatic Change of Director’s Particulars form, seems to be bureaucracy gone mad – especially when confronted with a drop down menu to choose from “UK”, “United Kingdom” or “Great Britain”, among others.
On the plus side, the removal of shareholder addresses saves a lot of typing – especially as the online forms can now handle up to 350 shareholders.
Conclusion
On the whole there have been some useful reforms for private companies, which really do make company secretarial work and corporate transactions easier. But there’s still plenty more red tape that hasn’t been cut, and even some shiny new tape to contend with.