Small Business Summary

The purpose of company law and corporate governance is to promote enterprise and stimulate investment. The government is determined to ensure that their system makes it easy to set up and grow a business.  A thorough overhaul of the law is needed to make it more suited to the needs of small business. This summary sets out the main elements of the Company Law Reform Bill affecting small business.  The Bill was introduced into Parliament on the 1st of November.

Clearer law

Current company law was written mainly with the large company in mind.  The provisions that apply to private companies are often expressed as an exception to the provisions applying to public companies, making them hard to understand. The government has turned this approach on its head.  Those parts of the law most relevant to small companies (such as the model articles of association and the requirements on accounts and reports) came first so that the provisions that apply to them are easier to find.  The Bill also uses simpler and clearer language.

Better guidance

Government cannot eliminate the complexity in company law, (as this would reduce flexibility for companies).  So, making it easier to understand for both companies and their advisors involves supplementing it with clearer and comprehensive guidance.  Small companies will easily be able to identify the basic day-to-day requirements that apply to them.  Government will increase the coverage of Companies House plain English guidance and ensure that it follows the principles of “Think Small First.”  DTI (Department of Trade and Industry) benefited from the advice of small companies in preparing draft model articles of association for private companies and intends to seek their help again in developing the guidance most frequently used by small companies.  This will include a new small company checklist of the basic company law requirements.

Improved website

Increasingly, small companies are using the Companies House website.  Companies House will continue to improve their website for their customers, including a wider range of web-based guidance, better links to related websites and on-line access to up to date companies legislation.  During 2007, Companies House will be offering web incorporation and this will be supported by easier access to relevant material, for example a company will be able to access its own details through the “my Companies House” portal.

Specific legislative changes

The main changes to company law affecting small companies are as follows:

Forming a company

1. The company memorandum will become a formal document recording the position at the point of registration with just the articles being the continuing constitutional document.
2. There will be separate model articles of association for private companies.  These will contain the minimum key rules on the internal workings of the company and will be shorter and clearer.
3. There will be improved rules for company names.
4. Companies will no longer be required to specify their objects.

No requirement for a company secretary

DTI are abolishing the requirement for private companies to have a company secretary.

Directors

The general duties that a director owes to the company are currently established in case law rather than statute making it hard for them to be widely understood.  The Bill includes a statutory statement of directors’ general duties both to make the law in this area more accessible and to change the law where it no longer corresponds to modern business practice.  DTI will provide a clear guidance for new directors on what these duties mean.

Directors’ addresses on the public record

Directors will automatically have the option of filing a service address on the public record (rather than their private home address).

Resolutions and meetings

Private companies will not need to hold an annual general meeting unless they positively opt to do so.  It will be easier for companies to take decisions by written resolution rather than holding a meeting, as such resolutions may in future be carried with a simple or 75% majority of eligible votes rather than requiring unanimity as at present.  Companies will be able to make greater use of electronic communications for communications with shareholders.

Accounts and Reports

The provisions on accounts and reports have been restated to make them much easier to understand for small companies and their advisors.  DTI are retaining the option for small and medium sized companies to file abbreviated accounts with Companies House.  The deadline for private companies to file their annual reporting documents will reduce from ten months after the year-end to nine, reflecting both improvements in technology and the increased rate at which information becomes out of date.

Shareholders will be able to agree limitations on the liability of auditors.

Financial assistance and capital maintenance

The rules on providing financial assistance to potential or actual shareholders, which limit the circumstances in which companies can provide assistance for the acquisition or purchase of their own shares, are highly complex and largely irrelevant to the majority of private companies and DTI are abolishing them.  DTI are also making it easier for private companies to make capital reductions.

Keeping the law up to date

In order to keep the law up to date and ensure it meets the users’ needs, the Bill includes a power to allow the reform or restatement of company law to be made in future by a special form of secondary legislation, subject to strong requirements on public consultation and Parliamentary scrutiny.

Costs and benefits

The Government estimates that total net savings to companies of company law reform could be around £250 million annually.

Implementations

20th January 2007:

1. EU Directive enabling Companies to make greater use of electronic communications. Full details are available on the DTI website (www.dti.gov.uk/bbf/co-act-2006/)

6th April 2007:

1. Removal of the maximum age limit (currently 70) for directors of PLC’s
2. Directors will no longer need to provide details of their interests in shares or debentures of the company or its group. The result is that Companies House will no longer accept Form 325 (Location of Register of director’s interests in shares), or Form 325a (Notice for inspection of a register of directors interests in shares kept in a non-legible format).
3. There will no longer be a statutory annual report by the Secretary of State to Parliament (the ‘Companies In’ report) but DTI will continue to produce the information.
4. Directors will not be required to disclose their interests in shares in the Directors report of the Annual Accounts for reports signed after 6 April.
5. Takeover forms will be replaced with forms that align with the clauses of the new Act: 429(4) Notice of non-assenting shareholders will become Form 980(1); 429dec Statutory Declaration relating to a Notice to non-assenting shares will become Form 980(dec); 430A Notice to non-assenting shareholders will become Form 984

More information

Click to download whole:

1. Companies Act 2006 (PDF format - 2.8MB) or
2. Explanatory Notes on the Companies Act 2006 (PDF format - 1.57MB).

The Company Law Reform Bill will take several months to complete its passage through Parliament and is not expected to come into force before 2007. All parts of the Act will come into force by October 2008, but there will be early commencement of some of the provisions. Refer to the DTI website for latest developments which will be updated when there are any new announcements. The full text of the Bill with explanatory notes is also available through the DTI website: [ www.dti.gov.uk/cld/review.htm ] and through the Companies House website ( www.companieshouse.gov.uk  ). You can also follow the progress of the Bill directly on the United Kingdom Parliament webpage http://www.parliament.uk/

If you have any queries or comments about the legislation, please contact DTI in one of the following ways:

Email us at companylawreform@dti.gsi.gov.uk, or

Write to Patrick Barry, Company Law Reform Bill,

5th Floor, 1 Victoria Street, London SW1H 0ET.

Tags: Companies Act 2006