2006 Chapter 46

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These Notes refer to the Companies Act 2006 (c.46) which received Royal Assent on 8 November 2006

COMPANIES ACT 2006

EXPLANATORY NOTES

INTRODUCTION

1.     These explanatory notes relate to the Companies Act 2006 (c.46) which received Royal Assent on 8 November 2006. They have been prepared by the Department of Trade and Industry (DTI) in order to assist the reader in understanding the Act. They do not form part of the Act and have not been endorsed by Parliament.

2.     The notes need to be read in conjunction with the Act. They are not, and are not meant to be, a comprehensive description of the Act. So where a section or part of a section does not seem to require any explanation or comment, none is given. Further, where provisions in the Act restate what was in the Companies Act 1985 (the 1985 Act) an explanation is not always given, except to the extent required to explain changes to associated provisions.

BACKGROUND

3.     The UK was one of the first nations to establish rules for the operation of companies. Today our system of company law and corporate governance, setting out the legal basis on which companies are formed and run, is a vital part of the legal framework within which business is conducted. As the business environment evolves, there is a risk that the legal framework can become gradually divorced from the needs of companies, in particular the needs of smaller private businesses, creating obstacles to ways that companies want and need to operate.

4.     In March 1998, the DTI commissioned a fundamental review of company law. An independent Steering Group led the "Company Law Review" (CLR) whose terms of reference required them to consider how core company law could be modernised in order to provide a simple, efficient and cost effective framework for British business in the twenty-first century. After extensive consultation with interested parties, the CLR presented its Final Report to the Secretary of State for Trade and Industry on 26 July 2001. The report contained a range of recommendations for substantive changes to many areas of company law, and a set of principles to guide the development of the law more generally, most notably that it should be as simple and as accessible as possible for smaller firms and their advisers and should avoid imposing unnecessary burdens on the ways companies operate.

5.     Many of the provisions of the Act implement CLR recommendations. The Government set out and consulted on its intentions in this regard in the White Papers "Modernising Company Law" (July 2002) and "Company Law Reform" (March 2005). The 2005 White Paper included approximately 300 draft clauses and described in detail the policy intention for other areas. Further clauses were made publicly available for comment in July, September and October 2005. The Companies Bill, then titled the Company Law Reform Bill, was introduced to the House of Lords on 4 November 2005.

OVERVIEW OF THE STRUCTURE OF THE ACT

6.     The general arrangement of the Act is as follows:

SUMMARY OF LEGISLATIVE CHANGES

7.     The company law provisions of the 2006 Act (Parts 1 to 39) restate almost all of the provisions of the 1985 Act, together with the company law provisions of the Companies Act 1989 (the 1989 Act) and the Companies (Audit, Investigations and Community Enterprise) Act 2004 (C(AICE) Act 2004). Paragraphs 9 and 10 below contain details of the provisions that remain in those Acts. The company law provisions also codify certain aspects of the case law.

8.     Tables of origins and destinations are available that show the origins of the company law provisions of the Act by reference to enactments in force on 8 November 2006. The tables identify where provisions of the existing law have been re-enacted with or without changes and where provisions of the new law have no predecessor or are fundamentally different from their predecessors.

9.     Of company law provisions in the Acts referred to in paragraph 7, the only ones that remain are those on investigations that go wider than companies (Part 14 of the 1985 Act) and the provisions on community interest companies in Part 2 of the C(AICE) Act 2004.

10.     The non-company law provisions in those Acts that remain are:

a)     Part 18 of the 1985 Act (floating charges and receivers (Scotland)),

b)     Part 3 of the 1989 Act (powers to require information and documents to assist overseas regulatory authorities),

c)     Section 112 to 116 of the 1989 Act (provisions about Scottish incorporated charities)

d)     Part 7 of the 1989 Act (provisions about financial markets and insolvency)

e)     Schedule 18 of the 1989 Act (amendments and savings consequential upon changes in the law made by the 1989 Act)

f)     Sections 14 and 15 of the C(AICE) Act 2004 (supervision of accounts and reports), and

g)     Sections 16 and 17 of the C(AICE) Act 2004 (bodies concerned with accounting standards etc).

11.     In non-company law areas the Act makes amendments to other legislation, in particular the Financial Services and Markets Act 2000, and also makes new provision of various kinds. The main areas in which provision of this kind is made are:

• overseas disqualification of company directors (Part 40),

• business names (Part 41) - replacing the Business Names Act 1985,

• statutory auditors (Part 42) - replacing Part 2 of the Companies Act 1989, and

• transparency obligations (Part 43) - amending Part 6 of the Financial Services and Markets Act 2000.

TERRITORIAL EXTENT AND DEVOLUTION

Northern Ireland

12.     Company law is a transferred matter. Currently, the provisions of GB company law are generally replicated, some time later, in separate Northern Ireland legislation. The Act provides for a single company law regime applying to the whole of the UK, so that companies will be UK companies rather than GB companies or Northern Ireland companies as at present. This does not affect the legislative competence of Northern Ireland: company law remains a transferred matter, and the Act could be separately amended or repealed in Northern Ireland if that were so desired.

13.     Where a note describes a particular section as restating or replacing a provision in the 1985 Act, the 1989 Act or the C(AICE)Act 2004, this should be read as applying equally to the corresponding provision of the Companies (Northern Ireland) Order 1986, the Companies (Northern Ireland) Order 1990 or the Companies (Audit, Investigations and Community Enterprise) Order 2005.

Scotland

14.     Company law is a reserved matter and Companies Acts extend to the whole of Great Britain. However, there are several areas where, in legislating about companies, the Act deals with matters that are devolved:

• changes (in Part 41) to the regulation of business names (a devolved matter) - these correspond to changes (in Part 5) to the regulation of company names (a reserved matter);

• statutory guidance to prosecutors and other enforcement authorities in relation to a new offence of knowingly or recklessly causing an audit report to be misleading, false or deceptive - although the offence itself is a reserved matter, guidance is to be issued by the Lord Advocate in Scotland (see section 509);

• changes relating to exemptions from audit requirements for companies that are charities (see section 1175);

• conferral of a power on the Auditor General for Scotland to specify public bodies for his audit (see section 483).

These were the subject of a legislative consent motion agreed to by the Scottish Parliament on 16 March 2006.

Wales

15.     Company law is not transferred to the Welsh Assembly. There are no provisions that impact on devolved competences.

Crown Dependencies

16.     Part 28 of the Act (takeovers) contains provision enabling it to be extended by Order in Council to the Isle of Man or any of the Channel Islands. This reflects the existing jurisdiction of the Takeover Panel (as the takeover regulator) and has been agreed by the relevant Island authorities. If the power were to be exercised, there would be further consultation with the Island authorities beforehand.

PART 1: GENERAL INTRODUCTORY PROVISIONS

Section 1: Companies

17.     This section restates section 735(1)(a) and (b) of the 1985 Act. It defines "company" and provides signposts to provisions in the Act which relate to companies that are registered but not formed under the Act or former Companies Acts, to unregistered companies and to overseas companies.

Section 2: The Companies Acts

18.     This section replaces section 744 of the 1985 Act. The Act does not restate or replace all existing companies legislation and section 2 makes it clear that any reference to "Companies Acts" in the Act includes those provisions of the Acts listed in subsection (1)(c) that remain in force as well as the company law provisions of the Act and Part 2 of the C(AICE) Act 2004.

19.     The CLR recommended that the law should provide for the formation of new companies of each of the types that are currently available (Final Report, paragraph 9.2). This recommendation is taken forward in the following group of sections, which retains all of the current forms of companies.

Section 3: Limited and unlimited companies

20.     This section restates section 1(2) of the 1985 Act. It updates the Companies Acts definitions of "limited company" and "unlimited company" to reflect changes to what is to be included in a company's memorandum of association (see section 8). As now, a company may be limited by shares or by guarantee. Where there is no limit on the liability of the company's members, a company is an "unlimited company."

Section 4: Private and public companies

21.     This section restates section 1(3) of the 1985 Act. It provides definitions of "private company" and "public company."

22.     A "private company" is any company that is not a public company.

23.     A "public company" is a company whose certificate of incorporation states that it is a public company. To obtain this certificate the company will need to comply with the provisions of the Act (or former Companies Acts) as regards registration or re-registration as a public company. There is a minimum share capital requirement (the "authorised minimum"), which is currently set at £50,000, and remains unchanged under the Act. In future the authorised minimum will however be capable of being satisfied in sterling or the euro equivalent to the prescribed sterling amount (see Chapter 2 of Part 20).

24.     Section 4 also provides a signpost to Part 20 of the Act, which sets out key differences between public and private companies, for example, a private company may not offer shares to the public.

Section 5: Companies limited by guarantee and having share capital

25.     This section restates section 1(4) and section 15(2) of the 1985 Act. It makes it clear that a company can no longer be formed (or re-register) as a company limited by guarantee and with a share capital. This provision has been in force in Great Britain since 22nd December 1980 and in Northern Ireland since 1st July 1983.

Section 6: Community interest companies

26.     The C(AICE) Act 2004 came fully into force on 1 July 2005. Part 2 of that Act created a new company vehicle, the "community interest company" or "c.i.c.", which is designed for use by social enterprises.

27.     This section provides a signpost to the provisions in the C(AICE) Act, which enable a company to be formed as or become a community interest company. Such companies are registered under the same legislation as other registered companies, but have to complete certain additional formalities and are subject to certain additional elements of regulation. Subsection (2) of this section highlights the fact that in some respects the requirements imposed on community interest companies are different from the requirements imposed on other registered companies.

PART 2: COMPANY FORMATION

28.     This Part of the Act is about how companies are formed. It replaces or, as the case may be, restates equivalent provisions in the 1985 Act.

Section 7: Method of forming company

29.     This section replaces sections 1(1) of the 1985 Act. It retains the current requirement that individuals who wish to form a company must subscribe their names to the memorandum of association ("memorandum"). Subsection (1) introduces the new provisions about forming a company. In line with the recommendations of the CLR, it is provided that a single person is able to form any sort of company (not just a private company) (Final Report, paragraph 9.2).

30.     Subsection (2) reproduces the existing requirement that a company may not be formed for an unlawful purpose.

Section 8: Memorandum of association

31.     This section replaces section 3(1) of the 1985 Act.

32.     Under the Act, the memorandum serves a more limited, but nonetheless important, purpose: it evidences the intention of the subscribers to the memorandum to form a company and become members of that company on formation. In the case of a company that is to be limited by shares, the memorandum will also provide evidence of the members' agreement to take at least one share each in the company.

33.     The memorandum of a company formed under the Act will, therefore, look very different from that of a company registered under the 1985 Act. In addition it will not be possible to amend or update the memorandum of a company formed under the Act.

34.     These changes to the memorandum are based on the CLR's recommendation that there should be a single constitution (Final Report, paragraph 9.4). In line with the principles behind this recommendation, in future key information regarding the internal allocation of powers between the directors and members of a company will be set out in one place: the articles of association ("articles").

35.     By virtue of section 28, provisions in the memoranda of existing companies will be treated as provisions in the articles if they are of a type that will not in be in the memoranda of companies formed under the Act. Existing companies will, therefore, not be required to amend their articles to reflect these changes, but they can do so if they wish. They will however be able to alter or update provisions in their constitution which are now set out in their memoranda by amending their articles, for example to reflect changes to the law made by the Act.

Section 9: Registration documents

36.     This section replaces various provisions in sections 2 and 10 of the 1985 Act. It prescribes the types of information or "documents" that must be delivered to the registrar when an application for registration is made and the registrar to whom the information must be delivered.

37.     The changes to the way in which certain information is delivered to the registrar are required as a result of the changes that have been made to the memorandum. In future, information which is currently set out in the memorandum will be provided to the registrar in accordance with the provisions of this section, which prescribes, amongst other things, the contents of the application for registration. In all cases this application must state:

• the company's proposed name;

• whether the company's registered office is to be situated in England and Wales (or Wales), in Scotland or in Northern Ireland;

• whether the liability of the company's members is to be limited and if so whether it is to be limited by shares or by guarantee;

• whether the company is to be a private or a public company.

38.     In the case of a company that is to have a share capital, the application must also contain a statement of capital and initial shareholdings (see section 10). In the case of a company that is to be limited by guarantee the application must also contain a statement of guarantee (see section 11).

39.     In all cases the application must also contain a statement of the company's proposed officers (see section 12) and a statement of the intended address of the company's registered office (that is, the postal address of the company's registered office as opposed to a statement confirming the jurisdiction in which the company's registered office is to be situated - which is also required).

40.     The application for registration must also contain a copy of any proposed articles (to the extent that the company does not intend to use the model articles (see sections 19 and 20) and must be accompanied by the memorandum (see subsection (1)) of this section and a statement of compliance (see section 13).

41.     In future it will be possible to form a company on-line and the various types of information referred to in the section are, therefore, capable of being delivered as a series of data entries as well as in paper or such other form as the registrar may permit or prescribe. The registrar has power under section 1068 to prescribe the form and manner in which documents are to be delivered to her.

Section 10: Statement of capital and initial shareholdings

42.     This section is a new provision. It sets out the contents of the statement of capital and initial shareholdings.

43.     Currently, in the case of a limited company with a share capital the memorandum is required to state the amount of the share capital with which the company proposes to be registered and the nominal amount of each of its shares. This is known as the "authorised share capital" and acts as a ceiling on the amount of capital which can be issued (although this limit can be increased by ordinary resolution). The CLR recommended that the requirement for a company to have an authorised share capital should be abolished (Final Report, paragraph 10.6).

44.     The Act gives effect to this recommendation and in future, information about the shares subscribed for by the subscribers to the memorandum, which is currently set out in the memorandum itself, will be provided to the registrar in the statement of capital and initial shareholdings.

45.     Like the statement of guarantee (see section 11), the statement of capital and initial shareholdings must contain such information as may be prescribed by the Secretary of State, in regulations made under the Act, for the purpose of identifying the subscribers to the memorandum (i.e. the founder members of the company).

46.     The statement of capital and initial shareholdings is essentially a "snapshot" of a company's share capital at the point of registration. For public companies, this requirement is linked to the abolition of authorised share capital (see above). It implements (as far as public companies are concerned) Article 2 of the Second Company Law Directive (77/91/EC) (the "Second Directive") which states:

"the statutes or instruments of incorporation of the company shall always give at least the following information..(c) when the company has no authorized capital, the amount of the subscribed capital..".

47.     The statement of capital and initial shareholdings must contain the following information:

• the total number of shares of the company to be taken on formation by the subscribers to the memorandum;

• the aggregate nominal value of those shares;

• for each class of shares: prescribed particulars of the rights attached to those shares, the total number of shares of that class and the aggregate nominal value of shares of that class; and

• the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the shares or by way of premium).

48.     The reference to "prescribed particulars of the rights attached to the shares" in this section (and elsewhere in the Act where a statement of capital is called for), refers to such particulars as may be prescribed by the Secretary of State by statutory instrument (see section 1167).

49.     Whilst the Second Directive only applies to public companies it is important that the information on the public register is up-to-date for both public and private companies. A statement of capital will, therefore, be required where it is proposed that a company formed under the Act will have a share capital on formation and, with limited exceptions (in particular, where there has been a variation of class rights which does not affect the company's aggregate subscribed capital) whenever a limited company having a share capital makes an alteration to its share capital (and in certain cases where an unlimited company makes a return to the registrar).

Section 11: Statement of guarantee

50.     This section replaces section 2(4) of the 1985 Act. It sets out the contents of the statement of guarantee that must accompany the application for registration where it is proposed that a company will be limited by guarantee on formation.

51.     The statement of guarantee is essentially an undertaking, given by the founder members of the company, to contribute to the assets of the company up to a specified amount in the event of it being wound up. New members must also agree to make the same contribution.

52.     A member of a company limited by guarantee is only liable to contribute to the assets of a company if it is wound up during the time that he is a member or within one year of him ceasing to be a member.

53.     Like the statement of capital and initial shareholdings the statement of guarantee must contain such information as may be prescribed by the Secretary of State, in regulations made under the Act, for the purposes of identifying the subscribers to the memorandum (i.e. the founder members of the company).

Section 12: Statement of proposed officers

54.     This section replaces section 10(2) and (3) of the 1985 Act and contains a new provision. Under section 10, details of the first director(s) and the secretary or joint secretaries must be given to the registrar at the time of application for registration. That requirement is carried forward but there are two changes:

• firstly, to the required particulars. These are specified in relation to directors in sections 163 to 166. The main change is that a service address must be provided for each director who is a natural person. This is in addition to the requirement for the usual residential address;

• secondly, as recommended by the CLR (Final Report, paragraph 4.7), there is no requirement for a private company to have a company secretary but it may do so if it wishes (see section 270(1)). As now, a company which proposes to be registered as a public company must have a company secretary (see section 271).

Section 13: Statement of compliance

55.     This section replaces section 12(3) and (3A) of the 1985 Act. At present, where an application for registration of a company is made in paper form, the application must be accompanied by a statutory declaration (made before a solicitor or commissioner of oaths) confirming that the requirements of the 1985 Act in respect of registration, and of matters precedent and incidental to it, have been complied with (see section 12(1) of that Act). This statutory declaration must be made by one of the persons whom it is proposed will be a founder director or secretary of the company (that is, on registration) or a solicitor engaged in the formation of the company.

56.     Where the application for registration is made in electronic form, in place of the statutory declaration required under section 12(3) of the 1985 Act, the same persons may, alternatively, deliver an "electronic statement" to the registrar. This statement must confirm that the requirements referred to in section 12(1) have been met.

57.     Based on the recommendations of the CLR (Final Report, paragraph 9.5), the current requirement for a statutory declaration or electronic statement, here and elsewhere in the Act, is replaced by a requirement to make a statement of compliance. This statement does not need to be witnessed and may be made in paper or electronic form. It will be for the registrar's rules under section 1068 to specify who may make this statement (and the form of it). As with all documents delivered to, or statements made to, the registrar, it is an offence to make a false statement of compliance - see section 1112.