Introduction

1 October 2007 has certainly proved to be a pretty momentous date for many companies. We have been busy amending many of our client companies’ Articles of Association, and also ensuring that directors are fully on top of the nature of their newly codified duties, amongst other things.  It’s also been interesting watching the reaction of many of our clients when they realise how much easier it now is for private companies to pass written resolutions.

However, it is important to remember that only some of the Companies Act 2006 (the ‘2006 Act’) came into force on 1 October.  There are of course two remaining implementation dates, 6 April 2008 and 1 October 2008.

This Article looks in brief at what changes will be occurring on 6 April 2008.

The Changes

Company secretaries

A significant change for private companies is that as from next April they will no longer be required to have a company secretary, although they can still choose to have one.  The provisions on execution of documents will also be changing so that it will be possible for a sole director, in a company without a company secretary, to execute documents and deeds on his or her own, in front of a witness.  Many existing companies will have provisions in their Articles of Association (‘Articles’) that either require the company to have a company secretary, or assume that it has one.  These provisions will continue to have effect so that any such private company that wishes to avail itself of the new relaxation will have to amend its Articles accordingly.

Accounts and reports

As a general rule the 2006 Act simplifies company law for smaller companies, and this is certainly the case in the area of accounts and reports.  Significantly, the government is taking advantage of certain flexibilities made available under EU law and is increasing the qualifying thresholds for small and medium-sized companies – the turnover criteria for a small company will be increasing from £5.6 million to £6.5 million, and the balance sheet figure will be increasing from £2.8 million to £3.26 million.

Audit

The most significant change here is that auditors will be able to limit their liability by agreement with the company.  There will also be a new criminal offence, punishable by a fine, in relation to an inaccurate auditor’s report.

Distributions

The headline-catching change here relates to distributions in kind.   The 1989 case Aveling Barford v Perion famously gave rise to questions concerning intra-group asset transfers at less than market value, namely, whether such transfers constitute distributions in kind for statutory purposes, and how the amount of the distribution should be determined (and hence what distributable profits the transferring company is required to have at the time of the disposal of the asset if the company is to avoid making an unlawful distribution).  The 2006 Act confirms that, where the transferring company has positive distributable reserves, the amount of any distribution arising from the sale, transfer or other disposition by a company of a non-cash asset to a shareholder should be calculated by reference to the asset's book value. Thus, a company that has distributable profits and makes a relevant transfer of an asset at book value where the market value is higher than book value does make a distribution, but the value of the distribution is zero and the distribution is lawful. If the asset is transferred for less than its book value, the amount of the distribution is equal to the difference between its book value and the actual consideration given for it, and must be covered by the company's distributable profits.

Other areas coming into force

Other areas of the 2006 Act coming into force in April relate to:

Although many people understandably are still trying to get to grips with the 1 October 2007 changes, as is clear from the above, there are a lot more to come next April.  As with the recent changes, we will be holding a seminar towards the end of March in which we will examine these.  Details and invitations will follow in due course. 

© Davenport Lyons 2007 All rights reserved.
This document reflects the law and practice as at October 2007. It is general in nature, and does not purport in any way to be comprehensive or a substitute for specialist legal advice in individual circumstances.