Frequently Asked Questions On The Companies Act 2006

Set out below are answers to some of the queries that we are increasingly being asked by our clients with respect to the Companies Act 2006 (the ‘Act’).  Please note that the answers provide a summary of the subject matter, and do not purport to be comprehensive or a substitute for specialist legal advice in individual circumstances.  For further information on any of these areas, or any other matter relating to the Act, please get in touch with your usual contact in the company commercial department. 

Various other FAQs on the Act are also available both on the Companies House website here and on the Department for Business, Enterprise and Regulatory Reform website here.

The Questions

1. What will we have to do to issue shares?

2. Will we still need to have a company secretary?

3. How will we be able to change our company name?

4. Will we still need to hold AGMs?

5. Will we be able to take most of our decisions by written resolution?

6. Do we still need to send information out to shareholders by hard copy?

7. Will we still need both a Memorandum and Articles of Association?

8. Will I be able to remain a director once I reach 70?

9. Will directors have to be 'natural persons'?

10. What will proxies be able to do under the Act?

11. Can you tell me more about the right to have an independent report on polls?

12. How does the 2006 Act affect the small companies accounting regime?

13. Are auditors going to be able to limit their liability?

14. Will directors be able to authorise conflicts of interests?

15. Is the prohibition on financial assistance being removed?

16. What is the new procedure for private companies to make capital reductions?

17. Will an individual be able to object to someone else’s company name?

The Answers

1. What will we have to do to issue shares?

At the moment, in order for a company to issue shares, there are various hoops that must be jumped through:

• there must be sufficient authorised but unissued share capital (with a special resolution (75% majority) being passed if this is not the case);
• any relevant pre-emption rights must be followed or disapplied (requiring a special resolution or using an authority set out in the company’s Articles of Association (‘Articles’)) where applicable;
• any other relevant restrictions (for example those set out in a shareholders’ agreement, if any) must be complied with; and
• the directors need to obtain ‘Section 80’ authority to allot the shares (either by an ordinary resolution (simple majority) or using an authority set out in the company’s Articles).

NB: for listed companies there are various other considerations that must be taken into account. These are not dealt with here.

However, from 1 October 2009 (the date on which the relevant provisions in the Act are being implemented), the process will generally be simpler:

• the Act abolishes the requirement for a company to have an authorised share capital.  Although for existing companies, who have their authorised share capital set out in their Articles, the limit will continue to operate as a restriction, the government intends to make transitional arrangements so that shareholders wishing to remove the deemed restriction from the Articles are able to do so by ordinary resolution rather than special resolution;
• pre-emption rights will still be relevant, as will any other restrictions set out, for example, in a shareholders’ agreement;
• for private companies, however, directors will no longer need authority to allot the shares provided that the company has (and will still have after the allotment) only one class of shares.  The Articles may still retain a restriction on this if the members so wish. 

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2. Will we still need to have a company secretary?

As from 6 April 2008, the answer is yes for public companies, but no for private companies (although they may still choose to have one if they wish).  For existing companies that have specific provisions in their Articles requiring the company to have a company secretary or assuming that it has one, the government has proposed that any such provisions continue to have effect so that private companies must amend their Articles if they no longer wish to have a company secretary.  The government also proposes that private company secretaries in office in April 2008 retain their existing powers to execute and authenticate documents.

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3. How will we be able to change our company name?

In addition to the current methods (such as by special resolution (75% majority)), as from 1 October 2009 a company will also be able to change its name by whatever means are provided in the company’s Articles. 

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4. Will we still need to hold AGMs?

As from 1 October 2007, the answer is yes for public companies, but no for private companies. For existing private companies, the government is proposing that if a private company has express provision for holding AGMs in its Articles, the effect of this will be preserved. However, indirect references to the AGM will be disregarded. So, for example, if the Articles provide for the directors or officers to retire by rotation at the AGM, their appointments will continue until terminated in accordance with the Act or other provisions in the Articles. Public companies will need to hold their AGMs within six months beginning with the day following their accounting reference date.  

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5. Will we be able to take most of our decisions by written resolution?

As from 1 October 2007, the answer is no for public companies, but yes for private companies.  Public companies will still be unable to pass any decisions by written resolution.  However, private companies will be able to pass written ordinary resolutions by simple majority of those eligible to vote and written special resolutions with a 75% majority of those eligible to vote, rather than the current requirement for unanimity on all types of resolutions.  Note, however, that as currently, written resolutions will not be able to be used to remove a director from office before the expiration of his or her term, or to remove auditors from office before the expiration of their term.  The Act contains much more detail relating to procedure than is set out in the Companies Act 1985 (the ‘1985 Act’) which currently applies. 

The expectation of this relaxation is that private companies will use written resolutions as their standard procedure, with general meetings becoming a rarity. 

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6. Do we still need to send information out to our shareholders by hard copy?

The Act allows much more freedom in terms of communicating with shareholders electronically, rather than by hard copy.  Companies can now (as from 20 January 2007) communicate documents and/or information to a shareholder (or debenture-holder) by e-mail provided that the shareholder has agreed to the use of e-mail, either in respect of that particular document/information or generally.  Such shareholder will need to provide the company will an e-mail address.  Companies can also communicate with a shareholder (or debenture-holder) via a website, if the shareholder has agreed to that method of communication, either in respect of that document/information in particular or generally.  The company is, however, required to notify the shareholder that the document has been posted on the website.  Shareholder consent can be deemed provided that: (i) the company has internal approval to communicate in this way, either through a shareholder resolution or through a provision in its articles; (ii) the shareholder has failed to respond (within 28 days) to a request from the company to agree to communication by means of its website.   The company’s request must state clearly the effect of failing to respond and must not be sent within 12 months of a previous request in respect of the same or a similar class of documents or information. 

Any document/information supplied via a website must be made available in a form which enables the shareholder to read and retain a copy of it.  A document must be made available on a website for the appropriate period specified in the Act or 28 days if not period is specified. 

Existing arrangements taking advantage of limited opportunities under the current legislation to communicate electronically will be preserved.   In relation to website communication, if a company’s articles already enable this, no change will need to be made unless the wording in the articles covers only certain documents, in which case a new resolution will be required.

The new rules apply to all companies, whether private or public, listed or unlisted.  However, companies listed on the main market will also have to comply with the provisions on electronic communications in the FSA’s new Disclosure and Transparency Rules, under which (subject to an expected transitional arrangement for companies which already communicate electronically) companies are prevented from communicating by e-mail or website unless they have obtained the approval of their shareholders in general meeting.   

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7. Will we still need both a Memorandum of Association and Articles of Association?

The answer, as from 1 October 2009, is yes.  Although at one point it was thought that only one constitutional document would be required under the Act, the need for a Memorandum of Association (‘Memorandum’) has been retained.  However, the Memorandum will serve a much more limited role than it currently does and will become essentially an historical document.  It will evidence the intention of the subscribers to the Memorandum to form the company and to become members on formation, and provides evidence of the members’ agreement to take at least one share each in the company.  It won’t be possible to amend or update the Memorandum – it is essentially a ‘snapshot’.

Those provisions that are set out in the Memorandum of an existing company that are of a type that will not form part of a new style Memorandum will be deemed to form part of its Articles. NB: the objects clause (currently a key clause in a company’s Memorandum) will be abolished and a company’ objects will be unrestricted unless any restrictions are specifically set out in a company’s Articles. 

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8. Will I be able to remain a director once I reach 70?

The upper age limit of 70, set out in the 1985 Act, was abolished on 6 April 2007.   Note, however, that the minimum age limit of 16 will apply from 1 October 2008.

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9. Will directors have to be ‘natural persons’?

As from 1st October 2008, companies must have at least one director who is a natural person. However, for existing companies, the government has announced that it intends to provide a grace period until October 2010 for any company which did not have at least one director who was a natural person at the time when the 2006 Act received Royal Assent, i.e. on 8 November 2006.

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10. What will proxies be able to do under the Act?

As from 1 October 2007, members’ rights to appoint proxies have been enhanced.  Proxies now have the same rights to attend and to speak and vote at meetings as the member (previously a proxy cannot speak at the meeting in the case of a public company).  On a show of hands, every proxy present at the meeting has one vote.  Articles of Association cannot provide that a proxy has fewer votes on a resolution on a show of hands than the member would have if he/she were present in person. 

Members have the statutory right to appoint more than one proxy, provided each is appointed to exercise the rights attached to different shares held by the member. 

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11. Can you tell me more about the right to have an independent report on polls?

As from 1 October 2007, members of companies listed on the main market of the London Stock Exchange have been able in certain circumstances be able to request an independent report on any poll taken or to be taken at a general meeting of the company.  The request must be made no later than one week after the date on which the poll is taken by:

• members holding at least 5% of the total voting rights of all members who have a right to vote on the poll; or
• at least 100 members who have a right to vote on the poll and who hold shares in the company with an average sum of not less than £100 paid up on those shares.

The appointment of an independent assessor (who may be the company’s auditor) must be made within one week of the request for a report. A copy of his report must be made available on a website that is maintained by or on behalf of the company.  Reports must contain the assessor’s opinion on whether the procedures adopted in connection with the poll were adequate, whether the votes cast (including proxy votes) were fairly and accurately counted and whether the validity of proxy appointments was assessed.  In order to carry out his job properly, the independent assessor is granted powers to attend meetings and gain access to information from the company and its directors, employees, shareholders and agents. 

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12. How does the 2006 Act affect the small companies accounting regime?

Generally, the 2006 Act seeks to simplify company law for smaller entities, and this is certainly the case in terms of accounts.  There is now a single set of accounting and reporting regulations for small companies and another set of regulations covering all other types of company.  In addition, the government has taken advantage of certain flexibilities made available at EU level for small companies and increased the qualifying thresholds - the turnover figure is now £6.5 million rather than £5.6 million and the balance sheet total figure is £3.26 million rather than £2.8 million. The provisions in the 2006 Act dealing with accounts and audit came into force on 6 April 2008.

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13. Are auditors going to be able to limit their liability?

The short answer is yes.  One of the most significant changes in the 2006 Act is the ability for auditors to limit their liability by agreement with the company.  The relevant provisions came into force on 6 April 2008.  For private companies, agreement is given by ordinary resolution (which can be a written resolution) either waiving the need for authorisation at all, or approving the principal terms of the agreement before it is entered into or approving the whole agreement after it has been entered into. For a public company, again agreement is given by ordinary resolution (which must be in general meeting) approving the principal terms of the agreement before it is entered into or approving the whole agreement after it has been entered into. The company's articles may prescribe a higher threshold than an ordinary resolution.

These agreements will not be effective if the limitation would result in the company recovering less than such amount as is fair and reasonable having regard to the auditor's responsibilities, the professional standards expected of him and the nature and purpose of his contractual obligations to the company.  In determining what is fair and reasonable, no account is taken of matters arising after the loss or damage has been incurred or the chances of recovery from other third parties responsible for the loss or damage.

The Financial Reporting Council has produced draft guidance on liability limitation agreements which it is currently consulting on.

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14. Will directors be able to authorise conflicts of interests?


As from 1 October 2008 the basic answer is yes.  On this date the three remaining codified directors’ duties will be coming into force: the duty to avoid conflicts of interest; the duty not to accept benefits from third parties, and the duty to declare interest in a proposed transaction or arrangement.   Looking at the first of these, the duty is that a director must avoid a situation in which he or she, has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company.  However, the duty is not infringed if the matter has been authorised by independent directors.  Certain conditions have to be met. For a private company, authorisation may be given by the directors, provided nothing in the company’s constitution invalidates such authorisation, by the matter being proposed to and authorised by the directors.  For a public company, authorisation may be given by the directors, provided its constitution specifically includes provision enabling the directors to authorise the matter, by the matter being proposed to and authorised by them in accordance with its constitution.  Public companies will therefore need to add provisions into their Articles of Association (‘Articles’) if directors are able to authorise conflicts.  For private companies incorporated before 1 October 2008 the members will need to resolve that authorisation can be given in accordance with the relevant provision.  

Board authorisation is only effective if the required quorum is met without counting the director in question or any other interested director and if the conflicted directors have not participated in the taking of the decision or if the decision would have been valid without the participation of the conflicted directors.

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15. Is the prohibition on financial assistance being removed?

The answer is yes for private companies.  As from 1 October 2008, a private company will be able to give financial assistance for the purchase of shares in itself – the private company ‘whitewash’ procedure will no longer be necessary.  However, the prohibition will remain for public companies. 

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16. What is the new procedure for private companies to make capital reductions?

As from 1 October 2008 there will be a new procedure for private companies to make capital reductions without the need to go to court.  The new procedure provides for the reduction of capital by special resolution, supported by a solvency statement.  Note, however, that a company using this procedure will not be able to reduce its capital to zero – the court approved special resolution procedure must be used in such instance.  The Act sets out the requirements in relation to the solvency statement which are aimed principally at the protection of creditors. All of the directors must make the solvency statement, therefore, if one or more of the directors is unable or unwilling to make the statement, the company will not be able to take advantage of this procedure for their reduction of capital and will need to use the court approved procedure (unless the relevant directors who object were to resign prior to the making of the statement).   It will be a criminal offence if the directors make a solvency statement without having reasonable grounds for the opinion expressed in it which is then delivered to the Registrar.

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17. Will an individual be able to object to someone else’s company name?

Yes, as from 1 October 2008.  The 2006 Act creates a new right for any person (not just a company) to object to a company names adjudicator if a company's name is the same as a name associated with the objector in which he has goodwill or where the name is sufficiently similar to such a name that it would be likely to mislead.  There is list of circumstances raising a presumption that a name was adopted legitimately.  The objection will be upheld if the respondent cannot show that any of these circumstances apply or that the name was adopted in good faith or the interests of the objector are not adversely affected to any significant extent.  Even if certain of the circumstances do apply (for example if the name was registered before the start of activities on which the objector relies to show goodwill) the objection will still be upheld if the objector shows that the main purpose of the respondent in registering the name was to obtain money from him or to prevent him registering the name. 

The adjudicator has the power to direct the company to change its name to one that does not raise objection and can set a deadline for such change.  If the name is not changed by the deadline, the adjudicator may determine a new name for the company. The decision of the adjudicator has to be made public and is open to appeal.  On appeal the court can determine a new name for the company.

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