Companies Act 2006

Why was the Act introduced?

The Companies Act (CA) 2006 was introduced as part of the long awaited reform of company law. It significantly replaced the Companies Acts of 1985 and 1989 which was said to have been ‘both needed and overdue.’^[1] The reasoning behind the Act was to adopt a ‘Think Small First approach’^[2] so that it would be administratively easier for small companies to set up and manage their business. It has been said that the previous law had obsolete arrangements that would make it extremely difficult for small businesses to manage which led to reluctance by smaller businesses to set up as limited companies.^[3] As such it was evident that this area of the law was in serious need of reform, which is what led to the enactment of the CA 2006.

What was the aim of the Act?

The aim of the Act was to reform company law by introducing some significant provisions^[4] and consolidating UK company law into one single Act. It has been said that the CA 2006 is ‘the most all-encompassing piece of corporate legalisation that has ever come out of Parliament’^[5] and which embodies the many attempts that have been made since the 1800’s to re-examine and re-modernise the whole of the existing laws relating to commercial companies. As put by Reisberg; ‘it holds the somewhat dubious record of being the largest Act of Parliament ever enacted.’^[6]

What main changes did make to the law?

The CA 2006 has introduced new Articles of Association that are intended to completely reform the ambiguous arrangements that existed under the previous law (Table A for companies limited by shares) and has also made new arrangements for those companies limited by guarantee.^[7] The Act also removed the requirement for a private company to have a company secretary and provided companies with the ability to dispense with the requirement to hold an Annual General Meeting. The process with regards to written resolutions was also amended so that only a 75% majority is needed for a written resolution to be passed. The most significant change that was made to the law under the Act, however, was the codification of director’s duties. Previously, the duties of directors formed part of the common law which often resulted in a great deal of confusion as to what duties were to be imposed. Under the CA 2006 there is now much greater clarity as to what obligations directors are subjected to.

The statutory code that has been created by the CA 2006 is contained within sections 171-177^[8], yet much of the previous is still in existence but is now in statutory form. This is because it is provided for under section 170 (3) that director’s duties are still based on ‘certain common law rules and equitable principles.’ It is also provided for under section 170 (4) that ‘these general duties shall be interpreted and applied in the same way as common law rules or equitable principles.’ In view of these provisions, it is evident that director’s duties are still based upon common law rules and equitable principles under the previous law yet the limits that are placed upon director’s duties are now much clearer. It has been said that before the CA 2006 was introduced ‘the law on directors’ duties was in places uncertain, contradictory and anachronistic.’^[9] The changes made by the CA 2006 are, therefore, largely welcoming and in certainty is now being provided.

This was recognised in the case of Thermascan Ltd v Norman^[10]when it was stated by the court that it must still be ensured by the corresponding common law rules and principles are taken into account when interpreting the new provisions under the CA 2006. This suggests that director’s duties remain the same as they were under the pre-existing common law, except for the fact that they now exist in a more comprehensive legal framework. For example, section 171 is based upon the equitable principle that directors ‘must only act within the powers that have been vested in them for the purposes of which they have been given’^[11] as also contained in the model articles of association (SI 2008/3229). Thus, as shown in Spackman v Evans^[12]those directors found to be acting outside the scope of their duties will be found liable for breaching their duties as directors as also identified in Re Cameron’s Coalbrook Steam Coal, and Swansea and Lougher Railway Co, Bennett’s Case.^[13]

The CA 2006 also sought to provide some protection to minority shareholders by providing shareholders with the ability to apply to the court under section 994 if they feel that the company’s affairs are being conducted in a manner which is unfairly prejudicial to their interests.^[14] This is an important provision for minority shareholders since it was previously ‘problematic for a minority shareholder who has fallen out with the majority.’^[15] This was due to the decision in Foss v Harbottle^[16]which was that ‘a company is a legal entity distinct from its shareholders and a company cannot function effectively unless the will of the majority generally prevails. This was detrimental to minority shareholders who were unable to have a say in how the company was being run even if it was prejudicial to their interests. Section 994, thus, provides some relief to minority shareholders who would have found it difficult to seek protection under the previous law.

Previously, a minority shareholder would have been required to demonstrate that their legitimate expectations have been breached (section 459 CA 1985) as illustrated in Re Bird Precision Bellows Ltd.^[17] As pointed out by Brabners what section 994 seeks to do is ‘protect minority shareholders in circumstances where the majority shareholders seek to act in a way which is unfairly prejudicial to their interests.’^[18] Whilst it may be difficult to determine what is meant by ‘unfair prejudice’ it is evident that it will be much easier for minority shareholders to demonstrate that they have been subjected to unfair prejudice than it would to show that their legitimate expectations have been breached.

Bibliography

Text Books

Alan Dignam and John Lowry. Company Law: Core Text (6^th edn OUP Oxford, 2010)

Andreas Cahn and David C Donald. Comparative Company Law: Text and Cases on the Laws Governing Corporations in Germany, the UK and the USA, (Cambridge University Press, 2010)

Frank Shackleton, Madeline Cordes and Geraldine Caulfield. Shackleton on the Law and Practice (Sweet & Maxwell, 2011)

Institute of Directors., The Director’s Handbook: Your Duties Responsibilities and Liabilities, (Kogan Page Publishers, 2010)

John De Lacy. Reform of UK Company Law (Routledge, 2013)

Office of the Law Times., The Law Times, (Oxford University, 1867)

Journal Articles

Arad Reisberg. ‘Corporate Law in the UK after Recent Reforms: The Good, the Bad and the Ugly’ (2010) 63 CLP 315

Brabners Chaffe Street LLP., Shareholders Disputes, (2011), accessed 19 February 2016

The Institute of Legal Secretary’s and Pas. ‘Reform of Company Law’ (2007) The Legal Secretary Journal Dedicated accessed 19 February 2016

Case Law

Foss v Harbottle (1843) 2 Hare 461

Re Bird Precision Bellows Ltd [1984] BCLC 195 (ChD)

Re Cameron’s Coalbrook Steam Coal, and Swansea and Lougher Railway Co, Bennett’s Case (1854) 5 De G M & G 284

Spackman v Evans (1868) LR 3 HL 171 

Thermascan Ltd v Norman[2009] EWHC 3694 (Ch)

Legislation

Companies Act 1985

Companies Act 1989

Companies Act 2006