UK Companies Act 2006 An Appropriate Model

Do you think that UK Companies Act 2006 achieved its objectives and provides an appropriate model that other country should follow?

INTRODUCTION

The UK’s Company Act 1985 and 1989 has been repealed with Companies Act 2006 and has brought a tremendous change in the attitude of business law in today’s generation. It is a gargantuan piece of legislation with a plethora of transitional provisions, secondary legislation and non- statutory guidance. The ‘Think small Company first’ principle is the start point which the 2006 Company Act legislation is based upon and the Act provides an easier process in the statutory requirements and filings of smaller businesses. With the new Act offering a more flexible legislation to companies, it has offered easier statutory procedures, less complicated filing requirements and nonetheless, a more confidential corporate structure. [1]

The objective of the new Act is to reduce the burden on the directors and the promoters to manage a Company. Since the execution of the Act, it has become quite easy to start a Company. Under the new Act, a Company can be formed with one person and with one constitutional document. The reduction of filing requirements and non-requirement of annual general meeting has brought a revolutionary change and a push for an innovative individual to start a Company and to be free from shackles of red tapism. The directors after this enactment can maintain confidentiality as they are not required to display their residential addresses and it will be held as protected information at Company’s house [2] . Also the reduction of age of a director to 16 years has added dynamism as more young people can become directors of the Company.

The coursework is divided into three parts: The first part deals with the objectives of the UK Companies Act, 2006 which focuses on the “Think Small Approach”, Registration of a company or corporation in the UK and overseas and lastly a brief discussion on the Memorandum as well as Articles of Association. The second part examines how UK Company Law can be used as an appropriate model for other countries all over the world, with specific relation to India and the United States of America. The final part discusses the loopholes brought about by the corporate finance partners Mills and Reeve.

OBJECTIVES

The UK Companies Act, 2006 has provided an effective legal and regulatory framework which promotes and encourages the growth of corporations. The Act has built a four pointer objective to achieve this aim. These objectives are mainly based on the employment, investment and enterprise areas of a company. The foremost aim is to enhance shareholder engagement, thereby promoting shareholder activism which leads to a long-term investment culture and reduction of short-termism attitudes. The concept of “Think Small First” has been brought into spotlight as this process ensures an effective regulatory mechanism whereby companies can follow suit. The procedure with regard to the formation of a company in UK is made easier with less legal formalities, and provides for flexibility in the future. [3]

The following changes signify the achievements of the objective of Company Act 2006 which is to simplify the incorporation of Companies. The first change is the easy nature of the rules guiding the formation of new companies. Different from the Issued Share Capital, companies formed on or after 1st October, 2009 are not affected by the concept of Authorised Share Capital. Though there is the need of Shareholders’ authority for allotment, Directors of such companies can give Shares without affirmation from them. It takes about 21days for right and securities issues for Shareholders to be resolved, with the Act the period has been minimised to 14 days there by reducing underwriting period and cost of security issues. Expenditures like preliminary formation expenses, commissions or discounts which arise from debts can no longer be written off with the Share premium account of the company. Instead of waiting for an approval of a contract to be given after general meetings, companies can enter into a contract off- market purchase s with its own shares whereas in former times, only shareholders’ approval was acceptable. [4]

The UK Companies Act 2006 has achieved its objectives of simplification of registration preceding October 1st 2009, were overseas company present in the UK had registered under the separate regimes, in which companies were allowed to register their business in UK under Company Act 1985 and also had to go through the requirements made by EU legislation for using a branch of business in UK. This approach often caused confusions, but the company Act 2006 brought a simple approach with only one regime coordinating registration and filing requirements for any overseas company present in the UK under the Overseas Companies Regulations 2009. It also coordinates the establishment of such companies, both its branches and place of business. Once an Overseas Company opens its establishment, the information of the company must be recorded at the Companies House within a month using Form OSIN01. Other companies who have registered in the past were required to update their company information before or by 30th March, 2010. [5]

Due to the Act, there is a substantial increase in the setup of a number of Companies as the reduction of cost and simplification of ‘Memorandum of Association (MOA) and Articles of Associations (AOA)” allows an individual to start a Company without wasting time in numerous formalities for formation of the Companies. The change in the legislation has provided more meaningful referencing to those who know the particular function they wish to achieve but who are not conversant with the specific sections of Company law. [6]

The role and opportunity of the MOA has changed majorly because of the UK Company Act 2006. Making the MOA a brief document since 1st October 2009 just asserts the wish of the applier(s) to begin a company, become members and take initial shares. It in no way involves an objects clause which is the objective for which the company is formed. Also the MOA will lose its value after the company’s formation; instead, the AOA will form the company’s internal rules.

The new Company Act 2006 is seen today as the new model which is one of its achieved objectives. The minimalist approach is used by article for private companies where no Annual General Meeting (AGM) are held and Shareholders decisions are delivered as written decision. However under the new model, the scope of the Articles for public companies is not very different from the old model but just a more updated layout and improved drafting style. [7] By modifying or excluding specific requirements or by acceptance of modified articles, companies at previous times have been able to differentiate model articles. But for companies which began before 1 October 2009, little requirements in the MOA will be perceived as necessity for the companies’ article. Therefore, the objects clause i.e. the purpose of opening such company will be seen as a part of the articles and will keep influencing the powers of the company except when it is being removed by a Shareholders decision. [8]

MODEL FOR OTHER COUNTRY TO FOLLOW

There have been discussions on which national model of corporate governance is more considerable for countries around the world to follow. The UK Company Law endorsed by the UK Company Act 2006 has proved itself to be a role model to other countries. Some business thinkers recommended the German and the Japanese business model because companies in these countries have enjoyed steady ownership, composition, and have worked hand-in-hand with banks and shareholders. According to Porter, the model brought about increase ineffective corporate decision making then in short term business. In the mid-1990s, the US Company Law had better chances for new company formation and the usage of new technologies such as IT, Telecommunications and Life Sciences, high level of Productivity and Employment growth. Contrarily, Germany and Japan witnessed a very low economic growth and were opposed to change an innovation in the 1990s. Unfortunately, the US felt short in all that was thought about them and the way business was run with the shatter of the dot-com bubble in 2001 and the scandal occurrences in major corporations like Enron, WorldCom and Global Crossing etc. This spurred up a disciplinary regulatory response called the Sarbanes- Oxley (SOX) Act, 2002 by the legislators that enacted significant cost on the US economy. Though a lot of significant sectors of the world economy are subject to US Corporation, its corporate governance is no longer seen as the great model to be used by other countries. [9]

The US Companies still keep up with its policies of one share one unit and the decision of the name of each ballot paper still rests on the Board. Under the UK Companies Act 2006, one or all of the directors can be removed by just a meeting of members called by the Shareholders to vote. A notice can be given by company from the members of a public company of their resolution so long as they hold 5% of the total voting rights or at least 100 votes as under section 338 of the UK Companies Act 2006. [10]

Cooperate Governance by Bob Tricker

The UK Companies Act 2006 posits that governance should encourage accountability to shareholders and the ability of the board to manage the company effectively. This is called the ‘best practice’ approach. [11]

If the US follows through with the UK Act 2006, the extra benefits and cost used by uncontested and incumbent directors in sustaining their seats will be gained back. According to Bob Monks, the US should adopt the UK Companies Act 2006 approach where the rights will be given to investors who would be able to call for meetings where directors can be removed. [12]

Cooperate Governance by Bob Tricker

Along with the USA, the UK Company Law has served as a base for the Indian Company Law (The Companies Act, 1956). The Indian Law has time and again followed to a lot of company legislations passed by the UK with its own modification. Tracing history, dating back from 1850 the Indian Company Law was formed with the endorsement of Indian Companies Act in accordance to the UK Companies Act of 1844. India had a few amendments which led to the Indian Companies Act of 1913 which was equivalent to the UK Companies Act 1908. It was this Act that brought the use of ‘Private Company’ to Indian Company Law for the First time. Other amendments were also made till Indians Independence in 1947 where a committee was appointed by the government in 1950 to look into Indian Company Act. [13] The Events in other countries brought about the urgency to change. A committee was set up by UK called The Cohen committee which projected substantial changes to the UK Companies Act and the assessment of corporate legislation in countries like South Africa and the United States backed the apparent need for the Companies Act in India to be changed. [14] With the recommendation given and turned to a bill, the present Companies Act was formed in 1956, and from that point amendments have been made in line with the UK Companies Act till date. [15]

From the explanation above, tracing the history of the India’s Companies Law it is evident that India looks up to UK Company Law in a bid to form a good Companies Act suitable to guide its country with its own modification. The UK Company Act 2006 has tried to make business easy through its achievements of objectives in the UK but also its helping other countries to do so. Using India as a case study the Company Act amendments done in 2006 introduced provisions relating to issuance of identification numbers to directors; where a person could not be appointed for re-appointed as director without an identification number. Another provision was with governance and e-filing. The government informed companies to the electronic filing of forms, applications, documents, and declarations in Portable Document Format and authentication of all these documents using digital significance. [16]

Under the second provision of the amendments of the Indian Companies Act, the government is using all the mentioned measures to simplify registration by cutting back on paper work, better filing system, also registering all companies under authentic documentation. Comparing it to the UK Companies Act 2006, one of its objectives was based on simplification of registration and filing requirements. Therefore, it has been observed and over time proven that India used UK Companies Act as a model to form its amendments with its own modification. [17]

COMMENTS

Though we have been talking about the achievements made by the UK Companies Act 2006 has had, it does not mean that it has not been criticized. One of the corporate finance partners of Mills and Reeve, Mr James Hunter highlighted some disadvantages of the UK Act. It therefore, goes ahead to point out that some advisers have struggles getting used to the changes and even companies who ‘are already overburdened by red tape’ too. Hunter posits that that Act has no real impact on most of the private companies’ day to day activities. He also spoke to the fact that a lot of companies will not notice the changes of the Act 2006 until a situation calls for it. He gave an example of companies who are not involved in Mergers Accusation transactions, reducing or buying back shares capital will probably not know of the changes until the next filing period comes and they find out that the period is not as long as before or the late filing pay has increased or when there is a return of their annual returns because of the use of the wrong form. These are the kind of reasons that alert people of the Act 2006.

However Hunter was quick to say that though the criticisms, it is different for companies who frequently participate in corporate transactions as the reorganisation procedure of the Act 2006 has helped another example was cited was of capital reduction without going through the former procedures which was actually very complicated. To Hunter, the Act 2006 is not an improvement from the previous act been used.

CONCLUSION

Following the progress of the course work, we were able to base our discussion in three categories: firstly the main aim of the discussion was laid down on the main objectives of the UK Companies Act. We shed more light on the countries where the UK Act has been used in the coordination of the business structure. This is to make other countries see that the UK Act 2006 has worked and is right model. Lastly, because there is not perfect Act, there were some criticism laid but we can summarize by saying that though the act has its disadvantages its approach is of simplicity in the formation of individual companies and flexibility in choice of corporate governance process, the strength of the model is the its high standard, low cost and dynamics.