Company Law in UK (Companies Act, 2006) - A Brief Overview

Company Law in UK has undergone major reforms under the Company Law Review (CLR), the objective of which was to modernize the legal framework in which companies operate. In 1998, the Government commissioned an independent Company Law Review Group, comprising experts, practitioners and business people to take a long-term fundamental look at core company law and to see how it could be brought upto date. The CLR conducted a thorough review and assessment and provided the essential blue print in the form of a Report in 2001. As a response to the final Report of the Company Law Review, the Government brought out White Paper on Company Law 2002. The White Paper 2002 evoked huge response. Considering the suggestions received, the Department of Trade and Industry again released the UK White Paper on Company Law, 2005 which contained draft of the Companies Bill, and invited views. Consequently, New Company Law Reform Bill was introduced in Parliament in May, 2006 for discussion and approval.

The UK Companies Act, 2006 received Royal Assent on 8th November 2006. The Act has effectively replaced the previous companies’ legislation with the exception of provisions relating to company investigations and community interest companies.

Salient features of Company Law in United Kingdom (Companies Act, 2006)

Mode of forming incorporated company (Section 7)

Any one or more persons associated for a lawful purpose may, by subscribing their names to the memorandum of association and otherwise complying with the requirement of the Act in respect of registration, form an incorporated company, with or without limited liability. A company may not be so formed for an unlawful purpose.

Minimum Authorized capital (public companies) (Section 763)

The amount of share capital with which the public company is proposed to be registered, must not be less than the authorized minimum (£50,000 or such other sum as the Secretary of State may by order specify).

Minimum membership (for carrying on business)

If a company, other than a private company limited by shares or by guarantee, carries on business without having at least two members and does so for more than 6 months, a person who, for the whole or any part of the period that it so carries on business after those 6 months (a) is a member of the company and (b) knows that it is carrying on business with only one member, is liable (jointly and severally with the company) for the payment of the company’s debts contracted during the period or, as the case may, that part of it. For the purpose of the said provision, references to a member of a company do not include the company itself where it is such a member only by virtue of its holding shares as treasury shares.

Power of directors to bind the company

In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorize others to do so, shall be deemed to be free of any limitation under the company’s constitution. For this purpose, a person deals with a company if he is a party to any transaction or other act to which the company is a party; a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors under the company’s constitution; and a person shall be presumed to have acted in good faith unless contrary to be proved.

The references above to limitations on the directors’ powers under the company’s constitution include limitations deriving from a resolution of the company in general meeting or a meeting of any class of shareholders, or from any agreement between the members of the company or of any class of shareholders.

Treasury Shares (Section 724)

Where qualifying shares are purchased by a company out of distributable profits, the company may (a) hold shares (or any of them) or (b) deal with any of them, at any time, in accordance with section 727 or 729 for disposal and cancellation of treasury shares. When shares are held under (a) above, then the name of the company must be entered in the register as the member holding those shares. For the purpose of the Act, references to a company holding shares as treasury shares are references to the company holding shares which (a) were (or are treated as having been) purchased by it in circumstances in which this section applies, and (b) have been held by the company continuously since they were so purchased. (or treated as purchase).

Where a company has shares of only one class, the aggregate nominal value of shares held as treasury shares must not at any time exceed 10 per cent of the nominal value of the issued share capital of the company at that time. 

Directors (Section 154)

Every public company shall have at least two directors and every private company is required to have at least one director.

Minimum age for appointment as director (Section 157): A person may not be appointed a director of a company unless he has attained the age of 16 years.

Appointment of directors of public company to be voted on individually (Section 160)

A motion for the appointment of two or more persons as directors of the company by a single resolution at a general meeting of a public company can not be made. It can be done, if a resolution in this regard has first been agreed to by the meeting without any vote being given against it.

Validity of acts of directors (Section 161)

The acts of a person acting as a director are valid even if it is afterwards discovered—

 (1) that there was a defect in his appointment;

•  (a) that he was disqualified from holding office;
•  (b) that he had ceased to hold office;
•  (c) that he was not entitled to vote on the matter in question.

 (2) This applies even if the resolution for this appointment is void under section 160.

Register of directors (Section 162, 163, 164, 165)

Every company must keep a register of its directors. The register must contain the following particulars of each person who is a director of the company:

–– in the case of an individual–

 name and any former name; a service address; the country or state (or part of the United Kingdom) in which he is usually resident; nationality; business occupation (if any); date of birth.

 –– in the case of a body corporate, or a firm that is a legal person under the law by which it is

governed– corporate or firm name; registered or principal office;

 –– in the case of an EEA company to which the First Company Law Directive (68/151/EEC) applies,  particulars of–

 (i) the register in which the company file mentioned in Article 3 of that Directive is kept (including details of the relevant state), and (ii) the registration number in that register;

 –– in any other case, particulars of –

 the legal form of the company or firm and the law by which it is governed, and if applicable, the

register in which it is entered (including details of the state) and its registration number in that

register.

The register must be kept available for inspection –

 (a) at the company’s registered office, or

 (b) at a place specified in regulations 

The company must give notice to the Registrar of the place at which the register is kept available for

inspection, and of any change in that place, unless it has at all times been kept at the company’s registered office.

The register must be open to the inspection of any member of the company without charge, and of any other person on payment of such fee as may be prescribed.

Resolution to remove director (Section 168)

A company may by ordinary resolution at a meeting remove a director before the expiration of his period of office, notwithstanding anything in any agreement between it and him.

Special notice is required of a resolution to remove a director or to appoint somebody instead of a director so removed at the meeting at which he is removed.

A vacancy created by the removal of a director under this section, if not filled at the meeting at which he is removed, may be filled as a casual vacancy.

Duty of directors (Section 171)

A director of a company must–

 (a) act in accordance with the company’s constitution, and

 (b) only exercise powers for the purposes for which they are conferred.

General Duties

•  –– Duty to promote the success of the company. (Section172)
•  –– Duty to exercise independent judgment. (Section173)
•  –– Duty to exercise reasonable care, skill and diligence. (Section174)
•  –– Duty to avoid conflicts of interest. (Section175)
•  –– Duty not to accept benefits from third parties. (Section176)
•  –– Duty to declare interest in proposed transaction or arrangement. (Section177)
•   –– Duty to declare interest in existing transaction or arrangement. (Section 182)
•  –– A General notice in accordance with section 185 is a sufficient declaration of interest in relation to the matters to which itrelates.

Duty to prepare directors’ remuneration report (Section 420 & 422)

The directors of a quoted company shall for each financial year prepare a directors’ remuneration report which shall contain the information specified in the Schedule to Act and comply with any requirement of that Schedule as to how the information is to be set out in the report. The directors’ remuneration report shall be approved by the Board of directors and signed on behalf of the Board by a director or the secretary of the company. Every copy of the said report which is laid before the company in general meeting or which is otherwise circulated, published or issued, shall state the name of the person who signed it on behalf of the Board. The copy of the directors’ remuneration report which is delivered to the registrar shall be signed on behalf of the Board by a director or the secretary of the company.

Members’ approval of directors’ remuneration report (Section 439)

The company must, prior to the meeting, give to the members of the company notice of the resolution to be moved at the meeting, as an ordinary resolution for approving the directors’ remuneration report for the financial year. Notice shall be given to each such member in any manner permitted for the service on him of notice of the meeting. The business that may be dealt with at the meetings shall include the resolution. The existing directors must ensure that the resolution is put to vote at the meeting. No entitlement of a person to remuneration is made conditional on the resolution being passed by reason only of the provision made. If there solution is not put to vote at the meeting, each existing director is guilty of an offence and liable to a fine.

Secretary (Section 270, 271, 273)

A Private Company is not required to have a Secretary. A public company must have a secretary. It is the duty of the directors of a public company to take all reasonable steps to secure that the secretary (or each joint secretary) of the company –

 (a) is a person who appears to them to have the requisite knowledge and experience to discharge the functions of secretary of the company, and

 (b) has one or more of the following qualifications.

The qualifications are–

(a) That he has held the office of secretary of a public company for atleast three of the five years immediately preceding his appointment as secretary;
(b) that he is a member of any of the bodies specified as below–

•  a. the Institute of Chartered Accountants in England and Wales;
•  b. the Institute of Chartered Accountants of Scotland;
•  c. the Association of Chartered Certified Accountants;
•  d. the Institute of Chartered Accountants in Ireland;
•  e. the Institute of Chartered Secretaries and Administrators;
•  f. the Chartered Institute of Management Accountants;
•  g. the Chartered Institute of Public Finance and Accountancy.

(c) that he is a barrister, advocate or solicitor called or admitted in any part of the United Kingdom;
(d) that he is a person who, by virtue of his holding or having held any other position or his being a member of any other body, appears to the directors to be capable of discharging the functions of secretary of the company.

Duty to keep register of secretaries (Section 275)

 (1) A company must keep a register of its secretaries.

 (2) The register must contain the required particulars of the person who is, or persons who are, the secretary or joint secretaries of the company.

 (3) The register must be kept available for inspection–

•  (a) at the company’s registered office, or
•  (b) at a place specified in regulations

 (4) The company must give notice to the registrar–

•  (a) of the place at which the register is kept available for inspection, and
•  (b) of any change in that place, unless it has at all times been kept at the company’s registered office.

 (5) The register must be open to the inspection–

•  (a) of any member of the company without charge, and
•  (b) of any other person on payment of such fee as may be prescribed.

Duty to notify registrar of changes (Section 276)

 (1) A company must, within the period of 14 days from–

•  a. a person becoming or ceasing to be its secretary or one of its joint secretaries,or
•  b. the occurrence of any change in the particulars contained in its register of secretaries, give notice to the registrar of the change and of the date on which it occurred.

 (2) Notice of a person having become secretary, or one of joint secretaries, of the company must be accompanied by consent by that person to act in the relevant capacity.

 (3) If default is made in complying with this section, an offence is committed by every officer of the company who is in default. For this purpose a shadow director is treated as an officer of the company.

 (4) A person guilty of an offence under this section is liable on summary conviction to a five not exceeding level 5 on the standard scale &, for continued contravention, a daily default five not exceeding one-tenth of level 5 on the standard scale.

Duty to keep accounting records (Section 386)

 (1) Every company must keep adequate accounting records.

 (2) Adequate accounting records means records that are sufficient–

•  (a) to show and explain the company’s transactions,
•  (b) to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
•  (c) to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).

 (3) Accounting records must, in particular, contain–

•  (a) Entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
•  (b) a record of the assets and liabilities of the company.

 (4) If the company’s business involves dealing in goods, the accounting records must contain–

•  (a) statements of stock held by the company at the end of each financial year of the company,
•  (b) all statements of stock takings from which any statement of stock as is mentioned in paragraph has been or is to be prepared, and 
•  (c) except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.

Where and for how long records to be kept (Section 388)

 (1) A company’s accounting records–

•  (a) must be kept at its registered office or such other place as the directors think fit, and
•  (b) must at all times be open to inspection by the company’s officers.

(2) If accounting records are kept at a place outside the United Kingdom, accounts and returns with respect to the business dealt with in the accounting records so kept must be sent to, and kept at, a place in the United Kingdom, and must at all times be open to such inspection.

(3) The accounts and returns to be sent to the United Kingdom must be such as to–

•  (a) disclose with reasonable accuracy the financial position of the business in question at intervals of not more than six months, and
•  (b) enable the directors to ensure that the accounts required to be prepared under this Part comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).

 (4) Accounting records that a company is required by section 386 to keep must be preserved by it–

•  (a) in the case of a private company, for three years from the date on which they are made;
•  (b) in the case of a public company, for six years from the date on which they are made.

A company’s financial year (Section 390)

A company’s financial year is determined as follows. Its first financial year–

•  (a) begins with the first day of its first accounting reference period, and
•  (b) ends with the last day of that period or such other date, not more than seven days before or after the end of that period, as the directors may determine.

Subsequent financial years–

 (a) begin with the day immediately following the end of the company’s previous financial year, and

 (b) end with the last day of its next accounting reference period or such other date, not more than seven days before or after the end of that period, as the directors may determine.

In relation to an undertaking that is not a company, references in this Act to its financial year are to any period in respect of which a profit and loss account of the undertaking is required to be made up (by its constitution or by the law under which it is established), whether that period is a year or not.

The directors of a parent company must secure that, except where in their opinion there are good reasons against it, the financial year of each of its subsidiary undertakings coincides with the company’s own financial year. The directors of a parent company must secure that, except where in their opinion there are good reasons against it, the financial year of each of its subsidiary undertakings coincides with the company’s own financial year.

Accounts to give true and fair view (Section 393)

The directors of a company must not approve accounts for the purposes of this Chapter unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss–

 (a) in the case of the company’s individual accounts, of the company;

 (b) in the case of the company’s group accounts, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.

The auditor of a company in carrying out his functions under this Act in relation to the company’s annual accounts must have regard to the directors’ duty under sub-section (1).

Duty to prepare individual accounts (Section 394)

The directors of every company must prepare accounts for the company for each of its financial years. (unless the company is exempt from the requirement under section 394A). Those accounts are referred to as the company’s “individual accounts”.

Approval and signing of accounts (Section 414)

•  (1) A company’s annual accounts must be approved by the board of directors and signed on behalf of the board by a director of the company.
•  (2) The signature must be on the company’s balance sheet.
•  (3) If the accounts are prepared in accordance with the provisions applicable to companies subject to the small companies regime, the balance sheet must contain a statement to that effect in a prominent position above the signature.

Every copy of the balance sheet which is laid before the company in general meeting or which otherwise circulated, published or issued, shall state the name of the person who signed the balance sheet on behalf of the Board. The copy of the company’s balance sheet which is delivered to the Registrar shall be signed on behalf of the Board by a director of the company.

If annual accounts are approved that do not comply with the requirements of this Act, every director of the company who –

 (a) knew that they did not comply, or was reckless as to whether they complied, and

 (b) failed to take reasonable steps to secure compliance with those requirements or, as the case may be to prevent the accounts from being approved, commits an offence.

A person guilty of an offence under this section is liable–

 (a) on conviction on indictment, to a fine;

 (b) on summary conviction, to a fine not exceeding the statutory maximum.

Approval and signing of directors’ report (Section 419)

 (1) The directors’ report must be approved by the board of directors and signed on behalf of the board by a director or the secretary of the company.

 (2) If in preparing the report, advantage is taken of the small companies exemption, it must contain a statement to that effect in a prominent position above the signature.

 (3) If a directors’ report is approved that does not comply with the requirements of this Act, every director of the company who–

 a. knew that it did not comply, or was reckless as to whether it complied, and

 b. failed to take reasonable steps to secure compliance with those requirements or, as the case may be, to prevent the report from being approved, commits an offence.

 (4) A person guilty of an offence under this section is liable–

 a. on conviction on indictment, to a fine;

 b. on summary conviction, to a fine not exceeding the statutory maximum.

Duty to file accounts and reports with the registrar (Section 441)

The directors of a company must deliver to the registrar for each financial year the accounts and  reports required by–

• ─ section 444 (filing obligations of companies subject to small companies regime),
• ─ section 445 (filing obligations of medium-sized companies),
• ─ section 446 (filing obligations of unquoted companies),or
• ─ section 447 (filing obligations of quoted companies).

This is subject to section 448 (unlimited companies exempt from filing obligations) and section 448A (dormant subsidiaries exempt from filing obligations).

Period allowed for laying and delivering accounts and reports (Section 442)

This section specifies the period allowed for directors of a company to comply with their obligation under Section 441 to deliver accounts and reports for a financial year to the Registrar. This is referred to in the Companies Acts as the “period for filing” those accounts and reports.

The period allowed for laying and delivering accounts and reports is for a private company, 9 months after the end of the relevant accounting reference period, and for a public company, 6 months after the end of that period. If the relevant accounting reference period is the company’s first and is a period of more than 12 months, the period allowed is (a) 9 months or 6 months, as the case may be, from the first anniversary of the incorporation of the company, or (b) 3 months after the end of the accounting reference period, whichever last expires.

The ‘relevant accounting reference period’ means the accounting reference period by reference to which the financial year for the accounts in question was determined.

Requirement for audited accounts (Section 475)

A company’s annual accounts for a financial year must be audited in accordance with this Part (Part 16) unless the company–

•  (a) is exempt from audit under section 477 (small companies), section 479A (subsidiary companies), or section 480 (dormant companies);or
•  (b) is exempt from the requirements of this Part under section 482 (non profit-making companies subject to public sector audit).

A company is not entitled to any such exemption unless its balance sheet contains a statement by the directors to that effect.

A company is not entitled to exemption under any of the provisions mentioned in sub-section (1)(a) unless its balance sheet contains a statement by the directors to the effect that–

•  (a) the members have not required the company to obtain an audit of its accounts for the year in question in accordance with section 476,and
•  (b) the directors acknowledge their responsibilities for complying with the requirements of this Act with respect to accounting records and the preparation of accounts. The statement required by sub-section (2) or (3) must appear on the balance sheet above the signature required by section 414.

Right of members to require audit (Section 476)

The members of accompany that would otherwise been titled to exemption from audit under any of the provisions mentioned in section 475(1)(a) may by notice under this section require it to obtain an audit of its accounts for a financial year.

The notice must be given by–

 (a) Members representing not less in total than10% in nominal value of the company’s issued share capital, or any class of it, or

 (b) if the company does not have a share capital, not less than 10% in number of the members of the company. The notice may not be given before the financial year to which it relates and must be given not later than one month before the end of that year.

Duties of Auditor (Section 498)

 (1) A company’s auditor, in preparing his report, must carry out such investigations as will enable him to for man opinion as to–

•  a). whether adequate accounting records have been kept by the company and returns adequate for their audit have been received from branches not visited by him, and
•  b). whether the company’s individual accounts are in agreement with the accounting records and returns, and
•  c). in the case of a quoted company, whether the auditable part of the company’s directors’ remuneration report is in agreement with the accounting records and returns.

 (2) If the auditor is of the opinion–

•  a). That adequate accounting records have not been kept, or that returns adequate for their audit
• have not been received from branches not visited by him, or
•  b). That the company’s individual accounts are not in agreement with the accounting records and returns, or 
•  c). in the case of a quoted company, that the auditable part of its directors’ remuneration report is not in agreement with the accounting records and returns,  the auditor shall state that fact in his report.

 (3) If the auditor fails to obtain all the information and explanations which, to the best of his knowledge and belief, are necessary for the purposes of his audit, he shall state that fact in his report.

 (4) If–

 a. the requirements of regulations under section 412 (disclosure of directors’ benefits: remuneration, pensions and compensation for loss of office) are not complied with in the annual accounts, or  b. in the case of a quoted company, the requirements of regulations under section 421 as to information forming the auditable part of the directors’ remuneration report are not complied within that report, the auditor must include in his report, so far as he is reasonably able to do so, a statement giving the required particulars.

 (5) If the directors of the company (a) have prepared accounts and reports in accordance with the small companies regime or (b) have taken advantage of small companies exemption in preparing the director’s report, and in the auditor’s opinion they were not entitled so to do, the auditor shall state that fact in his report.

Resolution removing auditor from office (Section 510)

 (1) The members of a company may remove an auditor from office at anytime.

 (2) This power is exercisable only–

 a. by ordinary resolution at a meeting, and

 b. in accordance with section 511 (special notice of resolution to remove auditor).

 (3) Nothing in this section is to be taken as depriving the person removed of compensation or damages payable to him in respect of the termination–

 a. of his appointment as auditor, or

 b. of any appointment terminating with that as auditor.

 (4) An auditor may not be removed from office before the expiration of his term of office except by resolution under this section.

Annual Return

Part 24 of the Companies Act 2006 of UK relates to a Company’s Annual Return.

Duty to deliver Annual Return (Section 854)

Every company must deliver to the registrar successive annual return each of which is made up to a date not later than the date that is the Company’s return date.

The Company’s return date is the anniversary of the Company’s incorporation or if the Company’s last return delivered in accordance with this part was made up to a different date, then the anniversary of that date.

Contents of Annual Return (Section 855-857)

─ General – address of the registered office, type of company and its principal business activities, particulars of Directors, Secretary, etc.

─ Information about share capital

─ Information about shareholders, etc.