Private Companies in the Era of Companies Act 2006

Private Companies in the Era of Companies Act 2006

Private Companies in the Era of Companies Act 2006

Companies Act 2006 transformed the corporate governance of private companies. Besides consolidating the fragmented UK legislations on companies, the Act also modernised the existing laws to match the business environment of the 21^st century. Sections of the Act touching on private companies were drafted on the understanding that owners and managers of small private companies are more often the same individuals[1]. Some of the changes brought by the Act are to abolish the need for private companies to: hold annual general meetings, lay accounts before their members in general meeting, and appoint company secretary. The Act has also introduced the regime of written resolutions. As result, the 2006 Act reduces the statutory burden placed on private companies and induces the necessary flexibility for companies to compete in the modern business environment.

One of the provisions that private companies could have benefited from is the reforms touching on company’s meetings[2]. The previous legislations had placed an unnecessary burden on small private companies to hold regular companies meetings just like the larger corporations. For instance, section 366(1) of the 1985 Companies Act has obligated all companies to hold an annual general meeting in addition to any other meeting held in the year. The requirement is repealed by the Companies Act 2006. The 2006 Act only makes reference to public companies[3]. This means that small private companies have the liberty to choose whether to hold an annual general meeting or not. However, if a company’s article requires an AGM to be held, that provision remains binding. In that case, the Act creates an opt-in system where the company can choose what best fits it.

The abolition of mandatory AGM creates several benefits for private companies. One, private companies no longer need to lay their accounts before the AGM. In the older regime, all companies were required to hold a general meeting where audited accounts could be laid to shareholders[4]. In the new regime, such meetings are no longer necessary since the account can be circulated to members in accordance with section 423 of the 2006 Act. The laying of audited accounts before AGM is cumbersome and costly[5]. It creates an unnecessary burden for small private companies, especially where the directors and shareholders are the same people[6]. Where directors and shareholders are the same people, they are aware of the company’s financial situation, and therefore the requirement to the table was an unnecessary financial burden.

In addition, the abolition of annual general meetings has an effect on the former requirement to annually appoint auditors[7]. Since the holding of AGM is now not mandatory, the requirement to annually appoint auditors was consequently abolished. Under the Companies Act 2006, auditors are considered reappointed annually unless it is otherwise required by the company’s article. This is for the same reason that owners and administrators of private companies are more often the same people. It is also recognized that most of the small private companies do not need an audit of their annual accounts. The annual turnover, assets worth, and the total number of employees sometimes qualify these small private companies for audit exemption[8].

Where the company wants to hold the meetings, the 2006 Act has made it easier for the shareholders to hold the meeting. This is after the Act changed the notice period required to call a meeting. The requirement to issue a 21 days’ notice before holding an AGM and other meetings called to consider special resolution are now immaterial. All other meetings now require a 14 days’ notice. In the case of short notice, a majority of shareholders holding 90% of the shares, or up to 95% where the articles so require, may agree to call the meeting. These provisions make it easier for small private companies to operate without being burdened by the law. It is also important to point out that written resolutions can substitute many of the companies meeting. The 2006 Act has abolished the former requirement of unanimity and instead replaced it by ordinary and special resolutions. With this regime, coupled with the acceptance of electronic communication, making decisions for small private companies has been made much easier. It now takes a shorter time for companies to pass written resolutions. The resolution passed can again be circulated to shareholders electronically. The philosophy behind such legislation is that in private companies directors and shareholders are the same people. The previous legal regime tended to treat these people as separate.

Before the coming of the Companies Act 2016, it was mandatory for all companies, private and public, to have a company secretary[9]. With the full enactment of the companies Act, this requirement has now been left with public companies. Private companies, from 6 April 2008, have now the discretion to choose whether or not to appoint a company secretary. Where the private companies choose to retain a company secretary, it must be expressly stated in the Articles of association. This change recognises the fact that some of the small companies, especially those that were owner-managed, appointed a company secretary just to satisfy the statutory requirement. This was a burden especially at times when companies need to cut down their cost of operation[10]. The Act allows small companies to choose whether they want to appoint a company secretary or not. This, however, does not mean that the duties of a company secretary are irrelevant; they have to be performed only that in the new legal dispensation, the director of a small private company can choose to perform the roles or delegate them to another employee like the companies accountant.

In summary, the 2006 Act reduces the challenges faced by small private companies by easing the administrative burden and modernising outdated statutory requirements. Small private companies, especially those that are owner-managed have now the leeway to make most of their decisions without being restricted by the statutory requirement. The beauty of the 2006 Act is that it creates an opt-in system whereby the small private companies can choose to be bound by some of the statutory requirements if there is a need to. 

Bibliography

Arcot, A and V Bruno, ‘One Size does not fit all, after all: Evidence from Corporate governance’, (World Bank, 2006)

Companies Act 1985

Companies Act 2006

Davies, J. ‘A guide to directors’ responsibilities under the Companies Act 2006’, [2007] the Association of Chartered Certified Accountants, p.8

Department for Business Enterprise & Regulatory Reform, ‘Companies Act 2006: A Summary of what it means for private companies’, (BERR, 2007)

Dignam, A “A Principled Approach to Self-regulation? The Report of the Hampel Committee on Corporate Governance’, [1998] Company Lawyer 140

Lipman, F and K Lipman, ‘Corporate Governance Best Practices: Strategies for Public, Private, and Not-for-Profit Organizations’, (John Wiley & Sons, 2006), p. 61

Slaughter and May, ‘Private company articles of association and the Companies Act 2006’, (Slaughter and May, 2007), p. 9

UK Corporate Governance Code 2014