The Companies Act 2006 and deregulation for private companies

Article Type: Corporate law outlook From: Strategic Direction, Volume 24, Issue 11

One of the overall objectives of the Companies Act 2006 is to simplify procedures available to private companies. The Act is being introduced in stages, with a number of provisions already introduced. Further key dates are 1 October 2008 and 1 October 2009.

Symptomatic of this reduction in formality, private companies are already no longer required to hold an annual general meeting, table annual accounts,appoint auditors at a meeting of the shareholders, or appoint a company secretary.

For private companies incorporated from October 2009, the directors will have greater ability to allot shares. Authorised share capital will be abolished,unless the articles of association specify a limit, so companies will have no restriction on the number of shares they can issue. Existing private companies will be allowed to amend their articles to remove any reference to authorised share capital and thereby take advantage of this more relaxed regime.

In addition, unless the articles contain a restriction to the contrary, the directors of private companies that only have one class of share will no longer require shareholder approval, or permission in the articles, to allot shares. They will have unlimited authority to do so. However, pre-emption rights will still have to be disapplied for shares to be allotted to individuals who are not already shareholders.

In the shorter term, further key deregulation from October 2008 will increase flexibility, as private companies will be able to reduce share capital using a solvency statement procedure. The current cumbersome and expensive requirement for a “whitewash”, which allows financial assistance in connection with the purchase of a private company’s shares, will be abolished. This is examined later in this article.

One of the fundamental principles of company law is the concept of maintenance of capital. Issued shares form part of the capital of the company and so, in order to protect those dealing with the company, particularly creditors, it has traditionally been made difficult to return capital to shareholders while the company is a going concern.

At present, in order to reduce share capital, a company requires a court order and must also be authorised in its articles in order to adopt this procedure. The role of the court is to ensure that each creditor’s rights have been safeguarded.

From October 2008, as an alternative to the court procedure, a private company will be able to reduce its share capital by special resolution of its shareholders supported by a statement, made by the directors, as to solvency and capital. Furthermore, a company will no longer be required to have specific authorisation in its articles to allow it to reduce its share capital (so long as there is no specific prohibition in the articles).

However, it should be noted that a company will not be able to reduce its share capital to zero using the new solvency statement procedure. Such a reduction would still need to be sanctioned by the court.

The solvency statement will be made by all of the directors, in a prescribed form, not more than 15 days before the special resolution is passed. Both the special resolution and the solvency statement will need to be registered with Companies House, along with a statement of capital and a statement by the directors confirming that the solvency statement was made not more than 15 days before the special resolution was passed.

In terms of financial assistance, until 1 October 2008 a company is prohibited from assisting any person to buy its shares, by the company providing to that person a gift, loan, indemnity or guarantee.

The current whitewash procedure allows private companies to overcome this restriction. The procedure involves all directors swearing a statutory declaration to confirm that the company will remain solvent for 12 months following the financial assistance. This statutory declaration must be accompanied by an auditors report and the assistance must be approved by a special resolution within 7 days of the statutory declaration. The financial assistance must then be given within 8 weeks of the statutory declaration.

From 1 October 2008, this procedure will not be required, as the prohibition on financial assistance is to be repealed.

Comment

The relaxation of the law relating to financial assistance for private companies will be a welcome change, in light of the fact that approximately£20m a year is spent by companies obtaining legal advice in relation to the current prohibition.

Although companies will benefit from the enhanced flexibility within company law, banks may harbour concerns. They rely on the whitewash procedure to focus the attention of directors on the wider implications of the transaction they are to undertake. When this procedure is no longer required, the banks may resort to introducing provisions in their loan agreements, which prohibit financial assistance without their consent. What form of consent the banks may require is unknown at this stage.

There could also be concerns regarding the solvency statement procedure, as the ability of private companies to reduce share capital without the court’s consent further lessens the safeguards designed to protect creditors.

However, deregulation arguably reflects the perceived unimportance of share capital in decisions by creditors as to whom they extend credit. It seems share capital is now considered a relatively unimportant measure of ability to repay credit in comparison to indicators such as cash flow, net assets or financial performance, especially with regard to private companies, which have no minimum share capital requirement.

Gordons LLP regularly advises on company law issues. If you are in any doubt about the implications of this new legislation please contact Richard Dean on 01274 202171 or e-mail: richard.dean@gordonsllp.com

Richard DeanCompany law associate at Bradford and Leeds-based law firm Gordons LLP.