Companies Act 2006 – A Summary

The Companies Act 2006 replaced the Companies Act 1985 as the UK’s key piece of legislation for the operation of companies. It is an important Act because it is the primary source of UK company law.

The main purpose of the Companies Act 2006 is to regulate how companies and the persons associated with companies should behave with each other and with third parties such as creditors.

The Sections of the Companies Act 2006

Parts 1 to 4 deal with the formation and constitution of a company.

Parts 5 to 6 contain rules around a company’s name and registered office.

Part 7 covers the alteration of a company’s status by re-registration.

Part 8 covers rules around the members (shareholders) of the company.

Part 9 deals with information rights and the exercise of members’ rights by others.

Part 10 describes the rights and duties of company directors.

Part 11 deals with derivative claims.

Part 12 refers to company secretaries.

Part 13 covers the rules around resolutions and meetings.

Part 14 contains rules controlling political donations and expenditure.

Part 15 deals with accounts and reports.

Part 16 contains rules around audit.

Part 17 covers share capital.

Part 18 addresses the process by which a limited company can acquire its own shares.

Part 19 deals with debentures.

Part 20 contains specific rules applicable to private / public companies.

Part 21 refers to the certification and transfer of securities.

Part 22 covers information about interests in company shares.

Part 23 refers to distributions.

Part 24 contains rules around a company’s annual return.

Part 25 deals with company charges.

Part 26 covers arrangements and reconstructions.

Part 27 addresses mergers and divisions of public companies.

Part 28 deals with takeovers.

Parts 29 and 30 cover fraudulent trading and unfair prejudice.

Part 31 addressed dissolution and restoration to the register.

Part 32 refers to company investigations.

Parts 33 and 34 covers companies not formed under the Companies Acts.

Part 35 covers the Registrar of Companies.

Part 36 contains offences under the Companies Acts.

Part 37 covers company communications and other supplementary provisions.

Parts 38 and 39 contain miscellaneous definitions and amendments.

Part 40 covers directors and foreign disqualification.

Part 41 refers to business names.

Part 42 addresses statutory auditors.

Part 43 contains transparency obligations.

Part 44 includes rules around information on exercise of voting rights.

Key Features of the Companies Act 2006 – Private Company Perspective

General Directors Duties Under the Companies Act 2006

Part 10 of the Act requires directors:

• To act within their powers.

• To promote the success of the company for the benefit of its members (shareholders) as a whole, having regard to a non-exhaustive list of factors.

• To exercise independent judgment.

• To exercise reasonable care, skill and diligence.

• To avoid conflicts of interest. 

• Not to accept benefits from third parties.

• To declare certain interests they have in a proposed transaction or arrangement with the company.

Although not part of the Act it is important to note that there is a further duty of company directors under UK common law which is that directors must, in certain circumstances, consider or act in the interests of the company’s creditors.

Members Rights

Shareholders have certain rights under the Companies Act 2006 such as:

• The right to receive a copy of the company’s annual accounts and reports.

• The right to receive resolutions and the articles affecting the company’s constitution.

• The right to receive a current statement of the company’s share capital.

• The right to a share certificate.

• The right to approve directors’ service contracts, loans to directors and payments to directors for loss of office.

• The right to vote on resolutions.

• Pre-emption rights on the issue of shares (unless the right is disapplied).

• The right to apply to court for an order that the company’s affairs are being conducted in a manner that is unfairly prejudicial to the interests of the members.

Resolutions

The Companies Act 2006 requires certain matters to be approved by the shareholders of the company. The shareholders therefore pass “ordinary resolutions” or “special resolutions” approving e.g.

• Removal of directors.

• Approval of certain contracts and loans to directors.

• Approval of substantial property transactions.

• Approval of share divisions or variation of director authority to allot shares.

• Authorising the company to purchase its own shares off-market.

• The above matters would need to be passed by an ordinary resolution so they would need to be passed by a simple majority of shareholders.

Examples of matters which would require a special resolution of a company’s members (i.e. passed by a majority of not less than 75%) include:

• Changes to the company’s articles of association.

• Change of company name.

• Disapplication of pre-emption rights.

• Reduction of share capital.

What happens if you breach the Companies Act 2006?

There are a number of offences which a company and its directors can commit under the Companies Act 2006. Some of the key ones are listed below.

• Failing to update Companies House with resolutions or changes to the company’s constitution. Company and every officer in default. Level 3 fine.

• Failing to record minutes of directors meetings. Every officer in default. Level 3 fine.

• Failing to maintain the company’s statutory books. Company and every officer in default. Level 3 fine.

• Failing to comply with duty to keep accounting records. Every officer in default. Imprisonment or a fine or both.

• Contravening the general rule against acquisition of its own shares. Company and every officer in default. Imprisonment or a fine or both.

• Fraudulent trading. Every person who is knowingly a party to the carrying on of the business with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose. Imprisonment or a fine or both.

In addition, the members of the company may bring a derivative claim against the directors or issue an unfair prejudice petition. Liquidators may also bring claims against directors who have breached their duties. The remedy for such claims would normally be damages to compensate for the loss caused by the breach.

Frequently Asked Questions

Are non-executive directors under the same duties as executive directors?

Yes they are, the Companies Act 2006 makes no distinction between executive and non-executive directors. However, even though the duties are the same, the way in which the duties apply to the non-executive directors may not be the same. For example, the duty to exercise reasonable care, skill and diligence under section 174 of the Act will vary because of their different roles on the board.

I don’t have a share certificate – does this mean I am not a shareholder?

No. Although it is good to have a share certificate (and if you are a shareholder you are entitled to one), a share certificate is simply evidence that you are a shareholder. A shareholder is someone who is named as a subscriber on company’s memorandum (i.e. the founder) and who has not given up their shares in the company or, in all other cases, someone who has agreed to become a member of the company and whose name is entered on the company’s register of members.

Is shareholder approval for a share buyback needed?

A contract for an off-market share buyback must be approved by a resolution of the shareholders.

An ordinary resolution will be sufficient unless the articles require otherwise. The written resolution procedure may be used.

The Companies Act 2006 does not impose any limits on the duration of a resolution authorising the buy-back however it is possible for the resolution to provide for long-stop date after which the authority will expire.

Which transactions with directors require the approval of shareholders?

The following transactions between a company and its directors must first be approved by the company’s members:

Long term service contracts.

Substantial property transactions.

Loans, quasi-loans and credit transactions.

Payments for loss of office.

What is a pre-emption right?

A pre-emption right is a right of first refusal in favour of existing shareholders in relation to new shares being issued in the company. It is an anti-dilution mechanism that allows shareholders to preserve their percentage shareholding in a company, provided they have sufficient funds available to take up their rights.

Part 17 of Chapter 3 of the Companies Act 2006 imposes a pre-emption right which can be disapplied in various ways e.g. by express provision in the company’s articles of association.

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