The Companies Act of 2006 is the
foundation of corporate law and governance in the United Kingdom. Its primary
aim is to guarantee that companies are appropriately and fairly managed.
The Act delineates model provisions, procedures, and safeguards that regulate
interactions within and between the company and its stakeholders. The 2006 Act
seeks to create a framework that supports business operations while imposing
the necessary constraints on the regulatory landscape by emphasising principles
such as transparency, accountability, and responsible governance.
These legislative reforms illustrate a
careful balance between fostering an environment conducive to economic,
commercial, and entrepreneurial development and fulfilling governmental
responsibilities to safeguard employees and the broader public interest. The
Act facilitates growth opportunities and reinforces the commitment to
ethical practices and accountability within corporate structures, enhancing
overall trust in the business ecosystem.
The Purpose of the Companies Act 2006
The Companies Act 2006 aims to update
and modernise corporate legislation by replacing outdated laws dating back 150
years. This reform reflects contemporary common law principles and
perspectives, integrating nearly 17 years of extensive consultation
and evaluation. For the first time, UK company law adopts successful elements
from other jurisdictions while considering the UK's unique economic
and social context.
Central to the legislation are several
critical policy considerations ensuring every company is an effective business
entity. Safeguarding shareholders' rights concerning board representation,
director compensation, and overall company governance is essential. However, it
is equally important that these regulations do not hinder the company and its
board's ability to function efficiently and make timely, commercially
prudent decisions.
The Companies Act 2006 has also reformed
the penalties associated with company law violations, modernising the framework
to reflect current standards. While most criminal sanctions target directors,
other company officers, including secretaries, are also
held accountable. Additionally, the Act addresses significant matters
concerning public benefit companies, private companies, and limited liability
partnerships (LLPs), focusing on the compliance issues for private companies,
which are vital for their long-term operational success.
The Company Incorporation Process
Incorporation under the Companies Act
2006 (as amended) is a fundamental step in creating a company's legal identity.
Prospective companies must complete the registration process
before commencing any trading activities. This involves submitting specific
documentation, such as the company’s memorandum and articles of association, to
Companies House and paying the requisite fees. Companies can be
registered as either private or public entities.
The decision regarding which
entity type to establish should be guided by the
management's evaluation of the organisation's goals and the various
organisational structures permitted by the relevant legislation in the jurisdiction of
incorporation. Upon registration, a private company is designated as
a “limited company,” which means that the liability of its shareholders and
directors for the company’s debts, in the event of insolvency, is generally
restricted to the unpaid amount on their shares.
The company's management is
tasked with its operations; however, company law outlines a comprehensive
and formal governance framework. This structure enables shareholders
to maintain oversight and control over management activities, provides
directors with necessary guidance and monitoring for significant management
decisions, regulates the relationships among shareholders, and ensures that the
interests of both internal and external stakeholders are safeguarded.
Regulatory oversight plays a crucial
role in ensuring that companies adhere to legal standards, fostering trust in
the corporate structure as a means for investment. Consequently, the
incorporation process becomes essential for individuals establishing a
business or corporate entity in the UK. The Companies Act 2006 facilitates a
consistent and accessible procedure that caters to the diverse incorporation
needs of entities while remaining flexible enough to adapt to
evolving business practices over time.
Share Capital
According to the Companies Act 2006,
share capital refers to the funds a company acquires from its members
or shareholders by issuing shares. This capital plays a crucial role in shaping
the company's financial framework. In this context, shares act as instruments
of ownership, serving dual functions: they facilitate the transfer of
ownership and can also amplify the voting rights and influence of the
shareholders. The existence of various classes of shares can result in an
uneven distribution of company profits, leading to disparities in ownership
stakes among shareholders.
Share capital can be categorised into
two main types: authorised capital,
which represents the maximum amount a
company is permitted to raise, and issued capital, which denotes
the portion of share capital allocated to shareholders. The
nominal value assigned to the shares that have been issued is
referred to as nominal share capital. Understanding these distinctions is
essential for comprehending how share capital impacts a
company's governance and financial health.
The Companies
Act establishes a regulatory framework governing the processes
involved when a company seeks to sell shares to augment its share
capital, as outlined in its constitutional document, specifically the articles
of association. This legislation also delineates the procedures for increasing,
varying, or altering existing share capital allocations and reducing or
cancelling share capital. The implications of issuing new shares and increasing
authorised share capital only materialise once the shares are officially
issued.
Existing shareholders may experience
dilution of the value of their ownership when a company's overall
capital is increased. Companies can repurchase shares, which can be
funded through profits. However, a reduction in capital may hinder the
company's ability to sustain a costly capital structure. While substantial
capital reserves can facilitate share buybacks, such actions
must be closely monitored and regulated to ensure financial
stability and compliance with legal requirements.
Memorandum and Articles of Association
The memorandum and articles of
association are essential documents for any company formed under the Companies
Act 2006. The memorandum, which is a public record, must contain key
information such as the company's name, registered office, status as a limited
company or a company limited by shares, and, if applicable,
details regarding the nature of the company's liability.
While additional information can be included in the
memorandum, these core elements are critical. The company name is crucial as it
forms the organisation's legal identity and must be registered as per
the Companies Act.
By registering its memorandum, a company
commits to adhering to the stipulations outlined in the Act. As a result, the
registered memorandum and articles of association impose certain limitations on
the company and its shareholders. This framework ensures that the
company operates within the legal parameters established by
the Act, safeguarding all parties' interests.
The articles of association outline a company's operational framework,
detailing how it should conduct its business activities. In contrast, the
memorandum primarily focuses on defining the company's structure
and objectives, making it a more foundational document in some respects.
While the articles govern the internal management processes, the memorandum
serves as a broader declaration of the company's purpose and goals.
The articles of association create a
comprehensive set of rules that guide the company's day-to-day functioning,
forming a blueprint for an organisation's governance criteria. They serve as a
binding agreement among the members and establish the relationship
between the shareholders and the company. This agreement specifies the terms
under which the company will secure the necessary financing for its operations,
thereby clarifying the expectations and responsibilities of all parties
involved.
Both the memorandum and articles of
association are accessible public documents, which means interested third
parties can review them. A company can amend these documents through a special
resolution. However, changes to the memorandum of association are restricted,
and any modifications to the articles must not infringe upon the members'
rights. This ensures that these documents' fundamental rights and
agreements are preserved.
The Role of Company Secretary
The role of the company secretary is
pivotal in the effective management of a company, ensuring adherence to the
requirements set forth by the Companies Act 2006. A company secretary is
tasked with maintaining the company’s statutory records,
coordinating audits when necessary, and submitting annual returns and
financial statements. Additionally, the company secretary is responsible
for drafting and distributing notices for meetings between members and
directors and often prepares the minutes of company meetings.
Beyond administrative duties, the
company secretary is a key advisor to the board of directors on governance
issues and procedural implementation. This position also encompasses the role
of governance advisor, ensuring that the board operates within the
legal framework and best practices. In the case of private companies, there is
flexibility in appointing a company secretary, allowing for
the selection of individuals without formal qualifications and
even permitting directors to fulfil this role. However, public
companies are restricted from appointing their directors as company
secretaries.
The company secretary's responsibilities
encompass a range of critical functions. These include responding to statutory
notices, facilitating communication between the board and
shareholders, managing share allotments, and maintaining statutory
records. Furthermore, the company secretary is responsible
for notifying relevant parties of any changes and providing guidance on
corporate governance matters, ensuring that all share transfer details are
accurately reflected in the company’s statutory register.
Part 8 of the Companies Act 2006
stipulates that the secretary serves as an officer of the
company, designated as an authorised individual for delivering
documents to the company. Section 277 (Particulars
of Secretaries to be Registered: Individuals) emphasises the necessity of
appointing a secretary; failure to do so constitutes an offence for the
company. Typically, the default retirement age for a company secretary is set
at 70, although the secretary may choose to retire earlier if directed by the
company's board of owners. As mandated by the owners, this provision
will be outlined in the company's articles.
Director’s Duties
The Companies Act 2006 offers a unique
perspective on various aspects of companies and their directors. This section
highlights the potential consequences that may arise if a director breaches
statutory obligations. Directors must understand and internalise the specific
duties outlined in Section 171 (Duty to Act Within Powers). Additionally, they should be aware that
legal assistance is available to support them as they carry out their
responsibilities, which go beyond company law. The emphasis is on practically
implementing their roles, prioritising the company's interests above those of
its shareholders.
The Companies Act 2006 defines the legal
responsibilities of company directors. Since 2007, they must act in good faith
to promote the company's success for its members. This involves considering the
long-term impact of their decisions, the interests of employees, the importance
of relationships with suppliers and customers, the effects on the community and
environment, maintaining ethical business practices, and addressing
shareholder interests.
Directors are mandated to
exercise a reasonable level of care, skill, and diligence in fulfilling their
roles. Should they fail to meet these obligations, they may face
legal repercussions for any breaches of duty. This framework ensures that
directors act responsibly and in the company's and its stakeholders'
best interests, promoting accountability and ethical governance within
corporate structures.
Shareholders
Shareholders
play a vital role in a company's corporate governance structure. The
Act establishes critical legal rights, obligations, and
responsibilities for shareholders. Several shares exist, including ordinary,
preference, redeemable, and non-voting, each with unique characteristics. As
stakeholders who have invested in the company, shareholders are
entitled to diverse benefits, such as dividends and investment returns.
Additionally, they can influence the company's operations.
Shareholders who have invested in the
company also have the right to vote at meetings, including Annual General
Meetings (AGMs), enabling them to impact corporate decision-making
directly. All shareholders within the same class enjoy equal rights concerning
their shares. Furthermore, shares can be traded or transferred
freely, allowing ownership and investment strategies to be flexible.
Directors' reports must be
distributed to all shareholders, regardless of their shareholding status.
As the law requires, they should include essential information about the parent
company's performance, including management's statements and consolidated accounts.
Companies must also hold an Annual General Meeting (AGM) at least once a
year, where resolutions for significant decisions, like approving
annual accounts, can be voted on. Shareholders have other methods to
pass resolutions and implement changes within the company.
Trustees possess the authority
to contest specific decisions or actions undertaken by a company by seeking
judicial intervention for redress or action. The dynamics of power within the
director-shareholder relationship tend to favour the directors, which
diminishes the influence of shareholders. Moreover, the ability of minority
shareholders to assert claims has been significantly curtailed, further
emphasising the imbalance in this relationship.
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