The Companies Act 2006 is a key piece of legislation in UK company law. It's a comprehensive framework that affects companies of all sizes and spans more than 1,300 unique sections. In short, it governs how businesses are formed, managed, and dissolved. Plus, it sets out the legal responsibilities of directors, shareholders, and other stakeholders.
In this guide, we'll provide a crystal clear overview of the Companies Act 2006. We'll run through its main purpose, how it affects businesses and most important sections to know.
What is the main purpose of the Companies Act 2006?
The main aim of the Companies Act 2006 is to streamline and simplify company law to make it more accessible for businesses. It was introduced to replace the outdated Companies Act 1985. Some of the key purposes include:
Clarifying directors’ duties: The Act formalises and outlines directors’ legal responsibilities to their companies.
Simplifying company formation: It makes it easier to set up and run a business, especially for small and private companies.
Promoting shareholder engagement: Provisions were introduced to protect shareholders' rights and encourage their participation in company decisions.
Reducing red tape: Administrative requirements were simplified, particularly for private limited companies, to reduce the regulatory burden.
How does the Companies Act 2006 affect businesses?
The Act impacts many areas of a business’s operations, from governance and decision-making to reporting requirements. Here’s how it typically affects companies:
Director responsibilities: Directors must act in good faith, promote the company’s success, and avoid conflicts of interest. Failure to comply can lead to legal action.
Company structure: Companies can now be incorporated more easily, with single-person directorships permitted for private limited companies.
Reporting obligations: Financial and corporate reporting must meet the updated standards, including filing annual returns and accounts with Companies House.
Shareholder protections: Shareholders have clearer rights regarding meetings, resolutions, and access to company records.
Companies Act 2006 sections summary
The Companies Act is divided into 47 parts with 1,300+ sections. Each part covers a different aspect of corporate law - here’s a brief overview of some of most important parts to know:
Part 1: Company formation – Rules for registering companies and setting up their structure.
Part 10: Directors’ duties – Codifies the duties directors owe to the company, including the duty to act in the company’s best interests.
Part 13: Resolutions and meetings – Defines the rules for company meetings and decision-making by written resolution.
Part 15: Accounts and reports – Sets out requirements for financial reporting and filing with Companies House.
Part 25: Charges – Covers the registration of company charges (like secured loans).
General director’s duties explained
The Companies Act 2006 arranges directors’ duties into a clear statutory framework. These duties are key to ensuring directors act in the best interests of the company and its stakeholders. Failure to meet these duties can result in legal action, financial penalties, or disqualification from serving as a director. Here’s an overview of each duty:
Duty to act within powers (Section 171)
Directors must adhere to the company’s memorandum and articles of association and use their powers only for the purposes for which they were granted. For example, issuing new shares should only be for raising capital, not diluting a rival shareholder’s influence.
Duty to promote the success of the company (Section 172)
Directors are required to act in a way that they believe will most likely lead to the company’s success. This includes considering factors such as employee interests, relationships with suppliers and customers, community impact, and environmental considerations.
Duty to exercise independent judgment (Section 173)
This duty ensures directors make decisions based on their own evaluations and judgments rather than simply following instructions from others, even if they were appointed by a controlling shareholder.
Duty to exercise reasonable care, skill, and diligence (Section 174)
Directors must apply the general knowledge, skills, and experience that can reasonably be expected from someone in their position. This includes any additional expertise they personally bring to the role.
Duty to avoid conflicts of interest (Section 175)
Directors must avoid situations where their personal interests conflict with those of the company. This duty applies broadly to prevent both actual and potential conflicts.
Duty not to accept benefits from third parties (Section 176)
Directors cannot accept benefits or gifts from third parties if it could compromise their independence or create a conflict of interest.
Duty to declare interest in proposed transactions or arrangements (Section 177)
If a director has a direct or indirect interest in a proposed transaction or arrangement, they must declare this to the board before the company enters into it.
Member’s rights explained
Members (also known as shareholders) have a range of rights that vary depending on the company’s structure and the class of shares they hold. These rights are essential for maintaining transparency, accountability, and fair decision-making.
Voting rights: Shareholders generally have the right to vote on key matters at general meetings, such as appointing or removing directors, approving dividends, or authorising major transactions. The number of votes they can cast often depends on the number of shares held.
Right to dividends: Members with ordinary shares may be entitled to receive a share of the company’s profits through dividends, provided the company declares them. Dividends are usually distributed proportionally to share ownership.
Right to access information: Shareholders can request access to certain company documents, including annual accounts and financial statements. They can also inspect the company’s register of members and resolutions passed.
Right to participate in shareholder meetings: Shareholders are entitled to receive notice of meetings and can attend, speak, and vote on resolutions.
Right to sue for unfair prejudice: If members believe the company’s affairs are being conducted in a manner unfairly prejudicial to their interests, they can apply to the court for relief under Section 994 of the Companies Act.
Pre-emption rights: In some cases, existing shareholders have the first right of refusal if the company issues new shares. This prevents their ownership percentage from being diluted without their consent.
FAQs
What happens if you breach the Companies Act 2006?
A breach of the Companies Act 2006 can lead to serious consequences, including fines, compensation orders, disqualification from being a director, and in some cases, personal liability for company debts. Serious violations could even lead to criminal prosecution.
What is the difference between private and public companies under the Act?
The Companies Act distinguishes between private limited companies (Ltd) and public limited companies (Plc). Public companies can offer shares to the public and must comply with stricter regulatory requirements, including higher capital thresholds and more detailed reporting.
Do small businesses need to comply with the Companies Act 2006?
Yes, all companies registered in the UK, regardless of size, must comply with the Companies Act. However, small businesses may benefit from simplified reporting requirements.
How are directors appointed and removed under the Companies Act?
Directors are typically appointed by shareholders through a resolution or specified provisions in the company’s articles. Removal can be done by an ordinary resolution, subject to notice requirements and any additional protections in the articles of association.
Final thoughts
The Companies Act 2006 remains a cornerstone of UK company law, shaping how businesses operate and ensuring accountability among directors and shareholders. Whether you’re a director, shareholder, or entrepreneur, understanding its key provisions can help you navigate your legal obligations and rights effectively.
Looking for legal advice? Get in touch today to see how our small business solicitors can help.