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Companies Act 2006 - issues for the FD

Although the Companies Act 2006 (2006 Act) will impact on all aspects of corporate governance and reporting, below we focus on the principal areas which will be of interest to finance directors.

Company law

Finance and Management newsletter, Issue 147, September 2007

published by the Finance and Management Faculty



The 2006 Act comes into effect on staggered commencement dates until October 2008. A small number of provisions have already come into force (see below). The three further planned commencement dates are 1 October 2007, 6 April 2008 and 1 October 2008.

View Your countdown to future Companies Act 2006 compliance

Changes already in force

The provisions already introduced are:

  • 1 January 2007 - Companies Act 1985 amendments implementing changes to the First Company Law Directive, so that company details must now be included on company emails and websites;
  • 20 January 2007 - implementation of the Transparency Directive, the new regime for disclosure of interests in shares, the safe harbour for directors from liability in relation to narrative financial reporting, and new provisions on communications with shareholders; and
  • 6 April 2007 - consolidation of the May 2006 implementation of the Takeover Directive, removal of the 70 year age limit for directors and removal of the requirements in section 324 of the 1985 Act for disclosure of directors' interests in shares (but with the Disclosure Rule requirements remaining for listed companies).


The communications provisions in the 2006 Act give companies an ability to use electronic communications with shareholders as the default position. Companies can now place documents, such as annual reports and accounts, on a website rather than having to mail them to shareholders in hard copy. Shareholders have to opt-out of website communications rather than, as under the 1985 Act, opt-in. However, a notice of availability of the document on the website must still be sent if no email address has been given.

Transparency rules (listed companies only)

To implement the EU Transparency Directive, part VI of the Financial Services and Markets Act 2000 was amended by the 2006 Act to give the Financial Services Authority (FSA) powers to make transparency rules. These rules, in force since 20 January 2007, sit alongside the existing listing, prospectus and disclosure rules. They contain the requirements for the disclosure of periodic financial information and the provision of information to the market by listed companies. They also contain the requirements for disclosure of interests in voting rights in listed, Alternative Investment Market (AIM) and PLUS Markets Group (PMG) companies (replacing provisions in sections 198-211 of the 1985 Act).

The financial reporting aspects of these rules apply for accounting periods beginning on or after 20 January 2007.

Safe harbour for narrative reporting

The 2006 Act's safe harbour in respect of directors' liability for statements in the directors' report (and the remuneration report and summary financial statements derived from those reports) has been in force for all reports issued after 20 January 2007. This means a director will be liable only in relation to statements which are untrue or misleading and are made in bad faith or recklessly or when there is deliberate and dishonest concealment of material facts. Also, that liability is only to the company and not to any third party.
It may become the practice for all the narrative reporting aspects of the annual report, such as the chairman's statement, the chief executive's statement and any voluntary Operating and Financial Review (OFR), to be incorporated into, or referred to by cross-reference in, the directors' report, in order to try to take full advantage of the safe harbour.

Changes yet to come

Directors' duties

One of the most controversial aspects of the 2006 Act has been the provisions governing directors. The key development is the introduction of a statutory statement of directors' duties codifying the common law rules and equitable principles which presently govern the relationship between directors and their companies.

The 2006 Act sets out the following seven duties for directors:

  • to act within the powers conferred by the company's constitution;
  • to promote the success of the company for the benefit of its members;
  • to exercise independent judgement;
  • to exercise reasonable care, skill and diligence;
  • to avoid conflicts of interest;
  • not to accept benefits from third parties; and
  • to declare any interest in a proposed transaction or arrangement with the company.

The first four of these duties come into force in October 2007 while the last three (which all relate to conflicts of interest) are coming into force in October 2008.

The duty to promote the success of the company requires a director to have regard to several factors, including the long-term impact of a decision, interests of employees, suppliers, customers and others, impact on the community, the environment and reputation, and the need to act fairly as among members of the company.

This duty encapsulates the concept of 'enlightened shareholder value' whereby the interests of stakeholders represent an important factor in whether a company is successful and should therefore be considered when making business decisions. It is important to remember, however, that the primary duty is still owed to the company itself, not other stakeholders.

The duty has been heavily debated, amid fears of greater board meeting bureaucracy as directors create a paper-trail to show they have shown due regard to the factors. The key is to take a proportionate approach to each decision. It is not the case that the factors will need to be recited in all board minutes. Of greater importance will be ensuring that all directors are aware of the statutory statement of duties, that procedures and processes (for example, terms of reference for management committees) reflect the new formulation of the duty and that the company's corporate social responsibility statements and strategies are aligned with the factors.

Enhanced business review (quoted companies only)

The requirements in the 2006 Act for the directors' report to contain a business review applies to all companies, unless the company is subject to the small companies regime. This requirement takes effect from October 2007, for financial periods starting after then.

Under the 1985 Act companies are required to include a fair review of the company's business, which is a balanced and comprehensive analysis of development, performance and position, as well as a description of the principal risks and uncertainties.

The 2006 Act additionally requires quoted companies to disclose the main trends and factors likely to affect the future development, performance or position of the business, and provide information about environmental, employment, social and community issues, and 'essential' contractual relationships.

Organisations should treat their business review as a means of demonstrating compliance with the duty to promote the company's success, including how the stakeholder factors are addressed in line with the company's corporate social responsibility strategy.

Accounts and reports

The overall change in the 2006 Act is to switch to a 'think small first' approach in relation to accounts. The 2006 Act starts with the small companies regime and builds up to the requirements for the largest companies and groups. At the larger end there is also a distinction drawn between quoted and unquoted companies. These provisions are being brought into force in April 2008.

Much of the detail regarding contents of UK Generally Accepted Accounting Principles (GAAP) annual accounts, currently contained in schedules to the 1985 Act, has not been reproduced but instead will be in secondary legislation. Drafts of these regulations are now available on the website of the Department for Business, Innovation & Skills (BIS).

Visit www.gov.uk/bis

Again, a 'think small first' approach has been followed, so that although the detailed rules have not been changed substantively, they have been restructured into a single set of accounting regulations for small companies and a single set for all other companies, so they should be easier for small companies and their advisers to follow.

Other changes to be introduced by the 2006 Act include directors having a general obligation not to approve accounts unless they give a true and fair view of the financial position of the company, and shorter deadlines for filing accounts.

For private companies the period for filing reports and accounts is reduced to nine months (from 10) after the end of the relevant accounting period, with no need (unless required in a company's articles) for an AGM. For public companies the filing deadline is reduced to six months (from seven), with the AGM held within that period.


One of the more widely debated areas of change that will be introduced by the 2006 Act is that a company and its auditor will be able to enter into a liability limitation agreement (LLA), which can cover, in relation to a company's accounts, negligence, default, breach of duty and breach of trust on the part of the auditors. Both public and private companies will be able to authorise an LLA either before it is made, by an ordinary resolution approving its principal terms, or after it is signed, by an ordinary resolution approving the LLA itself. The LLA will have to be approved annually thereafter. These provisions will be in force from April 2008. The government has published a response to the consultation on Part 16 (Audit) of the Companies Act 2006 and draft regulations (both are available on the DBERR website) for the information that must be disclosed in relation to auditor remuneration and limitation of liability agreements.

The Financial Reporting Council (FRC) has appointed an independent working group, which is expected to issue guidance on the new provisions by end-2007.


Capital maintenance

From October 2008 the 2006 Act will bring into force a range of helpful deregulatory measures relating to capital maintenance. The prohibition on private companies giving financial assistance for the purchase of their own shares has been removed (although there are still some restrictions where there is a public company in the group).

Under the 2006 Act, a private company limited by shares will be able to reduce its share capital in any way by special resolution without court approval if the resolution is supported by a directors' solvency statement covering the next 12 months. There is still some uncertainty about the effects of this method on distributable reserves. However, we expect the final version of the draft statutory instruments on this subject to allow any reserve arising to be treated as realised (its distributability then being dependent on whether there are any losses brought forward or subject to any common law tests). Provided the company has distributable profits, a sale by the company of a non-cash asset at book value will not result in the company having made a distribution (dealing with the so-called Aveling Barford decision). This will be of particular help for intra-group transfers.

Other provisions

Although this article covers the headline issues for FDs, running a company will change more generally once the 2006 Act is fully in force. Procedures relating to meetings and resolutions will alter from this October (2007), memoranda and articles of association will need to be amended to reflect the 2006 Act and running private companies will become easier in some administrative respects.

The 2006 Act contains a lot to get to grips with, for directors, shareholders and lawyers alike. A lot of the detailed secondary legislation is appearing on the BIS website now and those concerned with implementation of the Act should keep an eye on these developments.

Faculty web links

View Your countdown to future Companies Act 2006 compliance

FM special edition Companies Act 2006

FM145 Directors' duties

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View Impact of the companies Act 2006 on FDs (resources and webcast)


Kathryn Cearns is a consultant accountant with Herbert Smith LLP, advising the firm across its international office network on accounting issues. She previously worked for the Accounting Standards Board (ASB).

Carol Shutkever is a partner in Herbert Smith LLP's corporate finance group. She provides technical advice on company and corporate finance law issues. She is a member of a number of Law Society working parties on the Companies Act 2006.




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