The real implications of the Companies Act 2006 on small businesses

The Companies Act 2006 is the longest statute in English Law. Comprising 1300 sections with more than 40 sets of accompanying regulations, the Act is a massive piece of legislative reform at the heart of which was the adoption of a “Think Small First” approach. In generality, Company Law had been drafted for the governance of larger companies, with exemptions added on for smaller (private) companies. The Act has sought to reverse this by applying minimum requirements for all companies with additional layers provided for public and listed companies.

The rationale for the Act was to create a simple and modern regulatory framework that promotes growth, enterprise, investment and employment. The modernisations to Company Law were targeted to provide significant benefits to small businesses by the removal of substantive unnecessary regulation and making the law more accessible and comprehensive. Now that the dust has settled, what are the real implications on small businesses?

The Department for Business, Innovation & Skills has commenced post-implementation evaluation of the Act, and is currently surveying a random sample of companies to determine the impact that the Act has had on business. For the moment, an analysis of some of the major reforms will help to provide an indication.

Codification of directors’ duties

Prior to the 2006 Act directors’ duties such as acting in good faith with care and skill, and avoiding conflict of interests were based on common law rules and equitable principles. To create certainty, consistency and accessibility, and also promote a long-term investment culture, the Act has sought to clarify these duties into seven general duties.

It was anticipated that the codification could produce cost benefits of between £30m and £105m per annum by reducing the need for directors to take advice in such areas. However, in the short term these benefits are likely to have been diluted by uncertainty in some areas, especially as the duties are to be applied and interpreted in the same way as existing common law rules and equitable principles.

This uncertainty is unlikely to be resolved until more cases on the issues are decided by the courts.

Electronic Communications

Greater use of electronic communications should have a large impact on the speed and cost with which decisions can be made. The greater the number of members, particularly if there are many or bulky documents to be sent out, the greater the benefits. This, therefore, will tend to benefit larger rather than smaller businesses.

Constitutional Documents

The Act provides for new and simpler Model Articles of Association (replacing Table A) and has limited the importance of the Memorandum of Association by removing the requirement for companies to state their objects.

These changes have and will certainly simplify new company formations, and provide those companies with the long-term benefits of a reduced administrative burden. However, the changes have also created uncertainty for companies formed before 1st October 2009. Companies are not obliged by the Act to make changes to their constitutional documents but many have had to seek (costly) advice concerning adopting the new documents, and until they do adopt the new documents will not be able to take advantage of the benefits.

Company Secretaries

The Act states that private companies are no longer required to have a company secretary. This should make it easier and less costly for small businesses to conduct their day to day business.

Simplified Decision Making

Under the Act, private companies are no longer required to hold AGMs. The Act also makes it easier to take decisions using written resolutions.

Under the old law, it was possible for private companies to dispense with some of the formalities such as holding AGMs, or laying accounts if all the shareholders agreed but this has now become the default position for private companies.

Written resolutions used to require the unanimous consent of the shareholders. The Act now mirrors the rule for special and ordinary resolutions passed at general meetings of shareholders for written resolutions. Thus a 75% or 50% majority will suffice to pass special and ordinary resolutions respectively by written resolution. Coupled with the increased ability to utilise electronic communications, this should enable small businesses to make decisions more quickly, simply and cheaply than under the old law.

Simplified Capital Maintenance Provisions

Private companies are now able to give financial assistance for the purchase of their own shares and are not required to go to court to reduce their share capital. The impact of these changes, however, is mainly for the benefit of medium to large companies. It will always be difficult to assess the implications of the Act in respect of the original rationale for the promotion of growth, enterprise, investment and employment. The economy is in an entirely different condition to the economy when the Act was first implemented. The government had forecast that the changes in the Act would produce annual savings of up to £250m, with £100m savings for small business. How successful this has been we cannot yet quantify. The costs to small businesses of understanding the Act and implementing those changes that might bring them future benefits have probably reduced the short-term gains. In the long-term, with greater director awareness and knowledge of the Act, a widespread adoption of the new constitutional documents and greater experience of the courts in interpreting its application, the benefits to small business will become more evident. Setting up a company is now easier, running a company is getting easier, whilst the aim to promote a long-term investment culture has been de-railed in the short-term by economic conditions.