Companies Act 2006 Explained

Companies Act 2006 Explained. Author. John A Waller. Consultant. Reviewed: June 22nd, 2024.

As a company director, you need to understand the ground rules for operating a private company limited by shares.

The Companies Act 2006 remains the origin of UK law. As a result, it is the most important source of corporate law for private companies. The law is still the longest in the history of Parliament. About 1,300 sections have been built. However it is now amended by the Corporation Tax Act 2009.

Corporate governance requires a company’s articles of association, which are a document along with the memorandum of association from the company’s constitution, and also determines the duty of company directors,

Why, then, was the Companies Act 2006 brought into force?

Therefore, the primary objective was to:

  • Simplify along with,
  • Modernise corporate law

Also:

  • Codify common law. 

Revisions to the 2006 act then took effect in stages. Finalising in October 2009.

The fundamental changes, companies act 2006 explanation, therefore, being:

  • Extra stipulations for private and public registered companies in England and Wales, Scotland, plus Northern Ireland;
  • executed The European Union’s Transparency Obligation and Takeover Directives;
  • arranged (laws or rules) into a systematic code relating to various common law principles;
  • revised or reinstated most features of the 1985 Companies Act;
  • implemented a single United Kingdom company law regime. However, Northern Ireland is treated separately to the UK.

The Secretary of State’s power to prescribe model articles

  • (1) The Secretary of State may, by regulation, prescribe model articles for companies;
  • (2) Different model articles for private private companies can be prescribed for different business descriptions;
  • (3) A company may adopt any or all provisions of model articles;
  • (4) Any amendment to model articles by regulations under this section does not affect a registered company before the amendment takes effect;
  • The amendment here includes the addition, modification or repeal;
  • (5) Regulations under this section are subject to a negative resolution procedure.

How Does The Act Affect Business?

Before the 2006 act, directors duties and responsibilities were largely guided by case law. The 2006 Act then codified the duties of company directors into a statutory statement.

The main duties:

At all times;
  • Ensure you, therefore act within your powers, utilising skill and experience;
  • always promote the success of the company, therefore ensuring a benefit for shareholders;
  • ensure independent judgement at all times;
  • exercise reasonable care skill and diligence at all times;
  • avoid conflicts of interest at all times;
  • third-party benefits must not be accepted at any time;
  • make known interest transactions or arrangements with the company. Duties ensure minimum standards company directors adhere to;
  • trade within the company’s capacity;
  • company has adequate business funding;
  • file accounts and report at companies house electronically;
  • ensure the company has adequate business insurance;
  • as appropriate Government Licence approved to trade;
  • avoid fraudulently trading;
  • stay clear of wrongful trading of a limited company;
  • if turnover is required, then appoint a statutory auditor;
  • maintain a registered office;
  • ensure confirmation statement (Annual return) is filed;
  • ensure if it is a public company, all political donations are declared;
  • communicate with shareholders, give notice of meetings, record resolutions and meetings, and written resolutions.

Who does the Companies Act 2006 then apply?

Introduces provisions for private and public companies. Therefore, it applies a single company legal administration across the United Kingdom, replacing the two separate systems for Great Britain and Northern Ireland.

What is Section 1000 of the Act?

Section 1000: Authority to strike off a company not taking on business or running. If companies house registrar is, then it has plausible reasons to understand that the company is not carrying on business or in operation. The registrar may inquire whether the company is carrying on business or in operation.

Changes to section 172 of the Act 2006

A small alteration to section 172 of the UK Companies Act 2006 could impact company law, company directors’ duties, corporate governance, businesses, and the UK economy.

Presented by the BBA coalition changes. This change affects the duty of the company director set out in s172. It changes a company director’s duty from being a duty “to promote the company’s success” to being a duty “.

Does the Companies Act 2006 apply to Scotland?

Companies in Scotland remain governed by the Companies Act 2006, as Scotland has no independent Scottish company law regime.

Note though, Scotland has separate registrars in Scotland, England and Wales, and Northern Ireland.

Corporation Tax Act of 2009

The requirements of the act were performed progressively in stages. The final provision commenced in October 2009. Revisions to nearly all aspects of UK company law were made.

The following are the essential elements of the 2009 act:

  • Added additional requirements for the UK registered private and public quoted companies;
  • Changed most features of the Companies Act 1985;
  • Commenced through performance, the European Union’s Transparency Obligations and Takeover Directives;
  • Codified many enduring common UK law principles, including company directors’ duties;
  • Applied a single unified company law regime for the entire UK, replacing the previously used;
  • Different rules exist for Great Britain and Northern Ireland.

Why was the Companies Act 2013 added?

The new law brought into force aimed to help ease the process of affecting business overseas in India and develop corporate governance through accountability. It further introduces a:

  • Single-person company;
  • Small company;
  • dormant company and
  • corporate social responsibility.

Personal Liability and the Companies Act 2006

Company directors who fail to act responsibly may personally be liable if their’ misfeasance’ causes creditor loss. This will be investigated if the company is liquidated.

Misfeasance

Misfeasance is the intention to harm by not properly fulfilling a duty. A limited company protects directors, but they have a significant duty of care to the business, public, and creditors. Any breach risks such protection and personal liability.

Fraudulent trading penalties increased to 12 months on summary conviction and ten years on conviction.

What constitutes “misfeasance”, and how does it differ from “malfeasance”?

Misfeasance is not intended to harm another, though it is caused by a failure to carry out the required duties, perhaps through ignorance or negligence. This differs from malfeasance, which refers to intentionally carrying out an illegal or immoral act to cause another harm.

For further help on aspects of the Companies Act 2006 and subsequent amendments. Please contact HBG Advisory on and read Structural Changes to UK Corporate Law in 2020.

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