Business Glossary

What is the Companies Act 2006?

Please note that this article is intended for educational purposes only and should not be deemed to be or used as legal, employment, or health & safety advice. For guidance or advice specific to your business, consult with a qualified professional.

Every public or private company in the UK is subject to laws and regulations. And while these regulations are far-reaching, one of the most important pieces of legislation pertaining to businesses is the United Kingdom Companies Act 2006.

This serves as the foundation for the UK’s company laws and the requirements for compliance.

What is the UK Companies Act 2006?

The UK Companies Act is a piece of legislation designed to govern the operational and financial activities of businesses. It was designed to replace the Companies Act 1985 and filed in November 2006. It remains the longest act ever containing a total of 1,300 sections. It is designed to consolidate virtually all existing legislative provisions for companies while also introducing many new reforms.

The overarching goal of the act is to adjust the laws to simplify the way in which companies operate and communicate with their stakeholders. The act and its various amendments aim to do this by:

  • Making the company incorporation process simpler and easier to understand

  • Changing how companies update their Articles of Association

  • Encourage companies to embrace the shift towards digital communications

  • Making it voluntary for private companies to employ a company secretary rather than mandatory

  • Improving rights for indirect investors

  • Changing the rules around the naming of companies

  • Eliminating the necessity for private companies to hold an AGM (Annual General Meeting) every financial year

Duties for company directors

Under the UK Companies Act, company directors were given a new set of statutory duties which are codified in various sections of the act. These form a statutory model of best practice, including:

  • Acting within their powers as a company director (s171)

  • Promoting the success of the company for the benefit of all stakeholders (s172)

  • Exercising reasonable care, skill and due diligence (s174)

  • Avoiding any conflicts of interest (s175) and not accepting benefits from third parties (s176

  • Using their own independent judgement (s173)

  • Ensuring that proposed arrangements, resolutions or transactions of interest are properly declared (s177)

  • Company directors no longer need to file their personal address with Companies House

Changes in legislation for private companies

The act brought a number of legislative changes to private companies, such as:

  • Shareholder resolutions can be passed with a majority instead of unanimity

  • Directors have the authority to allocate unlimited shares of a single class

  • Companies can provide financial assistance to buyers of their own shares

  • Companies no longer need a court order to reduce their share capital

Changes in legislation for public companies

The act also includes new reporting requirements for public companies listed on the London Stock Exchange for increased transparency. These include:

  • Reporting on environmental and social issues

  • Disclosing major acquisitions

  • Filing all accounts within six months of the financial year’s end

  • Compulsory AGMs for board members

New duties when communicating to shareholders

Perhaps the most controversial part of the Companies Act is section 172 which outlines new duties companies must observe when communicating their success to their shareholders. These include:

  • Considering their impact on their environment and community

  • Demonstrating acting in the interests of employees

  • Placing clear emphasis on high standards of conduct

  • Fostering good relationships with stakeholders and other parties in their supply chain

UK Companies Act FAQs

Why was the UK Companies Act introduced?

The Companies Act 2006 was introduced to:

  • Simplify the way companies are run

  • Increase the rights of company shareholders and stakeholders

  • To simplify company law and make it more appropriate for the digital age

  • Unify systems within Great Britain and Northern Ireland

It was also partially intended to bring UK legislation in line with that of the EU although this has been abandoned since Brexit.

Does the UK Companies Act apply to overseas companies?

The Companies Act slightly redefines an “oversea company” as described in section 744 of the 1985 Act. This definition refers to any company incorporated outside Great Britain that establishes a place of business in Great Britain. Under the new Companies Act, the regulations can more thoroughly specify connections with the UK to enhance disclosure obligations.

Overseas companies are generally obliged to register with Companies House.

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