The Companies Act 2006 – one of the largest pieces of legislation ever placed before Parliament - contains a raft of new measures which take effect between January 2007 and October 2008.
The Government believes the Act will reduce the amount of “red tape” private companies have to contend with, and simplify company administration.
But a survey that we recently carried out reveals that only a small minority of businesses and their advisers believe the Act will achieve its central aim.
Overview
Jordans questioned around 800 company directors, company secretaries and professional intermediaries regarding the Companies Act 2006.
The Act was passed to simplify and modernise current company law by using plain English, to increase transparency and ensure a degree of de-regulation for private companies. However, only 7% of those who took part in our survey are confident the Act will actually reduce bureaucracy and make life simpler for them in terms of company administration.
Most – 57% – believe it may have some beneficial effect, but that companies will have to go through the pain and cost of changing their systems beforehand.
A substantial minority – the remaining 36% – say that while there are definite benefits within the Act, there will still be considerable administrative upheaval with no real reduction in ‘red tape.’
One survey respondent commented: “An opportunity has been missed to simplify many areas. It has been sold as making matters easier whilst increasing the ‘unknown’ burdens on directors of small companies, who will probably suffer.”
There was also concern that Companies House will not be able to have its systems in place by October next year, along with criticism about the way the Companies Act was drafted.
Another respondent commented: “Some provisions have been put in place to pacify vocal minorities and do nothing but create additional complexity and cost for companies.”
Awareness of directors and advisers
Our survey also highlights the fact that many company directors remain unaware about the Act and its full ramifications.
96% agree that directors need to be aware of the growth in responsibilities the legislation will entail, to include not only what is best for their company but also to include the interests of the environment, their staff and the community.
However, only 15% of survey respondents believe that most directors are already planning for the effect of the Companies Act. The majority, approaching two-thirds – 61% – say that most directors are still unaware of the Act and what it could mean for them and their business, even though a third of the Act will be in force by 1 October 2007, while almost a quarter – 24% – believe that very few directors are aware of the Act.
By contrast the survey confirms that business advisers such as solicitors and accountants are generally well informed about the Companies Act, with only 11% of respondents believing that advisers lack awareness.
Nevertheless just under half – 49% – say most advisers seem to be waiting for the implementation of various parts of the Act before taking a detailed interest. The remaining 40% believe their competitors are keeping a close watch on the progress of the legislation.
The clear message which comes across from our survey is that the Department of Trade and Industry needs to do far more in the way of education in regard to the Companies Act. Those who will bear the burden of complying with the Act – company directors – seem to be least aware of the changes it contains.
There has been a high-profile campaign to make company directors aware of their responsibilities under the imminent smoking ban, for example, whereas there is still widespread ignorance about the Companies Act, which has far wider repercussions for companies and the way they will have to operate.
As happened with the confusion over HIPs, it seems to have been left to professional intermediaries such as Jordans, and law and accountancy firms to carry out much of the task of educating the business community as to what its responsibilities are.
Detailed provisions
The Jordans survey also asked company directors, company secretaries and intermediaries for their views on the main provisions of the Companies Act – will they benefit businesses, will they create problems, or neither?
E-communications
On the “plus” side, there was overwhelming support (83%) for changes allowing listed and unlisted companies to save money and time by distributing important company documents to shareholders electronically.
Just 8% foresee problems in sending items such as annual accounts, the directors' report, auditors' report or summary of financial statements via email or fax, or by posting them on their website, rather than in hard copy form.
Email in particular has become such a part of normal business life that this will no doubt become one of the major methods of communication by companies to their shareholders and members. While a large majority in our survey see this as a benefit, it should be remembered that the use of email requires the consent of the member, which may be withdrawn at any time.
Website communication is also possible, but this requires individual member consent, and, if the company wants to rely on the deemed consent provisions if the member fails to reply, a further authority is needed in the company’s articles or by resolution.
It is important that companies are aware of, and follow, the rules in the Act relating to e-communications to avoid any risk of their decisions being later overturned for a procedural irregularity.
The e-communication provisions in the Act are already in force.
Service addresses for directors
Exactly three-quarters of those who took part in the survey also take a positive view of the fact that directors of private companies will now be able to provide a service address for the public record, rather than their home address. Again, 11% take the opposite view with 14% being “neutral”.
These provisions will take effect on 1 October 2008.
One person to form a company
62% believe it is beneficial that, under the new legislation, one person will be able to form a company, with only 17% seeing this as a problem.
These provisions will take effect on 1 October 2008.
Company secretary
While more than a third (36%) see benefits in private companies no longer having to have a company secretary, a larger number in the survey – 41% – see this as a backward step.
The removal of the requirement for a company secretary does not take effect until April 2008. At that time, private companies will still have a number of legal obligations to fulfil, such as keeping registers, filing annual returns, approving and filing accounts and ensuring that company law procedures are properly followed when changes occur in the company.
From April 2008, directors will be responsible for these matters. The danger highlighted by our respondents is that more companies will fall into default with these important filing obligations if there is no secretary to deal with them.
Time limit for passing written resolutions
The fact that written resolutions will have to be signed within 28 days of being circulated for signature in order to be valid, is seen as a plus for businesses by 30%, while 34% see it as a negative. The largest number – 36% - take neither stance.
These provisions take effect on 1 October 2007.
Private company – issue of shares
Opinion was also divided on the provision allowing directors of private companies with one class of shares the power to allocate shares without prior shareholder approval. Some 45% of survey respondents are “in favour”, with 41% against.
These provisions will take effect on 1 October 2008.
View the detailed survey questions.
