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Comments from ACCA September 2006

ACCA is pleased to comment on the Department’s consultation paper on the above.

Our main reaction to the subject matter of the paper is to argue that, as a rule, existing arrangements which are agreed between companies and their members and enshrined in existing articles of association should continue to be respected following the commencement of new primary legislation. Although material changes are to be made to the legal environment in which limited companies operate in future, the fact remains that the terms of the contract between the company and its members which the articles constitute will have been made and agreed between them. Whether or not some of the assumptions made at the time of agreement will continue to be valid in the light of the post-commencement legislation, a previously-agreed set of articles should still, in principle, bind company and members until such time as its contents are revised.

Clearly, it will be in the interests of all existing companies to consider how the changed circumstances of primary law affect their internal arrangements. But this is an argument for encouraging companies to review their existing articles and for taking appropriate action to change their contents as is seen fit in order to reflect the new legislation and the new options open to companies. We believe that a twelve month lead in period for commencement for the new Act should provide ample opportunity for all companies to carry this out, and we will encourage companies, through their advisers, to do this.

Our responses to the specific consultation questions posed in the paper are set out below:

Para 9 – transitional provisions following clause 28

We do not see any need for additional transitional rules.

Para 18 – implications of a company changing its name

We do not think it would be wise to provide that references to a company’s name in a company’s articles is to be deemed to be deleted on a change of name. Copies of the articles on the public record at Companies House and those retained and made available in hard copy format would still carry the old reference to the company’s name, which could cause confusion. It would be better in our view for the articles to be revised on the change of name.

We believe in any case that it would be in order for a statement of the company’s name to be an integral element of the new model set of articles – companies will frequently be asked to provide a copy of their constitutional documents in the course of commercial dealings with third parties and a free-standing document which sets out the company’s powers and internal procedures but which does not mention the company’s name or registered number will not be helpful.

Para 24 – entrenched provisions

We believe there is a case for ensuring that absolute entrenchments should continue on the same basis for charitable companies. But for ordinary commercial companies, we consider that it would be sufficient to take the position that all entrenched provisions should be capable of being amended with unanimous agreement of all members.

Para 35 – abolition of authorised share capital

In our view, the legal rules relating to the authorised share capital of private companies have always been of very limited practical use. They were introduced in 1980 as part of provisions in the EU Second Company Law Directive which were aimed at public companies only. To avoid having to amend the level fixed in its constitution, most private companies will at the outset set an authorised share capital which is higher than they envisage their foreseeable capital need to be: where a need does arise to increase the level, the level can be increased in a straightforward manner. We do not consider that the current requirement plays any material part in the safeguarding of members’ interests. Accordingly we would be content for the Bill’s provision for abolishing the requirement to fix a level of authorised share capital to come into effect for existing companies by overriding any existing restriction in their articles.

Para 40 – Permissions for making alterations to share capital

Given that the statutory basis for company authorisation of alterations to share capital is being totally changed, we do not consider it would be reasonable to imply, in future, that silence in a company’s articles on this matter – which currently prohibits a company from taking action – should be construed as implying authorisation. We believe that the underlying position is being changed so much that members’ authorisation should be sought and obtained before any of the relevant actions are taken.

Para 43 – validity of current allotment authorisations

We consider that existing authorisations given under s80 and s80A of the Companies Act 1985 should continue in force post-commencement.

Paras 48 and 50 – AGMs

We believe that all direct and indirect references in articles of association to the holding of AGMs should continue to apply. A provision to this effect would be likely to constitute a particular encouragement to private companies to actively revise their articles in the lead up to commencement of the new Act.

Paras 53 and 55 – company secretaries

As with our comment above regarding AGMs, we believe that provisions requiring a company secretary to be appointed, and setting out their powers and rights, should remain in force post-commencement. Similarly, any provisions which assume that a secretary will be appointed should be interpreted to mean that a secretary should be appointed. We agree strongly with the proposal in para 55 that existing company secretaries should retain their existing powers to execute and authenticate documents. (We remain of the view that the terms of the Bill itself do not provide sufficient clarity as regards the powers and status of a company secretary where a private company chooses to appoint one, post-commencement. Where the Bill refers to powers and status of the company secretary without specifying whether the intention is to refer to the secretary of a public company, there needs to be clarity as to whether the reference and its associated substance extends to a secretary appointed on a ‘voluntary’ basis).

Para 60 – exploitation by directors of company opportunities

The change in the law in this matter, so as to allow directors to take business advantage of opportunities available to their company, is a significant change in UK company law and one which would not have been envisaged as likely to apply to companies at the time when existing articles were drafted. We believe therefore that existing companies should be required to change their articles so as to effectively authorise their adoption of this new legal rule.

Para 66 – transactions with directors

We believe that existing provisions regarding directors’ conflict of interest should remain in force.

Paras 76 and 78 – implications for Scotland and Northern Ireland

We are not aware of any particular transitional issues for Scotland and northern Ireland.

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