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Implications of the Companies Act 2006 for the charity and voluntary sectors
General matters
The Companies Act 2006 is the longest Act ever considered by the UK Parliament and the breadth and variety of material covered by the Act is very significant. All of that material falls into two broad areas:-
- Law specific to public companies that have listed shares. These areas do not impact on charities and their trading subsidiaries or the wider voluntary sector.
- Law that applies to private companies. Many of these provisions have important implications for charities and their trading subsidiaries and for social enterprises in the form of limited companies, for community interest companies and for other voluntary sectors organisations that are in the legal form of a private limited company.
Here, we give an overview of some of the many areas that will matter most to charities and other “not-for-profit” companies and offer some thoughts on the practical implications. The Act is being activated in stages from 2007 – 2009.
Application in the United Kingdom
The Companies Act 2006 applies throughout the United Kingdom. So companies in Northern Ireland, as well as Scotland and England and Wales, need to consider its implications (previously there has always been a separate Northern Ireland Companies Ordinance).
Regulations and transitional rules
A great deal of law is set out in regulations to supplement the 2006 Act. These are particularly important in the level of detail they contain, their practical implications for pre-existing companies (which are often very different to the impact of the new rules on new incorporations) and because they implement the new Act in stages. This gradual implementation involves transitional rules and procedures which will have considerable practical implications for pre-existing companies in the charity and "not-for-profit" sectors.
Even after the 2006 Act is fully in force (expected to be late 2009), some parts of the 1985 Companies Act will remain law. Those parts are not of importance for charities but note that the principal legislation on community interest companies will remain in the 1985 Act and the relevant CIC regulations (as now). The Companies Act 2006 has extended these rules to Northern Ireland so that it is now possible to incorporate a CIC in Northern Ireland.
Which companies are affected?
All private companies are subject to the new law as it comes into force, whether they are limited by guarantee or by shares. So, there are implications for:-
- Trading subsidiaries of charities (whether the parent charity is in the legal form of a company of in some other legal form).
- Charities that are in the legal form of a private company.
- Non-charitable “not-for-profit” companies and any subsidiaries they own and operate.
- Companies in which charities or non-charitable “not-for-profit” organisations have a partial interest (eg partial ownership of a joint venture).
Are they affected in the same way that commercial companies are?
Many areas of the new law will apply equally to commercial and non-commercial companies but:-
- The new Act makes particular special provisions regarding charitable companies in a number of important areas;
- Charity law in both British jurisdictions (England and Wales, Scotland) adds additional or modified rules and requirements for charitable companies and in some cases for their trading subsidiaries.
Publicity and disclosure of information – premises, stationery, electronic communications, websites etc
In addition to all the present legal requirements, with effect from 1 January 2007, companies must make certain disclosures on their websites, order forms and electronic communications, including e mails. The new rules require a statement of :-
- The full company name.
- The place of registration (eg England and Wales), company registration number and registered office address.
It is essential to review all your material, including websites, e mail sign offs etc and adjust them to comply with these new obligations.
Electronic communications
New and more detailed rules on electronic communications by and to companies have been introduced from January 2007. these may be especially useful to larger charitable and non-commercial companies with large memberships (for example in relation to the administration of general meetings).
Governance matters
Companies are to be empowered to execute documents under the witnessed signature of one director. This is an optional alternative to execution by two directors or one director and the secretary. Charities should think through how this may impact on their internal procedures and controls, especially in relation to financial security and similar matters.
Annual obligations, accounting and reporting
New private companies are exempt from holding an annual general meeting and existing private companies are able to choose not to do so. This may be very useful for trading subsidiaries but note that their articles should be reviewed – alterations may be necessary or desirable to facilitate use of this new exemption. Dispensing with the AGM is not be desirable for a charitable company itself, for reasons of accountability and transparency, because of the possible approach of relevant regulators and to ensure good governance.
There are many changes to annual accounting and reporting obligations and the detailed procedures and requirements relevant to those. However, the impact on charities and their subsidiaries is subject to the Charities Act 2006 (England and Wales) or the Charities and Trustee Investment (Scotland) Act 2005 (Scotland) and associated regulations, plus SORP 2005. These provide the main obligations for charities, including new audit exemption thresholds relevant to charities.
Accounts have to be filed at Companies House within nine months of the financial year end (the previous time limit was ten months). This change requires careful preparation of timetables for the entire accounts preparation, audit or examination and approval process.
Constitutional matters
There will be a new shorter form of memorandum of association and new “model” articles for private companies (October 2009). The proposed "model" articles for guarantee companies will not be suitable for charities.
None of these changes will have much impact on charities, as they will remain subject to both charity law limitations (eg as to charitable objects) and the current expectations of relevant charity regulators (the Charity Commission for charities in England and Wales, the Office of the Scottish Charity Regulator for Scotland).
The memorandum and articles of trading subsidiaries should be reviewed now and altered as appropriate, because of the changes to the rules on company constitutions and the transitional rules that will affect the constitutions of existing companies. Jordans can assist.
Members’ meetings, members’ rights and related matters
Members of guarantee companies now have an absolute right to appoint proxies for general meetings. Proxies can vote on a show of hands as well as on a poll.
There are a number of detailed provisions that affect the organisation and conduct of members’ meetings and some revised or new rules on members’ rights and how they can be exercised. These took effect in October 2007. Note that some of the new rules are overriding whilst others are optional and can be varied by a company’s articles. It is therefore important that each company examines these new rules and reviews and updates its own current articles, in the light of its own needs and circumstances. Jordans can assist.
Directors
There is a new statutory statement of directors’ duties. Charities must bear in mind that there are now wider statutory duties for trustees under the new charity law statutes in both England and Wales and Scotland. Charities should consider arranging suitable training.
Directors under the age of 16 will not be permitted (from October 2008). It would, in any event, usually be inappropriate to appoint minors to the board of a charitable company or to the board of a charity’s trading subsidiary.
Directors will be permitted to use a “service address” and keep their residential address off the public record (from October 2009). However, a wide range of regulatory, investigative and other official bodies and agencies can access the residential address (which does have to be reported to Companies House and kept in a new register - see later) and no existing records will be removed from the public domain.
Note that the directors of charitable companies must still declare their residential addresses to the relevant charity regulator(s) (the Charity Commission and / or OSCR). These will be in the public domain because of charity law rules.
Optional secretary
Private companies may choose not to have a company secretary. Given the governance standards and accountability levels expected of charities and “not-for-profits” plus their heavier reporting obligations, the role of secretary remains an important one and it would be unwise for the board to dispense with a secretary in such companies.
Registers and records
There are a number of changes in relation to registers and records, including a continuing obligation to keep a register of secretaries (even if no secretary is in fact in office) and the obligation to establish a new Register of Directors’ Residential Addresses (“RODRA”). The RODRA is not open to public inspection as it will contain the residential addresses of all directors, where the directors have chosen to make their home address public in the Register of Directors the RODRA entry may simply cross refer to that. However the RODRA will be open to inspection by a range of investigatory, regulatory and other official bodies and agencies.
Omission of “limited” from company names
There will be new conditions for seeking permission to omit the word “limited” from a company name. There are saving provisions for existing companies that already have such permission.
Trading subsidiaries
Non-charitable "not-for-profit" companies are unlikely to make use of the new model articles when they are introduced (October 2009). As now, they will want to use articles tailored to their particular needs and circumstances.
However, some of the changes to the rules governing company constitutions may be useful in the context of new trading subsidiaries established after the new rules come into force (October 2009).
In addition to the simplification of annual obligations already in force, the simplifications of the rules on share capital and various share transactions (2008/2009) may be useful for trading subsidiaries.
Where directors refuse to register a share transfer they now have to provide reasons to the disappointed proposed new owner, on request. This may have important implications for partly owned subsidiaries.
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