In its sheer scale, the Companies Act has set a new record for business legislation.
In its sheer scale, the Companies Act has set a new record for business legislation. Tom Shaw, partner at law firm Speechly Bircham, says it is ‘three and a half inches thick’ – ironic when one of its stated aims is to simplify regulation.
To be fair, the next and final tranche of the Act to become law (in October next year) snips away more red tape than it rolls out. Shaw says there are two major changes companies should look out for, both of which liberalise the status quo.
Firstly, restrictions have been lifted on companies providing financial assistance to their acquirers. Financial assistance means allowing an acquirer to use assets of your company to help pay vendors.
Shaw explains that companies no longer have to go through a “whitewash procedure” (to prove their solvency) before providing financial assistance. That’s good news for dealmakers, but perhaps not for the acquired company’s creditors.
‘Target companies are still obliged to make sure that [providing financial assistance] is to the benefit of the company – and not just the exiting shareholders,’ Shaw counsels. ‘That may not be the case if it prejudices the position of creditors.’
The second change allows private companies to reduce their share capital without court approval. It’s especially handy for loss-making companies looking to access cash.
‘Say you start off with paid-up share capital of £500,000,’ Shaw elucidates. ‘You can reduce that to £10,000 by cancelling some of the shares, putting the balance of £490,000 into your distributable reserves pot to extinguish losses or pay dividends.’
Directors will still have to make a statement of solvency to show that the company can pay its debts within the next 12 months, Shaw adds.
The Companies Act is most likely to be remembered for the way it has codified the duties of directors, and in particular the requirement to act in the interests of ‘employees’, ‘the community’ and ‘the environment’, as well as the company itself. Exactly what that will mean in practice remains to be seen, but some directors have taken a positive view.
‘This legislation is actually long overdue,’ argues Gayna Hart, MD of healthcare software supplier Quicksilva. ‘Too many directors, particularly in small businesses haven’t really known what to do in their role and the Act has set out some minimum standards.’