UK: The Relevant Points Of The Companies Act 2006 For Lenders

Given the huge size of the Companies Act 2006, this note outlines specific issues that are relevant for lenders. For more detail on lenders' issues please click here to view PDF in a new window.

The Act has an impact on floating charge-holders in that liquidation expenses will take priority to floating charge assets. Other issues for lenders are the abolition of financial assistance, the possible changes to the system of registration of charges, directors’ duties and general company administration.

The Companies Act 2006 received Royal Assent on 8 November 2006. The Government has said that all parts of it will be in force by 1 October 2008. While certain provisions came into force on Royal Assent, and others are due to come into force in December and January, it is not yet known whether most of the key changes for lenders will be deferred until October 2008 or introduced in phases in the interim. The Act in its final form has not yet been printed. Rules and guidance will be published over the next few months. Eventually the 2006 Act will repeal and replace nearly all of the Companies Act 1985.

The key changes for lenders are:

• Liquidation expenses take priority to floating charge assets

The rule in re Leyland Daf will be reversed so that liquidators will be able to recover liquidation expenses from floating charge assets. This already happens in administration and puts the position back to what it used to be, before re Leyland Daf. The relevant clause is very brief. The detail will be in Rules that will give floating charge holders the right to approve the quantum of expenses.

• Abolition of financial assistance

The restriction on private companies from giving financial assistance for the acquisition of their own shares will be abolished when the relevant provisions of the Act come into force. Abolition of the rule against financial assistance might bring us back to the position before companies legislation in 1929, that is, the common law position where rules on "maintenance of capital" might undo the benefit of the abolition. The Government has promised a "saving provision" to avoid this happening.

• Registration of charges

It is not anticipated there will be any major changes to either the obligation to register, to what constitutes a registrable charge or to the effect of a failure to register.

There is a change to the position of an overseas company registering security in England & Wales. The Act has not brought over from the Companies Act 1985 the requirement for a company incorporated outside the UK but with business in the UK to register charges over property in E&W. In practice, the requirement has until now resulted in companies attempting to file such charges at Companies House and providing lenders with a copy of the rejection letter (a process known as a "Slavenburg filing"). Believing this to be a defect in the Act, the Secretary of State will be able to make Regulations requiring overseas companies that have a presence here to register specific charges over property situated in Great Britain.

• Directors’ duties

The Act codifies directors’ duties, meaning that it sets out in legislation the principles settled in cases, the common law. The thinking is that it is preferable for directors to understand their position by having it set out in the Act. The list of duties cannot be assumed to be complete. There is for example, no reference to the duty to consider creditors when contemplating the potential insolvency of the company.

Further reading: (Leyland Daf [2004] UKHL 9)

For an overview of the whole Act, Click Here for the deferred reform and Click Here for the takeovers article.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 29/11/2006.