The Companies Act 2006 (2006 Act) came into force on 1 October 2009 and since then businesses have been able to familiarise themselves with the changes. However, there are some common pitfalls for companies which were incorporated prior to the introduction of the 2006 Act that can pose significant risk and cost to its shareholders.
Historically under the Companies Act 1985 (the 1985 Act) the memorandum of association accompanied a company's articles of association and would include, amongst other things:
- the objects of the company;
- the authorised share capital of the company; and
- the limitation of liability of the shareholders of the company.
Under the 2006 Act, companies are no longer required to express the objects or authorised share capital. Although it is no longer commonplace, a company may choose to restrict the objects or authorised share capital by an express provision in its articles of association.
The limited liability statement, whenever expressed, is a fundamental protection for the company's shareholders. If the limitation of shareholder's liability is not explicitly stated (for a company incorporated before 1 October 2009 within its memorandum, or for a 2006 Act company, within its articles) its shareholders do not have the benefit of limited liability status and could be fully liable for all of the company's debts in the event of insolvency.
By virtue of the 2006 Act and certain transitional provisions bringing it into effect, the memorandum of companies incorporated prior to 1 October 2009 is deemed to form part of their articles of association.
It is normal for a company to adopt new articles of association by a special resolution, using the following standard wording: "in substitution for and to the exclusion of, the existing articles of association of the company". If a company incorporated prior to 1 October 2009 uses this standard wording it will be adopting the articles in substitution for both existing articles and memorandum. Therefore, if the limitation of liability of the shareholder is not re-stated in the newly adopted articles, the company's shareholders will become subject to unlimited liability.
It is crucial to ensure that, on adopting new articles of association or filing any amendments to existing articles, due care is paid to the company's existing constitutional documents to ensure that the fundamental protection of limited liability and any other desirable protections in the memorandum are maintained.
Term of the month
Corporate director: a body corporate who also acts in the capacity as a director of a company.
Did you know?
As part of the introduction of the Small Business, Enterprise and Employment Act 2015, (which seeks to introduce more transparency to UK companies, as can be seen through the introduction of the PSC regime as further discussed here, the role of the corporate director will be abolished.
Companies will not be allowed to appoint a corporate director (the appointment will be of no effect and doing so will be a criminal offence) and all existing corporate directorships will be automatically terminated after a 12 month grace period.
The Secretary of State will be given power to make exceptions to this prohibition, however this will only be in cases of low risk and high value cases and all of the corporate director's own directors must be natural persons.
The implementation of this provision was anticipated to take place in October 2016. However in September 2016 the government postponed this timescale indefinitely, whilst at the same time assuring its intention to progress implementation in the future.
For advice on this subject including details of the exemptions to this new prohibition, please contact our corporate team.
Have You Inadvertently Deleted The Limitation Of Liability For Your Shareholders?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
