Parliament and Whitehall

Companies Act 2006: implementation

The government has issued a written statement about the first commencement orders under this Act. It gives details of provisions to be brought into force from January to April 2007. The changes are more extensive than those indicated in an earlier government statement (see Accountancy, January 2007, p125). Significant changes are as follows:

1.   Amendments to the First Company Law Directive. On 1 January changes to implement new requirements under amendments made to the First Company Law Directive came into force. These are mainly concerned with the powers of Companies House to accept electronic filing. The new requirement for all companies is that the current obligation to put the company's statutory details, such as name and registered number, on company letters and order forms will apply whether or not they are in hard copy or electronic form. This is also extended to company websites.

2.   Disclosure of interests in shares. On 20 January ss198-211 of the Companies Act 1985 were repealed. The new Transparency Rules apply and contain disclosure requirements of interests in shares by listed AIM and PLUS market companies. The final rules and guidance are issued by the Financial Services Authority under the authority of the CA 2006 via an expanded Disclosure and Transparency (DIR) part of the FSA Handbook. UK issuers will adopt the CA 1985 disclosure requirement when a holding exceeds or falls below 3% and a 1% threshold thereafter.

3.   Power of companies to investigate ownership of their shares. On 20 January s212 of the CA 1985 was repealed. It was replaced by Part 22 of the CA 2006, the direct replacement being s793 of that Act. The new provisions contain in broad terms the same powers of investigation. The articles of most companies are deemed to include any replacement provision, but some will see a change as desirable.

4.   Safe harbour for financial statements. On 20 January s463 of the CA 2006 came into force. It creates a safe harbour in relation to directors' liability for statements in the directors' report, the remuneration report and summary financial statements. The business review is included. The section will, it is understood, apply to reports issued on or after 20 January. Under the safe harbour provisions a director will only be liable if untrue or misleading statements were made in bad faith or recklessly, or there is deliberate and dishonest concealment of material facts. Liability is only to the company and not to third parties.

5.   Shareholder communications. These provisions came into force on 20 January and relate to the ability to use electronic communication with shareholders. The relevant provisions are in ss1143-1148 and Sch 4 and 5 of the 2006 Act. (See Accountancy, January 2007, p125. Note that a company may obtain permission to communicate by website also by member resolution.)

6.   Takeovers Directive. This directive was implemented by regulations in May 2006 (see Accountancy, January 2007, p125). The provisions in Part 28 of the 2006 Act will replace the regulations. The provisions are substantially the same as those introduced in May.

7.   Disclosure of directors' interests. From 6 April the provisions in Part X of the CA 1985 regarding share dealings by directors and their families will be repealed. Directors of listed companies and their families will continue to have disclosure obligations under the Transparency and Disclosure Rules.

8.   Repeal of age limit on directors. From 6 April ss293 and 294 of the CA 1985 relating to directors aged 70 and over in public companies or private companies that are subsidiaries of public companies are repealed. In view of the age discrimination regulations, companies that have a 70 year (or other) age limit in their articles should remove them as they are potentially discriminatory.

Consultation will continue on policy issues related to the considerable amount of secondary legislation needed and on further transitional issues relating to the application of the Act to existing companies. The intention is to commence all parts of the Act by October 2008.

The Commencement Order, entitled The Companies Act 2006 (Commencement No 1, Transitional Provisions and Savings) Order 2006 (SI 2006/3428), is available at

Pensions Bill

The government has published its Pensions Bill for introduction in the Commons. The main provisions are:

1.   The setting up of a new delivery authority to deal with the new, low cost private pensions, known as 'personal accounts', aimed at those with no access to an occupational scheme. Employers will make compulsory contributions and employees will automatically join the personal account scheme or the employer's scheme, though they may opt out. The detailed proposals for personal account pensions will be given in a white paper.

2.   The link between the basic state pension and average earnings will be restored. Under the Bill, ministers are obliged to declare by April 2011 when they intend to restore the earnings link and to start doing so by 2015.

3.   Because of a forecast rise in average life expectancy, the state pension age will rise to 66 between 2024 and 2026, to 67 between 2034 and 2036, and to 68 between 2044 and 2046.

4.   The Bill will cut the number of years that it currently takes to become entitled to a full basic state pension - from 44 years for men and 39 for women to 30 years for all from 2010. In addition, years that women spend to take career breaks to look after children will count as employment.

Protection for LSE's light touch

The Investment Exchanges and Clearing Houses Bill received Royal Assent on 19 December 2006. It is the government's response to concerns that if a foreign rival acquired the London Stock Exchange, the LSE's light touch approach to regulation might be lost and draconian regulation introduced. Accordingly, the Bill introduces a blocking power by amending the Financial Services and Markets Act 2000 to confer on the Financial Services Authority a specific power to stop recognised investment exchanges and clearing houses from making changes in the regulatory provisions where the effect is likely to be disproportionate and which could damage London's reputation. The FSA must complete a detailed rule book on how to apply the blocking power. This should be ready early in 2008, but the Act will come into force immediately.

Rogue estate agent legislation

The Consumers, Estate Agents and Redress Bill has been introduced in the Lords. It targets rogue estate agents and traders. The Bill will:

•    make it compulsory for all estate agents to belong to an independent, approved ombudsman scheme with power to make awards of compensation to buyers or sellers;

•    ensure that those agents who refuse to join the scheme are barred from operating;

•    require the keeping by estate agents of records of dealings with buyers and sellers for six years - these records to be inspected without notice;

•    give stronger powers to the Office of Fair Trading (OFT) to remove rogue estate agents from the market;

•    give consumers the same seven-day cancellation and cooling off rights for solicited visits as they presently have for unsolicited visits;

•    streamline and strengthen consumer representation by bringing together the National Consumer Council, Energywatch and Postwatch into one organisation and providing a simplified information and advice service.

Note: Estate agents are currently regulated by the Estate Agents Act 1979. They do not need a licence to practice but the OFT can ban unfit persons. There is currently a voluntary ombudsman scheme, to which some 60% of estate agents belong.

ECJ to review age regulations

Under the Employment Equality (Age) Regulations 2006 (SI 2006/1031) an employer can fairly dismiss an employee at 65 where the reason for the dismissal is retirement. In addition, an employer will also be acting within the regulations if work is refused to those over 65.

Heyday, a membership organisation for those nearing retirement age, has mounted a legal challenge to the government on the ground that these provisions mean that UK regulations do not adequately implement the European Union's Equal Treatment Framework Directive (2000/78/EC).

The High Court has now referred the case to the European Court of Justice, creating uncertainty for employers, particularly since the ECJ's decision is not likely to be returned until late in 2007. If Heyday wins the case, the government will be forced to amend the regulations.

Statutory instruments

Employment rights

The Employment Rights (Increase of Limits) Order 2006 (SI 2006/3045) has been laid before parliament and came into force on 1 February 2007. It increases the limits which apply to certain employment tribunal awards and amounts payable under employment legislation where the event giving rise to compensation arises on or after 1 February.

The new amounts include:

•    a maximum compensatory award for unfair dismissal of £60,600 (up from £58,400 in 2006);

•    a maximum amount of a week's pay for the purpose of calculating a redundancy payment and other awards of £310 (£290 in 2006) so that, for example, the basic award for unfair dismissal and the statutory redundancy payment for a worker with 20 years' service or more now runs at a maximum of £9,300 (£8,700 in 2006).

Case notes

Disqualification of directors?

The High Court has ruled that the Department of Trade and Industry can mount successful disqualification proceedings under s6 of the Company Directors Disqualification Act 1986 against persons as unfit directors of insolvent companies, even though they have not been formally appointed as directors. (See Re Mea Corporation Ltd: Secretary of State for Trade and Industry v Aviss [2006] All ER (D) 432.)

The secretary of state submitted in this case that the first and second respondents had been either directors in fact (de facto) or shadow directors of each of three companies that had collapsed with debts of £20m. The first respondent contended that he had never been formally appointed as a director of two of the three companies. The second contended that he had not been a director of any of them.

Nevertheless, the High Court ruled that, because of their conduct, the respondents had been either directors in fact or shadow directors of each of the companies. They had been in control of the application of trading income and the payments made to trade creditors and the court considered that this was a critical aspect of corporate affairs. The court also ruled that, by failing to keep the affairs of the companies separate on the basis of their separate legal personalities, there had been increased deficiencies and further detriment to creditors.

Both respondents were disqualified from being concerned with the management of a company for a combined period of 18 years.

Comment. Briefly, a director in fact is a person who takes on the functions of a director and, importantly, is held out by the company as a director, though never appointed formally as one. A shadow director is a person in accordance with whose directions or instructions the directors of the company are accustomed to act. On these matters the court gave guidance as follows:

•    to establish whether a person is a shadow director, it is not a requirement to show that influence was exercised over the whole of the company's activities. If the person's advice was normally taken by the directors, it is irrelevant that sometimes when the person did not give that advice the board exercised its own discretion;

•    a person can be regarded as a director in fact and a shadow director simultaneously, as where he or she assumes the functions of a director in marketing, for example, and gives the board directions in regard to finance and manufacturing.

Employment law

Handbooks and service contracts

While company employee handbooks can be a useful source of information for workers, problems can be created where an employee alleges that part of such a handbook has become part of the contract of service. The Court of Appeal considered such a situation in Keeley v Fosroc International Ltd [2006] All ER (D) 65.

The employee alleged that a section on redundancy in a handbook entitled Employment Benefits and Rights had become part of his contract of service, even though it was discretionary as to amount.

The handbook said: 'Those employees with two or more years continuous service are entitled to receive an enhanced redundancy payment from the company which is paid free of tax to a limit of £30,000. Details will be discussed during both collective and individual consultation.'

On the issue of whether that part of the handbook could be enforced on redundancy, as part of the employee's contract, an employment tribunal said it could not. The provision was too open ended and did not expressly cover quantification. However, the Court of Appeal allowed the employee's appeal, saying it was enforceable. This conclusion was reached:

•    because the payment of enhanced redundancy payments was 'a well-known fact of employment life' in the employer's group of companies; and

•    there was evidence of consistent practice in the past in calculating the actual amount so this should not cause difficulty.

It was also clear from case law that there was a judicial readiness to enforce the exercise of a discretionary power, such as the amount to be paid in this case, once the court had concluded that the power had contractual effect.

Bank holidays and part-timers

Can part-timers claim anything in regard to bank holidays when in fact they do not normally work on a Monday? If an employer does wish to make some payment in lieu there would seem to be no legal problem about this, but if no such payment is offered, does this amount to discrimination against part-timers under the Part-time Workers (Prevention of Less Favourable Treatment) Regulations 2000 (SI 2000/1551)? A Scottish Employment Appeal tribunal has ruled that it does not. (See McMenemy v Capita Services [2006] IRLR 761.)

The EAT's explanation for its ruling was simply that the reason the claimant got nothing for bank holidays was not because he was part-timer, but because he did not work on a Monday.

Looking further into the issue of discrimination, the EAT ruled that:

•    under the regulations, any less favourable treatment must be on the grounds that the claimant was a part-timer; and

•    since this was a situation in which a hypothetical comparator could be used, the lack of discrimination could be shown by the fact that a full-time employee who did not work Mondays but from Tuesday to Saturday would also not receive anything in respect of bank holidays.

Comment. Section 13 of the Work and Families Act 2006 gives the government power to add the equivalent of bank and public holidays to the statutory requirement of four weeks' holiday under the Working Time Regulations 1998 (SI 1998/1833). It will be interesting to see how this is worked out for part-timers in the context of this case. Implementation is to be done in stages from October 2007 to October 2009. (See Accountancy, September 2006, p119.)

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