The Companies Act 2006: update

Introduction

The Companies Bill (formerly the Company Law Reform Bill) received Royal Assent on 8 November 2006 and is now known as the Companies Act 2006. The Act is the largest piece of legislation ever passed by Parliament.

Following the distribution of our briefing note 'The Companies Bill (formerly the Company Law Reform Bill)' dated September 2006 and our banking breakfast briefing on 31 October 2006, a further update regarding the Act is set out below. In addition to the new provisions introduced by the Act, which will be of specific relevance to lenders, there are also some practical implications to consider.

The issues featured are:

• Reversal of the Re Leyland Daf decision
• The importance of guarantees to lenders
• Registration of company security interests
• Timing for implementation of the Act
• Consolidation into one Act

Reversal of the Re Leyland Daf decision

As a reminder, the Act now entitles a liquidator to pay expenses in priority to unsecured creditors and floating charge holders. The impact of the reversal of this decision now restores power to the liquidators which is potentially at the expense of lenders in respect of floating charge assets. Once in force, the Act will enable liquidators to recover the costs of unsuccessful litigation as a liquidation expense out of floating charge realisations. Consequently, we anticipate an increase in liquidators using their powers to challenge transactions and lenders may need to delay closing matters relating to insolvent companies until any actions have ended.

The effect of this change and the Spectrum Plus case is that traditional security by way of charge over circulating assets is increasingly unattractive to lenders given the practical difficulty in obtaining fixed charge security and the statutory erosion of floating charge security (with liquidation expenses and the ring-fenced fund for unsecured creditors ranking ahead of the chargeholder).

The importance of guarantees to lenders

While the prohibition on the giving of financial assistance by private companies will be abolished when the relevant provisions of the Act come into force, there will still be important issues for lenders to consider in taking guarantees in support of acquisition debt. Where a company whose shares are being acquired is asked to give a guarantee in support of borrowings incurred to finance the acquisition of its shares, the lender will, as is currently the case, need to consider whether there is commercial benefit to the guarantor company in entering into the guarantee. It should not be assumed that it will always be in the best interests of a company to enter into a guarantee in connection with the acquisition of its shares.

Some commentators expect that after the prohibition on the giving of financial assistance by private companies is abolished, courts will focus more on the question of commercial benefit and may be more willing to question to efficacy of guarantees in the absence of commercial benefit. It will be interesting to see how this issue unfolds but it would be prudent for lenders to take legal advice when looking to take guarantees in circumstances where the existence of commercial benefit is not clear cut, at least until practice going forward becomes clearer.

While there may be an increased focus on commercial benefit, under the Act the ultra vires rule will be effectively abolished. Unless a company's constitution says otherwise, its objects are unrestricted.

Registration of company security interests

Under the Act, the regime for the registration of security interests against companies has basically remained the same. Law Commission proposals from a report in August 2005 relating to the electronic notice filing scheme for company security interests have not been incorporated into the Act. It is anticipated that the Law Commission proposals will be implemented at a later date, probably once electronic conveyancing has been fully established and tested at the Land Registry.

There are a few additional points to note in relation to company security interests:

• Firstly, charges which currently require registration in second registers (for example, land, ships and aircraft) currently require registration both at Companies House and in the other relevant register. One new section of the Act empowers the Secretary of State for Trade & Industry to make provision for information sharing between registers and order that a charge registered properly in one register need not be required to be registered a second time. It remains to be seen whether the Secretary of State will avail himself of these powers.
• Secondly, it was thought that the Act would introduce a requirement that a memorandum of satisfaction in relation to a floating charge would need to be countersigned by the creditor mirroring the position in Scotland. This has not however made its way into the final text of the Act and the position in England remains unaltered.
• Finally, while many sections of the current Companies Act are retained without alteration, the current section numbers have been change. On registering security, the form used will no longer be a form 395 but is expected to be renumbered to reflect the new section number allocated to the relevant provision in the final text of the Act.

Timing for implementation of the Act

The timing to implement the key areas which will affect lenders is not yet known. Provisions to implement the Takeovers and Transparency Directives and those relating to electronic communication are expected to become effective in January 2007 in line with European requirements. The Government proposes to publish the final explanatory notes and regulatory impact assessment, as well as an updated table of derivations and destinations, shortly.

The Government has indicated that it will bring the remaining provisions of the Act into force by October 2008. This date may seem a long time away but a lot of work still needs to be done before then. Many detailed provisions need to be set out in secondary legislation and further consultation on some aspects of the Act is anticipated.

Consolidation into one Act

The final text of the Act was published on 7 December 2006. The Act retains may provisions of the existing law and restates them with the new provisions into a single piece of consolidated legislation. A large proportion of the current section numbers we know and love have changed in the new Act. The full text of Act can be obtained from the Office of Public Sector Information (www.opsi.gov.uk)