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
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
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
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
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
For advice on this subject including details of the exemptions
to this new prohibition, please contact our corporate team.
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