The Isle of Man Government's press release of August 2 2005 promised the creation of a new type of business friendly company that would be simple and inexpensive to administer, and the Companies Act 2006 came into effect on November 1 2006 creating the 2006 Act Company. The 2006 Act operates in parallel to the Companies Acts 1931 - 2004 which govern the traditional type of company (a "1931 Act Company").
Almost three years into the existence of the 2006 Act Simcocks Advocates sees the two different types of company as "horses for courses". Which is more suitable for a particular client's needs depends on the situation. A characteristic of one type of company which might be an advantage in one situation may be a disadvantage in a different situation.
In our November 2006 paper* we set out the notable differences between 2006 Act and 1931 Act Companies as follows.
- There is no distinction between public and private companies.
- A 2006 Act Company need only have one director and that director can be a company. It must also have a registered agent but there is no reason the registered agent cannot be the sole director.
- Particulars of directors do not need to be filed with the Registrar of these companies.
- There is no need for a company secretary.
- There is no need to file allotments of shares. Shares can now be issued without a par value and a 2006 Act Company need not state its share capital in its Memorandum of Association.
- Prospectus requirements are reduced to ensuring that the prospectus or other offering document provides as much information as is necessary to enable an intending investor make an informed decision.
- Redemption, purchase of shares and financial assistance in connection with the acquisition of a company's own shares now depends on a solvency test by reference to the ability of the company to pay its debts and the value of its assets exceeding its liabilities. The solvency test will permit a reduction of share capital which would generally in the case of a 1931 Act Company require court approval.
- Accounting records should be such as to enable the financial position of the company to be determined reasonably accurately at any time.
- Of comfort to the directors will be a power of a 2006 Act Company to indemnify and purchase professional indemnity insurance for its directors.
- There can be late registration of company charges without having to go to court for leave to register out of time.
- The distinction between members' special, extraordinary or ordinary resolutions do not apply and there are no filing requirements. Unless the Act or the Articles of Association of the company say otherwise resolutions are passed with the agreement of members holding more than 50 per cent of the voting rights. Members' written resolutions will be also binding by a majority if the Articles of Association so provide.
- Any doubt lingering as to the effectiveness of telephone meetings and such like is resolved as the 2006 Act provides for such.
It can be helpful however to have a more detailed comparison of the characteristics of each type of company. A comparison table in summary form is set out below. This table is not exhaustive; it is intended as a practical guide and should not be taken as a statement of the law on any matter. The table takes into account the changes in the Companies (Amendment) Act 2009. References in the table to the FSC are to the Companies Registry Division of the Isle of Man Financial Supervision Commission, except under the heading "Regulatory and capital markets" where such references relates to the FSC's role as financial services regulator.
While the generally more relaxed characteristics of a 2006 Act Company may be advantageous depending on the situation, the 2006 Act introduces some new provisions and it remains to be seen how these will operate and develop in practice. Two examples to mention relate to (i) the registration of security and (ii) the Attorney General and FSC's right to inspect the accounting records of a 2006 Act company.
In relation to the registration of security, the 2006 Act (like the 1931 Act) provides that unless a charge created by the company is registered, it will be void against the liquidator and any creditor of the company. The 1931 Act lists the charges which are registrable, however the 2006 Act provides that any form of security interest (other than an interest arising by operation of law) is registrable.
The expression "security interest" is quite wide and will include interests not registrable under the 1931 Act, for example a pledge. A company may create a pledge by delivering possession of goods, or documents of title to goods. A pledge may in certain circumstances be created over intangibles, for example bearer bonds. Unlike in the case of a 1931 Act Company, if a pledge created by a 2006 Act Company is not registered it will be void against the liquidator and any creditor of the company.
In relation to the second example, the Companies Act 2006 provides that the Attorney General (and the FSC) is entitled to inspect the documents and records of a 2006 Act Company in written or electronic form at any reasonable time, which has no equivalent in the 1931 Act. However the 2006 Act does not specify the purposes for which that right may be exercised by the Attorney General, or specify any particular procedures which must be followed by the Attorney General to invoke that right. It may be that the right may only be exercised if it is in the public interest to do so, and it is likely that the courts would require that fair procedures be adopted. It remains to be seen how both practice and the law will develop in this regard.
We hope that this paper is of assistance both to clients deciding which type of company to use, and in working with each type of company.
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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.