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This article highlights some of the main changes introduced by the Companies Act 2006 which came into force on 1 October 2008 and are likely to be of most significance to private companies.

Some of the changes which simplified the current regime will be welcomed:

1.The previous rule that companies cannot give financial assistance for the purchase of their own shares will be abolished for private companies.

2.Private companies will no longer require the approval of the court to reduce their share capital.

Other provisions will probably be regarded as an extra burden:

1.There will be a new right for a person to object to the opportunistic registration of a company name.

2.Companies will no longer be able to have a sole corporate director but will require at least one natural person as a director.

3.A statutory duty of directors to avoid conflicts of interest will be introduced.

In terms of financial assistance, under the old law there was a prohibition on a company or any of its subsidiaries to give financial assistance for the purpose of acquiring its own shares. With many company sales there has been a risk of potential infringement. The exact scope of the prohibition is unclear but if the so called "whitewash" procedure is followed, financial assistance by a private company is permitted. Often, companies preferred complex structures to avoid falling within the prohibition in the first place.

The prohibition of financial assistance no longer applies to private companies. Consequently, the whitewash procedure will no longer be required. This should lead to great savings in time and money on share sale transactions.

Private companies will welcome this change but should note that the abolition of the general prohibition of financial assistance does not sanctify all possible cases of financial assistance and directors will still need to consider – and, if necessary, consult their professional advisers - whether a transaction:

(i) is "likely to promote the success of the company for the benefit of its members";

(ii)will involve an unlawful reduction of the company’s capital; and

(iii) is otherwise vulnerable to challenge as a transaction at an undervalue under the insolvency legislation.

Lenders should note, however, that while the whitewash procedure focused directors' attentions on the credit effect of any financial assistance, directors might now not even be aware that they are giving financial assistance. Therefore, lenders might wish to consider introducing provisions in their loan agreements which prohibit financial assistance without their consent and then stipulate their requirements to grant such consent.

In terms of reduction of share capital, from 1 October 2008 a private company will have an alternative means of reducing its share capital rather than having to resort to the court. The new procedure will require a special resolution of shareholders and a solvency statement to be given by all the directors. Creditors will have no right to object to such a reduction of capital but directors who make a solvency statement without having reasonable grounds for the opinions expressed in it will commit a criminal offence.

The new procedure is a quicker and cheaper alternative to the court-approved procedure which will nevertheless remain in place. Also, other means by which a company may lawfully reduce its capital such as the repurchase or redemption of its shares or the conversation to an unlimited company will remain available.

One reason for a company to reduce its share capital could be that the current share capital no longer reflects the actual financial position. Also, if a company has a large accumulated historic loss but is now profitable, the company will be prevented from paying dividends to shareholders because of the lack of distributable profits. In these circumstances, the company may want to reduce its share capital so as to be able to set off the reserve arising on such a reduction against the accumulated loss, thereby enabling it to pay dividends out of future profits.

In terms of practical issues, while private companies will in most cases favour the new solvency statement procedure to reduce their share capital, time will tell whether this will be generally accepted in practice, for example by lenders. Also, a company that is likely to be sold in the near future might prefer to follow the court route to avoid protracted questions in the due diligence process.

When it comes to objection to company name, there is a new right to object to a company's name on the ground that it is the same as a name in which someone else has goodwill or if it is too similar to such a name so as to suggest a connection between the company and the other business. A company can be directed to change its name if it does not have a legitimate reason for using that name.

Finding a name for a company is already far from straightforward and the new right will add a search on the trademark register to the standard vetting process as a name could otherwise be open to challenge by a trademark owner for being too similar to an existing mark.

For corporate directors, from 1 October 2008 every company will be required to have at least one director who is a natural person.

Until now, it was possible to have a corporate director as the sole director and this is frequently used for corporate group structures. To give existing companies some more time to adapt to the new requirement those companies which did not have a natural person as a director on 8 November 2006 will have until 1 October 2010 to make the necessary changes.

However, before a new director is appointed companies should check the following:

•Do the articles allow for the appointment of an individual as director?

•If the existing director(s) are not going to retire, does the new appointment exceed the maximum number of directors allowed by the company’s articles?

•If there is going to be more than one director, are provisions required in the company’s articles to deal with a deadlock of the board and to otherwise regulate the decision making process?

In terms of conflicts of interest, the Companies Act 2006 for the first time codifies directors' duties which until now have been developed in case law. Four of the seven core duties of directors were already brought into effect in October 2007. The final three duties will now be implemented.

Of most concern is the duty of a director to avoid a situation in which he, or a person connected with him, has a direct or indirect interest that conflicts or may conflict with the interests of the company. However, the other directors will be entitled to authorise any conflict provided that authorisation is sought in advance.

Under the old law, such situations of conflict can only be approved by the shareholders. In practice, most private companies addressed the need for shareholder sanction by including a provision in their articles entitling directors to continue to act in conflict situations subject to making appropriate disclosure to the other directors. Possibly such provisions will still be sufficient in future, but to avoid any arguments about whether a certain conflict situation is covered by the articles, the prudent approach would be to seek board authorisation for all situations of conflict or possible conflict.

The power of the other directors to authorise conflict situations will apply automatically to companies incorporated on or after 1 October 2008 as long as there are no restrictions to the contrary in the articles. Existing companies must ensure that their articles contain an express provision allowing authorisation by the other directors. If there is no other director who could authorise the conflict situation then shareholder approval must be obtained.

There will also be a duty of directors to declare any interest in a proposed transaction or arrangement with the company. This largely reflects the current law but any declaration made by a director in the past in respect of a transaction or arrangement with the company must now be updated if it becomes inaccurate or incomplete.

Therefore, companies formed prior to 1 October 2008 should consider amending their articles to give the board of directors power to authorise conflict situations.

Please note that this area of the law is very complex and you should not take or refrain from taking any step without full legal advice on your particular circumstances. The content of this article is of a general nature and no liability is accepted in connection with it or if any reliance is placed on it.

Stephan Weber is a solicitor at Sykes Anderson LLP