Legislation for companies

The Companies Act 2006

The Companies Act is the primary source of company law in the UK. It provides a single company law regime for the entire UK.

The Act was brought into force in stages and has been subject to additions and amendments since the first provisions were enacted in 2006.

The key provisions are as follows.

Formation of a company

• Companies may be incorporated online.
• A new format memorandum states that the subscribers declare their wish to form a company and agree to take the stated number of shares.
• The statement of proposed officers remains the same, but directors must now supply an address.
• No company secretary is required for private companies.

Members and management

• The minimum age for directorship is 16 years.
• Every company must have a director who is a natural person (i.e. a human being).
• Directors’ duties are codified in statute.

Decision making – meetings and resolutions

• AGMs are no longer required for private companies unless the companies wish to hold them or their articles require them to. Members may still require their directors to call a general meeting.
• The minimum notice of meetings is 14 days for private companies.
• Minutes of general meetings and records of written resolutions must now be kept for a minimum of ten years.
• Special resolutions require 21 days’ notice and can only be passed by a 75% majority.

Accounts and audit

• The time limit for filing accounts with Companies House is reduced to nine months for private companies.
• Directors have a duty not to approve accounts unless they give a true and fair view of the company’s financial position.
• Accounts must be signed by a director.
• The general prohibition against a company indemnifying its auditor against claims for negligence remains. However, there is a new provision enabling auditors to make a ‘liability limitation agreement’ with a client company.

Sports governance

This is a summary of the provisions as applied to private companies. Sports bodies should review and assure themselves that they have sufficient grasp of their legal obligations. As noted above, directors’ duties are now codified in the Act, and individuals who accept the position of director should quickly acquaint themselves with these duties before joining a board.

Duties of directors

Directors have certain legal duties; these are to the company itself, not to its shareholders, employees or any person external to the company. The duties of directors were introduced into UK statute law by CA2006 (ss. 171–77).

The duties apply to non-executive directors as well as to executive directors, and are listed below.

Duty to act within powers

A director must act within their powers in accordance with the company’s constitution; they should only exercise these powers for the purpose for which they were granted.

Duty to promote the success of the company

A director, in good faith, must act in the way they consider would be most likely to promote the success of the company for the benefit of its members as a whole. A director must also have regard, among other matters, to the:

• likely long-term consequences of any decision;
• interests of the company’s employees;
• need to foster the company’s relationships with its customers, suppliers and others;
• impact of the company’s operations on the community and the environment;
• desirability of the company maintaining its reputation for high standards of business conduct; and
• need to act fairly between members of the company.

There is no requirement that any one factor is given precedence over another, but the board must demonstrate it has at least considered the needs of stakeholders in its decisions. In addition, there is nothing in the Act that suggests one stakeholder should have greater significance than another. The organisation’s constitution should be properly constructed to ensure directors fully understand their duties, including those to members.

Duty to exercise independent judgement

The duty to exercise independent judgement applies to all directors whether or not they are considered independent for the purpose of relevant governance codes.

Directors with a particular interest should set aside any representative function and make final decisions on their own merits. All directors, regardless of how they are appointed, must demonstrate independent judgement.

Duty to exercise reasonable care, skill and diligence

No directorship is an honorary position, even for volunteers. It is a serious position and the law requires directors to use reasonable care, skill and diligence in carrying out their tasks.

There is a double test within the Act:

First, the objective standard – a board member must have the knowledge, skill and experience that would reasonably be expected of anyone doing that job. This is a basic level of competence expected from all directors.

Second, the subjective standard – a director has to perform according to the knowledge, skill and experience they actually have. This is a higher standard expected of those with special skill or experience – for example, a qualified accountant. They will be expected to use that expertise for the company’s benefit and will be judged by the higher standard.

Duty to avoid conflicts of interest

Board members have a duty to avoid conflicts of interest. However, this duty is not breached if the director declares to the board their interest in a transaction and the interest is approved by the board.

A director might have a direct or indirect interest in a contract – for example, a volunteer director who is an employee of another company with which the sports organisation is planning to sign a business contract. Such a contract is not illegal, although the company may choose to cancel it.

The Companies Act recognises certain situations in which an actual or potential conflict of interest may arise. These include situations where a director sits on two boards and the duties to each may conflict. This can occur in sport as NGB directors may also be board members of affiliated bodies, trustees of a related charity or nominated by another organisation with its own constitution and legal identity.

All of the situations above can amount to a breach of duty if they are not declared and managed in a transparent manner by the board.

Duty to declare interests in proposed transactions with the company

An example of such an interest is a director who owns a sports clothing company that wants to supply kit for teams at an event.

Proposed transactions do not necessarily create a conflict of interest, but they must be declared, and be subject to approval by the rest of the board. There should be a robust conflict of interest policy which sets out how individual directors and the board will manage such situations. Establishing a transparent tendering or bidding process will also ensure the organisation can secure suppliers that provide the best available product and value for money.

Duty not to accept benefits from third parties

It is not uncommon for board members and senior executives to be offered tickets to major sporting events in an effort to foster good relations between organisations. The Companies Act says that a director must not accept a benefit from a third party that was offered because of the director’s position or because of anything they may do as a director.

In the sporting world, it would be regarded as reasonable to accept an invitation to a sector-specific awards ceremony or a sporting event. However, sports board members must be mindful that they may be perceived as seeking and enjoying benefits in excess of those that would be deemed reasonable.

Our related tools page has further guidance for sports organisations that are incorporated as companies, including detailed information on Companies House requirements, memorandums and more.

Now, let’s look at legislation that is specific to registered charities.