The Companies Act 2006 (the Act) is a wholesale amendment and restatement of a detailed and complex area of the law. The Act governs all aspects of company law from the formation and dissolution of companies to ongoing formalities such as shareholder meetings and communications, and the duties and liabilities of directors. Much of the Act will not be relevant to corporate trustee companies which, for tax reasons, should restrict their activities to those of non-trading entities and so will not have to comply with certain provisions of the Act. However, directors of corporate trustee companies must ensure that they remain compliant with those provisions that do apply. This Alert highlights the 10 most important areas that trustee directors need to know about the Act. We suggest key action points for each area. Many of these issues will also be of relevance to sponsoring employers.
1 The Act may invalidate indemnities from sponsoring employers
Since 1 October 2007, the Act has prohibited companies from indemnifying their own directors or the directors of a group company against personal liability unless certain conditions are satisfied. This was already the position under the Companies Act 1985, but a new category of “qualifying pension scheme indemnity” has been introduced. These provisions apply to indemnities granted on or after 1 October 2007 and permit indemnification for the directors of pension scheme trustee companies where certain conditions are satisfied. These provisions represent a more flexible regime than that which has typically applied to directors’ indemnities.
Consequently, there are fewer conditions applicable to indemnities given in favour of pension trustee directors. Broadly, the indemnity must not offer protection against liability for a criminal fine or regulatory penalty or against the cost of defending criminal proceedings which result in the director being convicted. This is also the position under section 256 of the Pensions Act 2004 in respect of indemnities supported by scheme assets.
However, the Act will not affect indemnities from the pension scheme assets or indemnities given by sponsoring employers to the directors of a pension trustee company that has been set up as a company limited by guarantee (and so is not a group company). Companies limited by guarantee cannot indemnify their own directors.
If an indemnity does not satisfy the conditions in the Act, it will be void in its entirety. Any protection given by the same indemnity to the pension trustee company itself and any individual trustees would, therefore, also be void.
If a qualifying pension scheme indemnity is given, or an existing indemnity is amended so that it falls within the conditions in the Act, there are disclosure requirements that must be satisfied. The existence of the indemnity must be mentioned in the directors’ report in the annual report and accounts of both the trustee company and the company providing the indemnity. Furthermore, a copy of the indemnity must be available for inspection at the registered offices of both companies until one year after it has expired. A fine may be issued if these conditions are not met; at current levels, this could amount to as much as £100 per day of default.
Action: We recommend that trustee directors review the protection set out in their trust deed and rules and articles of association and make any necessary changes to comply with the Act. If changes are made then the disclosure requirements must be satisfied.
2 Directors have a new statutory duty to promote the success of their company
It has always been understood as a matter of common law that directors must act in the best interests of their company. This obligation has been codified from 1 October 2007 in a new statutory duty to promote the success of their company. There is a non-exhaustive list of six factors that all directors must consider when acting, many of which will not be relevant to pension trustee companies.
To demonstrate that trustee directors have complied with this obligation, we recommend that the purpose of the trustee company (ie, to act as trustee of one or more pension schemes) be clearly set out in the company’s constitutional documents. This will limit the scope of how the “success” of a pension trustee company is to be judged.
Furthermore, trustee directors should, as a matter of course at the beginning of each trustee meeting, remind themselves of their obligations, including not just the six statutory factors they are obliged to consider but also any other factors relevant to their company and its activities, such as the trust deed and rules of their scheme, guidance from The Pensions Regulator and general trust law. This consideration should be included in the minutes of each meeting.
Action: Trustee directors should review their procedures for meetings and consider their constitutional documents.
3 C onflicted trustee directors will be unable to act without the authority of their fellow directors
Trustee directors must always be alive to the possibility of conflicts arising between their obligations as trustee directors and their other responsibilities, most commonly the duties they owe to the sponsoring employer of the scheme in their capacity as employees, but also any other individual roles including membership of the pension scheme. The Pensions Regulator has recently issued draft guidance for trustees on the identification and management of conflicts of interest (see our Alert of 18 March 2008). It is not usually necessary for a conflicted trustee to resign, provided that appropriate steps are put in place to mitigate the impact of the conflict.
From 1 October 2008, trustee directors who face a conflict of interest will additionally have to obtain the express authority of their fellow directors to continue acting. Where the conflict affects a trustee director who is also a director of the sponsoring employer, authority will be required from both boards of directors. Such board authorisation will only be valid if given by independent (ie, non-conflicted) directors who are able to form a quorum. The directors of private companies incorporated on or after 1 October 2008 can give authorisation provided there is nothing in the company’s constitution to prevent them from doing so. The shareholders of companies incorporated before that date will need to pass a resolution to empower the directors to authorise conflicts of interest. Any sponsoring employers that are public companies will need to amend their articles to give directors the power to authorise any of their number who are also trustee directors to continue acting as directors of the employer.
Action: In order to make sure that this authority is meaningful, we recommend that the constitutional documents of all the relevant companies be reviewed to permit directors to have the flexibility to authorise conflicts and that the trust deed and rules are considered to ensure there is a corresponding easement within the scheme documents.
The trustee company articles of association may also be amended prior to 1 October 2008 to specify “permitted” conflicts of interest (eg, being a trustee director and member of the scheme), which will not then require authorisation after that date.
4 The deadline for filing company accounts has been shortened
All companies, including corporate trustees, have one month less in which to file their annual reports and accounts for financial years commencing on or after 6 April 2008. For private companies, these must now be filed within nine months of the end of the financial year (the corresponding period for sponsoring employers that are public companies has been reduced to 6 months). Private companies need only file a copy of their accounts with their shareholders – there is no longer a requirement to lay them before a General Meeting.
The penalties for late filing have also been significantly increased, to a maximum of £500 for private company accounts filed before 1 February 2009 but more than 6 months late (for public companies in similar circumstances, the fine would be £2,000). From 1 February 2009 this maximum will increase further to £1,500 for private company accounts filed more than 6 months late (£7,500 for public companies).
The timing and penalties for late filing of pension scheme (as opposed to pension trustee company accounts) with the Pensions Regulator have not been affected by the Act.
Private (and public) companies are also now permitted by the Act to accept a limit on the liability of their auditor in respect of their annual report and accounts, provided that certain conditions are satisfied (the conditions differing for private and public companies). In practice, this is unlikely to be an issue for pension trustee companies as the company report and accounts will typically not be complex. The Act does not affect the position as regards limitation of auditors’ liability for pension scheme annual report and accounts, which may be more of a practical issue.
Action: Diarise the new deadline for filing the next trustee company accounts.
5 Directors and secretaries need not register their home addresses with Companies House
Currently, all company directors and secretaries must disclose their residential address, which is publicly available from Companies House. It is possible for companies to obtain a confidentiality order for directors’ and secretaries’ addresses, but this is not usually routine for pension trustee directors.
From 1 October 2009, directors and secretaries will be able to file a service address (such as the company’s registered address) with their company and Companies House in addition to their residential address. Directors’ and secretaries’ home addresses will not be available to the public although certain public authorities and, in some cases, credit reference agencies, will be able to access them. There is some scope to remove existing personal details from the register, but only going as far back as 2003.
Action: Make sure that trustee directors’ details are up to date and consider making use of the new privacy facilities.
6 There is no longer an obligation to hold annual general meetings
There is no longer a requirement as a matter of company law for private companies to hold annual general meetings of shareholders, although companies may continue to do so (and must do so if required by their articles of association). However, many pension trustee companies have already taken advantage of the elective regime under the Companies Act 1985 and dispensed with this requirement. Any such resolution will continue to have effect. Sponsoring employers that are public companies must continue to have a company secretary.
Action: If not already dealt with, consider whether AGMs need be held in the future.
7 There is no longer a requirement to appoint a company secretary
From 6 April 2008, private companies have no longer been required to appoint a company secretary unless this is stipulated in the articles of association. Sponsoring employers may also take advantage of this relaxation unless they are public companies. Although a secretary is an invaluable resource for many trustee boards, this appointment can continue on a more informal basis (ie, just as secretary to the trustee directors and not as a formal company secretary), without the need to make filings with Companies House each time the secretary changes.
Action: Consider dispensing with a formal company secretary appointment. This may require amendments to the trustee company’s articles of association.
8 The requirements for execution of documents by a company have been relaxed
From 6 April 2008, it has been sufficient for a company to sign documents (including deeds) either by the signature of two directors or one director and the secretary (as previously), or by the signature of a single director in the presence of a witness. However, some pension trustee companies may prefer to retain a formal requirement that two directors execute certain documents, such as deeds of amendment. Articles of association or trust deeds and rules may already contain an express provision as to how deeds are executed, which should be reviewed. Sponsoring employers may also wish to consider how deeds will be executed in future.
Action: Consider the appropriate formalities for execution of documents by the trustee company. Restrictions may need to be stipulated in the articles of association or trust deed and rules of the pension scheme.
9 Electronic communications are set to become the norm
One of the intentions behind the Act is to modernise company law and save businesses money. Provisions in relation to electronic communications, therefore, came into force on 20 January 2007 in the first wave of implementation of the Act.
All companies must ensure that their name, registration number and registered address are clearly stated on all business paper; this now extends to electronic communications including websites.
Electronic filings have been permitted at Companies House since 1 January 2007. Companies House is recommending the use of password protected electronic filing as a means of preventing corporate identity theft. Electronic copies of documents are also available from Companies House.
From 20 January 2007, detailed rules have been introduced to govern electronic communications between companies and their shareholders. Although the number of formal communications required between a pension trustee company and its shareholders (typically, the sponsoring employer of the pension scheme) are limited, there are, of course, various disclosure requirements under pension law, so it will be useful for those communications to be able to take place electronically. Companies must obtain the express consent of those with whom they communicate (including shareholders) to do so electronically and must maintain up to date records of such consents. There are no equivalent consent requirements under pensions disclosure laws, but trustee companies will, of course, recognise the value of keeping up to date records.
Action: Review your website for compliance and consider wider use of electronic communications.
10 The requirements for constitutional documents are changing
All companies are currently required to have both a memorandum and articles of association, that respectively set out the objects and constitution of the company. From 1 October 2009, the memorandum a company incorporated after that date will only record the intention to establish the company. New companies will have unrestricted objects unless there are specific restrictions in their articles. An existing company objects in its memorandum will be considered part of their articles from this date. Given the importance of defining a pension trustee company’s objects to identify the company’s success (see item 2 above), trustee directors should review their constitutional documents and amend where appropriate. For example, trustee directors may want to restrict or prohibit certain activities expressly as well as defining the company’s objects.
Regulations made under the Companies Act 1985 contain standard articles of association (known as “Table A” articles), which automatically apply to companies unless they adopt individually tailored articles. As non-trading companies, it is not uncommon for pension trustee companies to have articles that incorporate all or part of Table A.
Table A has been amended from 1 October 2007 to reflect certain parts of the Act that have already come into force. The changes will not apply to existing companies unless specifically adopted and do not reflect all of the available flexibilities under the Act. Table A will be replaced by three new sets of model articles from 1 October 2009 but only for companies incorporated on or after that date.
The impact of the Act on companies’ constitutional documents is likely to be widespread. Whether a pension trustee company has individually tailored articles or uses Table A articles, they will need to be reviewed for compliance with the Act and amendments made where appropriate.
Areas where trustee directors may wish to amend their articles include:
- defining the objects of the company
- allowing directors to authorise one of their number to continue acting if conflicted
- removing the requirement to appoint a company secretary
- deleting references to annual general meetings
- specifying any requirements for the valid execution of certain documents (eg, deeds)
- permitting electronic communications with shareholders
Action: Arrange for the trustee company’s memorandum and articles of association to be reviewed and amended as appropriate.
Having identified the key elements of the Act that will be relevant to pension trustee companies, there are some provisions that have already been brought into force which necessitate immediate action by trustee directors. In particular, trustee directors should ensure that any indemnity they have been given by the sponsoring employers of the pension scheme complies with the conditions for a “qualifying pension scheme indemnity” and that they can demonstrate compliance with their statutory duty to promote the success of the trustee company.
Trustee company articles of association will need to be reviewed and amended where relevant. In particular, trustee directors should ensure that the objects of the company are clearly set out. They may also wish to take advantage of some of the increased flexibility and deregulatory provisions that are already in force, or will come into force on 1 October 2008. Some further changes may be necessary to articles after 1 October 2009, when the rest of the Act comes into force.