The Regulator for Charities in England and Wales

The Companies Act 2006

If you are a director of a charity established as a company registered with Companies House, you will need to be aware of the Companies Act 2006. It is being brought into effect in several stages – some provisions are already in force, some are due to take effect later this year and others are expected to be implemented in October 2009. There are a number of changes which affect charitable companies.

In this summary, we have :

More detailed information about the Act can be found on the Companies House website.

1. Main changes for charitable companies

(a) Already in force:-

  • Directors’ duties. The Act identifies new duties for directors, including the duty to act in the way s/he considers, in good faith, would be most likely to achieve the purposes of the company (s.172).
  • Casting vote. A Chairperson under articles adopted after 1 October 2007 cannot have a casting vote at a general meeting (but can at a meeting of the directors where permitted by the Articles of Association).
  • Annual General Meetings. There is no requirement for a company to hold an AGM (although it continues to be good practice for the articles of charities to make provision for them).
  • Extraordinary General Meetings. The category of “extraordinary” general meetings has been discontinued. Meetings of the company are now simply “general meetings”. Although only 14 days’ notice is required for a general meeting, the articles can make provision for longer notice and directors may wish to do so for certain types of general meeting such as AGMs or general meetings at which special resolutions are being considered.
  • Short notice meetings. Where members wish to call a company general meeting at short notice, the Companies Act 2006 requires a minimum 90% of members to support this (s.307).
  • Members’ right to appoint proxies. Members of charitable companies have the right to appoint proxies and notices of general meetings must refer to this right (ss. 324 and 325).
  • Written resolutions. Members may agree in writing to resolutions – there is no longer a requirement for unanimity. Instead, a simple majority is needed for ordinary written resolutions and a 75% majority for special written resolutions (ss.282 and 283, 288 to 300).
  • Company Secretary. It is no longer necessary to have a company secretary (s.270).
  • Accounting. The requirements for preparation and scrutiny of the accounts of charitable companies (Part 16, Chapter 1) have been brought into line with those for non-company charities. Our guidance Charity reporting and accounting : the essentials (CC15) provides further information on these requirements.
  • Electronic communications. Formal correspondence between a company and its members can be conducted by e-mail or other forms of e-communication defined by the Act, subject to certain conditions (ss1143 – 1148 and schedules 4 and 5).

(b) October 2008

Conflicts of interest and the Companies Act 2006

As from 1 October 2008 directors have been under a specific statutory duty to avoid a situation in which they have, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company (section 175(1) of the Companies Act 2006).

The Commission considers that directors of charitable companies were already under a duty to avoid conflicts of interest prior to the implementation of this section. Conflicts of interest include those arising from:

  • any personal financial interest in a transaction with the charity – for example, where a director receives payment from the charity for services or goods;
  • conflicts of duty which do not involve any material benefit to a director, for example, where a director is also a charity trustee of another charity which might be in competition with the charity ("conflicts of loyalty").

In the case of a charitable company the Companies Act duty does not apply to a conflict of interest arising in relation to a transaction or arrangement with the company if this is permitted by the company’s articles of association (section 175(3) of the Companies Act 2006 as modified for charitable companies by section 181).

Where a benefit or a transaction which may give rise to a conflict of interest is authorised by an order of the Charity Commission, the duty to avoid a conflict of interest does not apply (section 26(5)A of the Charities Act 1993).

In addition, authorisation may be given by the unconflicted directors to a conflict of interests where the company’s constitution includes provision enabling them to provide such authorisation (section 175(5) as modified by section 181). Such authorisation is not necessary where the conflict arises from a transaction or arrangement with the company which is authorised by the memorandum or articles of the company.

See questions and answers relating to conflicts of interest.

  • Minimum age of directors. The minimum age for directors will be 16 years – a director who has not attained this age when the provision is introduced will cease to be a director (s.157 and s.159).
  • At least one director to be a natural person. It will be a requirement that a company must have at least one director who is a natural person (ie a human being as opposed, for example, to a corporate body) (s.155).

October 2009

  • Single document. Companies will have a single document – the articles of association - to regulate their administration. Companies set up before this date with a memorandum and articles of association will not need to make any changes – all operative clauses in the memorandum, including the objects, will be deemed to be part of the articles when this provision comes into force in October 2009 (s.18 and 28).
  • Interim Managers. The Charity Commission will be required to give notice to the registrar of companies when it appoints an interim manager to a charitable company (s.1154).
  • Registration with Companies House. A court order is no longer required in every case to restore a company to the Companies Register (ss. 1024 to 1028).
  • Company names. Any company which is a charity will be automatically exempt from the requirement to have the word “limited” in its name (s.60(1)(a)).

2. How do the Companies Act changes affect the Charity Commission’s model memorandum and articles of association (GD1)?

We have amended GD1 to reflect all the changes brought in up to and including October 2008. The specific changes are :

Revisions to GD1 (Model Memorandum and Articles for a Charitable Company)

  • Clause 5 - this clause authorises certain benefits arising from a transaction or arrangement with the company is clause 5 of the Memorandum. This has been revised to take into account the new statutory powers with regard to payments to trustees for services and to take out trustee indemnity insurance.

Clause 5(4) and (5) in Option 2 of the memorandum provides the necessary structure for all the benefits previously authorised by Option 2 of the model memorandum and articles to continue to be authorised after 1 October 2008. These are all accommodated within the terms of section 175(3) or are to be authorised by the Commission so that the duty in section 175(1) does not apply.

In addition, some provision has been made for conflicts of duty where a director owes a duty of loyalty to another organisation but the unconflicted directors consider it is in the interests of the charity for that director to continue as a director. This provision can be found at Clause 5(7).

(Note that Article 39 of the model Articles of Association imposes a duty on the Directors to declare an interest in any transaction of the Charity and to absent themselves from any discussion where there may be a conflict between their personal interests and those of the Charity. This would include, for example, discussions about the need for the provision of a particular service which one of the Directors might have an interest in supplying (although in this example the terms of section 73C of the Charities Act 1993 would disqualify the director from participating in decisions related to their supply of services). Statutory duties to declare any interests came into force on 1 October 2008 (sections 177 and 182 of the Companies Act 2006)).

If existing charitable companies wish or need to adopt additional provisions and to amend their memorandum and articles accordingly, the consent of the Commission is required where the alteration authorises or would permit the trustees to authorise a benefit to the trustees (section 64 of the Charities Act 1993).

We consider that inserting a clause permitting the unconflicted directors to authorise a conflict of interest on the part of the directors is likely to be a regulated alteration and require our consent as it may permit a benefit to be authorised to the director concerned.

  • article 7 - we have adjusted the requirements for calling short notice meetings; we've also included a note that it is optional to hold an annual general meeting, and we have removed references to extraordinary general meetings
  • article 14 - we have removed the provision for the chairman to have a casting vote - this article now contains provisions with regard to appointment of proxies
  • article 15 - we have modified the voting requirements for written resolutions
  • article 16 - we have removed the provision preventing members from voting if they owe money.
  • we have updated the guidance in the notes and definitions in the articles about electronic communications (see, for example, notes to arts 45 and 46).

We will convert GD1 into an articles - only document next year.

3. What must directors do to comply with these requirements?

a. Some of the changes listed at section 1 above apply to all charitable companies, new and existing, and directors will need to be aware of how they affect their company. Changes which fall into this category include :

  • Directors’ duties;
  • The requirements for directors to be at least 16 years old and for there to be at least one director who is a natural person;
  • Members’ rights to appoint proxies and the requirement for notices of general meetings to refer to this right;
  • Minimum of 14 days’ notice for general meetings (longer if specified in the company’s articles), unless the short notice provisions are used;
  • Written members’ resolutions;
  • Electronic communications;
  • The exemption for charitable companies from the requirement to include “limited” in their names.

b. In other cases, the changes do not automatically apply to all companies and directors may wish to review their memorandum and articles of association and consider what changes to make. Examples of provisions in this category include :

  • Casting vote of the chairperson. Companies established since 1st October 2007 cannot include a provision giving the chairperson the casting vote. Where the articles of a company established before then provide for a chairperson’s casting vote, the provision will remain effective unless and until it is removed;
  • Although the Act allows companies not to include (or remove) provisions for company secretaries and for AGMs, it is up to individual companies to decide whether to include or remove any such provision;
  • The duty to avoid conflicts of interest applies to all directors of charitable companies but it is possible (i) for the memorandum and articles to authorise a conflict of interests arising from arrangements with the company and (ii) to include provisions for the non-conflicted trustees to authorise departures from the duty . Clause 5 of the revised GD1 contains clauses which we consider meet the requirements of those parts of the legislation which come into force on 1 October 2008 or were in force prior to that.

c. Further information on conflict of interest and the need to make changes.

Concern has been expressed about authorising conflicts arising from directors being trustees of other charities whose interests may conflict with those of the charitable company. Many sets of articles will contain a provision similar to that recommended in GD1 requiring conflicted trustees to withdraw from trustees’ discussions and take no part in decisions in which they have an interest. This is likely to be sufficient to avoid a conflict of loyalty arising in such situations.

Such a provision does not authorise any benefit to the trustee but it does permit a conflict arising from, for instance, another trusteeship to be avoided.

Circumstances may arise where the existing provisions of the memorandum and articles are not sufficient to permit a director to avoid a conflict of interests. In such cases it is possible for the Commission to authorise a director or directors to do something which would otherwise breach the duty to avoid a conflict by an order under section 26 where the Commission is satisfied that would be expedient in the interests of the charity.

Accordingly, it is the view of the Commission that it may not be necessary for charitable companies to amend their memorandum and articles in order to comply with the new duties. However, we appreciate that some charities may wish to do so. We have made some changes to GD1 (the Commission’s model memorandum and articles) to ensure they are compatible with the new conflict provisions.

d. We would recommend that directors refer to the Companies House website and seek guidance from someone qualified to advise on company law where they are unclear about what is required or what action to take.

Charity Commission
October 2008