Companies Act 2006

At Towerstone Accountants we provide specialist limited company accountancy services for directors and owner managed businesses across the UK. We created this webpage for people responsible for company filings and statutory records who want clear guidance on Companies House requirements without jargon. Our aim is to help you understand your obligations, avoid filing errors, and stay compliant with Companies House and HMRC.

The Companies Act 2006 is the backbone of company law in the UK. It governs how companies are formed, how they are run, the duties of directors, the rights of shareholders, and what information must be made public. Despite its importance, I find that many directors only encounter the Companies Act when something goes wrong, a missed filing, a dispute between shareholders, or a question about director responsibility.

From my experience as a chartered accountant advising UK limited companies, the Companies Act 2006 is not something directors need to memorise, but it is something they need to understand at a practical level. It shapes almost every obligation a company has and many of the personal responsibilities directors carry, often without realising it.

In this article, I will explain what the Companies Act 2006 is, why it was introduced, what it covers, and how it affects day to day company life. I will focus on the parts that matter most to directors and business owners, using clear UK language and practical examples rather than legal theory.

What is the Companies Act 2006

The Companies Act 2006 is the main piece of legislation that regulates companies in the UK. It replaced and consolidated earlier company law, much of which had developed piecemeal over decades.

The Act applies to most UK companies, including:

• Private limited companies

• Public limited companies

• Companies limited by guarantee

It sets out the rules for how companies are formed, managed, and ultimately wound up.

The Act is administered in practice through bodies such as Companies House and enforced through the courts and regulatory authorities where necessary.

Why the Companies Act 2006 was introduced

Before 2006, UK company law was spread across multiple Acts and amendments. This made it difficult for directors and advisers to navigate and understand their obligations clearly.

The Companies Act 2006 was introduced to:

• Modernise company law

• Simplify and consolidate existing legislation

• Make the law clearer and more accessible

• Reflect modern business practices

It was one of the largest pieces of legislation ever passed in the UK, running to thousands of sections and schedules.

Who the Companies Act 2006 applies to

The Companies Act applies to companies, not to sole traders or partnerships.

If you are a director or shareholder of a UK limited company, the Act applies to you.

This includes:

• One person companies

• Family owned companies

• Dormant companies

• Trading and non trading companies

The size of the company does not remove the obligation to comply.

Company formation under the Companies Act

The Act sets out how a company is formed and what is required at the point of incorporation.

To form a company, you must:

• Choose a company name

• Decide on the registered office address

• Appoint at least one director

• Decide on shareholders and share structure

• Submit incorporation documents

Once registered, the company becomes a separate legal entity, distinct from its owners.

This separation is one of the most important concepts in company law and underpins limited liability.

The concept of separate legal personality

Under the Companies Act, a company has its own legal personality.

This means:

• The company can own assets

• The company can enter into contracts

• The company can sue and be sued

• The company is responsible for its own debts

Directors and shareholders are not automatically responsible for company debts, although there are important exceptions.

Director duties under the Companies Act 2006

One of the most important parts of the Companies Act for directors is the codification of director duties.

These duties apply to all directors, including those of small owner managed companies.

The main statutory duties include:

• Acting within powers

• Promoting the success of the company

• Exercising independent judgement

• Exercising reasonable care skill and diligence

• Avoiding conflicts of interest

• Not accepting benefits from third parties

• Declaring interests in transactions

These duties are owed to the company, not to individual shareholders.

What promoting the success of the company means

This duty is often misunderstood.

Promoting the success of the company means acting in good faith to benefit the company as a whole. Directors must consider factors such as:

• Long term consequences of decisions

• Interests of employees

• Relationships with suppliers and customers

• Impact on the community and environment

• Fairness between shareholders

This does not mean every decision must benefit everyone equally, but it does mean decisions must be defensible as being in the company’s best interests.

Director liability and personal risk

Although companies provide limited liability, the Companies Act does not give directors unlimited protection.

Directors can be personally liable where they:

• Breach their statutory duties

• Trade wrongfully or fraudulently

• Fail to keep proper records

• Make unlawful distributions

This is why understanding the Act matters. Many director risks are not obvious day to day.

Shareholders and their rights

The Companies Act also sets out the rights of shareholders.

These rights include:

• Voting on certain company decisions

• Receiving dividends when declared

• Access to certain company information

• Protection against unfair prejudice

In small companies where directors and shareholders are often the same people, these distinctions can feel academic. They become very real when disputes arise or new shareholders are introduced.

Shares and share capital

The Act governs how shares are issued, transferred, and cancelled.

Key points include:

• A company must have at least one share

• Shares represent ownership not entitlement to management

• Different classes of shares can carry different rights

• Share issues must follow proper procedure

Poor handling of share issues is one of the most common technical errors I see in small companies.

Distributions and dividends

Dividends are governed by the Companies Act.

A company can only pay dividends out of distributable profits.

This means:

• There must be sufficient retained profits

• Dividends must be properly declared

• Interim and final dividends follow different rules

Paying dividends unlawfully can lead to personal liability for directors and repayment obligations for shareholders.

Company records and registers

The Companies Act requires companies to maintain statutory records.

These include:

• Register of directors

• Register of shareholders

• Register of people with significant control

• Records of resolutions

These records must be kept up to date and available for inspection.

Failing to maintain proper records is a breach of the Act and can cause problems during sales, investment, or disputes.

Companies House filings

The Act sets out what information must be filed publicly.

This includes:

• Annual accounts

• Confirmation statements

• Changes to directors or shareholders

• Changes to registered office

Companies House acts as the public record. Late or incorrect filings can result in penalties and damage credibility.

Accounts and reporting requirements

The Companies Act determines the framework for preparing and filing accounts.

It defines:

• Filing deadlines

• Size thresholds

• Reporting standards

• Disclosure requirements

Although accounting standards such as FRS 102 and FRS 105 set the technical rules, the obligation to prepare and file accounts comes from the Act itself.

Small companies and micro entities

The Act recognises that not all companies are the same.

It provides simplified regimes for:

• Small companies

• Micro entities

These regimes reduce disclosure and reporting burden but do not remove the obligation to keep accurate records.

Company meetings and resolutions

The Act sets out how decisions are made formally.

This includes:

• Ordinary resolutions

• Special resolutions

• Written resolutions

Many small companies rely heavily on written resolutions rather than formal meetings, which is permitted under the Act.

However, decisions still need to be documented properly.

Changes to company structure

The Companies Act governs how companies change over time.

This includes:

• Appointing or removing directors

• Issuing new shares

• Changing articles of association

• Changing company name

Failure to follow the correct process can invalidate decisions or create legal risk.

Winding up and dissolution

The Act also covers how companies come to an end.

This includes:

• Voluntary strike off

• Insolvent liquidation

• Members’ voluntary liquidation

Each route has strict legal requirements and consequences for directors.

The role of HMRC alongside the Companies Act

While the Companies Act governs company law, tax obligations sit alongside it.

Tax compliance is overseen by HMRC and operates under separate legislation.

However, company law and tax law overlap frequently, particularly around dividends, director loans, and record keeping.

Understanding both together is essential for running a company properly.

Common misunderstandings about the Companies Act

In practice, I see the same misunderstandings repeatedly.

These include:

• Thinking small companies are exempt

• Assuming accountants are responsible for compliance

• Believing limited liability removes all risk

• Treating company money as personal money

The Companies Act places responsibility squarely on directors.

Why the Companies Act matters for everyday decisions

The Act is not just about filings and paperwork.

It influences everyday decisions such as:

• Whether a dividend can be paid

• How money is taken from the company

• Who controls decision making

• How disputes are resolved

Directors who understand the framework tend to make better and safer decisions.

The importance of professional advice

The Companies Act 2006 is detailed and wide ranging.

From my experience, most problems arise not from deliberate wrongdoing but from misunderstanding or assumptions.

Good professional advice helps by:

• Interpreting obligations clearly

• Ensuring decisions are properly documented

• Protecting directors from unintended breaches

• Planning changes safely

This is particularly important as companies grow or become more complex.

Final thoughts

The Companies Act 2006 is the foundation of UK company law. It defines what a company is, how it operates, and where responsibility lies.

You do not need to know every section to run a company successfully, but you do need to understand the principles it sets out, especially around director duties, company money, and compliance.

In my experience, directors who respect the Companies Act and work within its framework enjoy far fewer problems, less stress, and far greater confidence in their decisions. It is not there to catch people out. It exists to provide structure, clarity, and fairness in how companies operate in the UK.

You may also find our guidance on corporate company law and articles of association in company law helpful when dealing with related Companies House tasks. For a broader overview of filings, registers, and statutory duties, you can visit our companies house hub.