Companies Act 2006 – Section 826

Section 826: Information protected from wider disclosure

1147. This section re-enacts provisions in section 211(9) (as applied by section 213(3)) and
215(4) of the 1985 Act. Under section 409 the Secretary of State may make regulations
exempting a company from the need to disclose information relating to related undertakings
in notes to its accounts in certain circumstances. The Secretary of State must agree that the
information need not be disclosed. Where advantage is taken of this exemption, the fact must
be stated in the company’s annual accounts. This section provides that this same information
must not be included in a section 805 report, (though its omission must be noted in the
report), and must not be available for inspection under section 811.

Section 827: Reckoning of periods for fulfilling obligations

1148. This provision re-enacts the provision of section 220(2) of the 1985 Act concerning
the calculation of periods in the Part expressed as a number of working days (as defined in
section 1173). In contrast to section 220(2), the definition of “working days” excludes bank
holidays only in the part of the UK where the company is registered.

Section 828: Power to make further provision by regulations

1149. This section re-enacts section 210A of the 1985 Act. It confers power on the Secretary
of State to make regulations to amend the definition of shares to which this Part applies
(subsection (1)(a) re-enacting section 210A(1)(a)). Power is also conferred to amend the
provisions in section 793 as to notice by a company requiring information about interests in
its shares, (subsection (1)(b) re-enacting section 210A(1)(e)), and the provisions as to what is
to be taken to be an interest in shares, (subsection (1)(c) re-enacting section 210A(1)(d)).

PART 23: DISTRIBUTIONS

1150. This Part restates the provisions on distributions in Part 8 of the 1985 Act. The only
substantive change is to the rules on distributions in kind, and the new provisions are in
sections 845, 846 and 851.

Sections 845 and 846: Distributions in kind

1151. In Capital Maintenance: Other Issues (paragraphs 24 to 43) the CLR explored the
difficulties created by the decision in Aveling Barford Ltd v. Perion Ltd [1989] BCLC 626
and made a number of suggestions as to how these difficulties might be overcome. Section
845 is a new provision which removes doubts to which the decision in this case has given
rise: in particular when a transfer of an asset to a member amounts to a distribution. The
concern behind this section is that, following the decision in the Aveling Barford case, it is
unclear when intra-group transfers of assets can be conducted by reference to the asset’s book
value rather than its market value (which will frequently be higher than the book value).

1152. The decision in Aveling Barford concerned the sale of a property by a company
(which had no distributable profits) at a considerable undervalue to another company
controlled by the company’s ultimate sole beneficial shareholder. The transaction was held to be void as an unauthorised return of capital. Whilst this case decided nothing about the
situation where a company that has distributable profits makes an intra-group transfer of
assets at book value, there was a concern that, as such a transfer of an asset at book value
may have an element of undervalue, the transaction would constitute a distribution thereby
requiring the company to have distributable profits sufficient to cover the difference in value.
The result has been that companies are often required either to abandon a transfer or to
structure it in a more complex way, for example, having the assets revalued and then sold (or
distributed under section 276 of the 1985 Act) so that the distributable reserves are increased
by the “realised profit” arising on the sale/distribution followed by a capital contribution of
the asset to the relevant group member.

1153. Section 845 does not disturb the position in the Aveling Barford case such that where
a company which does not have distributable profits makes a distribution by way of a transfer
of assets at an undervalue, this will be an unlawful distribution contrary to Part 23 of the Act.

1154. It clarifies, however, the position where a company does have distributable profits and
provides that where the conditions referred to in subsection (1)(a) and (b) are met, the
amount of any distribution consisting of or arising from the sale, transfer or other disposition
by a company of a non-cash asset to a member of the company should be calculated by
reference to the value at which that asset is included in the company’s accounts, that is, its
“book value”. Thus, if an asset is transferred for a consideration not less than its book value,
the amount of the distribution is zero, but if the asset is transferred for a consideration less
than its book value, the amount of the distribution is equal to that shortfall (which will
therefore need to be covered by distributable profits) – see subsection (2)(a) and (b). This
avoids the potential need for many companies to carry out asset revaluations requiring
professional advice and incurring fees to advisors prior to making a distribution of a non-cash
asset.

1155. The conditions that must be satisfied for subsection (2)(a) and (b) to apply are that at
the time of the disposition of the asset, the company must have profits available for
distribution and that if the amount of such a distribution were to be determined in accordance
with this section, it could be made without contravening any of the provisions of this Part (for
example, section 830 and section 831).

1156. Under subsection (3), in determining whether it has profits available for distribution
(as defined in section 830), a company may treat any profit that would arise on the proposed
disposition of the non-cash asset (that is, the amount (if any) by which the consideration
received exceeds the book value of the asset) as increasing its distributable profits.

1157. Section 846 replaces section 276 of the 1985 Act which applies where a company
“makes a distribution of or including a non-cash asset” and allows a company which has
revalued assets showing an unrealised profit in the accounts, to treat that profit as a realised
profit where the distribution is one of, or including, a non-cash asset. Section 846 tracks the
drafting of section 845 so that it applies not only where the company makes a distribution
consisting of or including a non-cash asset, but also where a company makes a distribution
arising from the sale, transfer or other disposition by it of a non-cash asset, in other words in
the same circumstances that are described in section 845.