Company Law Reform Bill

The Company Law Reform Bill was finally introduced to Parliament on 1 November. It proposes extensive changes to simplify and improve company law. The focus is on deregulation and this is expected to save businesses up to £250 million a year, including £100 million for small businesses. The new law will also be easier to understand and will allow a greater degree of flexibility.

The stated aim of the new law is to ensure that Britain remains one of the best locations in the world to set up and run a business, to keep the regulatory burden on business to a minimum, to promote shareholder engagement and to encourage a long-term investment culture. Certainly, it is true to say that there has been extensive consultation on the proposals with industry and lawyers, which has helped to ensure that the new bill does represent an improvement on the status quo.

The provisions most relevant to directors of a company are as follows:

• for the first time, there will be a statutory statement of directors’ duties. Although this will not provide much guidance on how in practice directors should discharge their duties, it will provide a clear and accessible list of what those duties are;
• the ability of shareholders to sue directors (on behalf of the company rather than the shareholders themselves) has been codified, with the aim of making such actions easier;
• all directors (not just those at serious risk of violence or intimidation) will be able to provide a service address for the public record. However existing residential address details will not be removed;
• private companies will be able to give financial assistance for the acquisition of their own shares or those of their (private company) parent, without having to go through the ‘whitewash’ procedure;
• private companies will be able to reduce their share capital by a special resolution supported by a solvency statement from the directors, rather than having to go to court;
• at least one director of every company will have to be a natural person;
• private companies will no longer need to have a company secretary; and
• the time period for filing accounts will be reduced to nine months (instead of 10 months) for private companies, and six months (instead of 7 months) for PLCs.

There are also a number of provisions relating to auditing. These are designed to increase the transparency of the audit procedure and the relationship between the company and the auditor:

• subject to annual shareholder approval, all companies will be allowed to limit the liability of their auditors to an amount considered by a court to be ‘fair and reasonable’ (i.e. an amount proportionate to their fault);
• shareholders will have greater rights to question auditors and named partners for audit reports (including the right for shareholders of quoted companies to raise questions about the reasons for auditors changing);
• audit reports will have to name the individual lead auditor as well as the audit firm (although provision is made for confidentiality in exceptional cases);
• changes to the requirements relating to the statements that auditors have to make when they stop auditing a company: explanatory statements are required more often, and some statements need to be sent to appropriate regulators; and
• creation of a criminal offence of recklessly or knowingly including misleading, false or deceptive matters in an audit report.

Shareholder engagement will be promoted through enhancing the powers of proxies and making it easier for indirect investors to be informed of and exercise governance rights in the company.

The Bill also includes a power to allow faster updating and amendment of company law in the future, subject to consultation and Parliamentary scrutiny requirements. This should avoid the sort of delays which have been experienced with the introduction of the current bill.

This article first appeared in our Construction and development legal update Spring 2006. To view this publication, please click here to open it as a pdf in a new window