Company Law Reform Bill

by Sam Lyon

The Company Law Reform Bill (“CLRB”) will result in annual savings of £250 million for UK businesses, with £100 million of those savings being made by the small, private, owner-managed companies, which make up 90% of companies registered in the UK.

These impressive figures were the official estimates announced by the UK Government as it published the CLRB in late 2005, but how have they attempted to instigate these savings and how will the CLRB affect the running of private companies on a day to day basis?

At over 500 pages in length, consisting of 885 clauses and 15 Schedules, and taking 7 years from inception to publication, the CLRB is neither a quick nor easy read. This article aims to highlight the proposed changes to the current law, which will be of most practical relevance to those who own and manage private companies.

Reduction in administrative “red tape”

Presently, all companies must have two governing documents, Memorandum of Association and Articles of Association. For most smaller companies, a statutory version of these documents is adopted in order to save both time and expense. The CLRB proposes to save further costs by merging these into a single, simpler, document, which will also be worded so as to be more applicable to the needs of smaller companies.

This attempt to ease the administrative burden can also be seen in the proposal to remove the mandatory appointment of a company secretary, thus introducing the possibility for the existence of genuine single member companies. Also, the holding of an Annual General Meeting will no longer be required, although companies may opt to do so, if they wish - this being in contrast to the current process, which involves a company having to pass a resolution to opt out of holding an AGM each year.

Decision-making within a company will also be simplified, with written resolutions able to be passed with the signatures of only the number of members who would have been required to vote in favour at a General Meeting, i.e. 75% or 50% depending on the nature of the resolution, as opposed to the current need for unanimity in order to pass a resolution in writing. This proposal has potential to make big savings for smaller companies, particularly where one or more shareholders are situated outside the UK.

Company directors’ actions to be subject to statutory duties

Imposing legal duties upon directors, in relation to their actions on behalf of companies, is not a new idea. However, at present, these duties exist only as a result of judicial decisions in cases stretching back many years. In order to make these duties more accessible to both directors and company members, the CLRB has put them into writing for the first time. In summary, these will be:

* To act within the company’s governing documents;
* To act in good faith, to promote the success of the company, but to also have regard to other factors such as, amongst others; the company’s employees, environmental consequences of the company’s actions, the long term consequences of their decisions.
* Exercise independent judgement;
* Avoid conflicts of interest;
* Not accept benefits from third parties; and
* Declare any personal interest in any proposed company transaction.

Whilst, strictly speaking, no new duties are imposed upon company directors. These statutory duties place a greater emphasis on the expectation that directors must consider the long term consequences that their decisions have upon a broad range of issues. Directors must now consider other interests than just those of the company and it will be interesting to see how much weight the courts attribute to these “other interests” if, or when, such matters are litigated before them.

Practical changes affecting directors

There will also be more noticeable and practical changes to the law regarding company directors. These include:
 
* the option for directors to file a service address at Companies House, thus keeping their private residential details from the public record. At the moment directors must obtain a court order to allow them to file a service address and this will only be granted where it can be shown that the director would be at serious risk of violence or intimidation if their residential details were to be filed on the public record;
* the power for fellow directors to approve company transactions in which a director has a conflict of interest. Currently, only a company’s members may approve such transactions; and
* the ability of a company to make a financial loan to a director of that company, which is forbidden at present.

Allowing financial assistance whilst limiting auditors’ liability

The law will be relaxed in relation to the financial assistance which a company can give to a member or prospective purchaser, for the purpose of the purchase of its own shares. Although it is possible for companies to do this at present, a lengthy and costly administrative auditing exercise must be carried out beforehand. The changes to the law would make the acquisition, and merging, of small companies a much simpler and less costly proposition, thus encouraging entrepreneurial activity.

In relation to a company’s accounting arrangements, proposed changes include:

* the allowance of a company’s auditors to limit their financial liability for negligence, to a reasonable level, with the company members’ approval; and
* the reduction in the period within which a private companies accounts must be filed from 10 months after the year end, to 7 months.

In conclusion, whilst the provisions of the CLRB may not appear to be a significant overhaul of the law in respect of private companies, it does provide for an effective streamlining of the law that will hopefully bring about the cost savings which the Government proclaimed at the time of the CLRB’s publication.

Sam Lyon is currently a trainee solicitor based in Burnetts' Commercial Department. He will qualify as a solicitor in September 2006, specialising in company commercial law.

For more information on company law, contact Burnetts commercial team on 01228 552222.

Aug 2006