In 2005 the Government announced that it intends to implement changes to simplify and improve company law in the form of the Company Law Reform Bill. At the centre of the Bill is a commitment to deregulation and it is estimated to save businesses up to £250 million a year including £100 million for small businesses.
 

The Bill has four objectives which include enhancing shareholder engagement and a long-term investment culture; ensuring better regulation and a “Think Small First” approach; making it easier to set up and run a company and providing flexibility for the future.

Current company law was written mainly with the large companies in mind. The provisions that apply to private companies are often expressed as an exception to the provisions applying to public companies, making them hard to understand. This approach has been turned on its head. The Bill is committed to help small businesses and many of the proposals in it have been created with small businesses in mind which is appropriate when one considers that the majority of UK businesses are SME’s. The Bill should help remove a great deal of unnecessary regulation and make the law more accessible and understandable. The main changes to company law affecting small companies are as follows:-

1. Forming a company - there will be separate model Articles of Association for private companies. These will contain the minimum key rules on the internal workings of the company and will be shorter and clearer.

2. No requirement for a Company Secretary - the requirement for private companies to have a company secretary will be abolished.

3. Directors - the general duties that a director owes to the company are currently established in case law rather than statute making them hard to be widely understood. The Bill includes a statutory statement of directors’ general duties both to make the law more accessible and to change the law where it no longer corresponds to modern business practice. Guidance will be provided for new directors as to what these duties mean.

4. Resolutions and Meetings - private companies will not need to hold an annual general meeting unless they positively opt to do so. It will be easier for companies to take decisions by written resolution, rather than holding a meeting, as such resolutions may in future be carried with a simple 75% majority of eligible votes rather than requiring unanimity as at present. Companies will also be able to make greater use of communications for communication with shareholders.

5. Accounts and Reports - the provisions on accounts and reports have been restated to make them easier to understand for small companies. The option for small and medium sized companies to file abbreviated accounts with Companies House will remain. The deadline for private companies to file their Annual Report documents will reduce from 10 months after year end to 9 reflecting both improvements in technology and the increased rate at which information becomes outdated.

6. Financial assistance - the rules on providing financial assistance to potential or actual shareholders which limit the circumstances in which companies can provide assistance for the acquisition or purchase of their own shares are highly complex and will be abolished.

Another major step forward under the Bill is the concept of ‘Enlightened Shareholder Value’. This is to be carried out by making it clear that, whilst directors must promote the success of the company for the benefit of its shareholders, this will only be achieved by recognising wider factors such as the contribution of employees, reputation of the business, suppliers, customers, etc and not just concentrating on pleasing the shareholders in the short term.

In addition the Bill proposes to implement auditor liability and improve audit quality by allowing shareholders to agree to limit the auditors’ liability to the company as well as greater rights for shareholders to question auditors and named partners for audit reports and audit reports to give the name of the individual lead auditor as well as the audit firm.

The Bill also goes further and has incorporated a new offence for knowingly or recklessly including false, misleading or deceptive matters in an audit report.

Although the Company Law Reform Bill does include a number of initiatives which have already been introduced, it is important to note that the Bill is definitely not a consolidation of the old law as there are a whole range of new and innovative measures. Notably the Bill includes a company law reform power to enable speedier updating and amendment of company law in the future.

The Bill has been a long time in its formation, stretching back to 1998, and has included a number of formal consultation stages as well as ongoing informal consultation with key stakeholders. It has suffered problems along the way due to the fact that English law is based on precedents and our legal system struggles when trying to adapt to changes in statutory wording.

Alan Johnson, Secretary of State for Trade and Industry has commented “An effective framework of company law and corporate governance will promote enterprise and help stimulate investment in the UK. We have focused throughout on making the law more accessible and thinking small first. The Bill makes an important contribution to our better regulation agenda.”

“The measures also represent a significant step forward in ensuring that our company law remains up to date, flexible and accessible for everyone who uses it. We have consulted every step of the way. Our company law is central to corporate activity and this important updating will provide a tremendous boost for British businesses, large and small.”

“We are determined to make sure that our law keeps step with economic needs. This Bill will help ensure that Britain remains a prime place for incorporation”.

The Government claims that the Bill will lead to the largest shake-up of company law for nearly two decades. In addition it will affect companies not just in England – but also Scotland, Northern Ireland and in particular Wales, as company law has not been devolved to the Welsh Assembly.

So what are the implications for Welsh businesses? In Wales perhaps more than any other part of the country the vast majority of companies are SME’s and these provisions will impact greatly on these companies. Notably by reducing the amount of bureaucratic “red tape” involved in company formalities and the day to day running of small companies and therefore easing the administerial burden which affects so many entrepreneurs, which should ultimately reduce costs.

A number of sources were used for research including the DTI and Government News Network websites.