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Company Law – Radical Changes Are On The Horizon
Tom Walker
Tom Walker
The Companies Bill is the first fundamental overhaul of company law since 1985. It has been designed to benefit small businesses and will become law in 2007. Tom Walker, a corporate services solicitor with Charles Lucas & Marshall puts it in context.
The Companies Bill aims to simplify many corporate procedures. As well as being directly relevant to small businesses it will also have a substantial impact on professional advisers and their clients.
The Bill runs to around 500 pages and 900 clauses and introduces wide-ranging reforms in a number of areas which will have an impact on directors, auditors and shareholders of private, public and quoted companies.
The Government’s overall objective is to simplify and modernise company law to meet today’s business needs and provide flexibility for the future. It has estimated that the measures could save businesses around £250 million per year, including £100 million for SMEs.
Much of current company law is drafted from the perspective of large public companies, whereas over 90 per cent of UK companies are small, private, owner-managed companies. The Government wishes to change the emphasis of company law to recognise this.
The specific objectives of The Companies Bill are to:
  • ensure better regulation and a 'Think Small First' approach
  • make it easier to set up and run a company
  • provide flexibility for the future
  • enhance shareholder engagement and a long-term investment culture
The main headline points which small companies and should be aware of include:
  • Setting out directors’ duties in statute
  • Ability to form a company with only one officer who can also be the sole shareholder
  • Removal of the prohibition on giving financial assistance for private limited companies and, therefore, the end of the “whitewash” procedure
  • Introduction of new default Articles of Association and simplification of Memorandum
  • Greater use of electronic reporting and filing
  • Auditor Liability and offences
  • Changes to the rules on maintenance of share capital for private limited companies
  • New rules to allow company law to be updated more regularly
  • Confidentiality of directors' home addresses
Directors
Under the Bill, a director’s primary duty is to act for the benefit of members of the company as a whole. However, when doing so, he or she must also have regard to the interests of employees, the impact on the environment, the desirability of the company maintaining a reputation for high standards of business conduct, and the need to act fairly as between the members.
This is an attempt to give effect to what the DTI calls “enlightened shareholder value.” The concern, however, for directors is the potential need to produce “audit trails” documenting how consideration was given to the necessary criteria when reaching decisions
.
Another significant change is that only one director, rather than a director and secretary, is required when setting up and running a private limited company. In addition, the sole director can also be the sole shareholder. There is no longer a requirement to have a secretary, although the responsibilities remain. Directors must be over the age of sixteen and, if there is a sole director, must be a natural person rather than another corporate body.
Shareholders
Shareholders will be encouraged to take a more active role in the business. They will have a new statutory right to sue directors on behalf of the company for negligence, default, breach of duty or breach of trust.
Private Companies – Formation and Administration
Existing pro-forma articles of association for a private limited company will be replaced by simplified default articles, and the Memorandum will no longer require an objects clause. Existing companies can continue to use their existing articles or adopt the new default articles by special resolution.
There is greater scope for private companies to conduct their business by written resolution and they will no longer need to hold an Annual General Meeting. Resolutions may be circulated to the members electronically - allowing most small companies to make decisions quickly and efficiently.
This article has merely been intended to provide a whirlwind tour of the forthcoming legislation which will have an enormous impact on all businesses, particularly SMEs and their advisors.
You can contact Tom Walker on 01635 521212 or tom.walker@clmlaw.co.uk
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