Company Law Reform Bill [HL]

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Company Law Reform Bill [HL]

Company Law Reform Bill [HL]
Part 16 — Audit
Chapter 6 — Auditors’ liability
252

Liability limitation agreements
524
Liability limitation agreements
(1)
A “liability limitation agreement” is an agreement that purports to limit the
amount of a liability owed to a company by its auditor in respect of any
negligence, default, breach of duty or breach of trust, occurring in the course of
5
the audit of accounts, of which the auditor may be guilty in relation to the
company.
(2)
Section 522 (general voidness of provisions protecting auditors from liability)
does not affect the validity of a liability limitation agreement that—
(a)
complies with section 525 (terms of liability limitation agreement) and
10
of any regulations under that section, and
(b)
is authorised by the members of the company (see section 526).
(3)
Such an agreement—
(a)
is effective to the extent provided by section 527, and
(b)
is not subject—
15
(i)
in England and Wales or Northern Ireland, to section 2(2) or
3(2)(a) of the Unfair Contract Terms Act 1977 (c. 50);
(ii)
in Scotland, to section 16(1)(b) or 17(1)(a) of that Act.
525
Terms of liability limitation agreement
(1)
A liability limitation agreement—
20
(a)
must not apply in respect of acts or omissions occurring in the course
of the audit of accounts for more than one financial year, and
(b)
must specify the financial year in relation to which it applies.
(2)
The Secretary of State may by regulations—
(a)
require liability limitation agreements to contain specified provisions
25
or provisions of a specified description;
(b)
prohibit liability limitation agreements from containing specified
provisions or provisions of a specified description.

“Specified” here means specified in the regulations.
(3)
Without prejudice to the generality of the power conferred by subsection (2),
30
that power may be exercised with a view to preventing adverse effects on
competition.
(4)
Subject to the preceding provisions of this section, it is immaterial how a
liability limitation agreement is framed.

In particular, the limit on the amount of the auditor’s liability need not be a
35
sum of money, or a formula, specified in the agreement.
(5)
Regulations under this section are subject to negative resolution procedure.
526
Authorisation of agreement by members of the company
(1)
A liability limitation agreement is authorised by the members of the company
if it has been authorised under this section and that authorisation has not been
40
withdrawn.

Company Law Reform Bill [HL]
Part 16 — Audit
Chapter 6 — Auditors’ liability
253

(2)
A liability limitation agreement between a private company and its auditor
may be authorised—
(a)
by the company passing a resolution, before it enters into the
agreement, waiving the need for approval,
(b)
by the company passing a resolution, before it enters into the
5
agreement, approving the agreement’s principal terms, or
(c)
by the company passing a resolution, after it enters into the agreement,
approving the agreement.
(3)
A liability limitation agreement between a public company and its auditor may
be authorised—
10
(a)
by the company passing a resolution in general meeting, before it enters
into the agreement, approving the agreement’s principal terms, or
(b)
by the company passing a resolution in general meeting, after it enters
into the agreement, approving the agreement.
(4)
The resolution required is an ordinary resolution, subject to any provision of
15
the company’s articles requiring a higher majority (or unanimity).
(5)
The “principal terms” of an agreement are terms specifying, or relevant to the
determination of—
(a)
the kind (or kinds) of acts or omissions covered,
(b)
the financial year to which the agreement relates, or
20
(c)
the limit to which the auditor’s liability is subject.
(6)
Authorisation under this section may be withdrawn by the company passing
an ordinary resolution to that effect—
(a)
at any time before the company enters into the agreement, or
(b)
if the company has already entered into the agreement, before the
25
beginning of the financial year to which the agreement relates.

Paragraph (b) has effect notwithstanding anything in the agreement.
527
Effect of liability limitation agreement
(1)
A liability limitation agreement is not effective to limit the auditor’s liability to
less than such amount as is fair and reasonable in all the circumstances of the
30
case having regard (in particular) to—
(a)
the auditor’s responsibilities under this Part,
(b)
the nature and purpose of the auditor’s contractual obligations to the
company, and
(c)
the professional standards expected of him.
35
(2)
A liability limitation agreement that purports to limit the auditor’s liability to
less than the amount mentioned in subsection (1) shall have effect as if it
limited his liability to that amount.
(3)
In determining what is fair and reasonable in all the circumstances of the case
no account is to be taken of—
40
(a)
matters arising after the loss or damage in question has been incurred,
or
(b)
matters (whenever arising) affecting the possibility of recovering
compensation from other persons liable in respect of the same loss or
damage.
45

Company Law Reform Bill [HL]
Part 16 — Audit
Chapter 7 — Supplementary provisions
254

528
Disclosure of agreement by company
(1)
A company which has entered into a liability limitation agreement must make
such disclosure in connection with the agreement as the Secretary of State may
require by regulations.
(2)
The regulations may provide, in particular, that any disclosure required by the
5
regulations shall be made—
(a)
in a note to the company’s annual accounts (in the case of its individual
accounts) or in such manner as is specified in the regulations (in the
case of group accounts), or
(b)
in the directors’ report.
10
(3)
Regulations under this section are subject to negative resolution procedure.
Chapter 7
Supplementary provisions
529
Minor definitions
In this Part—
15
“insurance market activity” has the meaning given in section 316(3) of the
Financial Services and Markets Act 2000 (c. 8);
“qualified”, in relation to an auditor’s report (or a statement contained in
an auditor’s report), means that the report or statement does not state
the auditor’s unqualified opinion that the accounts have been properly
20
prepared in accordance with this Act or, in the case of an undertaking
not required to prepare accounts in accordance with this Act, under any
corresponding legislation under which it is required to prepare
accounts;
“regulated activity” has the meaning given in section 22 of the Financial
25
Services and Markets Act 2000, except that it does not include activities
of the kind specified in any of the following provisions of the Financial
Services and Markets Act 2000 (Regulated Activities) Order 2001—
(a)
article 25A (arranging regulated mortgage contracts),
(b)
article 39A (assisting administration and performance of a
30
contract of insurance),
(c)
article 53A (advising on regulated mortgage contracts), or
(d)
article 21 (dealing as agent), article 25 (arranging deals in
investments) or article 53 (advising on investments) where the
activity concerns relevant investments that are not contractually
35
based investments (within the meaning of article 3 of that
Order);
“turnover”, in relation to a company, means the amounts derived from the
provision of goods and services falling within the company’s ordinary
activities, after deduction of—
40
(a)
trade discounts,
(b)
value added tax, and
(c)
any other taxes based on the amounts so derived.

Company Law Reform Bill [HL]
Part 17 — Private and public companies
Chapter 1 — Prohibition of public offers by private companies
255

Part 17
Private and public companies
Chapter 1
Prohibition of public offers by private companies
530
Prohibition of public offers by private company
5
(1)
A private company limited by shares or limited by guarantee and having a
share capital must not—
(a)
offer to the public any securities of the company, or
(b)
allot or agree to allot any securities of the company with a view to their
being offered to the public.
10
(2)
Unless the contrary is proved, an allotment or agreement to allot securities is
presumed to be made with a view to their being offered to the public if an offer
of the securities (or any of them) to the public is made—
(a)
within six months after the allotment or agreement to allot, or
(b)
before the receipt by the company of the whole of the consideration to
15
be received by it in respect of the securities.
(3)
A company does not contravene this section if—
(a)
it acts in good faith in pursuance of arrangements under which it is to
re-register as a public company before the securities are allotted, or
(b)
as part of the terms of the offer it undertakes to re-register as a public
20
company within a specified period, and that undertaking is complied
with.
(4)
The specified period for the purposes of subsection (3)(b) must be a period
ending not later than six months after the day on which the offer is made (or,
in the case of an offer made on different days, first made).
25
(5)
In this Chapter “securities” means shares or debentures.
531
Meaning of “offer to the public”
(1)
This section explains what is meant in this Chapter by an offer of securities to
the public.
(2)
An offer to the public includes an offer to any section of the public, however
30
selected.
(3)
An offer is not regarded as an offer to the public if it can properly be regarded,
in all the circumstances, as—
(a)
not being calculated to result, directly or indirectly, in securities of the
company becoming available to persons other than those receiving the
35
offer, or
(b)
otherwise being a private concern of the person receiving it and the
person making it.
(4)
An offer is to be regarded (unless the contrary is proved) as being a private
concern of the person receiving it and the person making it if—
40
(a)
it is made to a person already connected with the company and, where
it is made on terms allowing that person to renounce his rights, the

Company Law Reform Bill [HL]
Part 17 — Private and public companies
Chapter 1 — Prohibition of public offers by private companies
256

rights may only be renounced in favour of another person already
connected with the company; or
(b)
it is an offer to subscribe for securities to be held under an employees’
share scheme and, where it is made on terms allowing that person to
renounce his rights, the rights may only be renounced in favour of—
5
(i)
another person entitled to hold securities under the scheme, or
(ii)
a person already connected with the company.
(5)
For the purposes of this section “person already connected with the company”
means—
(a)
an existing member or employee of the company,
10
(b)
a member of the family of a person who is or was a member or
employee of the company,
(c)
the widow or widower, or surviving civil partner, of a person who was
a member or employee of the company,
(d)
an existing debenture holder of the company, or
15
(e)
a trustee (acting in his capacity as such) of a trust of which the principal
beneficiary is a person within any of paragraphs (a) to (d).
(6)
For the purposes of subsection (5)(b) the members of a person’s family are the
person’s spouse or civil partner and children (including step-children) and
their descendants.
20
532
Enforcement of prohibition: order restraining proposed contravention
(1)
If it appears to the court—
(a)
on an application under this section, or
(b)
in proceedings under section 459 or 460 of the Companies Act 1985
(c. 6) (protection of members against unfair prejudice),
25

that a company is proposing to act in contravention of section 530 (prohibition
of public offers by private companies), the court shall make an order under this
section.
(2)
An order under this section is an order restraining the company from
contravening that section.
30
(3)
An application for an order under this section may be made by—
(a)
a member or creditor of the company, or
(b)
the Secretary of State.
533
Enforcement of prohibition: orders available to the court after contravention
(1)
This section applies if it appears to the court—
35
(a)
on an application under this section, or
(b)
in proceedings under section 459 or 460 of the Companies Act 1985
(protection of members against unfair prejudice),

that a company has acted in contravention of section 530 (prohibition of public
offers by private companies).
40
(2)
The court must make an order requiring the company to re-register as a public
company unless it appears to the court—
(a)
that the company does not meet the requirements for re-registration as
a public company, and

Company Law Reform Bill [HL]
Part 17 — Private and public companies
Chapter 1 — Prohibition of public offers by private companies
257

(b)
that it is impractical or undesirable to require it to take steps to do so.
(3)
If it does not make an order for re-registration, the court may make either or
both of the following—
(a)
a remedial order (see section 534), or
(b)
an order for the compulsory winding up of the company.
5
(4)
An application under this section may be made by—
(a)
a member of the company who—
(i)
was a member at the time the offer was made (or, if the offer was
made over a period, at any time during that period), or
(ii)
became a member as a result of the offer,
10
(b)
a creditor of the company who was a creditor at the time the offer was
made (or, if the offer was made over a period, at any time during that
period), or
(c)
the Secretary of State.
534
Enforcement of prohibition: remedial order
15
(1)
A “remedial order” is an order for the purpose of putting a person affected by
anything done in contravention of section 530 (prohibition of public offers by
private company) in the position he would have been in if it had not been done.
(2)
The following provisions are without prejudice to the generality of the power
to make such an order.
20
(3)
Where a private company has—
(a)
allotted securities pursuant to an offer to the public, or
(b)
allotted or agreed to allot securities with a view to their being offered
to the public,

a remedial order may require any person knowingly concerned in the
25
contravention of section 530 to offer to purchase any of those securities at such
price and on such other terms as the court thinks fit.
(4)
A remedial order may be made—
(a)
against any person knowingly concerned in the contravention, whether
or not an officer of the company;
30
(b)
notwithstanding anything in the company’s constitution (which
includes, for this purpose, the terms on which any securities of the
company are allotted or held);
(c)
whether or not the holder of the securities subject to the order is the
person to whom the company allotted or agreed to allot them.
35
(5)
Where a remedial order is made against the company itself, the court may
provide for the reduction of the company’s capital accordingly.
535
Validity of allotment etc not affected
Nothing in this Chapter affects the validity of any allotment or sale of securities
or of any agreement to allot or sell securities.
40

Company Law Reform Bill [HL]
Part 17 — Private and public companies
Chapter 2 — Minimum share capital requirement for public companies
258

Chapter 2
Minimum share capital requirement for public companies
536
Public company: requirement as to minimum share capital
(1)
A company that is a public company (otherwise than by virtue of re-
registration as a public company) must not do business or exercise any
5
borrowing powers unless the registrar has issued it with a certificate under this
section (a “trading certificate”).
(2)
The registrar shall issue a trading certificate if, on an application made in
accordance with section 537, he is satisfied that the nominal value of the
company’s allotted share capital is not less than the authorised minimum.
10
(3)
For this purpose a share allotted in pursuance of an employees’ share scheme
shall not be taken into account unless paid up as to—
(a)
at least one-quarter of the nominal value of the share, and
(b)
the whole of any premium on the share.
(4)
A trading certificate has effect from the date on which it is issued and is
15
conclusive evidence that the company is entitled to do business and exercise
any borrowing powers.
537
Procedure for obtaining certificate
(1)
An application for a certificate under section 536 must—
(a)
state that the nominal value of the company’s allotted share capital is
20
not less than the authorised minimum,
(b)
specify the amount, or estimated amount, of the company’s
preliminary expenses,
(c)
specify any amount or benefit paid or given, or intended to be paid or
given, to any promoter of the company, and the consideration for the
25
payment or benefit, and
(d)
be accompanied by a statement of compliance.
(2)
The statement of compliance is a statement that the company meets the
requirements for the issue of a certificate under section 536.
(3)
The registrar may accept the statement of compliance as sufficient evidence of
30
the matters stated in it.
538
The authorised minimum
For the purposes of sections 536 and 537 (requirement as to minimum share
capital of public company) the authorised minimum is £50,000.
539
Consequences of doing business etc without a trading certificate
35
(1)
If a company does business or exercises any borrowing powers in
contravention of section 536, an offence is committed by—
(a)
the company, and
(b)
every officer of the company who is in default.
(2)
A person guilty of an offence under subsection (1) is liable—
40