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These Notes refer to the Company Law Reform Bill [HL]
as brought from the House of Lords on 24th May 2006 [Bill 190]
COMPANY LAW REFORM BILL [HL]
EXPLANATORY NOTES
INTRODUCTION
1. These explanatory notes relate to the Company Law Reform Bill as brought from the House of Lords on 24th May 2006. They have been prepared by the Department of Trade and Industry in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament.
2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the contents of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given.
BACKGROUND
3. The UK was one of the first nations to establish rules for the operation of companies. Today our system of company law and corporate governance, setting out the legal basis on which companies are formed and run, is a vital part of the legal framework within which business is conducted. As the business environment evolves, there is a risk that the legal framework can become gradually divorced from the needs of companies, in particular the needs of smaller private businesses, creating obstacles to ways that companies want and need to operate.
4. In March 1998, the DTI commissioned a fundamental review of company law. An independent Steering Group led the "Company Law Review" (CLR) whose terms of reference required them to consider how core company law could be modernised in order to provide a simple, efficient and cost effective framework for British business in the twenty-first century. After extensive consultation with interested parties, the CLR presented its Final Report to the Secretary of State for Trade and Industry on 26 July 2001. The report contained a range of specific recommendations for substantive changes to many areas of company law, and a set of principles to guide the development of the law more generally, most notably that it should be as simple and as accessible as possible for smaller firms and their advisers, and should avoid imposing unnecessary burdens on the ways companies operate.
[Bill 190-EN] 54/1
5. Many of the provisions of the Bill implement CLR recommendations. The Government set out and consulted on its intention to implement the recommendations of CLR proposals in the White Papers "Modernising Company Law" (July 2002) and "Company Law Reform" (March 2005). The 2005 White Paper included approximately 300 draft clauses and described in detail the policy intention for other areas. Further clauses were made publicly available for comment in July, September and October 2005.
OVERVIEW OF THE STRUCTURE OF THE BILL
6. The general arrangement of the Bill is as follows:
| PART | SUMMARY |
| Parts 1 to 7 | The fundamentals of what a company is, how it can be formed and what it can be called. |
| Parts 8 to 12 | The members (shareholders) and officers (management) of a company |
| Parts 13 and 14 | How companies may take decisions |
| Parts 15 and 16 | The safeguards for ensuring that the officers of a company are accountable to its members |
| Parts 17 to 24 | Raising share capital, annual returns and takeovers |
| Parts 25 to 33 | The regulatory framework, application to companies not formed under the Companies Acts and other company law provisions |
| Parts 34 and 35 | Business names and statutory auditors |
| Part 36 | Transparency obligations |
| Parts 37 to 40 | Miscellaneous and general |
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SUMMARY OF LEGISLATIVE CHANGES
7. The Bill amends and restates many of the provisions of the Companies Act 1985 (the 1985 Act) - approximately two-thirds of the 1985 Act is repealed. It also codifies certain provisions of case law. In some areas the Bill makes textual amendments to the 1985 Act or other legislation. There are also new provisions.
8. The Bill extends company law to the whole of the UK, so that companies will be UK companies rather than GB companies or Northern Ireland companies as at present.
TERRITORIAL EXTENT AND DEVOLUTION
Northern Ireland
9. Company law is a transferred matter. Currently, the provisions of GB company law are generally replicated, some time later, in separate Northern Ireland legislation. The Bill will extend GB company law to Northern Ireland (see the notes below on Part 38 of the Bill).
Scotland
10. Company law is a reserved matter and Companies Acts extend to the whole of Great Britain. However, there are several areas where, in legislating about companies, the Bill touches on matters which are devolved. A Sewel motion has been brought before the Scottish Parliament covering the following areas:
- changes (in Part 34) to the regulation of business names (a devolved matter) - these correspond to changes (in Part 5) to the regulation of company names (a reserved matter);
- statutory guidance to prosecutors and other enforcers in relation to a new offence of knowingly or recklessly causing an audit report to be misleading, false or deceptive - although the offence itself is a reserved matter, it is proposed that guidance be issued by the Lord Advocate in Scotland (see clause 499);
- certain changes relating to exemptions from audit requirements for companies that are charities (see clauses 463 and 466);
- conferral of a power on the Auditor General to specify public bodies for his audit (see clause 473).
Wales
11. Company law is not transferred to the Welsh Assembly. There are no Welsh clauses, and no areas that impact on devolved competencies.
Crown Dependencies
12. Part 24 of the Bill (takeovers) contains provision enabling it to be extended by Order in Council to the Isle of Man or any of the Channel Islands. This reflects the existing jurisdiction of the Takeover Panel (as the takeover regulator) and has been agreed by the relevant Island authorities. There will be further consultation with the Island authorities before the power is exercised.
PART 1: GENERAL INTRODUCTORY PROVISIONS
13. These clauses replace equivalent provisions in the 1985 Act. The Bill creates a single company law regime for the whole of the UK and, where a note on this or a subsequent Part of the Bill describes a particular clause as replacing or restating a provision in the 1985 Act, this should be read as applying equally to the corresponding provision in the Companies (Northern Ireland) Order 1986.
Companies and Companies Acts
Clause 1: Companies
14. This clause replaces section 735(1)(a) and (b) of the 1985 Act. It sets out the definitions of "company" and "existing company" (which refer to companies formed and registered under the Companies Acts). It also provides pointers to provisions in the Bill which relate to companies that are registered but not formed under the Bill or former Companies Acts, unregistered companies and overseas companies.
Clause 2: The Companies Acts
15. The Bill does not replace all existing companies legislation, only parts of it. This clause makes it clear that any reference to "Companies Acts" in the Bill includes those provisions of the Acts listed in subsection (1)(c) that remain in force (as well as the company law provisions of the Bill and Part 2 of the Companies (Audit, Investigations and Community Enterprise) (C(AICE)) Act 2004).
Types of company
16. The CLR recommended that the law should provide for the formation of new companies of each of the types that are currently available (Final Report, paragraph 9.2). This recommendation is taken forward in the following group of clauses, which retains all of the current forms of companies.
Clause 3: Limited and unlimited companies
17. This clause replaces section 1(2)(a)(b) & (c) of the 1985 Act. It updates the Companies Acts definitions of "limited company" and "unlimited company" to reflect changes to what is to be included in a company's memorandum of association (see clause 8: Memorandum of association). As now, a company may be limited by shares or by guarantee. Where there is no limit on the liability of the company's members, a company is an "unlimited company."
Clause 4: Private and public companies
18. This clause replaces section 1(3) and section 735(2) of the 1985 Act. It provides definitions of "private company" and "public company."
19. A "private company" is any company that is not a public company.
20. A "public company" is a company whose certificate of incorporation states that it is a public company. To obtain this certificate the company will need to comply with the provisions of the Companies Acts (or former Companies Acts) as regards registration or re-registration as a public company. There is a minimum share capital requirement (the "authorised minimum"), which is currently set at £50,000, and remains unchanged under the Bill.
21. This clause also provides a pointer to Part 17 of the Bill (Private and public companies), which sets out key differences between public and private companies, for example, a private company may not offer shares to the public.
Clause 5: Companies limited by guarantee and having a share capital
22. This clause replaces section 1(4) of the 1985 Act. It makes it clear that a company can no longer be formed (or re-register) as a company limited by guarantee and with a share capital. This provision has been in force in GB since 22nd December 1980 and in Northern Ireland since 1st July 1983.
Clause 6: Community interest companies
23. The C(AICE) Act 2004 came fully into force on 1 July 2005. Part 2 of that Act created a new company vehicle, the "community interest company" or "c.i.c.", which is designed for use by social enterprises.
24. This clause provides a signpost to the provisions in the C(AICE) Act, which enable a company to be formed as or become a c.i.c. Community Interest Companies are registered under the same legislation as other registered companies, but have to complete certain additional formalities and are subject to certain additional elements of regulation. Subsection (2) of this clause highlights the fact that in some respects the requirements imposed on c.i.c.s are different from the requirements imposed on other registered companies.
PART 2: COMPANY FORMATION
General
25. This Part of the Bill is about how companies are formed. It replaces equivalent provisions in the 1985 Act.
26. With effect from 1 January 2007, the registrar of companies ("registrar") will offer an electronic incorporation facility. This implements a recent amendment to the First Company Law Directive (68/151/EEC). The clauses in this Part have been prepared with the objective, in particular, of removing any obstacles to the formation of companies on-line.
Clause 7: Method of forming company
27. This clause replaces sections 1(1) and (3A) of the 1985 Act. Subsection (1) introduces the new provisions about forming a company. In line with the recommendations of the CLR, it is provided that a single person is able to form any sort of company (not just a private company) (Final Report, paragraph 9.2).
28. Subsection (2) reproduces the existing requirement that a company may not be formed for an unlawful purpose.
Clause 8: Memorandum of association
29. This clause replaces section 2 of the 1985 Act. It retains the current requirement that individuals who wish to form a company must subscribe their names to the memorandum of association ("memorandum").
30. Under the Bill, the memorandum serves a more limited, but nonetheless important, purpose: it evidences the intention of the subscribers to the memorandum to form a company and become members of that company on formation. In the case of a company that is to be limited by shares, the memorandum will also provide evidence of the members' agreement to take at least one share each in the company.
31. The memorandum of a company formed under the Bill will, therefore, look very different from that of a company registered under the 1985 Act.
32. In future, it will not be possible to amend or update the memorandum of a company formed under the Bill.
33. When the Bill comes into force, provisions in the memoranda of existing companies which are of a type that will not in be in the memoranda of companies formed under the Bill, will be treated as provisions in the articles - see clause 28 (Existing companies: provisions of memorandum treated as provisions of articles). Existing companies will, therefore, be able to alter or update provisions in their constitution which are now set out in their memoranda by amending their articles. The Government is considering the transitional arrangements and savings that will be required for existing companies across the Bill, with a view to minimising the changes that existing companies will need to make as a result of the new law, and it will be consulting interested parties on the various options over the coming months.
34. These changes to the memorandum are based on the CLR's recommendation that there should be a single constitution (Final Report, paragraph 9.4). In line with the principles behind this recommendation, in future key information regarding the internal allocation of powers between the directors and members of a company will be set out in one place: the articles of association ("articles").
35. Existing companies will not be required to amend their articles to reflect this change, but they may do this if they wish. They may want to amend their articles in any event to reflect changes to the law that are made in the Bill, for example, in future, companies formed under the Bill and existing companies will have unrestricted objects unless they specifically restrict them (see clause 32: Statement of company's objects).
Requirements for registration
Clause 9: Registration documents
36. This clause replaces sections 2 and 10 of the 1985 Act. It prescribes the types of information or "documents" that must be delivered to the registrar when an application for registration is made and the manner in which that information must be delivered to the registrar.
37. The changes to the way in which certain information is delivered to the registrar are required as a result of the changes that have been made to the memorandum (see note on clause 8: Memorandum of association). In future, information which is currently set out in the memorandum will be provided to the registrar in accordance with the provisions of this clause, which prescribes, amongst other things, the contents of the application for registration. In all cases this application must state:
- whether the company's registered office is to be situated in England and Wales (or Wales), in Scotland or in Northern Ireland;
- whether the liability of the company's members is to be limited and if so whether it is to be limited by shares or by guarantee;
- whether the company is to be a private or a public company.
38. In the case of a company that is to have a share capital, the application must also contain a statement of capital and initial shareholdings (see clause 10). In the
case of a company that is to be limited by guarantee the application must also contain a statement of guarantee (see clause 11).
39. In all cases the application must also contain a statement of the company's proposed officers (see clause 12) and a statement of the intended address of the company's registered office (that is, the postal address of the company's registered office as opposed to a statement confirming the jurisdiction in which the company's registered office is to be situated, which is also required).
40. The application for registration must also contain a copy of any proposed articles (to the extent that the company does not intend to use the model articles (see clause 19: Power of Secretary of State to prescribe model articles and clause 20: Default application of model articles) and must be accompanied by the memorandum (see subsection (1)) and a statement of compliance (see clause 13).
41. As mentioned above, in future it will be possible to form a company on-line and the various types of information referred to in the clause are, therefore, capable of being delivered as a series of data entries as well as in paper or such other form as the registrar may permit or prescribe. The registrar has power under clause 721 (Registrar's requirements) to prescribe the form and manner in which documents are to be delivered to her.
Clause 10: Statement of capital and initial shareholdings
42. This clause replaces section 2(5)(a) & (c), (6) & (6A) of the 1985 Act (which refer to the memorandum). It sets out the contents of the statement of capital and initial shareholdings.
43. Currently, in the case of a limited company with a share capital the memorandum is required to state the amount of the share capital with which the company proposes to be registered and the nominal amount of each of its shares. This is known as the "authorised share capital" and acts as a ceiling on the amount of capital which can be issued (although it can be increased pursuant to an ordinary resolution). The CLR recommended that the requirement for a company to have an authorised share capital should be abolished (Final Report, paragraph 10.6).
44. The Bill gives effect to this recommendation and in future, the memorandum will only contain a limited amount of information regarding a company's founder members: the subscribers to the memorandum (see clause 8: Memorandum of association). Information about the shares subscribed for by the subscribers to the memorandum, which is currently set out in the memorandum itself, will in future be provided to the registrar in the statement of share capital and initial shareholdings.
45. Like the statement of guarantee (see clause 11), the statement of capital and initial shareholdings must contain the names and addresses of the subscribers to the memorandum. The requirement in all cases is for a contact address - there is no need for the person making the statement to give his home address.
46. The statement of capital and initial shareholdings is essentially a "snapshot" of a company's share capital at the point of registration. The requirement for this statement (and the requirement for a statement of capital elsewhere in the Bill) is new. For public companies, this requirement is linked to the abolition of authorised share capital (see above). It implements (as far as public companies are concerned) Article 2 of the Second Company Law Directive (77/91/EC) (the "Second Directive") which states:
"the statutes or instruments of incorporation of the company shall always give as least the following information..(c) when the company has no authorized capital, the amount of the subscribed capital..".
47. The statement of capital and initial shareholdings must contain the following information:
- the total number of shares of the company to be taken on formation by the subscribers to the memorandum;
- the aggregate nominal value of those shares;
- for each class of shares:- prescribed particulars of the rights attached to those shares, the total number of shares of that class and the aggregate nominal value of shares of that class; and
- the amount to be paid up and the amount (if any) to be unpaid on each share (whether on account of the nominal value of the shares or by way of premium).
48. The reference to "prescribed particulars of the rights attached to the shares" in this clause (and elsewhere in the Bill where a statement of capital is called for), refers to such particulars as may be prescribed by the Secretary of State by statutory instrument (see section 744 of the 1985 Act).
49. Whilst the Second Directive only applies to public companies it is important that the information on the public register is up-to-date. A statement of capital will, therefore, be required where it is proposed that a company formed under the Bill will have a share capital on formation and, with limited exceptions (in particular, where there has been a variation of class rights which does not affect the company's aggregate subscribed capital) whenever a company having a share capital makes an alteration to its share capital (whether under the Bill or the remaining provisions of the 1985 Act which deal with alterations to a company's share capital).
Clause 11: Statement of guarantee
50. This clause replaces section 2(4) of the 1985 Act. It sets out the contents of the statement of guarantee that must accompany the application for registration where it is proposed that a company will be limited by guarantee on formation.
51. The statement of guarantee is essentially an undertaking, given by the founder members of the company, to contribute to the assets of the company up to a specified amount in the event of it being wound up. New members must also agree to make the same contribution.
52. A member of a company limited by guarantee is only liable to contribute to the assets of a company if it is wound up during the time that he is a member or within one year of him ceasing to be a member.
Clause 12: Statement of proposed officers
53. This clause replaces section 10 of the 1985 Act. Under this section, details of the first director(s) and the secretary or joint secretaries, must be given to the registrar at the time of application for registration. This requirement is carried forward but there are two deregulatory changes:
- firstly, as recommended by the CLR (Final Report, paragraph 11.46), once the Bill is in force, all directors will have the option of their home address being kept on a separate record to which access will be restricted (see Chapter 8 of Part 10: Directors' residential addresses: protection from disclosure). In order to benefit from this option, a director will have to provide a service address for the public record;
- secondly, as recommended by the CLR (Final Report, paragraph 4.7), it reflects the abolition of the requirement for private companies to have a secretary - see clause 253 (Private company not required to have a secretary).
Clause 13: Statement of compliance
54. This clause replaces section 12(3) and (3A) of the 1985 Act. At present, where an application for registration of a company is made in paper form, the application must be accompanied by a statutory declaration (made before a solicitor or commissioner of oaths) confirming that the requirements of the 1985 Act in respect of registration, and of matters precedent and incidental to it, have been complied with (see section 12(1) of that Act). This statutory declaration must be made by one of the persons whom it is proposed will be a founder director or secretary of the company (that is, on registration) or a solicitor engaged in the formation of the company.
55. Where the application for registration is made in electronic form, in place of the statutory declaration required under section 12(3), the same persons may, alternatively, deliver an "electronic statement" to the registrar. This statement must confirm that the requirements referred to in section 12(1) have been met.
56. Based on the recommendations of the CLR (Final Report, paragraph 9.5), the current requirement for a statutory declaration or electronic statement, here and elsewhere in the Bill, is replaced by a requirement to make a statement of compliance. This statement does not need to be witnessed and may be made in paper or electronic form. It will be for the registrar's rules under clause 721 (registrar's requirements) to specify who may make this statement (and the form of it). As with all documents delivered to, or statements made to, the registrar, it is an offence to make a false statement of compliance - see clause 764 (General false statement offence).
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