House of Commons - Explanatory Note
Company Law Reform Bill [HL] - continued          House of Commons

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Filing obligations of different descriptions of company

664.     Clauses 428 to 432 concern the filing obligations of different sizes of company. They restructure the provisions in sections 242, 246, 246A and 254 of the 1985 Act to make clearer what companies have to do.

665.     Clause 428 concerns the filing obligations of companies subject to the small companies regime (previously section 246(1) and (5) to (7) of the 1985 Act). Such companies may file abbreviated accounts and this clause gives the Secretary of State the power to make regulations concerning abbreviated accounts for such companies. Under subsection (6), small companies filing a full balance sheet with the registrar (whether prepared in accordance with international accounting standards or under the Bill), but omitting a copy of the profit and loss account and/or the directors' report, must include a statement on the balance sheet that they are delivered in accordance with the small companies regime. Subsection (8) requires the filed copy of the audit report to state the name of the auditor and, if there is one, of the senior statutory auditor, unless they are taking advantage of the exemption in clause 496, in which case they must state that they are doing so.

666.     Clause 429 restates provisions in section 246A of the 1985 Act permitting medium-sized companies (as defined in clause 443) to file abbreviated accounts and gives the Secretary of State the power to make regulations concerning abbreviated accounts for such companies.

667.     Clause 430 concerns the filing obligations of unquoted companies..

668.     Clause 431 concerns the filing obligations of quoted companies. This is a restatement of section 242 of the 1985 Act. Subsection (3) provides for the copies of all the accounting documents including the balance sheet to state the name of the person who signed the documents.

669.     Clause 432 replaces section 254 of the 1985 Act. It exempts unlimited companies from the obligation to file accounts. There are limitations on the exemption set out in subsections (2) and (3).

Requirements where abbreviated accounts delivered

670.     Clause 433 replaces the provision in section 247B of the 1985 Act requiring a special auditors' report in place of the auditor's report required by section 235 where a company delivers abbreviated accounts to the registrar of companies. There is no requirement for the special auditor's report where the company is entitled to exemption from audit and has taken advantage of that exemption.

671.     Clause 434 replaces sections 246(7) and (8) and 246A(4) of the 1985 Act concerning the approval and signing of abbreviated accounts.

Failure to file accounts and reports

672.     Clauses 435 and 436 re-enact sanctions in section 242(2) to (5) of the 1985 Act for failing to file accounts and reports within the required periods.

673.     Clause 437, which provides a civil penalty for failure to file accounts, restates section 242A of the 1985 Act with one change. Rather than setting out the table of penalties in the legislation, subsection (2) provides for the Secretary of State to make regulations specifying both the relevant periods and the amounts of the penalties. Regulations that have the effect of increasing the penalty will be subject to the affirmative resolution procedure. Otherwise, they will be subject to the negative resolution procedure.


Clause 438: Voluntary revision of accounts etc

674.     This clause restates section 245 of the 1985 Act providing for the voluntary revision of defective accounts and reports and summary financial statements. It replicates the existing power for the Secretary of State to make provision in regulations as to the application of the provisions of this Act to revised annual accounts and reports and summary financial statements. Regulations under this section are subject to the negative resolution procedure, which is consistent with the existing powers.

Clause 439: Secretary of State's notice in respect of accounts or reports

675.     This clause re-enacts section 245A of the 1985 Act. It concerns the Secretary of State's giving notice to the directors of a company if there is or may be a question as to whether the annual accounts or directors' report comply with the requirements of

the Bill or the IAS Regulation (Regulation (EC) 1606/2002 on the application of international accounting standards).

Clauses 440 to 442: Application to court

676.     Clauses 440 and 441 concern applications to the court in respect of defective accounts or reports. They re-enact sections 245B and 245C of the 1985 Act. Clause 441 gives the Secretary of State the power to authorise a person for the purposes of clause 440 to apply to the courts to require the directors of companies to prepare revised accounts and reports where the original accounts or reports were defective. Authorisation is subject to the negative resolution procedure, which corresponds to the existing provision. The Financial Reporting Review Panel (FRRP) is the only authorised person under this provision to date (the Companies (Defective Accounts) (Authorised Person) Order 2005: SI 2005/699).

677.     Clause 442 re-enacts sections 245D and E of the 1985 Act, with one modification. It provides for the disclosure of information by the Commissioners for Her Majesty's Revenue and Customs to a person authorised under clause 441 (currently the FRRP) to apply to the court in respect of defective accounts and reports. The provision contains important limitations, including criminal offences for use or disclosure of the information other than for permitted purposes. Clause 442(5)(b)(ii) increases the term of imprisonment from three months to six months for a person convicted on summary conviction in Scotland or Northern Ireland for an offence of unlawful disclosure. Subsection (2) provides that personal data may not be disclosed in contravention of the Data Protection Act 1998.

Power of authorised person to require documents etc

Clause 443: Power of authorised person to require documents, information and explanations

678.     This clause re-enacts section 245F of the 1985 Act. Subsections (1) to (3) provide the FRRP (as the person authorised under clause 441) with a statutory power to require a company and its officers, employees and auditors to provide documents and information. Where a person refuses to provide information or documents to the FRRP, the FRRP may apply to the court for an order. The court may make an order requiring disclosure. Failure to comply with such an order would be contempt of court.

Clause 444: Restrictions on disclosure of information obtained under compulsory powers

679.     This clause re-enacts section 245G of the 1985 Act. It ensures that information obtained by the FRRP under the powers in clause 443 is subject to restrictions on onward disclosure. Information relating to the private affairs of an individual or to any particular business may not be disclosed by the FRRP without the consent of the individual or business in question, except for the purposes of carrying out its

functions, or unless it is disclosed to specified persons or for specified purposes set out in clause 445.

Clause 445: Permitted disclosure of information obtained under compulsory powers

680.     This clause restates section 245G(3) of, and Schedule 7B to, the 1985 Act with modifications. It sets out the disclosures of information obtained by the authorised person under clause 443 that are permitted. A new provision in subsection (2) provides that disclosure is permitted where authorised by the FRRP, provided the disclosure satisfies one or more of subsections (4) to (7), and the FRRP considers disclosure to be in the public interest. Subsection (4) lists the specified persons to whom disclosures are permitted and subsections (3) and (5) list the specified purposes for which disclosure may be made. Subsections (5) and (6) set out the circumstances in which a disclosure to an overseas regulatory authority is permitted.

Clause 446: Power to amend categories of permitted disclosure

681.     This clause re-enacts section 245G(4) of the 1985 Act. It gives the Secretary of State power to amend the disclosure provisions relating to information obtained by the authorised person. As under the current law, an order under the clause is subject to the negative resolution procedure.


Clause 447: Liability for false or misleading statements in reports

682.     This clause is concerned with the extent of directors' liability in relation to the statutory narrative reporting requirements under this Part of the Bill (accounts and reports). Subsection (1) specifies that the liability provision applies to statements made in the directors' report (which includes the business review under clause 399), the directors' remuneration report (under clause 402) or summary financial statements derived from them. The clause limits the directors' liability to the company only in respect of loss suffered by it as a result of any untrue or misleading statement in a report, or the omission from a report of anything required to be included. Subsection (3) specifies that a director will only be liable in certain circumstances - that is, if an untrue or misleading statement is made deliberately or recklessly, or an omission amounts to dishonest concealment of a material fact. Subsection (4) makes clear that third parties, such as auditors, will remain liable to the company for negligence in preparing their own report. Subsection (6) ensures that these liability provisions do not affect any liability for a civil penalty or for a criminal offence.

Clause 448: Accounting standards

683.     This clause re-enacts section 256 of the 1985 Act. The Accounting Standards Board is the body prescribed for the purposes of issuing accounting standards (the Accounting Standards (Prescribed Body) Regulations 2005: SI 2005/697).

Clauses 449 to 451: Companies qualifying as medium-sized

684.     Medium-sized companies benefit from certain limited accounting and reporting exemptions. For example, clause 399(7) exempts medium-sized companies from disclosing certain non-financial information in their directors' reports.

685.     Clauses 449 to 451 set out which companies or parent companies qualify as medium-sized. The conditions for qualification as a medium sized company have been separated from those relating to small companies to make them easier to follow but they are otherwise unchanged from the current regime (sections 247, 247A and 249 of the 1985 Act).

General power to make further provision about accounts and reports

Clause 452: General power to make further provision about accounts and reports

686.     This clause gives the Secretary of State a general power to amend Part 15 by regulations in the areas specified in subsection (1)(a) to (d). This power, together with a number of specific powers in Part 15 to enable the form and contents of accounts and reports to be prescribed by regulations, replaces the wider general power in section 257 of the 1985 Act. Subsection (3) provides that the general power may not be used to amend the provisions of clause 375 (accounts to give true and fair view) or Chapter 12 (revision of defective accounts and reports) other than consequentially. Subsections (4) and (5) enable regulations under the section to create criminal offences or provide for civil penalties in circumstances corresponding to those in Part 15. The regulations are subject to the Parliamentary procedure in clause 457.

Other supplementary provisions

Clause 453: Preparation and filing of accounts in euros

687.     This clause re-enacts section 242B of the 1985 Act, replacing references to ECUs with references to euros. It enables companies to show the amounts in their annual accounts additionally in euros, and to deliver to the registrar an additional copy of their accounts translated into euros.

Clause 454: Power to apply provisions to banking partnerships

688.     This clause re-enacts section 255D of the 1985 Act. It gives the Secretary of State the power to apply the accounting and reporting provisions of the Bill that apply to banking companies to banking partnerships. As under the current law, the regulations are subject to the affirmative resolution procedure.

Clause 455: Meaning of "annual accounts" and related expressions

689.     This clause provides definitions of the terms "annual accounts" and "annual accounts and reports" for the purpose of this Part, the meaning being different for unquoted and quoted companies.

Clause 456: Notes to the accounts

690.     This clause re-enacts section 261 of the 1985 Act. It concerns the notes to a company's accounts.

Clause 457: Parliamentary procedure for certain regulations under this Part

691.     This clause specifies the Parliamentary procedure that must be followed in connection with regulations made under the various provisions of this Part which replace the requirements as to the form and content of accounts and reports currently contained in Schedules to Part 7 of the 1985 Act, and in relation to the general regulation-making power in clause 452. The clause follows section 257 of the 1985 Act in requiring affirmative resolution procedure for regulations which add to the documents required to be prepared by companies, restrict the exemptions available to particular classes or types of company, add to the information to be included in any particular document or otherwise make the requirements more onerous. Other regulations are subject to negative resolution procedure.

Clause 458: Minor definitions

692.     This clause contains other definitions for the purposes of this Part


693.     This Part brings together various provisions on the audit of companies from the 1985 Act. It also introduces a number of significant changes to the law on auditing. Much of the law in this area reflects EU Company Law Directives, including parts of the Fourth (78/660/EEC), Seventh (83/349/EEC) and Eighth (84/253/EEC) Directives, and of the recently adopted Audit Directive (not yet published), which will replace the Eighth.


694.     This Chapter restates the existing requirement for companies to produce audited accounts, currently in section 235(1) of the 1985 Act; and the existing exemptions, currently in sections 249A to 249E of that Act.

695.     The only changes from the existing law in this Chapter are to replace the reporting accountant as the person who reports on the accounts of small charitable companies in lieu of audit with the independent examiner and to make it possible for the UK Comptroller and Auditor General (or the public sector auditors associated with devolved administrations) to carry out public sector audits of the accounts of certain non-departmental public bodies that are registered companies.

Clause 459: Requirement for audited accounts

696.     This clause restates the requirement for each company to have its annual accounts audited, unless it takes advantage of one of the exemptions in subsequent clauses. Directors must state in the balance sheet if they are taking advantage of an exemption. Unless the company is subject to a public sector audit, the statement must say that the members have not required an audit, and that the directors take responsibility for producing compliant accounts.

Clause 460: Right of members to require audit

697.     This clause restates the right of shareholders to require an audit, even if the company qualifies for one of the audit exemptions.

Clauses 461 to 463: Exemption from audit: small companies

698.     These clauses restate the exemption from audit for small companies. A company must not only meet the general small company criteria in clause 364, but its turnover and balance sheet totals must fall below £5.6 million and £2.8 million respectively. A company that is a charity can qualify for the exemption only if it is very small, with a gross income for the year no higher than £90,000.

699.     Clause 462(1) excludes from the exemption various categories of company including public companies and some financial services companies. Clause 463 sets out the conditions for a company in a group qualifying for a small company exemption.

Clauses 464 and 465: Exemption from audit: dormant companies

700.     These two clauses restate the exemption from audit available to dormant companies. "Dormant" is defined in clause 809. Certain financial services companies are excluded from using the exemption even if they are dormant.

Clauses 466 to 471: Exemption from audit: certain charities

701.     These clauses provide an option for certain charities of choosing to have an independent examination and so being exempt from needing a statutory audit. This is available to a charity that is a small company, but whose turnover is higher than £90,000 so that it is not eligible for complete exemption under clause 461. This is similar to the existing exemption in section 249A of the 1985 Act for charities of an appropriate size that choose to have a reporting accountant's report.

702.     Clause 467 (1) excludes from this exemption various categories of charity including those that are public companies and some financial services companies. Clause 468 sets out the conditions for a charity company in a group qualifying for the option of an independent examiner's report.

703.     Clause 469 requires an independent examiner's report to comply with the requirements for independent examination of charities in the Charities Act 1993 (or the corresponding Scottish requirements). Clause 470 defines who can act as an independent examiner for charities who use this exemption. They must be persons meeting the requirements in the Charities Act 1993 (or the corresponding Scottish

requirements). Clause 471 gives the independent examiner the same rights to obtain information from the company as are given to an auditor by clauses 489 to 491.

Clauses 472 and 473: Companies subject to public sector audit

704.     These two clauses, the only wholly new provisions in this chapter, are intended to enable a public sector auditor to audit non-commercial, public sector bodies that happen to be constituted as companies.

Clause 472: Non-profit-making companies subject to public sector audit

705.     This clause exempts from Companies Act audit any non-departmental public body that is a company and is non-profit-making, if it has been made subject by order to a public sector audit.

706.     For most UK bodies, such an order can be made under the Government Resources and Accounts Act 2000, and the body in question will then be audited by the National Audit Office on behalf of the UK Comptroller and Auditor General. Under the Audit and Accountability (Northern Ireland) Order 2003, an order can make a body subject to audit by the Comptroller and Auditor General for Northern Ireland. And under sections 96 and 144 of the Government of Wales Act 1998, an order can make a body subject to audit by the Auditor General for Wales.

707.     Some Scottish bodies are subject to public sector audit by the Auditor General for Scotland (AGS) under statute, namely the Public Finance and Accountability (Scotland) Act 2000. But there is at present no order-making power to make further companies subject to audit by the AGS. Such a power is conferred by the following clause.

708.     The companies exempted by this clause are not subject to the Fourth Company Law Directive: the Directive is based on Article 44(2)(g) (formerly 54(3)(g)) of the EC Treaty, and Article 48 of the Treaty excludes from the scope of Article 44 undertakings that are non-profit-making. That is why subsection (3) gives "non-profit-making" the same meaning as in the Treaty.

709.     Subsection (2) provides that a group company can benefit from this exemption, only if every company in the group is non-profit-making. Subsection (4) provides that clause 459 (2) applies to a company that uses this exemption, so that its directors must make a statement on its balance sheet that the company is eligible for the exemption.

Clause 473: Scottish public sector companies: audit by Auditor General for Scotland

710.     This clause creates a new power whereby Scottish Ministers can provide that a company should have its accounts audited by the Auditor General for Scotland (AGS). This is available for companies depending on their functions or their funding: the Scottish Ministers can designate a company under this power if its functions are public functions that are all covered by the Scottish Parliament's responsibilities; or if the company receives all or most of its funding from a public body already audited by the AGS. In the case of the latter, the funding body may be audited by the AGS because it is covered by the Public Finance and Accountability (Scotland) Act 2000, or because it is itself a company that Scottish Ministers have made auditable by the AGS by a previous order under this clause.

711.     If an order is made under this clause providing that a company should have a public sector audit by the AGS, and if that company is non-profit-making, then it will benefit from the exemption from this Part in the preceding clause.

Clause 474: General power of amendment by regulations

712.     This clause provides a power for the Secretary of State to change the provisions on requirement for audited accounts in Chapter 1. Taken together with clause 452, it broadly restates the power in section 257 of the 1985 Act. Subsection (2) enables the regulations to make consequential changes to other legislation. The power is subject to affirmative resolution if it is extending the requirement for audit, or otherwise making requirements more onerous; and to negative resolution otherwise.


713.     This Chapter broadly restates the existing law in sections 384 to 388A of the 1985 Act on the way in which shareholders appoint a company's auditors, with some minor changes (as explained below). The provisions are reorganised to deal with private and public companies separately. The Chapter also introduces a new power for the Secretary of State to require disclosure of the terms of audit appointments.

Private companies

714.     These clauses restate the law on appointment of auditors of private companies, providing that auditors are generally to be appointed by shareholders by ordinary resolution. For any financial year other than the first, this will generally be done within 28 days of the circulation to a company's shareholders of the accounts for the previous year.

715.     There are two changes: firstly, that an auditor's term of office will typically run from the end of the 28 day period following circulation of the accounts until the end of the corresponding period the following year. This will apply even if the auditor is appointed at a meeting where the company's accounts are laid. The second change is that an auditor is now deemed to be re-appointed unless the company decides otherwise.

Clause 475: Appointment of auditors of private company: general

716.     This clause provides for a private company's obligation to appoint an auditor, unless it is taking advantage of exemption from audit. The appointment is to be done by the shareholders by ordinary resolution, except that the directors can appoint the company's first auditor (or the first after a period of audit exemption), and can fill a casual vacancy.

Clause 476: Appointment of auditors of private company: default power of Secretary of State

717.     This clause provides for the obligation on a company to inform the Secretary of State if it has failed to appoint an auditor within 28 days of circulation of its accounts; and the Secretary of State's power to appoint an auditor in those circumstances. It derives from section 387 of the 1985 Act.

Clause 477: Term of office of auditors of private company

718.     This clause provides that the end of the term of office of the auditor of a private company is to be the end of the next 28-day period for appointing auditors. It further provides in subsection (2) that at the end of his term an auditor will automatically be deemed to be re-appointed except in five cases:

  • if he was appointed by the directors;

  • if the company's articles require actual re-appointment;

  • if enough members have given notice to the company under the following clause;

  • if there has been a resolution that the auditor should not be reappointed; or

  • if the directors decide that they do not need auditors for the following year.

719.     When there is a change of auditor, subsection (1)(a) provides that the term of office of the incoming auditor does not begin before the end of the previous auditor's term. This means that a new auditor's term will typically begin immediately after the end of the 28-day period for appointing auditors.

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Prepared: 26 May 2006