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

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Clause 513: Duty of company to notify appropriate audit authority

778.     This clause introduces a new duty on a company to notify the appropriate audit authority whenever an auditor leaves office before the end of his term, that is when he has resigned or is dismissed. The company has the choice of sending in the statement of circumstances made by the auditor under clause 509, or of sending in its own statement of the reasons. Subsection (3) sets the deadline for notification as 14 days after the auditor has deposited his statement with the company. Subsections (4) to (6) set out the offence of failure to comply with this requirement, and the maximum penalties.

Clause 514: Information to be given to accounting authorities

779.     This clause sets out the duty of the audit authorities to give the accounting authorities information about departing auditors and the power, if they think it right to do so, to pass on the statements which they receive from departing auditors under the clause 512. The accounting authorities are the Secretary of State and anyone the Secretary of State has authorised under Part 15 to apply to the court in respect of the revision of defective accounts. At present this is the Financial Reporting Review Panel, part of the Financial Reporting Council organisation.

780.     Subsection (3) deals with the situation where the same body is both an audit authority and an accounting authority. If an accounting authority receives a statement that the court has determined need not be circulated to members, then subsection (4) provides that it must treat the statement as confidential, in the same way that authorities have to treat information obtained under compulsory powers under Part 15.

Clause 515: Meaning of "appropriate audit authority" and "major audit"

781.     This clause defines two terms used in connection with the duty to inform the audit authority when an auditor leaves office, namely "appropriate audit authority" and "major audit". The former means the Secretary of State, or the body to whom he has delegated functions in relation to the supervision of statutory auditors under Part 33, currently the Professional Oversight Board, part of the Financial Reporting Council organisation.

782.     "Major audit" is defined as meaning the audit of a listed company, or of any other company where there is a major public interest. "Major public interest" in turn is to be interpreted by reference to guidance issued by any of the audit authorities. In practice, this will generally be guidance issued by the Financial Reporting Council.

Clause 516: Effect of casual vacancies

783.     This clause applies when one out of two or more joint auditors ceases to be an auditor of the company. It enables the remaining auditors to continue in office. It restates section 388(2) of the 1985 Act.

CHAPTER 5: QUOTED COMPANIES: RIGHT OF MEMBERS TO RAISE AUDIT CONCERNS AT ACCOUNTS MEETING

784.     This Chapter introduces a new right for members of a quoted company to raise questions about the work of the auditors (all members of a company limited by shares are shareholders).

Clause 517: Members' power to require website publication of audit concerns

785.     This clause creates a new right whereby members of a quoted company - if they have a large enough holding in the company, or there are enough of them - can ask the company to publish on a website a statement raising questions about the accounts, or about the departure of an auditor, that they propose to bring up at the next meeting where the accounts are to be discussed.

786.     Subsection (2) specifies the thresholds the members have to meet, which are the same as for shareholders who want to ask a company to circulate a statement under clause 290, namely they must either have 5% of the total voting rights, or there must be at least 100 of them, holding shares on which there has been paid up an average sum per member of at least £100. Subsection (4) sets out the mechanics of transmitting the request to the company: it may be in hard copy or electronic.

787.     Subsection (5) protects the company if members abuse the new right, e.g. by requesting a defamatory statement to be published. It enables the company, or someone else such as the auditor, to apply to the court, and the court can then determine whether the right is being abused, in which case the company is not obliged to publish the statement. Subsection (6) provides that the court can order the shareholders who requested publication to pay some or all of the costs of the proceedings.

Clause 518: Requirements as to website availability

788.     This clause sets out the requirements which the company must meet in making the shareholders' statements available on a website, in the same way as clause 336. Subsection (4) requires the company to get the statement onto a website within three days of receiving it, and to keep it available at least until after the meeting to which it relates.

Clause 519: Website publication: company's supplementary duties

789.     This clause requires quoted companies to draw attention to the possibility of a website statement in the notice of the accounts meeting. It also specifies the costs of publication are to be borne by the company. Subsection (3) requires the company to forward the statement to the auditor at the same time as it puts it on a website. Subsection (4) provides that a statement under this chapter can be dealt with at the accounts meeting.

Clause 520: Website publication: offences

790.     This clause provides for offences when a company fails to comply with either of the preceding two clauses, with maximum penalties of an unlimited fine.

Clause 521: Meaning of "quoted company"

791.     This clause defines the phrase "quoted company" for the purposes of Chapter 5 of Part 16 as being the same as the definition in clause 367 in Part 15, and that the power in Part 15 to amend the definition also applies in this chapter.

CHAPTER 6: AUDITORS' LIABILITY

792.     This Chapter will make it possible for auditors to limit their liability by agreement with a company, but the agreement will not be effective if it is not fair and reasonable.

793.     It achieves this by defining the "liability limitation agreement" - a contractual limitation of an auditor's liability to a company, requiring member agreement - as a new exception to the general prohibition, restated here, on a company indemnifying its auditor. The court will be able to set aside such a limitation as ineffective if it purports to limit liability to an amount that is not fair and reasonable in all the circumstances.

Clause 522: Voidness of provisions protecting auditors from liability

794.     This clause restates the existing general prohibition, currently in section 310 of the 1985 Act, against a company indemnifying its auditor against claims by the company in the case of negligence or other default. Any such indemnities are void and unenforceable except where permitted by clauses 523 to 526.

Clause 523: Indemnity for costs of successfully defending proceedings

795.     This clause contains the current exception from the prohibition in clause 522 allowing the company to indemnify the auditor against the costs of successfully defending himself against a claim, though it does not repeat the current exception that allows the company to buy insurance for its auditor.

Clause 524: Liability limitation agreements

796.     This clause defines a "liability limitation agreement" as an agreement that seeks to limit the liability of an auditor to a company whose accounts he has audited. The agreement can cover liability for negligence, default, breach of duty or breach of trust by the auditor in relation to the audit of accounts for a particular financial year.

797.     Subsection (2) provides that such an agreement is immune from the general voidness of such agreements under clause 522, provided that the agreement complies with the rules in the following clause, and that it has been authorised by the members of the company in the way specified in clause 526. Subsection (3) provides that the agreement's effect is limited by clause 527, which contains a test of fairness and reasonableness, and that certain provisions of the Unfair Contracts Terms Act 1977 do not apply.

Clause 525: Terms of liability limitation agreement

798.     This clause contains rules about the terms of a liability limitation agreement. An agreement must relate to the audit of a specified financial year, and the limitation may be expressed in any terms, not necessarily as a fixed financial amount or a formula.

799.     Subsection (2) confers on the Secretary of State a power to make regulations (subject to negative resolution) prescribing or proscribing specified provisions or descriptions of provisions; and subsection (3) provides that the power may be used to prevent adverse effects on competition.

Clause 526: Authorisation of agreement by members of the company

800.     This clause specifies the way in which members of a company are to give their approval to a liability limitation agreement, without which approval the agreement will not be effective. The members of a private company can pass a resolution waiving the need for approval. The members in a private or a public company can pass a resolution before an agreement is signed approving its principal terms, or can approve the agreement after it is signed. The resolution should be an ordinary one, unless any higher threshold is set in the company's articles.

801.     Subsection (5) specifies what the principal terms of a liability limitation agreement are for this purpose, namely the terms that specify, or enable one to determine, (i) the sorts of faults by the auditor that are covered, (ii) the financial year in relation to which those faults are covered, and (iii) the limit on the auditor's liability.

802.     Subsection (6) provides that members, by passing an ordinary resolution, can withdraw their approval of a liability limitation agreement at any time before the agreement is entered into. If the company has already entered into the agreement, approval can be withdrawn, by ordinary resolution, only before the start of the financial year to which the agreement relates.

Clause 527: Effect of liability limitation agreement

803.     This clause provides that a liability limitation agreement will not be effective to limit an auditor's liability if the limitation would result in the company recovering an amount that was less that what was fair and reasonable, in all the circumstances of the case, having regard in particular to the auditor's responsibilities, the auditor's contractual obligations, and the standards expected of the auditor. If a court decides that a liability limitation agreement would limit the auditor's liability to an excessive degree, the agreement will have effect as if it limited liability to the amount that the court determines is fair and reasonable.

804.     Subsection (3) provides that in assessing what is fair and reasonable, the court should not take into account circumstances arising after the loss or damage in question has been incurred. Nor should it take into account the chances of the company successfully claiming compensation from any other people responsible for the loss or damage.

Clause 528: Disclosure of agreement by company

805.     This clause requires companies to disclose any liability limitation agreement they have made with their auditor in accordance with any regulations made by the Secretary of State subject to negative resolution. Subsection (2) provides that the regulations may require this disclosure to be in a company's annual accounts (or in any other manner in the case of group accounts), or in the directors' report.

CHAPTER 7: SUPPLEMENTARY PROVISIONS

Clause 529: Minor definitions

806.     This clause defines a number of terms used in this Part.

PART 17: PRIVATE AND PUBLIC COMPANIES

807.     The provisions of Chapter 1 of this Part replace sections 58(3), 81 and 742A of the 1985 Act. One of the major differences between public and private companies is that private companies are not allowed to offer their shares to the public.

808.     The provisions in Chapter 2 of this Part replace sections 117 and 118 of the 1985 Act. They deal with the minimum share capital requirements for public companies which are formed as such on their original incorporation.

CHAPTER 1: PROHIBITION OF PUBLIC OFFERS BY PRIVATE COMPANIES

809.     The CLR considered the prohibition on private companies offering their shares to the public in paragraph 4.160 of Developing the Framework and then examined the dividing line between public and private companies in Chapter 2 of Completing the Structure. The CLR presented their conclusions in paragraphs 4.54 to 4.62 of the Final Report.

Clause 530: Prohibition of public offers by private company

810.     Subsection (1) of this clause continues the prohibition in section 81(1) of the 1985 Act on private companies offering their shares or debentures to the public. The prohibition only applies to private companies limited by shares or limited by guarantee and having a share capital. The prohibition does not apply to unlimited companies or to companies limited by guarantee and not having a share capital.

811.     Private companies are also prohibited from allotting their shares or debentures with the intention that they are offered to the public by someone else. Subsection (2) creates a presumption as to when shares or debentures have been allotted in this way. Similar provision was made in section 58(3) of the 1985 Act which this subsection replaces.

812.     A private company will no longer commit an offence if it offers its securities to the public. Instead, if a private company does breach the prohibition it will be compelled to re-register as a public company, unless it appears to the court that the company does not meet the requirements for re-registration and that it is impractical or undesirable to require it to take steps to do so, in which case the court may make a remedial order and/or an order for the compulsory winding up of the company.

813.     Subsection (3) contains an exemption to the prohibition on public offers. Where a private company intends to become a public company it will be able to make an offer before it has completed the formalities of re-registration as a public company. Acts done in good faith before allotment in anticipation of re-registration will not be treated as breaching the prohibition on offers to the public, even if the re-registration arrangements do not ultimately succeed. The exemption also applies if, as part of the terms of the offer, the company undertakes to re-register as a public company and then complies with that undertaking not later than 6 months after the day on which the offer is first made to the public.

Clause 531: Meaning of "offer to the public"

814.     This clause explains what is meant by "offer to the public" for the purposes of the prohibition on public offers contained in clause 530. This clause also sets out certain circumstances where an offer is not to be regarded as an offer to the public. It replaces section 742A of the 1985 Act.

815.     An offer will not be an offer to the public if it is not calculated to result in shares or debentures of the company becoming available to anyone other than those receiving the offer. For example, where shares are offered to a particular person, with the intention that no one other than that particular person may take up the offer or acquire the shares as a result. Nor will an offer be an offer to the public if the offer is otherwise a private concern of the person receiving it and the person making it.

816.     Subsection (4) creates two further exemptions for offers to persons already connected with the company (as defined in subsection (5)) and for offers in respect of securities to be held under an employees' share scheme (as defined in section 743 of the 1985 Act). Such offers are presumed to be the private concern of those involved and so not an offer to the public if the conditions set out in subsection (4) are met.

817.     The range of persons already connected with the company for the purposes of subsection (4) has been expanded slightly from the current provision in section 742A. It now includes a trustee of a trust where the principal beneficiary is an existing debenture holder of the company or the widow or widower, or surviving civil partner of a person who was a member or employee of the company.

818.     Subsection (6) explains what is meant by a member of a person's family for the purposes of subsection (5).

Clause 532: Enforcement of prohibition: order restraining proposed contravention

819.     This clause enables members, creditors or the Secretary of State to apply to the court for an order restraining a private company from carrying out any proposed contravention of the prohibition on offering shares or debentures to the public. This is a new procedure which will enable the member, the creditor or the Secretary of State to prevent by civil action any further activity by the company towards making an offer in contravention of the public offer prohibition. The court must also make such an order if, in proceedings brought by a member under section 459 of the 1985 Act or by the Secretary of State under section 460 of the 1985 Act, it appears to the court that the company is proposing to breach the public offer prohibition.

Clause 533: Enforcement of prohibition: orders available to the court after contravention

820.     This clause applies where a private company breaches the prohibition on offering securities to the public. It introduces a new enforcement procedure for breaches; it replaces the criminal offence currently imposed in section 81 of the 1985 Act with a civil enforcement procedure.

821.     If a company breaches the prohibition, certain members, certain creditors or the Secretary of State may apply to the court. In order to have standing to bring the application, the member or creditor must have been a member or a creditor at the time the offer was made in contravention of the public offer prohibition; in addition anyone who became a member as a result of the offer to the public may bring an application.

822.     On such an application, if the court decides the company has acted in contravention of the public offer prohibition then it must order the re-registration of the company as a public company, unless it appears to the court that the company does not meet the requirements for re-registration as a public company (see Part 7 of the Bill), and it is impracticable or undesirable to require it to take steps to do so. If the court is unable to order re-registration for these reasons, it may instead make a remedial order or an order for the compulsory winding up of the company (see Chapter 6 of Part 4 of the Insolvency Act 1986). The court has discretion as to whether or not to make these orders. This might be appropriate for example where the company has breached the prohibition but has not allotted shares, and has withdrawn the offer and undertaken not to do it again.

Clause 534: Enforcement of prohibition: remedial order

823.     A remedial order is an order for the purpose of putting anyone affected by the breach of the public offer prohibition back in the position they would have been in if the breach had not occurred. It may require any person knowingly concerned in the contravention, whether or not an officer of the company, to offer to purchase the shares or debentures that were the subject of the offer on such terms as the court thinks fit. The remedial order will override the terms of the company's constitution, but no one holding the securities will be obliged to accept the offer made to purchase them. It may be made 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.

Clause 535: Validity of allotment etc not affected

824.     This clause makes clear that any allotment or sale of securities or any agreement to allot or sell securities is not made void simply because there has been a breach of the prohibition on offers to the public. Equivalent provision was made in section 81(3) of the 1985 Act.

CHAPTER 2: MINIMUM SHARE CAPITAL REQUIREMENT FOR PUBLIC COMPANIES

825.     Currently a company which is registered as a public company on its original incorporation may not do business or exercise any borrowing powers unless the registrar has issued it with a certificate under section 117 of the 1985 Act (a "trading certificate"). The registrar will only issue a trading certificate if she is satisfied that the nominal value of the company's allotted share capital is not less than the 'authorised minimum', which is defined in section 118 of that Act.

Clause 536: Public company: requirement as to minimum share capital

826.     This clause replaces section 117(1)(2)(4) and (6) of the 1985 Act. It does not make any substantive changes to those provisions and, like these, only applies to public companies that are formed as such on their original incorporation (as opposed to companies that re-register from private limited to public under the provisions of Part 7 of the Bill: Re-registration as a means of altering a company's status).

827.     This clause retains the requirement for a trading certificate for such companies. It applies to public companies that are registered as such under the Bill (as opposed to private companies which re-register as public). As now, the registrar will only issue a trading certificate if she is satisfied that certain conditions are met: in particular that the minimum share capital requirement (known as "the authorised minimum") (see subsection (2)).

828.     A trading certificate has effect from the date that it is issued and is conclusive evidence that the company is entitled to do business as a public company.

Clause 537: Procedure for obtaining certificate

829.     This clause replaces section 117(3) of the 1985 Act. It prescribes the contents of the application for a trading certificate (see subsection (1)), which, amongst other things, must include a statement that the nominal value of the company's share capital is not less than the authorised minimum (see note on clause 538: The authorised minimum).

830.     The current requirement for a statutory declaration (or "electronic statement") when an application is made for a trading certificate 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 to specify who may make this statement (and the form of it).

Clause 538: The authorised minimum

831.     Under section 118 of the 1985 Act the authorised minimum is £50,000. This implements Article 6 of the Second Company Law Directive (77/91/EEC) which requires that in order that a public company may be incorporated or obtain authorisation to commence business, a minimum capital shall be subscribed, the amount of which shall be not less than 25000 ECU (expressed in the domestic currency of the Member State). As recommended by the CLR (Completing the Structure, paragraph 7.6), this clause retains the authorised minimum at £50,000.

832.     Once a company has obtained a trading certificate under clause 537 (Procedure for obtaining certificate) or section 117 of the 1985 Act, there is no requirement for the authorised minimum to remain denominated in sterling and if it wishes a public company may subsequently redenominate all of its share capital (including the authorised minimum) under the provisions in Part 19 of the Bill: Share Capital (see note on clause 586: Redenomination of share capital).

833.     The power to alter the authorised minimum contained in section 118 has not been retained. If it becomes necessary to alter the authorised minimum as a result of an amendment to the Second Company Law Directive (77/91/EEC), this change could be achieved by regulations made under section 2(2) of the European Communities Act 1972.

Clause 539: Consequences of doing business etc without a trading certificate

834.     This clause replaces section 117 (7) and (8) of the 1985 Act. Where a public company which is required to have a trading certificate enters into a transaction without first obtaining such a certificate, the directors are jointly and severally liable for any loss or damage caused to the other party to the transaction as a result of the company failing to meet its obligations. A director will only be jointly and severally liable with the company if he was a director at the time that the transaction was

entered into and if the company has failed to meet its obligations under the transaction in question within 21 days of being called on to do so (see subsection (3)).

835.     Notwithstanding the fact that the company should not have entered into the transaction, the transaction itself is valid.

836.     Where a public company that is formed under this clause, or under section 117 of the 1985 Act, has not obtained a trading certificate within a year of its incorporation, it may be wound up by the court (see section 122(1)(b) of the Insolvency Act 1986).

 
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Prepared: 26 May 2006