Company Law Reform Bill [HL] (265-270)

House of Commons

Session 2005 - 06
Internet Publications
Other Bills before Parliament

Company Law Reform Bill [HL] (265-270)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 17 — Audit
Chapter 6 — Auditors’ liability
265

Liability limitation agreements
548
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 546 (general voidness of provisions protecting auditors from liability)
does not affect the validity of a liability limitation agreement that—
(a)
complies with section 549 (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 550).
(3)
Such an agreement—
(a)
is effective to the extent provided by section 551, 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.
549
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.
550
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] (changed to Companies Bill [HL])
Part 17 — Audit
Chapter 6 — Auditors’ liability
266

(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.
551
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] (changed to Companies Bill [HL])
Part 17 — Audit
Chapter 7 — Supplementary provisions
267

552
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
553
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] (changed to Companies Bill [HL])
Part 18 — A company’s share capital
Chapter 1 — Shares and share capital of a company
268

Part 18
A company’s share capital
Chapter 1
Shares and share capital of a company
Shares
5
554
Shares
(1)
In the Companies Acts “share”, in relation to a company, means share in the
company’s share capital.
(2)
A company’s shares may no longer be converted into stock.
(3)
Stock created before the commencement of this Part may be reconverted into
10
shares in accordance with section 634.
(4)
In the Companies Acts—
(a)
references to shares include stock except where a distinction between
share and stock is express or implied, and
(b)
references to a number of shares include an amount of stock where the
15
context admits of the reference to shares being read as including stock.
555
Nature of shares
The shares or other interest of a member in a company are personal property
(or, in Scotland, moveable property) and are not in the nature of real estate (or
heritage).
20
556
Nominal value of shares
(1)
Shares in a limited company having a share capital must each have a fixed
nominal value.
(2)
An allotment of a share that does not have a fixed nominal value is void.
(3)
Shares in a limited company having a share capital may be denominated in any
25
currency, and different classes of shares may be denominated in different
currencies.
(4)
If a company purports to allot shares in contravention of this section, an offence
is committed by every officer of the company who is in default.
(5)
A person guilty of an offence under this section is liable—
30
(a)
on conviction on indictment, to a fine, and
(b)
on summary conviction, to a fine not exceeding the statutory
maximum.
557
Numbering of shares
(1)
Each share in a company having a share capital must be distinguished by its
35
appropriate number, except in the following circumstances.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 18 — A company’s share capital
Chapter 1 — Shares and share capital of a company
269

(2)
If at any time—
(a)
all the issued shares in a company are fully paid up and rank pari passu
for all purposes, or
(b)
all the issued shares of a particular class in a company are fully paid up
and rank pari passu for all purposes,
5

none of those shares need thereafter have a distinguishing number so long as
it remains fully paid up and ranks pari passu for all purposes with all shares of
the same class for the time being issued and fully paid up.
558
Transferability of shares
(1)
The shares or other interest of any member in a company are transferable in
10
accordance with the company’s articles.
(2)
This is subject to—
(a)
the Stock Transfer Act 1963 (c. 18) or the Stock Transfer Act (Northern
Ireland) 1963 (c.24 (N.I.)) (which enables securities of certain
descriptions to be transferred by a simplified process), and
15
(b)
regulations under Chapter 2 of Part 22 of this Act (which enable title to
securities to be evidenced and transferred without a written
instrument).
(3)
See Part 22 of this Act generally as regards share transfers.
559
Companies having a share capital
20
References in the Companies Acts to a company having a share capital are to a
company that has power under its constitution to issue shares.
560
Issued and allotted share capital
(1)
References in the Companies Acts—
(a)
to “issued share capital” are to shares of a company that have been
25
issued;
(b)
to “allotted share capital” are to shares of a company that have been
allotted.
(2)
References in the Companies Acts to issued or allotted shares, or to issued or
allotted share capital, include shares taken on the formation of the company by
30
the subscribers to the company’s memorandum.
Share capital
561
Called-up share capital
In the Companies Acts—
“called-up share capital”, in relation to a company, means so much of its
35
share capital as equals the aggregate amount of the calls made on its
shares (whether or not those calls have been paid), together with—
(a)
any share capital paid up without being called, and
(b)
any share capital to be paid on a specified future date under the
articles, the terms of allotment of the relevant shares or any
40
other arrangements for payment of those shares; and

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 18 — A company’s share capital
Chapter 2 — Allotment of shares: general provisions
270

“uncalled share capital” is to be construed accordingly.
562
Equity share capital
In the Companies Acts “equity share capital”, in relation to a company, means
its issued share capital excluding any part of that capital that does not carry any
right (either as respects dividends or as respects capital) to participate beyond
5
a specified amount in a distribution.
Chapter 2
Allotment of shares: general provisions
Power of directors to allot shares
563
Exercise by directors of power to allot shares etc
10
(1)
The directors of a company must not exercise any power of the company—
(a)
to allot shares in the company, or
(b)
to grant rights to subscribe for, or to convert any security into, shares in
the company,

except in accordance with section 564 (private company with single class of
15
shares) or section 565 (authorisation by company).
(2)
Subsection (1) does not apply—
(a)
to the allotment of shares in pursuance of an employees’ share scheme,
or
(b)
to the grant of a right to subscribe for, or to convert any security into,
20
shares so allotted.
(3)
If this section applies in relation to the grant of a right to subscribe for, or to
convert any security into, shares, it does not apply in relation to the allotment
of shares pursuant to that right.
(4)
A director who knowingly contravenes, or permits or authorises a
25
contravention of, this section commits an offence.
(5)
A person guilty of an offence under this section is liable—
(a)
on conviction on indictment, to a fine;
(b)
on summary conviction, to a fine not exceeding the statutory
maximum.
30
(6)
Nothing in this section affects the validity of an allotment or other transaction.
564
Power of directors to allot shares etc: private company with only one class of
shares
Where a private company has only one class of shares, the directors may
exercise any power of the company—
35
(a)
to allot shares of that class, or
(b)
to grant rights to subscribe for or to convert any security into such
shares,
except to the extent that they are prohibited from doing so by the company’s
articles.
40