Company Law Reform Bill [HL] (395-401)

House of Commons

Session 2005 - 06
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Other Bills before Parliament

Company Law Reform Bill [HL] (395-401)

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 2 — Justification of distribution by reference to accounts
395

Application of provisions to successive distributions etc
843
Successive distributions etc by reference to the same accounts
(1)
In determining whether a proposed distribution may be made by a company
in a case where—
(a)
one or more previous distributions have been made in pursuance of a
5
determination made by reference to the same relevant accounts, or
(b)
relevant financial assistance has been given, or other relevant payments
have been made, since those accounts were prepared,

the provisions of this Part apply as if the amount of the proposed distribution
was increased by the amount of the previous distributions, financial assistance
10
and other payments.
(2)
The financial assistance and other payments that are relevant for this purpose
are—
(a)
financial assistance lawfully given by the company out of its
distributable profits;
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(b)
financial assistance given by the company in contravention of section
691 or 692 (prohibited financial assistance) in a case where the giving of
that assistance reduces the company’s net assets or increases its net
liabilities;
(c)
payments made by the company in respect of the purchase by it of
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shares in the company, except a payment lawfully made otherwise than
out of distributable profits;
(d)
payments of any description specified in section 718 (payments apart
from purchase price of shares to be made out of distributable profits).
(3)
In this section “financial assistance” has the same meaning as in Chapter 2 of
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Part 19 (see section 696).
(4)
For the purpose of applying subsection (2)(b) in relation to any financial
assistance—
(a)
“net assets” means the amount by which the aggregate amount of the
company’s assets exceeds the aggregate amount of its liabilities, and
30
(b)
“net liabilities” means the amount by which the aggregate amount of
the company’s liabilities exceeds the aggregate amount of its assets,

taking the amount of the assets and liabilities to be as stated in the company’s
accounting records immediately before the financial assistance is given.
(5)
For this purpose a company’s liabilities include any amount retained as
35
reasonably necessary for the purposes of providing for any liability—
(a)
the nature of which is clearly defined, and
(b)
which is either likely to be incurred or certain to be incurred but
uncertain as to amount or as to the date on which it will arise.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 3 — Supplementary provisions
396

Chapter 3
Supplementary provisions
Accounting matters
844
Realised losses and profits and revaluation of fixed assets
(1)
The following provisions have effect for the purposes of this Part.
5
(2)
The following are treated as realised losses—
(a)
in the case of Companies Act accounts, provisions of a kind specified
for the purposes of this paragraph by regulations under section 402
(except revaluation provisions);
(b)
in the case of IAS accounts, provisions of any kind (except revaluation
10
provisions).
(3)
A “revaluation provision” means a provision in respect of a diminution in
value of a fixed asset appearing on a revaluation of all the fixed assets of the
company, or of all of its fixed assets other than goodwill.
(4)
Where—
15
(a)
on the revaluation of a fixed asset, an unrealised profit is shown to have
been made, and
(b)
on or after the revaluation, a sum is written off or retained for
depreciation of that asset over a period,

an amount equal to the amount by which that sum exceeds the sum which
20
would have been so written off or retained for the depreciation of that asset
over that period, if that profit had not been made, is treated as a realised profit
made over that period.
(5)
For the purpose of this section there is treated as having been a revaluation
where—
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(a)
the directors have considered the value of fixed assets of the company,
without actually revaluing them, and
(b)
they are satisfied that their aggregate value at the time of their
consideration was not less than the aggregate amount at which they
were then stated in the company’s accounts.
30
(6)
Where the relevant accounts are required to be prepared in accordance with
this Act, subsection (5) applies only if it is stated in a note to the accounts—
(a)
that the directors have considered the value of fixed assets of the
company without actually revaluing them,
(b)
that they are satisfied that the aggregate value of those assets at the time
35
of their consideration was not less than the aggregate amount at which
they were then stated in the company’s accounts, and
(c)
that accordingly, by virtue of that subsection, amounts are stated in the
accounts on the basis that a revaluation of fixed assets of the company
is treated as having taken place at that time.
40
845
Determination of profit or loss in respect of asset where records incomplete
In determining for the purposes of this Part whether a company has made a
profit or loss in respect of an asset where—

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 3 — Supplementary provisions
397

(a)
there is no record of the original cost of the asset, or
(b)
a record cannot be obtained without unreasonable expense or delay,
then,
its cost is taken to be the value ascribed to it in the earliest available record of
its value made on or after its acquisition by the company.
5
846
Realised profits and losses of long term insurance business
(1)
The provisions of this section have effect for the purposes of this Part as it
applies in relation to an authorised insurance company carrying on long term
business.
(2)
An amount included in the relevant part of the company’s balance sheet that—
10
(a)
represents a surplus in the fund or funds maintained by it in respect of
its long term business, and
(b)
has not been allocated to policy holders or, as the case may be, carried
forward unappropriated in accordance with asset identification rules
made under section 142(2) of the Financial Services and Markets Act
15
2000 (c. 8),

is treated as a realised profit.
(3)
For the purposes of subsection (2)—
(a)
the relevant part of the balance sheet is that part of the balance sheet
that represents accumulated profit or loss;
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(b)
a surplus in the fund or funds maintained by the company in respect of
its long term business means an excess of the assets representing that
fund or those funds over the liabilities of the company attributable to
its long term business, as shown by an actuarial investigation.
(4)
A deficit in the fund or funds maintained by the company in respect of its long
25
term business is treated as a realised loss.

For this purpose a deficit in any such fund or funds means an excess of the
liabilities of the company attributable to its long term business over the assets
representing that fund or those funds, as shown by an actuarial investigation.
(5)
Subject to subsections (2) and (4), any profit or loss arising in the company’s
30
long term business is to be left out of account.
(6)
For the purposes of this section an “actuarial investigation” means an
investigation made into the financial condition of an authorised insurance
company in respect of its long term business—
(a)
carried out once in every period of twelve months in accordance with
35
rules made under Part 10 of the Financial Services and Markets Act
2000, or
(b)
carried out in accordance with a requirement imposed under section
166 of that Act,

by an actuary appointed as actuary to the company.
40
(7)
In this section “long term business” means business that consists of effecting or
carrying out contracts of long term insurance.

This definition must be read with section 22 of the Financial Services and
Markets Act 2000, any relevant order under that section and Schedule 2 to that
Act.
45

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 3 — Supplementary provisions
398

847
Treatment of development costs
(1)
Where development costs are shown as an asset in a company’s accounts, any
amount shown in respect of those costs is treated—
(a)
for the purposes of section 833 (distributions to be made out of profits
available for the purpose) as a realised loss, and
5
(b)
for the purposes of section 835 (distributions by investment companies
out of accumulated revenue profits) as a realised revenue loss.

This is subject to the following exceptions.
(2)
Subsection (1) does not apply to any part of that amount representing an
unrealised profit made on revaluation of those costs.
10
(3)
Subsection (1) does not apply if—
(a)
there are special circumstances in the company’s case justifying the
directors in deciding that the amount there mentioned is not to be
treated as required by subsection (1),
(b)
it is stated—
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(i)
in the case of Companies Act accounts, in the note required by
regulations under section 402 as to the reasons for showing
development costs as an asset, or
(ii)
in the case of IAS accounts, in any note to the accounts,

that the amount is not to be so treated, and
20
(c)
the note explains the circumstances relied upon to justify the decision
of the directors to that effect.
Distributions in kind
848
Distributions in kind: determination of amount
(1)
This section applies for determining the amount of a distribution consisting of
25
or including, or treated as arising in consequence of, the sale, transfer or other
disposition by a company of a non-cash asset where—
(a)
at the time of the distribution the company has profits available for
distribution, and
(b)
if the amount of the distribution were to be determined in accordance
30
with this section, the company could make the distribution without
contravening this Part.
(2)
The amount of the distribution (or the relevant part of it) is taken to be—
(a)
in a case where the amount or value of the consideration for the
disposal is not less than the book value of the asset, zero;
35
(b)
in any other case, the amount by which the book value of the asset
exceeds the amount or value of any consideration for the disposal.
(3)
The company’s profits available for distribution are treated as increased by the
amount (if any) by which the amount or value of any consideration for the
disposition exceeds the book value of the asset.
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(4)
In this section “book value”, in relation to an asset, means—
(a)
the amount at which the asset is stated in the relevant accounts, or
(b)
where the asset is not stated in those accounts at any amount, zero.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 3 — Supplementary provisions
399

(5)
The provisions of Chapter 2 (justification of distribution by reference to
accounts) have effect subject to this section.
849
Distributions in kind: treatment of unrealised profits
(1)
This section applies where—
(a)
a company makes a distribution consisting of or including, or treated as
5
arising in consequence of, the sale, transfer or other disposition by the
company of a non-cash asset, and
(b)
any part of the amount at which that asset is stated in the relevant
accounts represents an unrealised profit.
(2)
That profit is treated as a realised profit—
10
(a)
for the purpose of determining the lawfulness of the distribution in
accordance with this Part (whether before or after the distribution takes
place), and
(b)
for the purpose of the application, in relation to anything done with a
view to or in connection with the making of the distribution, of any
15
provision of regulations under section 402 under which only realised
profits are to be included in or transferred to the profit and loss account.
Consequences of unlawful distribution
850
Consequences of unlawful distribution
(1)
This section applies where a distribution, or part of one, made by a company
20
to one of its members is made in contravention of this Part.
(2)
If at the time of the distribution the member knows or has reasonable grounds
for believing that it is so made, he is liable—
(a)
to repay it (or that part of it, as the case may be) to the company, or
(b)
in the case of a distribution made otherwise than in cash, to pay the
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company a sum equal to the value of the distribution (or part) at that
time.
(3)
This is without prejudice to any obligation imposed apart from this section on
a member of a company to repay a distribution unlawfully made to him.
(4)
This section does not apply in relation to—
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(a)
financial assistance given by a company in contravention of section 691
or 692, or
(b)
any payment made by a company in respect of the redemption or
purchase by the company of shares in itself.
Other matters
35
851
Saving for certain older provisions in articles
(1)
Where immediately before the relevant date a company was authorised by a
provision of its articles to apply its unrealised profits in paying up in full or in
part unissued shares to be allotted to members of the company as fully or
partly paid bonus shares, that provision continues (subject to any alteration of
40
the articles) as authority for those profits to be so applied after that date.

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 24 — Distributions
Chapter 3 — Supplementary provisions
400

(2)
For this purpose the relevant date is—
(a)
for companies registered in Great Britain, 22nd December 1980;
(b)
for companies registered in Northern Ireland, 1st July 1983.
852
Restriction on application of unrealised profits
A company must not apply an unrealised profit in paying up debentures or
5
any amounts unpaid on its issued shares.
853
Treatment of certain older profits or losses
(1)
Where the directors of a company are, after making all reasonable enquiries,
unable to determine whether a particular profit made before the relevant date
is realised or unrealised, they may treat the profit as realised.
10
(2)
Where the directors of a company, after making all reasonable enquiries, are
unable to determine whether a particular loss made before the relevant date is
realised or unrealised, they may treat the loss as unrealised.
(3)
For the purposes of this section the relevant date is—
(a)
for companies registered in Great Britain, 22nd December 1980;
15
(b)
for companies registered in Northern Ireland, 1st July 1983.
854
Application of rules of law restricting distributions
(1)
Except as provided in this section, the provisions of this Part are without
prejudice to any rule of law restricting the sums out of which, or the cases in
which, a distribution may be made.
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(2)
For the purposes of any rule of law requiring distributions to be paid out of
profits or restricting the return of capital to members—
(a)
section 848 (distributions in kind: determination of amount) applies to
determine the amount of any distribution or return of capital consisting
of or including, or treated as arising in consequence of the sale, transfer
25
or other disposition by a company of a non-cash asset; and
(b)
section 849 (distributions in kind: treatment of unrealised profits)
applies as it applies for the purposes of this Part.
(3)
In this section references to distributions are to amounts regarded as
distributions for the purposes of any such rule of law as is referred to in
30
subsection (1).
855
Saving for other restrictions on distributions
The provisions of this Part are without prejudice to any enactment, or any
provision of a company’s articles, restricting the sums out of which, or the
cases in which, a distribution may be made.
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856
Minor definitions
(1)
The following provisions apply for the purposes of this Part.
(2)
References to profit or losses of any description—
(a)
are to profits or losses of that description made at any time, and

Company Law Reform Bill [HL] (changed to Companies Bill [HL])
Part 25 — A company’s annual return
401

(b)
except where the context otherwise requires, are to profits or losses of
a revenue or capital character.
(3)
“Capitalisation”, in relation to a company’s profits, means any of the following
operations (whenever carried out)—
(a)
applying the profits in wholly or partly paying up unissued shares in
5
the company to be allotted to members of the company as fully or
partly paid bonus shares, or
(b)
transferring the profits to capital redemption reserve.
(4)
References to “realised profits” and “realised losses”, in relation to a company’s
accounts, are to such profits or losses of the company as fall to be treated as
10
realised in accordance with principles generally accepted at the time when the
accounts are prepared, with respect to the determination for accounting
purposes of realised profits or losses.
(5)
Subsection (4) is without prejudice to—
(a)
the construction of any other expression (where appropriate) by
15
reference to accepted accounting principles or practice, or
(b)
any specific provision for the treatment of profits or losses of any
description as realised.
857
General power to make further provision by regulations
(1)
The Secretary of State may by regulations modify the provisions of this Part.
20
(2)
The regulations may—
(a)
amend or repeal any of the provisions of this Part, or
(b)
make such other provision as appears to the Secretary of State
appropriate in place of any of the provisions of this Part.
(3)
Regulations under this section may make consequential amendments or
25
repeals in other provisions of this Act, or in other enactments.
(4)
Regulations under this section are subject to affirmative resolution procedure.
Part 25
A company’s annual return
858
Duty to deliver annual returns
30
(1)
Every company must deliver to the registrar successive annual returns each of
which is made up to a date not later than the date that is from time to time the
company’s return date.
(2)
The company’s return date is—
(a)
the anniversary of the company’s incorporation, or
35
(b)
if the company’s last return delivered in accordance with this Part was
made up to a different date, the anniversary of that date.
(3)
Each return must—
(a)
contain the information required by or under the following provisions
of this Part, and
40
(b)
be delivered to the registrar within 28 days after the date to which it is
made up.