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I have only one technical question, on which I would welcome the Minister’s view. Clearly, what became known as Section 700 accounts were criticised by the company law review committee, and it is appropriate to move away from that. My question concerns the simplification of accounts procedures for non-European Union countries. They are straightforward in the EU because companies formed there comply with the accounting rules that have emerged by a series of directives, so it is clear what they will say. In the Government’s view, will the liberalisation—that may be the wrong noun, so let us say alteration—of the rules and the replacement of the Section 700 accounts make it marginally harder for creditors and people dealing with those companies to find out exactly what is happening or will it improve their position?

Lord Young of Norwood Green: My Lords, the first question was a minority view, so to speak, as I understood the noble Lord, Lord De Mauley. Responses to each of the consultations on a simplified single regime for overseas companies consistently supported the approach. Almost all respondents supported the regime as set out in the draft regulations set out in December 2007, which was based on the concept of an overseas company with a UK establishment. Key stakeholders have continued to be involved in the finalisation of the draft regulations and have continued to support the concept of a single regime. It seems to be pretty well supported.

Impact assessment can be justified by the savings. The net saving of £4.9 million is measured in terms of new overseas companies registering a UK establishment under the new regime. It is rather difficult to quantify one of the main benefits of the regime, which is that these companies no longer have to decide whether their establishment in the UK is a place of business or a branch. This element of choice and the time and effort required will vary from company to company.

The PwC assessment of costs to business of UK regulation did not include an assessment of this choice. We believe that the simplification of the regime is a major customer benefit, and it is unfortunate that this saving cannot be counted. Instead, we have been able to quantify the benefit to companies of following the new simplified accounting regime and avoiding the existing Section 700 accounts requirements. PwC assessed the cost of preparation of such accounts to be just under £885 per company.

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Many overseas companies will now be in a position to avoid this cost by filing accounts already prepared under the parent law of their country of incorporation. We have taken an indicative view that half the overseas companies that could benefit from this change will do so. It is difficult to be more accurate, given the range of countries involved, and the saving could be higher. Those companies unable to rely on parent law and still required to prepare accounts will find the new arrangements more straightforward, and we have estimated an average reduced cost of half that for Section 700 accounts assessed by PwC. We based the saving on the number of active overseas companies registered at Companies House that are non-EU companies with a UK branch or overseas companies with a place of business. EU companies with a UK branch are not subject to Section 700 accounts, so we have not counted them in the saving calculation.

For some existing overseas companies, there will be negligible increased cost. The regulations include transitional provisions that allow existing companies sufficient time to provide a set of accounts where they have not already been provided. Other information to be provided as part of the transition is negligible. We have allowed companies six months from 1 October 2009 to comply with a simple return to the registrar. Respondents to the December 2007 consultation did not challenge the figures used, nor did they offer any alternative approach. On the contrary, the majority supported the approach taken.

In response to the noble Lord, Lord Razzall, accounting by non-EU companies has been modernised, not liberalised. It will be easier for creditors because the resulting accounts will follow more modern accounting standards—so I am assured. I think that we have dealt with all the questions raised.

Motion agreed.

Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009

Copy of the Regulation
16th Report from the JCSI

Considered in Grand Committee

4.16 pm

Moved By Lord Young of Norwood Green

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Lord Young of Norwood Green): We are debating today the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009. Limited liability partnerships were introduced by the Limited Liability Partnerships

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Act 2000. The main early users of the limited liability partnership form were major accountancy and law firms, and now all sizes and types of businesses are using it.

The LLP Act is a relatively short Act that sets out the basic structure of the LLP and provides a power to fill it out as appropriate by applying to LLPs selected provisions of company law. The LLP Regulations 2001 applied major parts of the Companies Act 1985, with appropriate modifications, to LLPs along with bits of financial services and insolvency law.

As the Companies Act 1985 has been comprehensively replaced by the Companies Act 2006, we need to update the regulations that apply company law provisions to LLPs. Last year, your Lordships debated the Limited Liability Partnerships (Accounts and Audit) Regulations, which applied to LLPs rules on accounts and audit corresponding to those under the Companies Act 2006. These take effect for financial years beginning on or after 1 October 2008. The current regulations complete that work by applying to LLPs the other relevant provisions of the Companies Act 2006, with modifications as necessary. They apply to the whole of the United Kingdom.

If any noble Lord is familiar with the 2001 LLP regulations, he or she will have noticed that the current regulations are much longer. This is because the earlier regulations simply listed the section numbers of provisions in the Companies Acts that were to be applied with a list of textual modifications. The current regulations take the approach of writing out the provisions so that the regulations can be read as a stand-alone document without looking at the Companies Act. This approach received strong support when we consulted, particularly from practitioners in the field.

Much of the update has simply meant applying to LLPs the provisions of the Companies Act 2006 that correspond to the provisions of the 1985 Act that were applied to LLPs. As set out in the Explanatory Memorandum, some of the new provisions of the 2006 Act are applied to LLPs, but others are not. Broadly, these decisions maintain the approach of applying to LLPs the rules that regulate a company's dealings with third parties and, in particular, the filing and transparency requirements, but not rules on the internal workings of companies.

There is also a small number of changes that are not directly related to the Companies Act 2006. They include providing a new right for a member of an LLP, if he is the sole remaining member, to apply to have the LLP dissolved. In summary, these regulations will keep the law on LLPs up to date and consistent with current company law. I beg to move.

Lord De Mauley: I am grateful to the Minister. The Explanatory Memorandum says that this instrument and the application of the accounts and audit provisions of the 2006 Act to LLPs will be,

I notice that the other Explanatory Memorandums for the orders that we are discussing today all say something similar. What does “from 2011” mean? It sounds like, “not before 2011”, which is rather worrying. Does it mean, on the other hand, “in 2011”? If not, when will we know the outcome of the review?

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Other noble Lords may have received a communication regarding these regulations from the Institute of Chartered Accountants in England and Wales, an institute of which, I should disclose, I am a member. While most of its concerns with earlier drafts appear to have been allayed, it raised the following points. Perhaps the Minister could address them.

The first concerns Regulation 18, which would apply Sections 162 to 165 of the 2006 Act, which concern the registry of directors’ names to LLPs with modifications. That will require an LLP to keep available for inspection a register of members containing certain particulars, including a service address for each individual member and whether a member is a designated member. In practice, the institute notes that most LLPs currently maintain a list of all members at their principal place of business and do not object to the requirement being imposed. However, particularly given that failure to comply will be an offence, it feels—and I can see the point—that it is important that the Minister’s department provides LLPs with adequate information about that new requirement to ensure compliance as from 1 October.

The institute also notes that the department has postponed the decision on whether to apply the overseas company disclosure regime to LLPs. It understands that it would be undesirable to hold up the application of the remainder of the Act to LLPs while the difficult question of overseas LLPs is considered, but it would like to know when the issue will be tackled, as there is now a discrepancy between the treatment of overseas companies, as against overseas LLPs.

Lastly, as a drafting point, the institute draws attention to the fact that in Regulation 51 applying Section 1007(1) and 1007(5)(a), reference is made to an application being made by an LLP. It says that that should refer to an application being made on behalf of an LLP. I should be interested to hear whether the Minister can respond to those points.

Lord Razzall: I make one point in support of the regulations, which is to congratulate whoever in the Government or the department was responsible for producing them in this format. Before the Minister’s time, when we ground our way through the Companies Bill in the august Chamber, we argued from these Benches that it was important that the Company Law Reform Bill became a consolidating Act, for the reasons that the Minister gave—that it was important that people could read legislation in a digestible form, rather than having to leap from one section and one Act to the other, the only benefit of which being to increase the profits of Butterworths. I welcome this approach and hope that the Government will continue to follow it when we have further legislation in this area.

Lord Young of Norwood Green: I thank the noble Lord, Lord Razzall, for that comment. The Acts have been implemented in stages, which will need to be reflected in our evaluation. We will begin to evaluate some provisions commenced in 2007 next year, but we will wait until 2011 to evaluate most provisions commenced in October 2009.

The regulations for LLPs come into effect on 1 October 2009, in line with the implementation date for the remaining provisions of the Companies Act 2006 for

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companies. We will take steps to ensure that LLPs know about these changes, particularly the new register of members, given the importance of the situation in which they find themselves. Companies House will send a mailshot to all LLPs telling them about the changes. It will highlight the new requirement to keep a register of members available for inspection, and it will mention that a failure to do so will be an offence. Guidance and specimen forms will be available on the Companies House website from 1 July. We will look at the drafting point raised by the ICAEW to see whether it needs amendment. No consensus has emerged about how or whether to change the way in which we regulate overseas LLPs. The regulations before us therefore continue the approach in the existing regulations.

I believe that I have dealt with all the questions. I am grateful to noble Lords for their contributions to this debate. The regulations represent the last step towards the application of the Companies Act 2006 to limited liability partnerships. They ensure that the regulations under which LLPs form and operate are in step with modern company law. In summary, by applying the remaining provisions of the Companies Act 2006 to LLPs, as set out in the regulations, where necessary and appropriate, we make essential changes to align the requirements for LLPs with those for companies. This will ensure that LLPs enjoy some of the same benefits and savings as companies, and remain an attractive and distinctive corporate vehicle for business, with different characteristics from companies and other types of partnerships. I commend these regulations to the Committee.

Motion agreed.

Companies Act 2006 (Accounts, Reports and Audit) Regulations 2009

Copy of the Regulation
15th Report from the JCSI

Considered in Grand Committee

4.27 pm

Moved By Lord Young of Norwood Green

The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Lord Young of Norwood Green):The main purpose of this instrument is to complete the implementation of the company reporting directive, directive 2006/46, in relation to corporate governance statements that publicly traded companies publish separately from the directors’ report.

The regulations before the Committee today amend the Companies Act 2006 to make provision for the filing of separate corporate governance statements at Companies House. They also implement the directive’s requirement for an auditor’s report on any separate corporate governance statement. Rules made last year by the Financial Services Authority implemented the requirement for a corporate governance statement and set out what it should contain. As permitted under the

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directive, the FSA rules give companies the option to prepare a separate corporate governance statement rather than including it in a specific section of the directors’ report. The auditor is required by these regulations to check that information in a separate corporate governance statement on internal control and risk management systems in relation to the financial reporting process and share capital is consistent with the audited financial statements. That is the same check that would be required to be carried out by the auditor if the information formed part of the directors’ report.

We do not believe that these regulations should add to the costs of audit because the test for consistency should not be onerous, and in a number of companies, the audited financial statements may not contain information on internal control and risk management systems.

The regulations also contain some technical accounting amendments. If the noble Lord wishes, I can give a brief description of each of the accounting amendments that remain in Part 3 of the regulations.

As noble Lords will be aware, a version of this instrument was laid before Parliament earlier this year and then withdrawn. That earlier version contained an amendment to Section 413 of the Companies Act 2006 concerning disclosure of loans to directors of banking companies. We have decided to re-lay the draft regulations without that amendment. We want to consider further what form the amendment should take and to conduct a public consultation. I commend these regulations to the Committee. I beg to move.

4.30 pm

Lord De Mauley: I thank the Minister once again for introducing these regulations. I do not think that they are particularly controversial so I will not detain your Lordships long. As the name includes the word “audit” I suppose I should disclose once again my membership of the Institute of Chartered Accountants in England and Wales although I have not been a practitioner since at least the early 1980s.

When these regulations were being debated on Monday in another place, I notice that the Liberal Democrat spokesman asked the Minister several technical questions, which he did not fully answer. Perhaps I can leave it to the noble Lord, Lord Razzall, to pursue these matters if he wishes to do so. On these Benches, we are strong supporters of transparency. Transparency is particularly important with company accounts. Although relatively modest in their ambitions, we are supportive of the impetus behind these regulations. When they were debated in another place my honourable friend Oliver Heald asked the Minister why these provisions had taken so long to promulgate. He asked if it was because the Financial Services Authority had taken a very long time to create the rules. The Minister there undertook to make inquiries of the FSA, and it would be helpful to know if there is an answer yet.

Lord Razzall: I do not propose to repeat the questions that my colleague in another place asked, but I will say what they were. The two questions he asked were: first,

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whether the Minister will state the accounting impact of the fairly technical changes to realise losses; and, secondly he asked about the transfer and value of pensions. I do not expect the Minister to answer because I understand that the Minister in another place gave an undertaking to write to my colleague with an answer to that, which no doubt we will see in due course. I do not propose to delay the Committee any further; I am happy to support this regulation.

Lord Lyell: Could I delay the Minister for 10 seconds? I had a look through the corporate governance statements. My noble friend told us when he last carried out work in the audit profession; I go back at least 15 to 20 years before that.

Will the Minister clarify something for me, though not necessarily today? On page 3 under “Part 15 definition of ‘corporate governance statement’”, the noble Lord will find paragraph 6 and “Auditor’s report on separate corporate governance statement”. That is not necessarily his duties, but in Regulation 6 he will find Section 497 of the Companies Act 2006, which, I am afraid, is not part of my bedtime reading. I am fascinated by the auditor’s report on the auditable part of directors’ remuneration, but I am somewhat suspicious. I wonder what aspects of the report and the directors’ remuneration would not be auditable, to put it politely. Perhaps the noble Lord could reassure me—not today, but in writing, because I do not want to delay the Committee any further. I am very grateful for his words of reassurance throughout.

Lord Young of Norwood Green: I say to the noble Lord, Lord De Mauley, that with regard to the implementation by the FSA of rules of directive 2006/46, requirements on corporate governance statement, the Government consulted on the implementation of the directive in March 2007. One of the questions asked was whether the requirement for a corporate governance statement should be implemented by rules made by the FSA or should it be prescribed as part of the Companies Act.

The consultation period closed on 1 June 2007. Consultees preferred a continuation of the existing regime for corporate governance statements. The Government therefore decided with the agreement of the FSA that the requirement for a corporate governance statement should be implemented by FSA rules. The FSA needed to consult on its rules, which encompass not only the corporate governance statement but also requirements for audit committees in the Audit Directive 2006/43/EC. The FSA’s consultation document was published in December 2007; the consultation period closed on 20 March 2008. Due to that need to consult and the length of the consultation period, the FSA was not able to make the rules by the common commencement date of 6 April 2008. They were made, however, within the deadline for implementation of the directive.

In answer to his technical questions, I assure the noble Lord, Lord Razzall, that a letter has been placed in the Libraries of both Houses. The noble Lord, Lord

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Lyell, asked about the non-auditable parts of directors’ remuneration—the parts that the auditors cannot reach. No doubt, we will provide a Written Answer.

I am grateful to noble Lords for their contributions to this debate and for their succinctness. The regulations make some modest changes to the law which are needed to complete our exercise of the member state option under the EU directive permitting publicly

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traded companies to prepare a separate corporate governance statement should they so wish. I hope that, on this basis, noble Lords will support the regulations.

Motion agreed.

The Deputy Chairman of Committees: That completes the business before the Grand Committee this afternoon. The Committee stands adjourned—remarkably early.

Committee adjourned at 4.36 pm.

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