The Company Law Reform Bill will cut red tape for small businesses, says John Davies, but only up to a point.

Striking the right balance between encouraging business activity and providing reasonable safeguards is something in which governments have an obvious interest. And it is this issue which is at the heart of the government’s Company Law Reform Bill, which was presented to Parliament last November.

The Department of Trade and Industry says that a lot of company law is written from the perspective of the public company rather than the smaller, private company. The Department aims to produce a law that is more accessible to small businesses, making requirements as unrestricting and easy to understand as possible.

The Bill proposes a number of changes to current company law rules, which are of special significance to small private companies. These include rules relating to annual accounts, the role of the company secretary, the holding of AGMs, bypassing resolutions and the duties of company directors.

All companies are currently subject to a basic legal requirement to hold an annual general meeting (AGM) once a year. At the AGM, ‘standard business’ is conducted - placing the annual accounts before members, reviewing progress over the previous year and appointing auditors for the next year.

The trouble is, for most private companies in which owners and managers are often one and the same, this meeting serves no useful purpose. As a result, in many cases the AGM never actually happens - it is simply recorded as a fictional minute in the books.
A recent change in the law alre
ady gives private companies the opportunity to opt out of the AGM. But the new Bill goes further and exempts private companies from any legal requirement to hold one.

Currently, all limited companies, whether they be listed firms or small husband and wife teams, must appoint a company secretary. However, the new Bill proposes that in future private companies should not be required to do this.
In the private company environment, the post of company secretary is frequently seen as something of a formality.

Traditionally, the post has been occupied by the spouse of the business owner, and many companies will welcome this change as being one less bit of red tape to worry about.

However, even with the streamlining of small company law that the Bill promotes, being in charge of a company still carries with it important and, in some cases, onerous obligations for directors. These obligations are being strengthened under the Bill.

Where a company treats the office of company secretary seriously, and appoints a person who is knowledgeable about company law and directors’ duties, that person can can be extremely useful to both directors and shareholders in terms of ensuring that they comply with all their responsibilities.

The Bill will also allow private companies to bypass legally binding resolutions by means of written resolutions, thereby doing away with the obligation to convene formal general meetings to do so.

A written resolution will not need to attract the unanimous support of all the company’s members -it only needs the same level of support that would be required if the same resolution were being proposed at a formal meeting. In other words, a simple majority or 75% of votes, depending on the company’s constitution, is all that’s required to bypass a resolution.

While the new Bill will distinguish more sharply between private and public companies in terms of the level of regulation, there will be no such distinction in terms of the legal responsibilities of directors, which are to be increased and strengthened.

For the first time, UK company legislation will set out the essential legal responsibilities of all directors. To some extent, this process will simply reiterate the legal principles which have been laid down by the courts over the past century and a half. But there are to be important new aspects to directors’ duties.

For example, directors are now to be judged not only by reference to the skills and experience that they actually have - this has always been the common law position - but by reference to an ‘objective’ standard of skill and care. This means that the law will expect all directors to act in accordance with a minimum standard of skill and care, whatever their backgrounds and whatever the nature of their involvement with their company.

In addition, although directors will in future owe their legal duties to their company, and not to any outside interests, they will be required to take into account, in the decision-making process, a number of prescribed factors which are designed to improve the quality of company decision-making.

Under the new Bill, all limited companies, whether they be public or private, will continue to have to prepare their annual accounts in accordance with the statutory disclosure and ‘true and fair’ rules. However, the time allowed for private companies to file their annual accounts with Companies House will be reduced from 10 months to seven.

In addition, while companies will still be able to file so-called ‘abbreviated accounts’ with Companies House instead of their full accounts, in future these will have to include details of the company’s annual turnover.
A company’s directors have a legal responsibility to ensure that their firm’s annual accounts comply with the legal disclosure rules and the requirement to give a ‘true and fair view’ of the financial state of the company.

Therefore, if the directors approve a set of accounts which they know do not comply with the rules, or are ‘reckless’ as to whether they comply or not, they will be committing a criminal offence.

For this reason, whether or not a company’s accounts are audited by an independent auditor, for the great majority of small companies it will be essential that the accounts are prepared by a qualified external accountant.

The Bill is likely to arrive on the statute book by spring 2006 and to come into force shortly thereafter.

Key Changes
Deadline for private companies to file annual reporting documents will reduce from 10 to seven months

Private companies can opt not to have a company secretary

Private companies will not be required to hold an annual general meeting

Directors’ legal responsibilities will increase to improve accountability and decision-making