These articles gives a general overview only and the legal position at the time of writing them. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print.
Impact of Company Law Reforms on Small Companies
In March 2005 the Government published the Company Law Reform Bill which proposes wide ranging reforms of company law.
95% of UK limited companies are small private companies which play an increasingly significant role in the economy, however company law has traditionally been drafted with the larger public company in mind. In order to address this apparent imbalance, the Government has initiated an overhaul of existing law in order to make it better suited to the needs of small businesses.
The proposed reforms are based on key objectives established by the Government to make it easier to set up and run a company, ensure better regulation of company affairs, promote greater shareholder engagement and a long term investment culture.
The objective is to review and restructure those parts of the law that are most relevant to small companies and to make them more straightforward and easier to understand and apply in future. The most significant reforms for small businesses are set out below:
Forming a Company
It will still be necessary for a company to be incorporated with a memorandum and articles of association, however the memorandum will only state that the subscribers intend to form a limited company. The objects of a company will be deemed to be unrestricted unless the articles of association specify to the contrary. The existing standard articles of association will be replaced by a shorter form which will be drafted from the perspective of a small company and will contain the minimum key rules required to regulate the internal workings of a company.
Directors
The new Bill will introduce a statutory statement of directors' duties which have until now have been largely established on common law principles. There will also be accompanying guidance for new directors in order to help them understand and carry out these duties effectively in the future.
Directors will have a greater duty to promote the success of the company for the benefit of its members. They will be required to consider the longer terms consequences of their decisions and to take into account other factors such as employee interests, the reputation of the company, relationships with customers and suppliers, and the impact of the business on the environment and wider community.
Under the new legislation directors will no longer be required to file their own private home address at Companies House and will instead have the option to file an alternative address for service. Companies will also be able to seek approval from shareholders for making loans to directors.
Company Secretaries
Private companies will no longer be required to appoint a company secretary. This does not mean that the current duties carried out by a company secretary will cease to exist and they will still need to be carried out by another officer or member of the company.
Resolutions and Meetings
Private companies will no longer need to hold an annual general meeting unless they choose to do so. It will be easier for companies to take decisions by written resolution rather than holding a meeting. Currently, written resolutions may only be passed by unanimous consent, however under the new proposals, they may be carried instead with a simple or three quarters majority of eligible votes.
Companies will be able to make greater use of e-mail for communications with their members with the aim of making information more accessible and encouraging shareholders to take a more active role in influencing how the company is run in future.
Share Capital
It will become easier for private companies to reduce their share capital by passing a special resolution supported by a solvency statement from the directors and authorisation in the articles of association will no longer be required for the issue of redeemable shares.
The requirement for shareholder approval for an allotment of shares will be removed except where there is more than one class of share.
Under the new proposals there will no longer be the need for paper share certificates and share transfer rules will be simplified.
Financial Assistance
The rules for private companies for the provision of financial assistance to potential or actual shareholders will be abolished. The existing ‘whitewash' procedure is both complex and expensive to operate and frequently causes delays in transactions carried out by small companies.
Accounts and Audits
The current law relating to audit and accounts for companies will be restated in order to make them much easier for small companies to understand and apply.
Small and medium sized companies will still be required to submit abbreviated accounts to Companies House. The deadline for filing annual reporting documents will, however, be reduced from ten to seven months after the year end in recognition of the extent to which technology has improved and the rate at which information becomes out of date.
The Bill proposes to implement auditor liability and improve audit quality by allowing shareholders to agree the limits of auditors' liability as well as giving shareholders the right to question auditors. There will also be a new criminal offence for auditors who knowingly or recklessly issue an incorrect audit report.
How will this affect the small company?
Many of the proposed reforms to company law are designed to make it easier for companies to operate and small companies, in particular, should be able to look forward to reducing both the time and costs of their administration in future.
April 2006
This article gives a general overview only and the legal position at the time of writing this article. It cannot be relied upon in any particular case. Specific legal advice must always be considered to include consideration as to whether the legal position contained in this article has changed since going to print. For further information and advice, please contact Martin Evans, Nial Ledingham or David Halfhead on 0800 135 7917 or alternatively by email on Martin.Evans@lemon-co.co.uk, Nial.Ledingham@lemon-co.co.uk or David.Halfhead@lemon-co.co.uk.
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