CIMA UK Company Law Topic Gateway Series No.14 Prepared by Louise Ross and Technical Information Service Last updated April 2008
Topic Gateway Series UK Company Law 1 UK Company Law Topic Gateway Series No. 14 Prepared by Louise Ross and Technical Information Service Last updated April 2008
Topic Gateway Series UK Company Law About Topic Gateways Topic Gateways are intended as a refresher or introduction to topics of interest to CIMA members.They include a basic definition,a brief overview and a fuller explanation of practical application.Finally they signpost some further resources for detailed understanding and research. Topic Gateways are available electronically to CIMA members only in the CPD Centre on the CIMA website,along with a number of electronic resources. About the Technical Information Service CIMA supports its members and students with its Technical Information Service (TIS)for their work and CPD needs. Our information specialists and accounting specialists work closely together to identify or create authoritative resources to help members resolve their work related information needs.Additionally,our accounting specialists can help CIMA members and students with the interpretation of guidance on financial reporting, financial management and performance management,as defined in the CIMA Official Terminology 2005 edition. CIMA members and students should sign into My CIMA to access these services and resources. The Chartered Institute of Management Accountants 26 Chapter Street London sW1P 4NP United Kingdom T.+44(0)2088492259 F.+44(0)2088492468 E.tis@cimaglobal.com www.cimaglobal.com
Topic Gateway Series UK Company Law About Topic Gateways Topic Gateways are intended as a refresher or introduction to topics of interest to CIMA members. They include a basic definition, a brief overview and a fuller explanation of practical application. Finally they signpost some further resources for detailed understanding and research. Topic Gateways are available electronically to CIMA members only in the CPD Centre on the CIMA website, along with a number of electronic resources. About the Technical Information Service CIMA supports its members and students with its Technical Information Service (TIS) for their work and CPD needs. Our information specialists and accounting specialists work closely together to identify or create authoritative resources to help members resolve their work related information needs. Additionally, our accounting specialists can help CIMA members and students with the interpretation of guidance on financial reporting, financial management and performance management, as defined in the CIMA Official Terminology 2005 edition. CIMA members and students should sign into My CIMA to access these services and resources. The Chartered Institute of Management Accountants 26 Chapter Street London SW1P 4NP United Kingdom 2 T. +44 (0)20 8849 2259 F. +44 (0)20 8849 2468 E. tis@cimaglobal.com www.cimaglobal.com
Topic Gateway Series UK Company Law UK Company Law updated Definition and concept Company Law(known as Corporate Law in some countries)refers to the formation and governance of corporate entities.In the UK,the responsible body is the Corporate Law and Governance Directorate of the Department for Business,Enterprise and Regulatory Reform(BERR),formerly the Department of Trade and Industry(DTI).This directorate also represents UK interests in the development of EU company law.It is worth noting that some matters are dealt with in law while other aspects of corporate governance are dealt with in codes of best practice. Context In the current syllabus,CIMA students will learn and may be examined on this topic in paper C5 Business Law,Financial Analysis(paper P8)and Financial Accounting and Tax Principles(paper P7). Overview The main piece of legislation is the Companies Act 2006(CA 06).This new Act is the largest single piece of legislation ever passed by the UK Parliament,and is the product of eight years of consultation on company law reform.CA 06 is a consolidation of all the company law provisions of CA 85,CA 89 and the Companies(Audit,Investigations and Community Enterprise)Act 2004 or C(AICE)04. The elements of those acts which were not incorporated into CA 06 relate to community enterprise companies or to investigations which are wider in scope than just companies.These remnants are listed in paragraphs 9 and 10 of the explanatory notes to CA 06 which can be found on the BERR Companies Act web pages.Effectively CA 06 repeals and replaces about two-thirds of CA 85. The Government's motivation for CA 06 was to increase shareholder engagement and to promote a long-term view of investment,rather than decisions made on the basis of immediate returns.It also aimed to simplify regulation by 'thinking small first',recognising that the vast majority of UK companies are small,and to achieve cost savings for industry. 3
Topic Gateway Series UK Company Law 3 UK Company Law - updated Definition and concept Company Law (known as Corporate Law in some countries) refers to the formation and governance of corporate entities. In the UK, the responsible body is the Corporate Law and Governance Directorate of the Department for Business, Enterprise and Regulatory Reform (BERR), formerly the Department of Trade and Industry (DTI). This directorate also represents UK interests in the development of EU company law. It is worth noting that some matters are dealt with in law while other aspects of corporate governance are dealt with in codes of best practice. Context In the current syllabus, CIMA students will learn and may be examined on this topic in paper C5 Business Law, Financial Analysis (paper P8) and Financial Accounting and Tax Principles (paper P7). Overview The main piece of legislation is the Companies Act 2006 (CA 06). This new Act is the largest single piece of legislation ever passed by the UK Parliament, and is the product of eight years of consultation on company law reform. CA 06 is a consolidation of all the company law provisions of CA 85, CA 89 and the Companies (Audit, Investigations and Community Enterprise) Act 2004 or C(AICE) 04. The elements of those acts which were not incorporated into CA 06 relate to community enterprise companies or to investigations which are wider in scope than just companies. These remnants are listed in paragraphs 9 and 10 of the explanatory notes to CA 06 which can be found on the BERR Companies Act web pages. Effectively CA 06 repeals and replaces about two-thirds of CA 85. The Government’s motivation for CA 06 was to increase shareholder engagement and to promote a long-term view of investment, rather than decisions made on the basis of immediate returns. It also aimed to simplify regulation by ‘thinking small first’, recognising that the vast majority of UK companies are small, and to achieve cost savings for industry
Topic Gateway Series UK Company Law Other significant developments incorporated into CA 06 include: a statutory statement of directors'duties encouragement for electronic communication with shareholders protection against liability for forward-looking statements. See below for further detail BERR list the benefits of the CA 06 to companies,shareholders and others at: www.berr.gov.uk/bbf/co-act-2006/Major%20Benefits%20to%20Business/page35194.html [Accessed 25 April 2008] Companies Act 2006 The Companies Act 2006 is available online at: www.opsi.gov.uk/acts/acts2006a.htm [Accessed 25 April 2008] The main sections likely to be of interest to members are(but are not confined to): Directors'duties (sections 170-177).CA 06 embedded in statute the concept of Enlightened Shareholder Value,which introduced a statutory statement of directors'duties.This clarified that directors must continue to promote the success of the company for the benefit of its shareholders.However,they also have to take into account wider factors such as the company's impact on the environment and the need to foster relationships with customers,suppliers and other stakeholders. Contents of Directors'Report and Business Review(sections 416-417) Electronic Communication with Shareholders(Schedule 5,Part 3).The goal is to make it common practice for shareholders to vote electronically,and for companies to distribute annual reports and other communications electronically. This is one of the biggest money(and tree)saving aspects of the Act,hence its early implementation. Forward looking statements(section 463).Directors are protected against statements(including forward looking statements which didn't subsequently come true)if they were made in good faith and carefully.A director can be held liable for statements in the directors'report only if the director knew they were untrue or misleading (or was reckless as to whether they were untrue or misleading)or if the director knew an omission was dishonestly concealing a material fact. 4
Topic Gateway Series UK Company Law 4 Other significant developments incorporated into CA 06 include: • a statutory statement of directors’ duties • encouragement for electronic communication with shareholders • protection against liability for forward-looking statements. See below for further detail. BERR list the benefits of the CA 06 to companies, shareholders and others at: www.berr.gov.uk/bbf/co-act-2006/Major%20Benefits%20to%20Business/page35194.html [Accessed 25 April 2008] Companies Act 2006 The Companies Act 2006 is available online at: www.opsi.gov.uk/acts/acts2006a.htm [Accessed 25 April 2008] The main sections likely to be of interest to members are (but are not confined to): Directors’ duties (sections 170 -177). CA 06 embedded in statute the concept of Enlightened Shareholder Value, which introduced a statutory statement of directors’ duties. This clarified that directors must continue to promote the success of the company for the benefit of its shareholders. However, they also have to take into account wider factors such as the company’s impact on the environment and the need to foster relationships with customers, suppliers and other stakeholders. Contents of Directors’ Report and Business Review (sections 416-417) Electronic Communication with Shareholders (Schedule 5, Part 3). The goal is to make it common practice for shareholders to vote electronically, and for companies to distribute annual reports and other communications electronically. This is one of the biggest money (and tree) saving aspects of the Act, hence its early implementation. Forward looking statements (section 463). Directors are protected against statements (including forward looking statements which didn’t subsequently come true) if they were made in good faith and carefully. A director can be held liable for statements in the directors’ report only if the director knew they were untrue or misleading (or was reckless as to whether they were untrue or misleading) or if the director knew an omission was dishonestly concealing a material fact
Topic Gateway Series UK Company Law Auditor liability (sections 534-538).With the agreement of the company and the approval of shareholders,auditors are allowed to limit their liability (using a specified monetary cap,a formula or other means).The limit must be no less than what is 'fair and reasonable',considering the nature of the auditors' responsibilities and what is expected of them. There is also a useful index of defined expressions at Schedule 8 of the Act,at: www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_85 [Accessed 25 April 2008] Phased implementation CA 06 gained the Royal Assent in late November 2006,at which point only a small proportion of its provisions were implemented.Those mainly related to the EU Transparency Directive which had to be implemented by January 2007,and included the statutory basis for directors'liability in respect of the Business Review. Other provisions will be implemented by a succession of Regulations over the following three years,with the aim that the entire Act will be in force by 1 October 2009.This represents a slippage of the original timetable,to accommodate Companies House'concerns about its readiness for an October 2008 implementation of certain provisions. BERR has published a final implementation timetable called the Table of Commencement Dates which is usefully colour-coded according to the different implementation dates.Annoyingly,BERR advises that this should not be seen as the definitive timetable,and it advises users to refer to the individual commencement orders on the OPSI website.Unless advised otherwise,this is the timetable.Available from:www.berr.gov.uk/bbf/co-act-2006/index.html [Accessed 25 April 2008] Other legislation:Limited liability partnerships The Limited Liability Partnerships Act 2000 created a new form of organisation for businesses,the Limited Liability Partnership(LLP).LLPs need to be registered at Companies House,and are subject to the same rules as private limited companies in respect of registration and audit.It has not been significantly amended by CA 06.Available from: www.opsi.gov.uk/ACTS/acts2000/20000012.htm [Accessed 25 April 2008] The Limited Liability Partnerships Regulations 2001(Statutory Instrument 2001 No.1090)adds reference to LLPs to the then CA 85 and 89,Insolvency Act 86 and Company Directors Disqualification Act 1986. 5
Topic Gateway Series UK Company Law 5 Auditor liability (sections 534 – 538). With the agreement of the company and the approval of shareholders, auditors are allowed to limit their liability (using a specified monetary cap, a formula or other means). The limit must be no less than what is ‘fair and reasonable’, considering the nature of the auditors’ responsibilities and what is expected of them. There is also a useful index of defined expressions at Schedule 8 of the Act, at: www.opsi.gov.uk/acts/acts2006/ukpga_20060046_en_85 [Accessed 25 April 2008] Phased implementation CA 06 gained the Royal Assent in late November 2006, at which point only a small proportion of its provisions were implemented. Those mainly related to the EU Transparency Directive which had to be implemented by January 2007, and included the statutory basis for directors’ liability in respect of the Business Review. Other provisions will be implemented by a succession of Regulations over the following three years, with the aim that the entire Act will be in force by 1 October 2009. This represents a slippage of the original timetable, to accommodate Companies House’ concerns about its readiness for an October 2008 implementation of certain provisions. BERR has published a final implementation timetable called the Table of Commencement Dates which is usefully colour-coded according to the different implementation dates. Annoyingly, BERR advises that this should not be seen as the definitive timetable, and it advises users to refer to the individual commencement orders on the OPSI website. Unless advised otherwise, this is the timetable. Available from: www.berr.gov.uk/bbf/co-act-2006/index.html [Accessed 25 April 2008] Other legislation: Limited liability partnerships • The Limited Liability Partnerships Act 2000 created a new form of organisation for businesses, the Limited Liability Partnership (LLP). LLPs need to be registered at Companies House, and are subject to the same rules as private limited companies in respect of registration and audit. It has not been significantly amended by CA 06. Available from: www.opsi.gov.uk/ACTS/acts2000/20000012.htm [Accessed 25 April 2008] • The Limited Liability Partnerships Regulations 2001 (Statutory Instrument 2001 No.1090) adds reference to LLPs to the then CA 85 and 89, Insolvency Act 86 and Company Directors Disqualification Act 1986