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Session 2005 - 06 Publications on the internet Other Bills before Parliament Arrangement of Clauses (Contents) |
| Company Law Reform Bill [HL] | |||||||||||||||||||||
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These Notes refer to the Company Law Reform Bill [HL] as introduced in the House of Lords on 1st November 2005 [HL Bill 34] COMPANY LAW REFORM BILL [HL]EXPLANATORY NOTES1. These explanatory notes relate to the Company Law Reform Bill [HL] as introduced in the House of Lords on 1st November 2005. They have been prepared by the Department of Trade and Industry in order to assist the reader of the Bill and to help inform debate on it. They do not form part of the Bill and have not been endorsed by Parliament. 2. The notes need to be read in conjunction with the Bill. They are not, and are not meant to be, a comprehensive description of the contents of the Bill. So where a clause or part of a clause does not seem to require any explanation or comment, none is given. BACKGROUND 3. The UK was one of the first nations to establish rules for the operation of companies. Today our system of company law and corporate governance, setting out the legal basis on which companies are formed and run, is a vital part of the legal framework within which business is conducted. As the business environment evolves, there is a risk that the legal framework can become gradually divorced from the needs of companies, in particular the needs of smaller private businesses, creating obstacles to ways that companies want and need to operate. 4. In March 1998, the DTI commissioned a fundamental review of company law. An independent Steering Group led the "Company Law Review" (CLR) whose terms of reference required them to consider how core company law could be modernised in order to provide a simple, efficient and cost effective framework for British business in the twenty-first century. After extensive consultation with interested parties, the CLR presented its Final Report to the Secretary of State for Trade and Industry on 26th July 2001. The report contained a range of specific recommendations for substantive changes to many areas of company law, and a set of principles to guide the development of the law more generally, most notably that it should be as simple and as accessible as possible for smaller firms and their advisers, and should avoid imposing unnecessary burdens on the ways companies operate. 5. Many of the provisions of the Bill implement CLR recommendations. The Government set out and consulted on its intention to implement the recommendations of CLR proposals in the White Papers "Modernising Company Law" (July 2002) and "Company Law Reform" (March 2005). The 2005 White Paper included approximately 300 draft clauses and described in detail the policy intention for other areas. Further clauses were made publicly available for comment in July, September and October 2005. OVERVIEW OF THE STRUCTURE OF THE BILL 6. The general arrangement of the Bill is as follows:
SUMMARY OF LEGISLATIVE CHANGES 7. The Bill amends and restates many of the provisions of the Companies Act 1985 (the 1985 Act) - approximately two-thirds of the 1985 Act is repealed. It also codifies certain provisions of case law. In some areas the Bill makes textual amendments to the 1985 Act or other legislation. 8. The Bill extends company law to the whole of the UK, so that companies will be UK companies rather than GB companies or Northern Ireland companies as at present. TERRITORIAL EXTENT AND DEVOLUTION Northern Ireland 9. Company law is a transferred matter. Currently, the provisions of GB company law are generally replicated, some time later, in separate Northern Ireland legislation. The Bill will extend GB company law to Northern Ireland (see the notes below on Part 35 of the Bill). Scotland 10. Company law is a reserved matter and Companies Acts extend to the whole of Great Britain. However, there are several areas where, in legislating about companies, the Bill touches on matters which are devolved. A Sewel motion will be brought before the Scottish Parliament covering the following areas:
Wales 11. Company law is not transferred to the Welsh Assembly. There are no Welsh clauses, and no areas that impact on devolved competencies. Crown Dependencies 12. Part 22 of the Bill (takeovers) contains provision enabling it to be extended by Order in Council to the Isle of Man or any of the Channel Islands. This reflects the existing jurisdiction of the Takeover Panel (as the takeover regulator) and has been agreed by the relevant Island authorities. There will be further consultation with the Island authorities before the power is exercised. PART 1: GENERAL INTRODUCTORY PROVISIONS 13. These clauses replace equivalent provisions in the 1985 Act. The Bill creates a single company law regime for the whole of the UK and, where a note on this or a subsequent Part of the Bill describes a particular clause as replacing or restating a provision in the 1985 Act, this should be read as applying equally to the corresponding provision in the Companies (Northern Ireland) Order 1986. Companies and Companies Acts Clause 1: Companies 14. This clause replaces section 735(1)(a) and (b) of the 1985 Act. It sets out the definitions of "company" and "existing company" (which refer to companies formed and registered under the Companies Acts). It also provides pointers to provisions in the Bill which relate to companies that are registered but not formed under the Bill or former Companies Acts, unregistered companies and oversea companies. Clause 2: The Companies Acts 15. The Bill does not replace all existing companies legislation, only parts of it. This clause makes it clear that any reference to "Companies Acts" in the Bill includes those provisions of the Acts listed in subsection (1)(c) that remain in force (as well as the company law provisions of the Bill and Part 2 of the Companies (Audit, Investigations and Community Enterprise) (C(AICE)) Act 2004). Types of company 16. The CLR recommended that the law should provide for the formation of new companies of each of the types that are currently available (Final Report, paragraph 9.2). This recommendation is taken forward in the following group of clauses, which retains all of the current forms of companies. Clause 3: Limited and unlimited companies 17. This clause replaces section 1(2)(a)(b) & (c) of the 1985 Act. It updates the Companies Acts definitions of "limited company" and "unlimited company" to reflect changes to what is to be included in a company's memorandum of association (see clause 8). As now, a company may be limited by shares or by guarantee. Where there is no limit on the liability of the company's members, a company is an "unlimited company." Clause 4: Private and public companies 18. This clause replaces section 1(3) and section 735(2) of the 1985 Act. It provides definitions of "private company" and "public company." 19. A "private company" is any company that is not a public company. 20. A "public company" is a company whose certificate of incorporation states that it is a public company. To obtain this certificate the company will need to comply with the provisions of the Companies Acts (or former Companies Acts) as regards registration or re-registration as a public company. There is a minimum share capital requirement (the "authorised minimum"), which is currently set at £50,000, and remains unchanged under the Bill. 21. This clause also provides a pointer to Part 17 of the Bill, which sets out key differences between public and private companies, for example, a private company may not offer shares to the public. Clause 5: Companies limited by guarantee and having a share capital 22. This clause replaces section 1(4) of the 1985 Act. It makes it clear that a company can no longer be formed (or re-register) as a company limited by guarantee and with a share capital. This provision has been in force in GB since 22nd December 1980 and in Northern Ireland since 1st July 1983. Clause 6: Community interest companies 23. The C(AICE) Act 2004 came fully into force on 1st July 2005. Part 2 of that Act created a new company vehicle, the "community interest company" or "c.i.c.", which is designed for use by social enterprises. 24. This clause provides a signpost to the provisions in the C(AICE) Act, which enable a company to be formed as or become a c.i.c. Community Interest Companies are registered under the same legislation as other registered companies, but have to complete certain additional formalities and are subject to certain additional elements of regulation. Subsection (2) of this clause highlights the fact that in some respects the requirements imposed on c.i.c.s are different from the requirements imposed on other registered companies. General 25. This Part of the Bill is about how companies are formed. It replaces equivalent provisions in the 1985 Act. 26. With effect from 1st January 2007, the registrar of companies ("registrar") will offer a web incorporation facility. This implements a recent amendment to the First Company Law Directive (68/151/EEC). The clauses in this Part have been prepared with the objective, in particular, of removing any obstacles to the formation of companies on-line. Clause 7: Method of forming company 27. This clause replaces section 1(1) and (3A) of the 1985 Act. Subsection (1) introduces the new provisions about forming a company. In line with the recommendations of the CLR, it is provided that a single person is able to form any sort of company (not just a private company) (Final Report, paragraph 9.2). 28. Subsection (2) reproduces the existing requirement that a company may not be formed for an unlawful purpose. Clause 8: Memorandum of association 29. This clause replaces section 2 of the 1985 Act. It retains the current requirement that individuals who wish to form a company must subscribe their names to the memorandum of association ("memorandum"). 30. Under the Bill, the memorandum serves a more limited, but nonetheless important, purpose: it evidences the intention of the subscribers to the memorandum to form a company and become members of that company on formation. In the case of a company that is to be limited by shares, the memorandum will also provide evidence of the members' agreement to take at least one share each in the company. 31. The memorandum of a company formed under the Bill will, therefore, look very different from that of a company registered under the 1985 Act. 32. In future, it will not be possible to amend or update the memorandum of a company formed under the Bill. The memorandum of such a company will essentially be a "snapshot" of part of the company's constitution at the point of registration. 33. When the Bill comes into force, provisions in the memoranda of existing companies which are of a type that will not in be in the memoranda of companies formed under the Bill, will be treated as provisions in the articles (see clause 29). Existing companies will, therefore, be able to alter or update provisions in their constitution which are now set out in their memoranda by amending their articles. 34. These changes to the memorandum are based on the CLR's recommendation that there should be a single constitution (Final Report, paragraph 9.4). In line with the principles behind this recommendation, in future key information regarding the internal allocation of powers between the directors and members of a company will be set out in one place: the articles of association ("articles"). 35. For companies formed under the Bill, constitutional information of this type will be set out in the articles. Existing companies will not be required to amend their articles to reflect this change, but they may do this if they wish. They may want to amend their articles in any event to reflect changes to the law that are made in the Bill, for example, in future, companies formed under the Bill and existing companies will have unrestricted objects unless they specifically restrict them (see clause 33). 36. Existing companies are currently able to "entrench" elements of their constitution in the memorandum (that is, provide that a particular provision may not be altered or may only be altered if certain conditions are met). In future, it will be possible for companies to entrench elements of their constitution in their articles (see clause 23) and where the memorandum of an existing company contains a "provision for entrenchment" this will be treated as a provision in the company's articles with effect from the date that the Bill comes into force (see clause 29). Requirements for registration Clause 9: Registration documents 37. This clause replaces sections 2 and 10 of the 1985 Act. It prescribes the types of information or "documents" that must be delivered to the registrar when an application for registration is made and the manner in which that information must be delivered to the registrar. 38. The changes to the way in which certain information is delivered to the registrar are required as a result of the changes that have been made to the memorandum (see note on clause 8). In future, information which is currently set out in the memorandum will be provided to the registrar in accordance with the provisions of this clause, which prescribes, amongst other things, the contents of the application for registration. In all cases this application must state:
39. In the case of a company that is to have a share capital, the application must also contain a statement of the company's initial shareholdings (see clause 10) and a statement of capital (see clause 11). In the case of a company that is to be limited by guarantee the application must also contain a statement of guarantee (see clause 12). 40. In all cases the application must also contain a statement of the company's proposed officers (see clause 13) and a statement of the intended address of the company's registered office (that is, the postal address of the company's registered office as opposed to a statement confirming the jurisdiction in which the company's registered office is to be situated, which is also required - see above). 41. The application for registration must also contain a copy of any proposed articles (to the extent that the company does not intend to use the model articles - see clause 21) and must be accompanied by the memorandum (see clause 9(1)) and a statement of compliance (see clause 14). 42. As mentioned above, in future it will be possible to form a company on-line and the various types of information referred to in the clause are, therefore, capable of being delivered as a series of data entries as well as in paper or such other form as the registrar may permit or prescribe. The registrar has power under clause 680 to prescribe the form and manner in which documents are to be delivered to her. Clause 10: Statement of initial shareholdings 43. This clause replaces section 2(5)(a) & (c), (6) & (6A) of the 1985 Act (which refer to the memorandum). It sets out the contents of the statement of initial shareholdings. 44. Currently, in the case of a limited company with a share capital the memorandum is required to state the amount of the share capital with which the company proposes to be registered and the nominal amount of each of its shares. This is known as the "authorised share capital" and acts as a ceiling on the amount of capital which can be issued (although it can be increased pursuant to an ordinary resolution). The CLR recommended that the requirement for a company to have an authorised share capital should be abolished (Final Report, paragraph 10.6). 45. The Bill gives effect to this recommendation and in future, the memorandum will only contain a limited amount of information regarding a company's founder members, that is the subscribers to the memorandum (see clause 8). Information about the shares subscribed for by the subscribers to the memorandum, which is currently set out in the memorandum itself, will in future be provided to the registrar in the form of two statements made in the application for registration: a statement of initial shareholdings and a statement of share capital (see clause 11). 46. Like the statement of share capital and the statement of guarantee (see clause 12), the statement of initial shareholdings must contain the names and addresses of the subscribers to the memorandum. The requirement in all cases is for a contact address - there is no need for the person making the statement to give his home address. Clause 11: Statement of share capital 47. A statement of capital is essentially a "snapshot" of a company's share capital at a particular point in time. In this context it requires information to be provided with respect to the share capital to be taken by the subscribers on formation. 48. The requirement for a statement of capital, here and elsewhere in the Bill, is new. For public companies, this requirement is linked to the abolition of authorised share capital (see note on clause 10). It implements (as far as public companies are concerned) Article 2 of the Second Company Law Directive (77/91/EC) ("the 2nd Directive") which states: "the statutes or instruments of incorporation of the company shall always give as least the following information..(c) when the company has no authorized capital, the amount of the subscribed capital..". 49. A statement of capital must contain the following information:
50. The reference to "prescribed particulars of the rights attached to the shares" in this clause (and elsewhere where a statement of capital is called for), refers to such particulars as may be prescribed by the Secretary of State by statutory instrument (see section 744 of the 1985 Act). 51. Whilst the 2nd Directive only applies to public companies it is important that the information on the public register is up-to-date. A statement of capital will, therefore, be required where it is proposed that a company formed under the Bill will have a share capital on formation and, with limited exceptions (in particular, where there has been a variation of class rights which does not affect the company's aggregate subscribed capital) whenever a company having a share capital makes an alteration to its share capital (whether under the Bill or the remaining provisions of the 1985 Act which deal with alterations to a company's share capital). Clause 12: Statement of guarantee 52. This clause replaces section 2(4) of the 1985 Act. It sets out the contents of the statement of guarantee that must accompany the application for registration where it is proposed that a company will be limited by guarantee on formation. 53. The statement of guarantee is essentially an undertaking, given by the founder members of the company, to contribute to the assets of the company up to a specified amount in the event of it being wound up. New members must also agree to make the same contribution. 54. A member of a company limited by guarantee is only liable to contribute to the assets of a company if it is wound up during the time that he is a member or within one year of him ceasing to be a member. Clause 13: Statement of proposed officers 55. This clause replaces section 10 of the 1985 Act. Under this section, details of the first director(s) and the secretary or joint secretaries, must be given to the registrar at the time of application for registration. This requirement is carried forward but there are two deregulatory changes:
Clause 14: Statement of compliance 56. This clause replaces section 12(3) and (3A) of the 1985 Act. At present, where an application for registration of a company is made in paper form, the application must be accompanied by a statutory declaration (made before a solicitor or commissioner of oaths) confirming that the requirements of the 1985 Act in respect of registration, and of matters precedent and incidental to it, have been complied with (see section 12(1) of that Act). This statutory declaration must be made by one of the persons whom it is proposed will be a founder director or secretary of the company (that is, on registration) or a solicitor engaged in the formation of the company. 57. Where the application for registration is made in electronic form, in place of the statutory declaration required under section 12(3), the same persons may, alternatively, deliver an "electronic statement" to the registrar. This statement must confirm that the requirements referred to in section 12(1) have been met. 58. Based on the recommendations of the CLR (Final Report, paragraph 9.5), the current requirement for a statutory declaration or electronic statement, here and elsewhere in the Bill, is replaced by a requirement to make a statement of compliance. This statement does not need to be witnessed and may be made in paper or electronic form. It will be for the registrar's rules under clause 725 to specify who may make this statement (and the form of it). As with all documents delivered to, or statements made to, the registrar, it is an offence to make a false statement of compliance (see clause 719). Registration and its effect Clause 15: Registration 59. This clause replaces section 12(1) of the 1985 Act. As now, where the registrar is satisfied that all of the requirements of the Bill as to registration have been met she will register the documents delivered to her and issue a certificate of incorporation under clause 16. |
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