Clause 344: Enforcement of directors' liabilities by shareholder action

623.     This clause provides a mechanism by which an authorised group of shareholders may enforce on behalf of the company any liability under clause 343. It reproduces the effect of section 347I of the 1985 Act.

Clause 345: Costs of shareholder action

624.     This clause provides that the authorised group of members of a company are not to be entitled as of right to have the cost of the shareholder action met from the funds of the company, but have the right to apply to the court for an indemnity out of the company's assets in respect of costs incurred or to be incurred in a shareholder action. The court would have full discretion to grant such an indemnity on such terms as it thinks fit. The clause reproduces the effect of section 347J of the 1985 Act.

Clause 346: Information for purposes of shareholder action

625.     This clause provides that the authorised group of members of a company is entitled, once the action is commenced, to be provided by the company with all information possessed by it, in the control of it or obtainable by it relating to the subject matter of the action. It reproduces the effect of section 347K of the 1985 Act.

Exemptions

626.     Clauses 347, 348, 349, 350 and 351 set out five exemptions to the requirement for prior shareholder authorisation:

• clause 347 creates a new exemption in relation to donations to trade unions (including trade unions in EU member states other than the UK). The exemption will cover any form of "donation", including the provision of company rooms for trade union meetings, the use of company vehicles by trade union officials and paid time off for trade union officials.

• clause 348 restates the current exception in respect of subscriptions paid to a trade association for membership of the association.

• clause 349 restates the current exception in respect of donations to all-party parliamentary groups.

• clause 350 restates the exemption for political expenditure that is exempt by virtue of an order by the Secretary of State. An order made by statutory instrument under this clause may confer an exemption on companies or expenditure of any description or category specified in the order. The parallel power in section 347B(8) - (11) of the 1985 Act was used in 2001 to exempt business activities such as the publication of newspapers which, by their very nature, involve the publication or dissemination of material which seeks to influence the views of members of the public.

• clause 351 restates the current exemption in section 347B(4) of the 1985 Act under which authorisation for donations is not required unless the donation or aggregate amount of the donations by the company exceeds £5,000 in a 12 month period. Donations by other group companies (including wholly-owned subsidiaries) must be taken in to account in calculating whether the £5,000 threshold has been exceeded.

PART 15: ACCOUNTS AND REPORTS

627.     The provisions of this Part replace the provisions of Part 7 of the 1985 Act relating to accounts and reports. The provisions of Part 7 of the 1985 Act relating to audit are replaced by provisions in Part 16 of the Bill.

628.     The provisions have been reordered and redrafted to make it easier for companies of whatever size to find the requirements relevant to them. In Part 7 of the 1985 Act the provisions applying to small companies are generally expressed as modifications of the provisions applying to large companies. These clauses proceed on the opposite basis: where provisions do not apply to all kinds of company, provisions applying to small companies appear before the provisions applying to other companies.

629.     A further change is to enable the Secretary of State to replace the detailed Schedules to Part 7 of the 1985 Act by regulations. This will give more flexibility to arrange the material currently in Schedules to make it easier to follow for different types of company. It is unnecessary and undesirable to have parallel and duplicative regimes on the detail for different types of company in primary legislation, but this could be done in parallel sets of regulations for different sizes and types of company.

630.     The main substantive changes in this Part are:

• a reduction in the time limit for private companies to file their accounts from ten months to nine months after the year end (clause 420);

• a reduction in the time limit for public companies to lay full financial statements before the company in general meeting and file them from 7 months to 6 months after the year end (clause 420);

• new requirements for quoted companies to publish their annual accounts and reports and preliminary results on a website (clauses 406 to 408); and

• replacement of the general power of the Secretary of State to alter accounting requirements in section 257 of the 1985 Act by more specific powers in relation to specific sections.

CHAPTER 1: INTRODUCTION

Clause 353: Scheme of this Part

631.     This introductory clause indicates the main way in which the structure of this Part differs from that of Part 7 of the 1985 Act: provisions relating to small companies are set out before provisions relating to larger companies; provisions applying to private companies appear before those applying to public companies; and provisions applying to quoted companies appear after those applying to other companies.

Companies subject to the small companies regime

Clause 354: Companies subject to the small companies regime

Clause 355: Companies qualifying as small: general

Clause 356: Companies qualifying as small: parent companies

Clause 357: Companies excluded from the small companies regime

632.     These clauses set out which companies, parent companies or groups fall within the small companies regime - that is, those that qualify as small companies or groups and are not excluded from the regime for one of the reasons set out in clause 357.

633.     With one small change, the conditions for qualification as a small company are unchanged from the current regime (sections 247, 247A and 249 of the 1985 Act). The change is that whereas section 247A(2) of the 1985 Act provides that a group is ineligible if any of its members is a body corporate other than a company having power to offer its shares or debentures to the public, the reference in clause 357(2)(b) is now to such a body corporate whose securities are admitted to trading on a regulated market in an EEA state. The 1985 definition of "regulated market" is to be found in clause 451. This reflects changes made by the Accounts Modernisation Directive (2003/51/EEC).

Clause 358: Quoted and unquoted companies

634.     The definitions of quoted and unquoted company in this clause are equivalent to the definition of "quoted company" in section 262 of the 1985 Act. A power is conferred similar to that in clause 328 to amend the definition of "quoted company" by regulations. If the regulations extend the application of this Part then they will be subject to affirmative resolution procedure. Otherwise they are subject to negative resolution procedure.

CHAPTER 2: ACCOUNTING RECORDS

635.     Clauses 359 and 361 set out the general duty to keep accounting records and specify where and for how long records are to be kept. They replace equivalent provisions in sections 221 and 222 of the 1985 Act. Their purpose is to ensure that businesses have the right information to make informed decisions and to prepare accounts which comply with the Companies Acts and, where relevant, with International Accounting Standards. "Accounting records" is a broad term and includes, for example, bank statements, purchase orders, sales and purchase invoices.

636.     Clause 360 creates a criminal offence for every officer of a company who is in default, where the company has failed to keep adequate accounting records under clause 359. The clause replicates the existing penalties under section 221(5) of the 1985 Act (imprisonment or a fine).

637.     Clause 362 makes similar provision in relation to failure to comply with clause 361, replacing section 222(4) and (6) of the 1985 Act.

CHAPTER 3: A COMPANY'S FINANCIAL YEAR

Clause 363: A company's financial year

638.     This clause replaces section 223 of the 1985 Act. A company's financial year is the period for which its accounts and reports must be prepared. A company's financial year is the same as its accounting reference period (see clause 364), subject to the directors' decision to alter the last day of the period by plus or minus seven days.

Clause 364: Accounting reference periods and accounting reference date

Clause 365: Alteration of accounting reference date

639.     These clauses replace sections 224 and 225 of the 1985 Act.

640.     Clause 364 (2) and (3) preserve the accounting reference dates of companies incorporated before 1st April 1996 (in the case of GB companies), and before 22nd August 1997 (in the case of Northern Irish companies). Otherwise, a company's accounting reference date is the last day of the month in which the anniversary of its incorporation falls. Its first accounting reference period is a period of more than six months but not more than eighteen months beginning with the date of incorporation and ending with the accounting reference date unless the company changes its accounting reference date, (the date on which the accounting reference period ends) in accordance with clause 365. Subsequent accounting reference periods (financial years) are successive periods of 12 months, again subject to any alteration of the accounting reference date.

641.     Clause 365(4) provides that a company cannot change its accounting reference date if the period allowed for delivering accounts and reports to the registrar for that period has already expired. Under the corresponding provision in the 1985 Act, the company cannot change the date "if the period allowed for laying and delivering accounts and reports in relation to that period has already expired." Under the Bill only public companies will be obliged to lay their accounts at a general meeting.

CHAPTER 4: ANNUAL ACCOUNTS

General

Clause 366: Accounts to give true and fair view

642.     Subsection (1) introduces an overarching obligation on directors (the preparers of accounts) not to approve accounts (prepared in compliance with the requirements set out in clause 367 for individual accounts, clause 371 for group accounts of small companies and clause 372 for other group accounts) unless they give a true and fair view of the financial position of the company. This provision reflects the underlying legal duty already expressed in Community law.

643.     Subsection (2) in addition places a requirement on auditors to take this overarching duty to give a true and fair view into consideration when giving an opinion on the accounts. This requirement supplements the functions of an auditor set out in clause 482.

Individual accounts

644.     Clauses 367 to 370, which replace sections 226, 226A and 226B of the 1985 Act, concern the duty of the directors to prepare individual accounts. The individual accounts may either be prepared under the Bill (Companies Act individual accounts) or (unless the company is a charity) in accordance with international accounting standards adopted under the IAS Regulation (IAS individual accounts). The terms "IAS Regulation" and "international accounting standards" are defined in clause 451. Once a company has switched to IAS individual accounts all subsequent individual accounts must be prepared in accordance with IAS unless there is a relevant change of circumstance (see clause 368(3) to (5)).

645.     The provisions concerning the form and content of Companies Act accounts currently to be found in the Schedules to Part 7 of the 1985 Act will in future be contained in regulations to be made by the Secretary of State (clause 369(3)). The Parliamentary procedure for such regulations is set out in clause 450.

Group accounts: small companies

Clause 371: Option to prepare group accounts

646.     This clause provides that a company that is subject to the small companies regime and is a parent company is not obliged to prepare group accounts in addition to its individual accounts, (restating section 248 of the 1985 Act), but it may opt to do so.

647.     The current exemption in section 248 of the 1985 Act from preparation of group accounts by parent companies heading medium sized groups has been abolished, following the substantial increase in the financial thresholds for medium sized groups in 2004.

Group accounts: other companies

648.     The clauses relating to group accounts have been reorganised to make them easier to follow.

649.     Clauses 372 to 375 re-enact sections 227(1) and (8), 228, 228A and 229(5) of the 1985 Act. Clause 372 concerns the requirements and exemptions from requirements in relation to group accounts. Parent companies not subject to the small companies regime have the duty to prepare consolidated accounts unless exempt from having to do so under clauses 373 to 375. Clause 373 provides an exemption from preparing group accounts for companies included in EEA group accounts of a larger group. Clause 374 provides such an exemption for companies included in non-EEA group accounts of a larger group, and clause 375 an exemption when all the company's subsidiary undertakings could be excluded from consolidation in Companies Act group accounts, (see clause 378).

Group accounts: general

Clause 376: Group accounts: applicable accounting framework

650.     This clause replaces section 227(2) to (7) of the 1985 Act. Parent companies whose securities are publicly traded must prepare group accounts in accordance with the IAS Regulation. Other parent companies (with the exception of charitable companies) have the choice whether to prepare group accounts under the Companies Act (Companies Act group accounts) or in accordance with adopted international accounting standards (IAS group accounts). Once a company has switched to IAS group accounts all subsequent group accounts must be prepared in accordance with IAS unless there is a relevant change of circumstance, (see subsections (4) to (6)).

Clause 377: Companies Act group accounts

651.     For companies preparing Companies Act group accounts, this clause gives the Secretary of State power to make provision by regulations as to the form and content of the consolidated balance sheet and consolidated profit and loss account and additional information to be provided by way of notes to the accounts. The regulations will replace the current requirements are contained in Schedule 4A to the 1985 Act. These regulations are subject to the Parliamentary procedure in clause 450.

Clause 378: Companies Act group accounts: subsidiary undertakings included in the consolidate

652.     This clause replaces section 229 of the 1985 Act. It requires all subsidiary undertakings to be included in the consolidated accounts subject to certain permitted exclusions.

Clause 379: IAS group accounts

653.     This clause re-enacts section 227B of the 1985 Act. A company may opt or may be required to prepare group accounts in accordance with international accounting standards. This clause provides that where it does so, this must be stated in the notes to the accounts.

Clause 380: Consistency of financial reporting within the group

654.     This clause re-enacts section 227C of the 1985 Act. If the parent company prepares both consolidated and individual accounts under IAS, it is not required to ensure that all its subsidiary undertakings also use IAS. However, it must ensure that its individual accounts and those of all its subsidiary undertakings use the same financial reporting framework, unless there are good reasons for not doing so.

Clause 381: Individual profit and loss account where group accounts prepared

655.     This clause replaces section 230 of the 1985 Act. A parent company that prepares group accounts and that meets the criteria in subsection (1)(a) and (b) may, subject to the profit and loss account being approved by the directors, dispense with the inclusion of a profit and loss account in the company's accounts, for example when delivered to the registrar. The profit and loss account may also omit the information on employee numbers and costs required by clause 384. The exemption currently provided for in section 230(2) for certain information required by provisions of Schedule 4 to the 1985 Act, will be provided for in regulations under clause 369.

Information to be given in notes to the accounts

Clause 382: Information about related undertakings

656.     This clause replaces section 231(1) to (4) of the 1985 Act. The requirement to disclose information about related undertakings in the notes to a company's annual accounts applies whether or not the company has to produce group accounts but there are different disclosure requirements in each case. This clause gives the Secretary of State a new power to make regulations requiring information about related undertakings to be given in notes to a company's annual accounts. These regulations are subject to the Parliamentary procedure in clause 450. The regulations will replace the provisions of Schedule 5 to the 1985 Act.

657.     Subsection (3) enables regulations under the section to make provision corresponding to section 231(3) of the 1985 Act authorising the omission from the notes to the accounts of information in respect of undertakings established outside the UK, or carrying on business outside the UK where the directors consider that disclosure would be seriously prejudicial to the business of that undertaking, or to the business of the company or any of its subsidiary undertakings. The Secretary of State must agree to the omission. This exemption is sought by a very small number of companies each year.

Clause 383: Information about related undertakings: alternative compliance

658.     This clause replaces section 231(5) to (7) of the 1985 Act. Where there are numerous related undertakings and the directors believe that full disclosure would result in information of excessive length in the notes to the accounts, they may give more limited information. As a minimum this must include information in subsection (2) (a) and (b). Subsection (3) provides that the full information on the related undertakings must be submitted with the next annual return.

Clause 384: Information about employee numbers and costs

659.     This clause replaces section 231A of the 1985 Act concerning particulars of staff. Section 231A was inserted by the Companies Act 1985 (International Accounting Standards and Other Accounting Amendments) Regulations 2004 (SI 2004/2947) re-enacting provisions previously in the Schedules to the 1985 Act so that they continued to apply both to companies preparing Companies Act accounts and to those preparing IAS accounts.

Clause 385: Information about directors' benefits: remuneration

660.     This clause, together with clause 386, replaces section 232 of the 1985 Act. Under section 232, information on directors' remuneration specified in Part 1 of Schedule 6 must be given in notes to a company's annual accounts. Small companies may be exempt from some of the disclosures required by Schedule 6; quoted companies are subject to separate requirements on the disclosure of directors' remuneration under Schedule 7A.

661.     The clause gives the Secretary of State a new power to make provision by regulations requiring information about directors' remuneration to be given in notes to a company's annual accounts. Regulations under this section are subject to the Parliamentary procedure in clause 450.

Clause 386: Information about directors' benefits: advances, credit and guarantees

662.     This clause replaces section 232 of the 1985 Act as regards the disclosure of advances, credit and guarantees. Under section 232, information on the following areas must be given in notes to a company's annual accounts:

• details of loans, quasi-loans, credit transactions and related guarantees and security between a company and its directors or persons connected with its directors;

• details of any other transactions or arrangements in which a director, indirectly or directly, has a material interest.

This can be seen as an extension of the internal disclosure of directors' interests required by section 317 of the 1985 Act.

663.     Part 2 of Schedule 6 to the 1985 Act provides details of the disclosures required in respect of these areas. Part 3 imposes similar disclosure requirements in respect of such transactions made between the company and its other officers (such as its company secretary). These provisions are complex and difficult to understand. The Bill repeals Parts 2 and 3 of Schedule 6.

664.     Clause 386 sets out the new disclosure requirements in respect of (a) advances and credits granted by the company to its directors, and (b) guarantees of any kind entered into by the company on behalf of its directors. The wording of the clause is much closer to that of articles 43(1)(13) and 34(13) of the Fourth (78/660/EEC) and Seventh (83/349/EEC) Company Law Directives;

665.     The powers under clause 369(3)(b) (Companies Act individual accounts) and clause 377(3)(b) (Companies Act group accounts) will be used to require the disclosure of information about certain related party transactions in the notes to Companies Act accounts.

666.     Companies will no longer be required to disclose transactions made between the company and officers other than directors.

667.     Under clause 386(8) banks and the holding companies of credit institutions need only state (i) the amount of an advance or credit; and (ii) in relation to a guarantee, the amount of the maximum liability that may be incurred by the company (or its subsidiary). In the light of the simplified disclosure regime for advances, credit and guarantees, sections 343 and 344 of the 1985 Act, which make special provision for financial institutions, are repealed.

Approval and signing of accounts

Clause 387: Approval and signing of accounts

668.     This clause replaces section 233 of the 1985 Act. It provides that a company's annual accounts (its individual accounts and any group accounts) must be approved by the board of directors and the balance sheet must be signed.

669.     Subsection (3), which requires the balance sheet of accounts prepared in accordance with the small companies regime to carry a statement to that effect, re-enacts sections 246(8) and 248A(5) of the 1985 Act.

670.     Section 233 (4) of the 1985 Act, which required that a director of the company should sign the copy of the balance sheet delivered to the registrar, has not been reproduced. This requirement would have hampered developments in the electronic delivery of accounts.

CHAPTER 5: DIRECTORS' REPORT

671.     Clauses 388 to 392 concern the duty to prepare a directors' report, its content, approval and signature. They replace sections 234, 234ZZA, 234ZZB, 234ZA, 234A, 246(4)(a) and 246A(2A) and 246(8) of the 1985 Act.

672.     Clause 389(4) gives the Secretary of State power to make provisions by regulations as to other matters that must be disclosed in the directors' report. These regulations replace the provision formerly made by Schedule 7 to the 1985 Act. The regulations are subject to the Parliamentary procedure in clause 450.

673.     Clause 391 corrects one aspect of section 234ZA of the 1985 Act. That provision was disapplied for companies exempt from audit under sections 249A(1) or 249AA(1) of the 1985 Act, but not for charitable companies exempt by virtue of having a report prepared by a reporting accountant under section 249C of that Act. The re-drafted provision exempts all companies exempt from audit under Part 16 of the Bill.

CHAPTER 6: QUOTED COMPANIES: OPERATING AND FINANCIAL REVIEW

674.     Clauses 393 to 395 replace sections 234AA and 234AB of the 1985 Act. Clause 394 gives the Secretary of State power to make provision by regulations as to the objective and contents of the operating and financial review. These matters are currently set out in Schedule 7ZA to the 1985 Act and regulations made under this section will replace the provisions in that Schedule. These regulations are subject to the Parliamentary procedure in clause 450.

CHAPTER 7: QUOTED COMPANIES: DIRECTORS' REMUNERATION REPORT

675.     Clauses 396 to 398 replace sections 234B and 234C of the 1985 Act. These sections, which were inserted into the Act by the Directors' Remuneration Report Regulations 2002, require quoted companies to:

• publish a report on directors' remuneration as part of the company's annual reporting cycle; and

• disclose within the report details of individual directors' remuneration packages, the company's remuneration policy, and the role of the board and remuneration committee in this area.

676.     Clause 397 gives the Secretary of State power to make provision by regulations as to the information that must be contained in a directors' remuneration report and how it should be set out. These matters are currently set out in Schedule 7A to the 1985 Act, and regulations made under this clause will replace the provisions in Schedule 7A. The regulations will also specify the extent to which the directors' remuneration report should be subject to audit. Regulations under this clause are subject to the Parliamentary procedure in clause 450.