| Company Law Reform Bill [HL] - continued | House of Lords |
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Clause 502: Failure to re-appoint auditor: special notice required for resolution at general meeting 812. This clause sets out the procedure for changing auditor between one financial year and the next at a general meeting. This may be done by resolution at the meeting, but special notice is required if no deadline for appointing auditors has passed since the outgoing auditor left, or if the deadline has passed when an auditor should have been appointed without one being appointed. So, for example, if a public company chooses not to re-appoint an auditor at its accounts meeting, but later (before the next accounts meeting) changes its mind, it would need to give special notice of any general meeting appointing replacement auditors. 813. Subsection (3) provides that immediately it receives a proposed resolution for changing auditor, the company should send a copy of it both to the outgoing auditor and to his proposed replacement; and subsection (4) provides that the former may then send the company a written statement setting out his views. Subsections (5) and (6) provide that the company should send its shareholders any statement from the outgoing auditor, and that if it is received to late for this it should be read out at the meeting. 814. Subsection (7) provides protection if the outgoing auditor abuses his right to have representations circulated, e.g. by requesting defamatory material to be published. It enables the company, or someone else, to apply to the court, and the court can then determine whether the right is being abused, in which case the company is not obliged to circulate the auditor's representations, nor need they be read out at the meeting. The court can order the auditor to pay some or all of the costs of the proceedings. Clause 503: Resignation of auditor 815. This clause restates the right of an auditor to resign by written notice to the company. His resignation is effective from the date it is delivered to the company's registered office, or from a later date specified in it. To be effective it must be accompanied by the statement required by clause 506. Clause 504: Notice to registrar of resignation of auditor 816. This clause restates the obligation on a company whose auditor resigns to inform the registrar. Default in complying is an offence. Clause 505: Rights of resigning auditor 817. This clause restates the right of an auditor who resigns to require the directors to convene a general meeting of the company so that it can consider his explanation of the circumstances that led to his decision to resign. The auditor can ask the company to send out a written explanation either in advance of that meeting if he has requested one, or before the next appropriate general meeting. 818. The directors have 21 days to send out a notice convening a meeting once a resigning auditor has asked for it, and it must then be held within 28 days of the notice. 819. Subsection (9) provides protection if the resigning auditor abuses his right to have an explanatory statement circulated, e.g. by requesting a defamatory material to be published. It enables the company, or someone else, to apply to the court, and the court can then determine whether the right is being abused, in which case the company is not obliged to circulate the statement. The court can order the auditor to pay some or all of the costs of the proceedings. Clause 506: Statement by auditor to be deposited with company 820. This clause requires a departing auditor to make a statement when he stops being the auditor of a company and to deposit it with the company. For quoted companies, this statement should explain the circumstances surrounding his departure. For other public companies and all private companies, it should explain the circumstances unless the auditor thinks that there is no need for them to be brought to the attention of the shareholders or creditors. In that case, the statement should state that there are no such circumstances. 821. This reverses the position under section 394 of the 1985 Act, where auditors were only required to make a statement if they considered there were relevant circumstances, and provides that auditors leaving quoted companies will now always be required to make a statement of the circumstances. 822. Subsection (4) sets out the deadline for depositing such a statement with the company, namely:
Clause 507: Company's duties in relation to statement 823. Unless the departing auditor's statement says that there are no circumstances to be brought to the attention of shareholders and creditors, this clause obliges the company to circulate the statement to everyone to whom it needs to send the annual accounts. The company must do this within 14 days of receiving it. 824. If the company does not want to circulate the statement, e.g. because it appears to be defamatory, it can apply to the court, and if the court decides that the departing auditor is abusing his rights, then the company need not circulate the statement, but instead must send an account of the court decision to those to whom it would have sent the statement. In the event of a successful application, the court can order the auditor to pay some or all of the costs. 825. In the event of an unsuccessful application, the company must circulate the statement within 14 days of the end of the court proceedings. Clause 508: Copy of statement to be sent to registrar 826. This clause provides that the departing auditor must send a copy of his statement to the registrar, normally within 28 days of depositing it with the company. 827. The auditor is not required to send it to the registrar if within 21 days of depositing it he hears that the company has applied to the court. But if the company lets him know that its application was unsuccessful, then he must send it to the registrar within seven days of being told. Clause 509: Copy of statement to be sent to appropriate audit authority 828. This clause introduces a new obligation on departing auditors and the companies of which they have ceased to be auditors to send copies of their leaving statements to an appropriate audit authority. It contains different rules depending on whether the company the auditor is leaving is classified as a "major audit" or not. Major audit is defined in subsection (6) as meaning the audit of a listed company, or of any other company where there is a major public interest. "Major public interest" in turn is to be interpreted by reference to guidance issued by any of the audit authorities. In practice, this will generally be guidance issued by the Financial Reporting Council. 829. In relation to major audits, the departing auditor and the company should always send a copy of his statement to the Secretary of State, or to the body to whom he has delegated functions in relation to the supervision of statutory auditors under Part 33, currently the Professional Oversight Board for Accountancy, part of the Financial Reporting Council organisation. He should do this as the same time as he deposits his statement with the company under clause 506. 830. In relation to other audits, the departing auditor and the company are required to send his statement to an audit authority only if he is leaving before the end of his term of office, meaning only if he has resigned or has been dismissed. For these audits, the appropriate audit authority is the auditor's supervisory body, and the timing requirement is to be set by each supervisory body. 831. Subsection (4) provides that where the auditor's statement to the company said that there were no circumstances that needed to be brought to the attention of shareholders or creditors, that statement must have attached to it a statement of the auditor's reasons for leaving when sending it to the audit authority. 832. Subsections (7) to (9) set out the offence of failure to comply with these requirements, and the maximum penalties. Clause 510: Information to be given to accounting authorities 833. This clause sets out the duty of the audit authorities to tell the accounting authorities information about departing auditors and if they think it right to do so, to pass on the statements which they receive from departing auditors under the preceding clause. The accounting authorities are the Secretary of State or anyone the Secretary of State has authorised under Part 15 to apply to the court in respect of the revision of defective accounts. At present this is the Financial Reporting Review Panel, part of the Financial Reporting Council organisation. 834. Subsection (3) deals with the situation where the same body is both an audit authority and an accounting authority. 835. If an accounting authority receives a statement that the court has determined need not be circulated to members, then subsection (4) provides that it must treat the statement as confidential, in the same way that authorities have to treat information obtained under compulsory powers under Part 15. Clause 511: Effect of casual vacancies 836. This clause applies when one out of two or more joint auditors ceases to be an auditor of the company. It enables the remaining auditors to continue in office. It restates section 388(2) of the 1985 Act. CHAPTER 5: QUOTED COMPANIES: RIGHT OF MEMBERS TO RAISE AUDIT CONCERNS AT ACCOUNTS MEETING 837. This Chapter introduces a new right for members of a quoted company to raise questions about the work of the auditors (all members of a company limited by shares are shareholders). Clause 512: Members' power to require website publication of audit concerns 838. This clause creates a new right whereby members of a quoted company - if they have a large enough holding in the company, or there are enough of them - can ask the company to publish on a website a statement raising questions about the accounts, or about the departure of an auditor, that they propose to bring up at the next meeting where the accounts are to be discussed. 839. Subsection (2) specifies the thresholds the members have to meet, which are the same as for shareholders who want to ask a company to circulate a statement under clause 290, namely they must either have 5% of the total voting rights, or there must be at least 100 of them, holding shares on which there has been paid up an average sum per member of at least £100. 840. Subsection (4) sets out the mechanics of transmitting the request to the company: it may be in hard copy or electronic. 841. Subsection (5) protects the company if members abuse the new right, e.g. by requesting a defamatory statement to be published. It enables the company, or someone else such as the auditor, to apply to the court, and the court can then determine whether the right is being abused, in which case the company is not obliged to publish the statement. Subsection (6) provides that the court can order the shareholders who requested publication to pay some or all of the costs of the proceedings. Clause 513: Requirements as to website availability 842. This clause sets out the requirements which the company must meet in making the shareholders' statements available on a website, in the same way as clause 327. 843. Subsection (4) requires the company to get the statement onto a website within three days of receiving it, and to keep it available at least until after the meeting to which it relates. Clause 514: Website publication: company's supplementary duties 844. This clause requires quoted companies to draw attention to the possibility of a website statement in the notice of the accounts meeting. It also specifies the costs of publication are to be borne by the company. 845. Subsection (3) requires the company to forward the statement to the auditor at the same time as it puts it on a website. Subsection (4) provides that - regardless of a company's articles - a statement under this chapter can be dealt with at the accounts meeting. Clause 515: Website publication: offences 846. This clause provides for offences when a company fails to comply with either of the preceding two clauses, with maximum penalties of an unlimited fine. CHAPTER 6: AUDITORS' LIABILITY 847. This Chapter will make it possible for auditors to limit their liability by agreement with a company, but the agreement will not be effective if it is not fair and reasonable. 848. It achieves this by defining the "liability limitation agreement" - a contractual limitation of an auditor's liability to a company, requiring member agreement - as a new exception to the general prohibition, restated here, on a company indemnifying its auditor. The court will be able to set aside such a limitation as ineffective if it purports to limit liability to an amount that is not fair and reasonable in all the circumstances. Clause 516: Provisions protecting auditors from liability Clause 517: Indemnity for costs of successfully defending proceedings 849. These clauses restate the existing general prohibition, currently in section 310 of the 1985 Act, against a company indemnifying its auditor against claims by the company in the case of negligence or other default. Any such indemnities are generally void and unenforceable. They also contain the current exception allowing the company to indemnify the auditor against the costs of successfully defending himself against a claim, though they do not repeat the current exception that allows the company to buy insurance for its auditor. Clause 518: Liability limitation agreements 850. This clause defines a "liability limitation agreement" as an agreement that seeks to limit the liability of an auditor to a company whose accounts he has audited. The agreement can cover liability for negligence, default, breach of duty or breach of trust by the auditor in relation to the audit of accounts for a particular financial year. 851. Subsection (2) provides that such an agreement is immune from the general voidness of such agreements under clause 516, provided that the agreement has been authorised by the members of the company in the way specified in the following clause. Subsection (3) provides that the agreement's effect may be limited under clause 520, which contains a specific test of fairness and reasonableness, and that certain provisions of the Unfair Contracts Terms Act 1977 accordingly do not apply. Clause 519: Authorisation of agreement by members of the company 852. This clause specifies the way in which members of a company are to give their approval to a liability limitation agreement, without which approval the agreement will not be effective. 853. The members of a private company can pass a resolution waiving the need for approval. The members in a private or a public company can pass a resolution before an agreement is signed approving its principal terms, or can approve the agreement after it is signed. The resolution should be an ordinary one, unless any higher threshold is set in the company's articles. 854. Subsection (4) specifies what the principal terms of a liability limitation agreement are for this purpose, namely the terms that specify, or enable one to determine, (i) the sorts of faults by the auditor that are covered, (ii) the financial year in relation to which acts or omissions are covered, and (iii) the amount to which liability is limited. Clause 520: Effect of liability limitation agreement 855. This clause provides that a liability limitation agreement will not be effective to limit an auditor's liability if the limitation would result in the company recovering an amount that was less that what was fair and reasonable, in all the circumstances of the case, having regard to the auditor's responsibilities, the auditor's contractual obligations, and the standards expected of the auditor. 856. If a court decides that a liability limitation agreement would limit the auditor's liability to an excessive degree, the agreement will have effect as if it limited liability to the amount that the court determines is fair and reasonable. Clause 521: Disclosure of agreement by company 857. This clause requires companies to disclose any liability limitation agreement they have made with their auditor. The Secretary of State will produce regulations giving detailed requirements for this disclosure, through secondary legislation subject to negative resolution. 858. Subsection (2) provides that the regulations may require this disclosure to be in a company's annual accounts, or in the directors' report. Clause 522: Exclusion of agreements for more than one year 859. This clause provides that a liability limitation agreement can be valid only in relation to one financial year's audit. Clause 523: Termination of agreement by members of company 860. This clause gives a company's members the right, by ordinary resolution, to terminate a liability limitation agreement in respect of any subsequent act or omission. The termination will take effect to remove the limitation in respect of any failure by the auditors that takes place after the date of the resolution or any later date specified in the resolution in respect of any financial year after the resolution is agreed. CHAPTER 7: SUPPLEMENTARY PROVISIONS Clause 524: Minor definitions 861. Subsection (1) defines a number of terms used in this Part. Subsection (2) explains how references in this Part to "profit and loss" are to be interpreted in relation to a non-profit-making undertaking. PART 17: PRIVATE AND PUBLIC COMPANIES 862. The provisions of Chapter 1 of this Part replace sections 58(3), 81 and 742A of the 1985 Act. One of the major differences between public and private companies is that private companies are not allowed to offer their shares to the public. 863. The provisions in Chapter 2 of this Part replace sections 117 and 118 of the 1985 Act. They deal with the minimum share capital requirements for public companies which are formed as such on their original incorporation. CHAPTER 1: PROHIBITION OF PUBLIC OFFERS BY PRIVATE COMPANIES 864. The CLR considered the prohibition on private companies offering their shares to the public in paragraph 4.160 of Developing the Framework and then examined the dividing line between public and private companies in Chapter 2 of Completing the Structure. The CLR presented their conclusions in paragraphs 4.54 to 4.62 of the Final Report. Clause 525: Prohibition of public offers by private company 865. Subsection (1) of this clause continues the prohibition in section 81(1) of the 1985 Act on private companies offering their shares or debentures to the public. The prohibition only applies to private companies limited by shares or limited by guarantee and having a share capital. The prohibition does not apply to unlimited companies or to companies limited by guarantee and not having a share capital. The prohibition is extended so that it covers not just shares and debentures, but any securities of the company (as defined in clause 527). 866. Private companies are also prohibited from allotting their securities with the intention that they are offered to the public by someone else. Subsection (2) creates a presumption as to when shares or other securities have been allotted in this way. Similar provision was made in section 58(3) of the 1985 Act which this subsection replaces. 867. A private company will no longer commit an offence if it offers its securities to the public. Instead, if a private company does contravene the prohibition it may be compelled to re-register as a public company or be wound up (see clause 529). 868. Subsection (3) contains an exception to the prohibition on public offers where a private company intends to become a public company, in which case it will be able to make an offer before it has completed the formalities of re-registration as a public company. As part of the terms of the offer, the company must undertake to re-register as a public company in no more than 6 months from the making of the offer to the public. Acts done in good faith in anticipation of re-registration will not be treated as breaching the prohibition on offers to the public, even if the re-registration arrangements do not ultimately succeed. Clause 526: Meaning of "offer to the public" 869. This clause explains what is meant by "offer to the public" for the purposes of the prohibition on public offers contained in clause 525. This clause also sets out certain circumstances where an offer is not to be regarded as an offer to the public. It replaces section 742A of the 1985 Act. 870. An offer will not be an offer to the public if it is not calculated to result in shares or other securities of the company becoming available to anyone other than those receiving the offer. For example, where shares are offered to a particular person, with the intention that no one other than that particular person may take up the offer or acquire the shares as a result. Nor will an offer be an offer to the public if the offer is otherwise a private concern of the person receiving it and the person making it. 871. Subsections (4) and (5) create two further exceptions for offers to persons already connected with the company (as defined in subsection (6)) and for offers in respect of securities to be held under an employees' share scheme (as defined in section 743 of the 1985 Act). Such offers will not be offers to the public if the conditions set out in subsections (4) or (5) are met. 872. The range of persons already connected with the company for the purposes of the subsection (4) has been expanded slightly from the current provision in section 742A. It now includes a trustee of a trust where the principal beneficiary is an existing debenture holder of the company or the widow or widower, or surviving civil partner of a person who was a member or employee of the company. Clause 527: Meaning of "securities" 873. This clause explains what is meant by "securities". It follows the definition currently contained in section 228(6) of the 1985 Act (clause 373(6) of the Bill). Clause 528: Enforcement of prohibition: order restraining proposed contravention 874. This clause enables members, creditors or the Secretary of State to apply to the court for an order restraining a private company from carrying out any proposed contravention of the prohibition on offering securities to the public. This is a new procedure which will enable the member, the creditor or the Secretary of State to prevent by civil action any further activity by the company towards making an offer in contravention of the public offer prohibition. The court must also make such an order if in proceedings brought by a member under section 459 of the 1985 Act or by the Secretary of State under section 460 of the 1985 Act, it appears to the court that the company is proposing to breach the public offer prohibition. Clause 529: Enforcement of prohibition: order for re-registration or winding up 875. This clause applies where a private company breaches the prohibition on offering securities to the public. It enables members, creditors or the Secretary of State to apply to the court for an order for the re-registration or failing that, winding up of the company. This is a new procedure which will enable members, creditors or the Secretary of State to enforce the public offer prohibition. In order to have standing to bring the application, the member or creditor must have been a member or a creditor at the time the offer was made in contravention of the public offer prohibition; in addition anyone who became a member as a result of the offer to the public may bring an application. 876. If the court decides the company has acted in contravention of the public offer prohibition it must make an order for the re-registration of the company as a public company unless it appears to the court that the company does not satisfy the requirements for re-registration (see Part 7 of the Bill), and that it is impractical or undesirable to require it to do so. In such cases the court will make a compulsory winding up order and Chapter 6 of Part 4 of the Insolvency Act 1986 will apply. |
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| © Parliamentary copyright 2005 | Prepared: 17 November 2005 |