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2 July 2008 : Column GC83
Companies (Reduction of Share Capital) Order 2008
5.22 pm
The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Baroness Vadera) rose to move, That the Grand Committee do report to the House that it has considered the Companies (Reduction of Share Capital) Order 2008.
The noble Baroness said: The order does two things. It sets out how the reserves arising from a reduction of capital—the cash that a company gets from reducing its share capital—may be treated, and it provides the form in which a solvency statement must be made, underpinning the new option introduced by the Companies Act for private companies to reduce their share capital without reference to a court. The treatment of reserves arises when a company, public or private, has reduced its share capital by any of the means permitted to it. The order clarifies whether the reserve is to be treated as distributable to shareholders by way of, for example, dividends.
The provisions of the order follow consultation on drafts and detailed discussions with the Institute of Chartered Accountants in England and Wales and the Law Society. The order provides that, subject to some exceptions, reserves resulting from a reduction of capital will be treated as “realised profits” for the purposes of Part 23 of the Companies Act 2006. Part 23 sets out the rules for the distribution of a company’s assets. The effect of the order is that, with certain specified exceptions, once a reserve is created, Part 23 controls its distribution. This removes the need for what is currently extensive professional guidance on the matter.
The second aspect of the order arises from the need to prescribe the form of the solvency statement that is provided for under Section 643 of the 2006 Act. This part of the Act enables private companies to rely on a solvency statement for the purpose of reducing share capital without the need to have the reduction confirmed by a court. For companies wishing to utilise the solvency statement route under the new Act, the directors must form the opinion and confirm in a statement that, at the date of the statement, there are no grounds on which the company could be found to be unable to pay its debts; that if it is intended to commence a winding-up at any time in the 12 months following the statement, the company will be able to pay its debts within 12 months of the commencement of the winding up; and that, in any other case, the company will be able to pay its debts within the year following the date of the solvency statement. The content required of the solvency statement is therefore set out in the Act. This order relates only to the form of the statement which the Act requires to be prescribed in an order.
In this order we have prescribed the most elementary requirements as to the form of a solvency statement: it must be in writing, indicate that it is a
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Moved, That the Grand Committee do report to the House that it has considered the Companies (Reduction of Share Capital) Order 2008. 22nd report from the Joint Committee on Statutory Instruments.—(Baroness Vadera.)
Lord De Mauley: I thank the Minister for explaining the order. I declare an interest as a Fellow of the Institute of Chartered Accountants in England and Wales, on whose briefing I will draw in a moment. Before I do so, I should say that we strongly support anything which reduces the regulatory burden on business.
On the transitional provisions, I understand that, even after implementation of the order, a surplus which has arisen on a reduction of capital which took place before 1 October this year will not become distributable. Is there any logic for this?
I hope your Lordships will forgive me if I take this opportunity to probe the wider context of the Government’s position on the possibility of more fundamental reform of the capital maintenance and distributions regime, both at United Kingdom and EU levels. For example, it appears from a recent KPMG study into the costs of the capital maintenance regime, and the commission’s reaction thereto, that the UK has over-implemented the second directive regime, resulting in much higher costs in the UK compared to other member states. This appears to be caused by the UK’s realised profits test, which, as I understand it, is not required in other member states. Do the Government propose to consult urgently and widely, with a view to reforming these rules? If not, why not?
The interaction between IFRS or converged UK GAAP and the current capital maintenance and distribution rules can mean that the payment of dividends can become an extremely and unnecessarily complicated process. Can the Minister explain what action the Government are taking to press the EU for changes to the second directive in relation to public companies and to alleviate the problems faced by private companies?
Baroness Vadera: On the issue of the date, following discussions with stakeholders we are minded to agree that the provisions on reserves arising from reductions of share capital should be applicable prospectively as from 1 October 2008, irrespective of when the capital reduction took effect. The matter will be addressed in the draft seventh commencement order, which is currently subject to public consultation. We intend to make the order before the Summer Recess.
I am aware that there is wider debate with respect to specific aspects of the capital maintenance regimes—for instance, the realisation test—and that there are arguments both for and against further legislative reforms. European Community law governs much, if not all, of this area. While we do not currently have plans to publish a consultation on the specific proposals, we are maintaining an open
2 July 2008 : Column GC85
On Question, Motion agreed to.
Small Limited Liability Partnerships (Accounts) Regulations 2008
5.29 pm
The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Baroness Vadera) rose to move, That the Grand Committee do report to the House that it has considered the Small Limited Liability Partnerships (Accounts) Regulations 2008.
The noble Baroness said: We are considering three sets of draft regulations to be made under the Limited Liability Partnerships Act 2000: the Limited Liability Partnerships (Accounts and Audit) (Application Of Companies) Act 2006 Regulations 2008; the Small Limited Liability Partnerships (Accounts) Regulations 2008, and the Large and Medium-Sized Limited Liability Partnerships (Accounts) Regulations 2008.
The first set of regulations applies, with modification, the provisions of Parts 15, 16 and 42 of the Companies Act 2006, dealing with the accounts of limited liability partnerships and the audit of those accounts. The other two sets of regulations apply to small and to large and medium-sized limited liability partnerships respectively provisions on the form and content of accounts previously contained in schedules to the Companies Act 1985 and the Companies (Northern Ireland) Order 1986 as applied to limited liability partnerships.
Limited liability partnerships were created by the Limited Liability Partnerships Act 2000 and its Northern Ireland equivalent in 2002. A great deal of the substance of the law applying to limited liability partnerships is created by regulations applying parts of company law, particularly the Companies Act 1985, to limited liability partnerships with appropriate modifications. A similar approach is taken in Northern Ireland.
Since its creation seven years ago, the limited liability partnerships structure has appealed to businesses of all sizes and sectors. The number of businesses choosing to operate as limited liability partnerships continues to rise—from 24,555 in May 2007 to nearly 30,000 by February this year. The Companies Act 2006 has introduced important reforms to company law. In light of these changes, the Government will apply the relevant provisions of the 2006 Act to limited liability partnerships. This will be done in two stages. The first is the draft regulations we are debating today. These apply the accounts and audit provisions of the 2006 Act to limited liability partnerships. These will come into effect for financial years beginning on or after 1 October 2008; and the new Companies Act provisions on accounts and audit came into force for companies on 6 April 2008. Our consultees told us that they would like the equivalent provisions to be brought into force for limited liability partnerships on 1 October 2008. The second stage will be to apply the remaining
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The regulations before the Committee are the result of consultations on the broad approach to applying the 2006 act to LLPs, and then on the detail. The vast majority of respondents to the consultations supported our approach. Following the principles of “think small first” and to improve the clarity of the legislation, we have taken this opportunity to change the structure of the legislation applying aspects of company law to LLPs. The 2001 LLP regulations apply large parts of the Companies Act 1985 with modification of varying degrees made by textual amendment in schedules to those regulations. This creates a complex set of regulations that have to be read together with the 1985 Act. A similar approach is taken in Northern Ireland.
In contrast, the regulations we are debating today set out the 2006 Act provisions applied to LLPs in full, as modified to take account of particular characteristics of LLPs. As is the case for companies, separate regulations for small LLPs and for medium-sized and large LLPs will apply the provisions on form and content of accounts previously contained in schedules to the 1985 Act and the 1986 Northern Ireland order. By applying the 2006 Act in this way we ensure that LLPs reap the benefits of simpler, clearer and more cost-effective legislation in more modern language. In line with the extension of company law to Northern Ireland, the regulations applying the 2006 Act to LLPs will also extend to LLPs in Northern Ireland.
In summary, the draft regulations are the first phase of the application of the Companies Act 2006 to limited liability partnerships. They restate in full the provisions as applied, in a set of stand alone regulations that are more user-friendly for LLPs, particularly small LLPs and their advisers. I commend the draft regulations to the Committee. I beg to move.
Moved, That the Grand Committee do report to the House that it has considered the Small Limited Liability Partnerships (Accounts) Regulations 2008. 22nd report from the Joint Committee on Statutory Instruments.—(Baroness Vadera.)
Lord De Mauley: I thank the noble Baroness for explaining the regulations, the impulsion for which is, I understand, the reduction of the regulatory burden on limited liability partnerships through the application of certain provisions of the Companies Act 2006. As I said earlier, we strongly welcome any attempt to deregulate and make life simpler. Furthermore, I do not think that the regulations are hugely controversial in themselves. There are, however, a couple of matters that I would like to raise.
First, the impact assessments each tabulate the number of small, medium-sized and large LLPs that were respectively in existence in May 2007. What are the dividing lines between small, medium and large? Are those dividing lines structured so as to move over time in line with inflation—which, after all, is now rather more significant than it has been in recent years?
2 July 2008 : Column GC87
Secondly, I take this opportunity to make a gently critical point about BERR’s procedures for calculating the financial impact of an SI. Perhaps the Minister can confirm this, but I understand that to estimate the cost on LLPs of implementing the Companies Act 2006 BERR simply took its estimate of costs of implementation on limited companies, multiplied it by the number of LLPs and then divided the result by the number of limited companies. LLPs tend to be small, as the Government’s own figures show, and so do not tend to have in-house access to all the things that large companies do. If, for instance, a senior member of an LLP did his own accounts under the old system, the implementation of the new one will mean that he has either to retrain—Companies Act 2006 provisions being somewhat different from the 1985 ones—or to subcontract to an accountant, both of which will cost money.
Furthermore, this SI does not blanket apply the Companies Act 2006. A number of exceptions are made—for instance, where the Act refers to specific numbers, and on definitions of company types and so on. I suggest that these render it yet more inappropriate to calculate the cost of implementation in this way.
If I am correct, in essence the department has used a short-cut method of determining the costs to LLPs of implementing the Companies Act 2006 that is not up to its normal standards. Perhaps the Minister could respond to that suggestion.
Lord Razzall: As the noble Lord, Lord De Mauley, indicates, the regulations, which are being debated together, are not in themselves controversial. I await with interest the Minister’s answer to his question. I wish to put on the record, as perhaps the Minister did not do the Government justice in her opening remarks, how much I approve of and appreciate the way this is being done. When the Bill that became the Companies Act 2006, which turned out to be the longest Bill in the history of your Lordships’ House, was being debated, one of the points we made at Second Reading was that it was a serious error not to regard it as a consolidation Bill. Eventually the Government acceded to that argument and produced it as a consolidation Bill.
I hope this is a precedent for all future regulations under the Bill. It ought to go on record how important it is that they take the form of option C as set out in the impact assessment, rather than option B. Had option B been implemented for the purposes of these regulations, the only beneficiary would have been the publisher Butterworths, which would have had to have sold more copies of its book for people to plough through in order to try to cross-relate the relevant sections of the Companies Act to these regulations. I welcome the fact that option C has been the approach, so we have a set of regulations that stand on their own which anyone can read when they see what has to go into accounts. I hope that, the consolidation of the 2006 Act having been achieved, future regulations
2 July 2008 : Column GC88
Baroness Vadera: With reference to the question about the way in which thresholds are set, they are set at the European level. If we were to have our own set of thresholds and uprate them every time for inflation, we would be adding a layer of complexity that would not be appropriate either for the Government or for businesses. For the purpose of information, the thresholds are, for a small LLP, a turnover of not more than £6.5 million and a balance sheet of £3.26 million, and for a medium-sized LLP, £25.9 million turnover and £12.9 million in balance sheet. We do not think it would be appropriate to have a different set of definitions.
I cannot answer the question about the way in which the impact assessment was carried out because it was done some time ago, but I shall see if lessons can be learnt—not least wearing my hat as the Minister for better regulation; it is the least I can do. I am most grateful for the comments of the noble Lord, Lord Razzall, which will be warmly welcomed by the large number of people in BERR who have been working on this for some time.
On Question, Motion agreed to.
Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008
The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Baroness Vadera): I beg to move the Motion standing in my name on the Order Paper.
Moved, That the Grand Committee do report to the House that it has considered the Large and Medium-sized Limited Liability Partnerships (Accounts) Regulations 2008. 22nd report from the Joint Committee on Statutory Instruments.—(Baroness Vadera.)
On Question, Motion agreed to.
Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008
The Parliamentary Under-Secretary of State, Department for Business, Enterprise and Regulatory Reform (Baroness Vadera): I beg to move the Motion standing in my name on the Order Paper.
Moved, That the Grand Committee do report to the House that it has considered the Limited Liability Partnerships (Accounts and Audit) (Application of Companies Act 2006) Regulations 2008. 22nd report from the Joint Committee on Statutory Instruments.—(Baroness Vadera.)
On Question, Motion agreed to.
- The Committee adjourned at 5.41 pm.
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