The Company Law Review - Coursework Example

The Company Law Review was a Missed Opportunity to Implement a Model of the Company better Adapted to Contemporary Challenges With reference to S.172of the Companies Act, 2006 Introduction: Recent corporate failures in protecting Shareholders money were the prime reasons behind the Company Law Review to form a model of the Company in the Companies Act, 2006.  On a close scrutiny, it was alarming to note that the non-executive directors of these Companies were holding too many jobs at a time and did nothing to control corporate abuses. Many of them forged the accounts to give themselves lavish fat cat rewards, bonuses and share options. They made extensive use of tax havens to create complex corporate structures and produced opaque accounts. Auditors were in hand with management and their reports were misrepresenting. Thousands of innocent people have lost their savings and investments. The Department of Trade and Industry (DTI) conceived that businesses in general will benefit from the new measures put forward in the proposals. There will be greater clarity on directors duties to include more attention to the interests of shareholders, but can pay regard to the long as well as the short term, taking due account of the interests of employees, suppliers, consumers and the environment. (Company law reform: UK proposals published, Out-Law News, 18/03/2005, http://www.out-law.com/page-5438, accessed on 10th April, 2009) The main proposals of DTI are: i. allowing shareholders to agree to limit the auditors liability to the company, so the financial liability of the auditor relates to the auditors responsibility for the loss; ii. greater rights for shareholders to question auditors and named partners for audit reports; iii. audit reports to give the name of the individual lead auditor, as well as the audit firm; and iv. Tougher penalties for reckless statements by auditors including custodial sentences. Duty to promote the success of the company (section 172) The duty which is laid down in section 172 substitutes the common law duty of dedication. This duty of the Directors is considered as the duty to act in good faith in the interests of the company. The new duty warrants action towards the success of the company. The promotion should be for the welfare of the members as a collective body: it should not be just for the sake of the shareholders. This duty on the part of the directors is: - A duty to exercise reasonable care, skill and diligence - A duty to promote the success of the company - A duty to act within their powers - A duty to exercise independent judgment - A duty to avoid conflicts of interest - A duty not to accept benefits from third parties - A duty to declare any interest in a proposed transaction or arrangement (Directors’ duties under the Companies Act, 2006, September 2007, p-3&4,http://www.law-now.com/cmck/pdfs/nonsecured/directorsdutiesoct2007.pdf., accessed on 15th April, 2009). Failure to Act in honesty by the Directors of the company in compliance to Section 172: The Company Law Review considered the following major issues in their proposals restructuring those parts of company law most relevant to small businesses, making it easier for them to understand what they need to do. The main issues are: (i) Simpler rules for forming a company; (ii) Abolition of the need for a company secretary; (iii) Making AGM opt in rather than opt out; and (iv) New model articles. History of company law review: The last noteworthy review of company law in the UK was more than forty years ago. Since then, related statute and case law have been altered. There have been major growths in recognized best practice’ in corporate governance,1 with the outcome that it is now difficult and time consuming for directors to find out precisely what is the law applicable to the companies. In 1998, the then Secretary of State for Trade and Industry determined that there should be an all-inclusive appraisal of company law. The Review was carried on by a Steering Group constituting experts from law, commerce, accountancy and academia, with the support of a generally based Consultative Group, and it brought out its concluding report in July 2001. The Government reacted to the Review Groups propositions in a White Paper, Modernizing Company Law, in July 2002.2 Footnotes: 1 As recommended by a series of reviews set up in response to financial scandals in the late 1980s and early 1990s. The reviews started with the Cadbury Report in 1992, followed by the Rutteman Report of 1994, the Greenbury Report of 1995, the Hampel Report of 1998 (which was the basis of the existing ACombined Code@ referred to elsewhere in our Report) and the Turnbull Report of 1999. For more details on these, see Ev 18-19 2 Cm 5553. The White Paper is in two volumes, with the consultative document in Volume I and draft clauses of the proposed Companies Bill in Volume II. We refer to it simply as >the White Paper= throughout this Report, and, except where otherwise indicated, all references are to Volume I. Overseas Companies (Company Contracts and Registration of Charges) Regulations 2009: The [Companies Act] 2006 has a single rule under which a company in a foreign country must be registered at Companies House if it has an organisation in the UK. This is a fresh concept. This revised draft Regulations states that if a company is established in a foreign country and has a running organisation in UK, then it has to comply with the requirement to register the establishment. Third parties can ascertain whether a company in a foreign country has registered its establishment by inspecting its register at the Companies House. (Robert Goddard, 9th April, 2009 (http://corporatelaw and governance.blogspot.com/). The Government finally published its long awaited white paper on company law reform on 17th March 2005. The White Paper builds directly on the work of the Company Law Review (CLR), and of the Government’s following White Paper of 2002. According to Patricia Hewitt, the Secretary of State for Trade & Industry, the planned Company Law Reform Bill is intended to address 4 important objectives: i. to improve shareholder commitment and a long term investment culture; ii. to guarantee better guideline and a “Think Small First” approach; iii. to make it lighter to establish and run a company; and iv. To provide suppleness for the future. (Andrew Holton, 21 March 2005, White Paper on Company Law Reform, http://www.swat.co.uk /NewsViews/TechnicalNews /tabid /149/articleType/ArticleView/articleId/2591/White-Paper-on-Company-Law-Reform.aspx, v viewed on 18th April, 2009). Conflicts of interest and the Companies Act 2006 From 1st October 2008 directors should follow a particular statutory duty to nullify a position in which they have, or can be directly or indirectly an interest that conflicts, or perhaps may conflict, with the interests of the company (section 175(1) of the Companies Act 2006). This means directors should not act in such interests which crosses the interests of the company. The Commission feels that directors of charitable companies were under a duty to avoid conflicts of interest before the implementation of this section. Conflicts of interest include those arising from: i. any personal financial interest in a dealing with the charity – for instance, where a director gets defrayal from the charity for services or goods; ii. conflicts of duty which do not call for any material gain to a director, for instance, where a director is also a charity trustee of another charity which might be in competition with the charity ("conflicts of loyalty"). In the case of a charitable company the Companies Act of a director’s duty does not apply to a difference of interest developing in relation to a dealing or agreement with the company if this is allowed by the company’s articles of association (section 175(3) of the Companies Act 2006 as altered for charitable companies by section 181). (The Companies Act 2006, http://www.charity-commission.gov.uk /supportingcharities /compact.asp, viewed on 18th April, 2009). The Law Review recommended the following points: EC Directives (Prospectus Directive, Company Disclosure Obligations, Corporate Governance Directive) on selective information that has to be printed when a company issues shares, looks for a stock exchange listings, and informs to the stock markets. Linked reviews in the UK of company listing rules, the task of non-executive Directors, value of the directive of financial reporting and auditing, the law on company charges, and Cabinet Office reviews on the revelation of valuable interests in unquoted companies, and reorganization of charity laws.  The contents of the above mentioned reviews have not been integrated into the White Paper or draft Bill and it did not talk about any thing about the approved EC testimonials on environmental issues in company annual reports and accounts, and corporate social obligation which are also important and significant to future Company Law.  The Law Review suggested that the new company law should reflect on the large number of less significant private companies first, with diverse provisos for the less large public companies. But in practice, the bulk of pollution incidents were induced by Sees. Smaller companies’ actions (some of which are excused from environmental directives) were only lightly synchronized by new company law as well. The new company law now requires both small and large companies to account for and report to a least standard concerning with the volume of raw materials, water and energy used, plus waste and discharges produced. This would help to decrease waste production and pollution, and enhance their productivity, reserve efficiency, competitiveness and profitability. This would also help the Government attain other wider sustainable development policy and economic objectives.  Improving governance   Clauses 19 and Schedule 2 in Vol. 2 of the draft Bill – are welcome. The Directors should cover the short and long term consequences of their action, where relevant, and taken into account, where practicable relevant matters, such as their relationships with employees and the impact of the business on the community and on the environment. All company directors should be aware of the impacts of natural events such as droughts, storms, floods and should care for the availability of raw materials and energy from coal, gas, nuclear sources etc. They should also be well informed of the impact of EU environmental legislation, and the impact of climate change together with the environmental collision of their supply chain and the necessity of the disposal of the waste products. The Directors should be given a statutory duty of care towards the environment in the same way as they do to their employees and customers. This will remove any ambiguity and will make the law crystal clear. Company Directors should be made liable for any negligence or willful misconduct in relation to the environment.   “Companies House should send Directors of both public and private companies a leaflet summarizing the main legal requirements on them by various laws – and we recommend this is also extended to cover laws relating to the environment, as well as health and safety etc. We would be happy to assist and support the drafting of such guidance.”(Gilbert McCullagh, Strategic Business Analyst, Halifax Share Dealing, 2005). The aim of the law should be to render a framework to encourage the long term health of companies, taking into consideration both the interests of shareholders and more liberal corporate social and environmental obligations. The precise duties of care essential of companies to their employees and society at large will usually be set out in other legislation, to bring in health and safety, environmental and employment law under its scope. But, the proposed statement of directors’ duties in the White Paper does symbolize a step forward as, for the first time, it openly distinguishes that good managers will have consideration to a wider range of considerations than value to shareholders, which may lead to Short-termism. The White Paper’s conceptualisation gives the responsibility of making decisions with regard to the company’s future on the directors, and not on the courts (Paragraph 22, Conclusions and recommendations, The White Paper on Modernising Company Law, http://www.publications.parliament. uk/ pa/cm200203/cmselect/cmtrdind/439/439.pdf, viewed on 18th April, 2009). Other ways of simplifying and streamlining the law -Disclosure of convictions  It is recommended that Companies should disclose their directors’ criminal convictions in their Annual Report and Accounts, including those for offences relating to wildlife and environmental legislation. In addition to information on prosecutions and fines for criminal offences by companies made public by the Agency and Health and Safety Executive, there should also be an electronic public register of convictions for offences under Company Law maintained by Companies House.   The Review, with reference to Section 172, failed on proposing ways to control unitary boards, executive directors, empowering stakeholders, non-executive directors or forcing auditors to give true and correct picture of the financial status. The government was once again proved supportive to corporate lobby. No link is made between the proposals in the White Paper and broad government policies.   The Corporate Law Review Reports which were the back-bone of the Companies Act, 2006 have the following implications. (Response to white paper: by Gillridge ,Gillridge Lane, London Road, CROWBOROUGH,East Sussex,TN6 1UR) Directors’ duties, liabilities & Corporate Directors As the current legislation stands, shareholders are the only individuals who can enforce Directors Duties.  Surely, those who have been affected by poor environmental and social performance of companies (i.e., the stakeholders) should also have the right to enforce these duties. Likewise, when Directors are promoting the success of the company, they must consider the impact of its operations on the community and the environment. It could be like “a Director also has a duty to report on any significant negative social and environmental impacts of their business activities, operations, policies and products and that this must also be coupled with a legal duty requiring directors to take reasonable steps to reduce and mitigate those impacts. The Act on Auditors responsibility according to the reform also states that the law on the person having the right to sue the auditors need not be changed. It has to be as it is. But since auditing and displaying the financial statements is vital for a company, the government has proposed to make it a criminal offence if knowingly or carelessly a wrong opinion with regard to the audit is given. The law states as follows; “The Government believes that it would be inappropriate to change the law on who can sue the auditors in the civil courts.  However given the wider importance of audited financial statements, the Government proposes to make it a criminal offence knowingly or recklessly to give an incorrect audit opinion.” Reference: 1. http://www.berr.gov.uk, viewed on 19th April, 2009 2. http://www.nextstep.co.uk/uploadedfiles/pdf/article2.pdf , viewed on 19th April, 2009. Read More