Company Act 1985 - Essay Example

Company Act 1985 Company law was established for the sake of outlining the duties to be fulfilled by the company's responsible figures. The flows present in the Company Act regarding prohibition of companies to give financial assistance to their own shares mandated a change to be studied which came into existence by 2006 as the new Company's Act. The prohibition on companies giving financial assistance for the purchase of their own shares under the Companies Act 1985 In this act prohibition is stated in section 151(1) and (2), where assisting is prohibited at or before an acquisition in section 1, while in section 2 assisting is prohibited after an acquisition. In section 152 examples of types of those prohibited assistances are given, but it does not state clearly what "financial assistance" means which is mentioned in each of these examples, therefore consequently prohibition is not also clearly defined. (Gleghorn) Section 151 in the 1985 Companies Act declares the prohibition of financial assistance of one's own shares in a public company and legal actions such as fines and imprisonment can be taken if this is done, this can be considered as a precautionary action to provide a certain step back safety option for investors from major capital loss risks. Private companies however have certain law exceptions which give them an escape to provide financial assistance. The purchase is allowed in private companies if the conditions in Sections 155-158 are followed; thereby allowing financial assistance. This is known as "whitewash". The court case of Brady v Brady involving two brothers sharing a family business was the first to encounter this issue and they filed a petition feeling that their assts where not justly divided upon a previous agreement. The judge consequently allowed financial assistance as an exception to the withheld rule though at first it was not seen to fit the frame of permitted cases. "Infringing the prohibition on financial assistance is a criminal offence and may involve serious civil consequences. This uncertainty has prompted calls for reform, which the government would appear to be addressing in its White Paper "Modernising Company Law" by proposing to simplify the rules for public companies and to abolish the restrictions altogether for private companies." (Gleghorn) The many advantages from omitting this section was removing the negative effect it had on private companies, remove the burden of falling into illegal traps, avoid time consuming procedures such as whitewashing and by so save the money spent on it. In an effort to develop an effective infrastructure for companies to work in, an independent group was formed to oversee the management of the 1998 DTI review and, following an extensive process of consultation, presented its final report on 26 July 2001 which included the following recommendations (Government's White Paper, "Modernizing Company Law" (July 2002)) for the abolition of complex rules on financial assistance for private companies: Abolition of the whitewash procedure. The financial assistance provisions should in future apply only to public companies. So the whitewash procedure will no longer be necessary for private companies. It is unlikely to be extended to apply to public companies. The prohibition would also no longer apply to unlimited companies. Foreign subsidiaries. The scope of the prohibition should be amended so that it is made clear that the prohibition does not apply to provision of financial assistance by a foreign subsidiary for the acquisition of shares in its British parent company. Criminal sanctions. Criminal sanctions for breach of the financial assistance provision should continue for directors but should be relaxed for companies. Transactions should no longer be void solely on the grounds that they constitute unlawful financial assistance. How Companies Act 2006 will change the law in this area The Secretary of State, Alistair Darling, said that, "this Act will ensure Britain remains one of the best places in the world to set up and run a business. It makes sure the regulatory burden on business is 'light-touch', promotes shareholder engagement and will help encourage a long-term investment culture in the UK." (New Year's Resolutions, Companies Act 2006) One of the Companies Act 2006 major transformations is the permission of private companies to buy their own shares, allowing financial assistance to take place in purchasing those shares. Whitewashing will be erased by such a change in Company Acts, meaning that any act under Company's Act 1985 that was allowed at that time will be legal in the current regime, other acts that could not be whitewashed at that time will remain so and will be illegal to proceed in it. The 1985 Act recognized how numerous small companies have a relatively small share of capital, by so made the rules to include some exceptions to allow them to maintain their capital, but in order for this to be done those small companies have to thoroughly understand the laws given to acknowledge their rights for those exceptions which were not comprehensible and intelligible. (Companies Act 2006 and Private Companies, 2006) In the new Act review, numeral deregulatory actions where launched to eliminate many laws that where frankly pointless and inconsistent in regards to private companies including the financial assistance regulations. It abolished financial assistance dilemma for private companies and simplified the capital regime reduction to diminish the time and money spent on configuring transactions in order to follow the rules made. (Companies Act 2006 and Private Companies, 2006) Other countries in comparison to the UK In New Zealand the Company Law was revised and changed in respect to legislation issues. Minority shareholder remedies and restrictions on share issues where addressed. "In both its April 1989 (NZLC R8) and June 1989 (NZLC R9) Reports, the Law Commission stressed that a new Personal Property Securities Act was an important part of its recommendations for company law reform." Simplification of the laws and abolishing section four of the 1955 Company's law were significant actions taken in this prospective. In India the Company Law Board made major changes in the Company law by entitling shareholders to have power on the decisions to be taken, something that was not implemented beforehand but to be done in the name of public interest. China amended their company law in 2005 also giving shareholders further control. The previous restriction of "limiting the size of subsidiary investment" has been eliminated. It is now not a necessity for "profit distribution and voting rights to be solely based on the capital contribution ratio of shareholders", this elevates the likelihood of preferred shares. (China: Company Law Amended, 2006) Consideration of whether further reform is needed The renewed 2006 Act brought many positive contributions to small private companies making their life easier and provided shortcuts to issues that were providing some difficulties and time consuming procedures now avoided. Some of these changes that influenced private companies other than abolishing the previously prohibited financial assistance include defining the duties of directors, promoting shareholders to be engaged in investing and giving them rights to take legal action if negligence occurred, limitation of auditors' liabilities, aid in e-communications, a secretary is no longer needed, a simpler administration for private companies to run. If a private company wants to benefit from any of those amendments that have evolved, it should amend its constitution, though the law adjustments did not oblige the private companies to perform anything, nevertheless such an action is fundamental to be processed. The long run for the execution of those modified modern laws that is to be concluded by end of 2008 is quite a long time for a law to be enforced. Such modifications should be functional sooner than this, allowing companies whether private or pubic to benefit from those improvements as soon as possible. Simply the process for completion of this amendment is too extensive to be applied. This unnecessary delay is unjustified and is purely a waste of valuable time that can be invested in other means. The Company Act must be more convenient and all those positive contributions are appreciated but utilizing the long term plan into a shorter one can be more beneficial to all parties in many aspects. References China: Company Law Amended, Hong Kong, January 6, 2006 http://www.hg.org/articles/article_1184.html Companies Act 1985 http://en.wikipedia.org/wiki/Companies_Act_1985 Companies Act 2006 Chapter 46 1-760 Companies Act 2006 and Private Companies, November 21, 2006 http://www.bytestart.co.uk/content/legal/35_2/companies-act-guide.shtml The Companies Act 2006 - a summary of what it means for private companies, Department Trade and Industry, 1-12, 2007 Gleghorn, S., Financial assistance: moving towards a clearer interpretation Government's White Paper, "Modernizing Company Law", July 2002 Mayer Brown Rowe& MAW, Financial Assistance: Non Statutory Auditor's Reports in a "Whitewash", 2003 Modern Company Law: Developing the Framework chapter 6: Small and Private Companies: Introduction and Background, A Consultation Document from the Company Law Review Steering Group - March 2000, 219- 226 Modern Company Law: Developing the Framework chapter 7 Small and Private Companies: Proposed Simplifications for the Private Company, A Consultation Document from the Company Law Review Steering Group - March 2000, 227-267 New Year's Resolutions: Companies Act 2006, Corporate Law Newsflash, January 2007 http://www.sghlaw.com/news/2007/corporate%20law%20companies%20act%202006.html Report No 16: Company Law Reform: Transition and Revision, September 1990, Wellington, New Zealand Stephen Mayson ; Christopher Ryan ; Derek French (2004), Company Law, Oxford University Press (UK) Woods, Catherine, UK Companies Act passed to praise from the profession.(Regulation), The Accountant, Publication Date: 11/01/2006 Read More