Insight: Duty bound

If the company law reform bill successfully negotiates a path through parliament it will introduce the requirement for companies to negotiate proportionate liability caps with their auditors by contract.

In future, auditors and their clients will negotiate exactly what the auditor can be held liable for and to what extent, subject to shareholder approval. The change is the result of a long and arduous campaign by the accountancy profession.

But directors’ duties have also been codified in the bill. As solicitors Lovells points out in a briefing document, a “much wider range of stakeholders has been imported into the way in which a director fulfils his duties”.

A director must have regard to: the likely consequence of any decision in the long term; the interests of employees; the need to foster relationships with suppliers, customers and others; the impact of the company’s operations on the community and the environment; the desirability of the company maintaining a reputation for high standards of business conduct; and the need to act fairly as between members of the company.

Chris Langridge, partner at lawyers Cripps Harries Hall, believes this is one of the most controversial aspects of the bill. “Most directors appreciate they have a duty to act in the interests of the company and the shareholders,” he says. “This goes further.” City law firm, Charles Russell, claims that the bill is a “potentially significant step on the road to enforced corporate social responsibility”.

Directors’ liabilities are also covered in the bill. Any provision that purports to exempt a director from liabilities is void, except in relation to qualifying third-party indemnity provisions and to insurance. A qualifying third-party indemnity provision must not provide an indemnity against fines or sums payable to a regulatory authority. It cannot provide indemnity against any liabilities in defending criminal proceedings where the director is convicted, or in defending civil proceedings brought by the company or an associated company in which judgment is given against him.

The bill also proposes to introduce a statutory derivative action, which will enable shareholders to sue directors for negligence, default, breach of duty or breach of trust.

The bill requires directors only to approve annual accounts if they are satisfied that they give a “true and fair view”, a move supported by Deloitte audit partner, Martyn Jones.

“Maintaining the concept of ‘true and fair’ is an important factor in retaining investor confidence during the move to international financial reporting standards as the IFRS requirement to ‘present fairly’ has been interpreted by some as a lesser criterion, which is unnecessarily rules based,” he says.

There are many other elements in the company law reform bill. For example, it introduces a criminal offence for auditors who “knowingly or recklessly” provide an incorrect audit opinion, with individuals convicted facing an unlimited fine.

Shareholders have also gained new rights. For example, shareholders will be able to require the company to publish on its website statements 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 discussed.

The government has also made much of the deregulatory nature of the bill, estimating that its provisions could save businesses up to £250m a year. For example, it supports the greater use of e-communications and removes the need for hard copy share certificates, aiming to cut the cost of rights issues. Small businesses will benefit from the abolition of the need for a company secretary, simpler rules for forming a company and new model articles.

There are new requirements for quoted companies to publish their annual accounts and reports and preliminary results on a website that is accessible, free of charge, by all members of the public. The annual accounts and reports for a financial year must remain available until the accounts for the next financial year are published on the website.

In terms of reporting in general, public companies will have a statutory obligation to prepare an operating and financial review for each financial year. The time limit for public companies to lay full financial statements before the company and file them has been reduced from seven months after the year end to six months. The deadline for private companies has been reduced from 10 to nine months.

On the plus side, directors may welcome the fact that most of them will no longer have to reveal where they live, but can file a service address on the public record instead.

Another change that could have widespread impact is the requirement for companies to have at least one director who is a “natural person”. In future, one company cannot be the sole director of another company.

The bill also includes a company law reform power to allow faster updating and amendment of company law in future, subject to requirements for consultation and parliamentary scrutiny.