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.