Draft Company Law Reform Bill 'puts small business first'

Proposals to save businesses £250million a year - including £100million to small business - and update company law were published today (March 17) by Trade and Industry Secretary Patricia Hewitt.

The DTI claimed that company law will be substantially changed to make it easier to understand and more flexible - especially for small businesses. It said the plans would help keep the regulatory burden to a minimum, and promote shareholder engagement and a long-term investment culture.

Small business measures

It is estimated that business benefits from these proposals would total around £250m a year. This includes an annual £100m benefit for small companies from:

• restructuring those parts of company law most relevant to small businesses making it easier for them to understand what they need to do;
  
• simpler rules for forming a company;
  
• abolition of the need for a company secretary;
  
• making AGM opt in rather than opt out; and
  
• new model articles.

All businesses

For all businesses there will be a range of measures including:

• greater clarity on directors' duties, including making clear that they have to act in the interests of shareholders, but can pay regard to the long term as well as the short term, taking due account of the interests of employees, suppliers, consumers and the environment;
  
• greater use of e-communications and removing the need for hard copy share certificates; and
  
• an option for all directors to file a service address on the public record rather than a private address.

Shareholder engagement will also be promoted through enhancing the powers of proxies and making it easier for indirect investors to be informed and exercise governance rights in the company.

Audits

The draft package also includes proposals on auditor liability and audit quality including:

• 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;
  
• greater rights for shareholders to question auditors and named partners for audit reports;
  
• audit reports to give the name of the individual lead auditor, as well as the audit firm; and
  
• tougher penalties for reckless statements by auditors including custodial sentences.

Effective framework

Patricia Hewitt said: "An effective framework of company law and corporate governance will promote enterprise and helps stimulate investment in the UK.

"We needed a thorough overhaul of the law to make it more suited to the needs of our companies and the measures set out in the White Paper will help us achieve that.

"The proposals are part of a wide programme of action to boost enterprise, encourage investment and promote long-term company performance. These measures represent a significant step forward in ensuring that our company law remains up to date, flexible, and accessible for everyone who uses it."

The consultation is open until 10 June and the aim is to introduce a Bill as soon as Parliamentary time allows.

Summary

A short summary of the main changes for small businesses is available on the DTI's website: Company Law Reform: Small Business Summary (pdf)