Company formation and capital maintenance
ACCA's response to the Department of Trade and Industry's Company Law Review Steering Group's Consultation Document 3, of the above title, is set out below.
Before addressing the specific questions posed, we would make a general comment about the Steering Group's approach to this issue. The Group has expressly eschewed the idea of restricting access to the limited company format through the imposition of a minimum capital requirement. We feel bound however to re-iterate our own preference for such a course of action.
Consideration of formation and capital rules for limited companies needs, in our view, to be considered in conjunction with the assessment, which we understand is being undertaken separately within the review project, of alternative business formats. The evaluation of both areas needs to consider the suitability of particular types of structure to businesses of particular sizes and organisational structure, and whether the current range of formats, including the limited company, meet the real needs of businesses.
It is our view that much of the pressure for relaxation of the compliance requirements imposed on small companies derives from the fact that many micro-businesses choose to incorporate and subsequently find that the burden of incorporation is too onerous for them. Since many very small businesses are not, in our view, properly suited to the company format, we see merit in the introduction of a new format which provides very small businesses with the aspects of corporate structure that seem to be of positive value to most of them, such as legal personality and perpetual succession, while freeing them from the compliance burdens which stem, logically and legitimately, from the attribution of limited liability. The limited company format should, then, effectively be reserved for those businesses that are able to demonstrate a substantial financial commitment, via a minimum capital rule.
Our responses to individual questions posed in the Document are set out below:
1 Yes.
3 Yes.
8 Given the blurring of the distinction between the memorandum and the articles, and given that individual provisions of each may be changed by a similar procedure, there seems no obvious reason why there need to be two separate constitutional documents. We therefore support the proposal to introduce, with respect to new companies, a single, integrated constitutional document.
9 Yes.
15 We fully support the proposal to require, on the registration form, confirmation from directors that they have read an authoritative statement of their duties and responsibilities as directors. We feel that such a statement could usefully be included as a standard feature in the annual directors' report of private companies.
19 We agree that there should be a general rule to the effect that a company's constitution should be capable of amendment by special resolution. It should, additionally, be open to a company to entrench individual provisions in its constitution so as to require unanimity to amend or remove them.
23 We believe it to be a logical progression from s35 of the Companies Act 1985 for companies to be given unlimited capacity to act and to be free of any compulsion to list their objects in their constitution. Where any restrictions or limitations are set down in the constitution of a particular company, members should have the right to restrain any violation of them.
24 We agree that companies that are charities should be subject to charity law with respect to their activities.
41 Yes.
42 Yes.
45 We do not consider that there is any reason why the current figure for minimum allotted share capital need be changed.
55 We agree with the proposal to abolish the standard requirement for companies to seek court approval to reduce their capital under the Companies Act. While adequate protection for creditors is essential, the current requirement for court approval does not, in practice, constitute any meaningful safeguard, and can be a disproportionately time-consuming and expensive exercise.
56 Yes.
57 Yes.
58 We agree that a directors' declaration of solvency should always be subjected to independent verification in the form of an auditor's report, along the lines suggested in paragraph 3.30 of the consultation document. With respect to question 58(c), it does not follow, in our opinion, that just because a company is exempt from having its annual accounts audited it should also be exempt from external verification of any declaration of solvency that it might make. The rationale for exempting small private companies from the statutory audit is that such companies are usually owner-managed, and because of this do not routinely need the assurance of stewardship that the annual audit is meant to provide to non-manager shareholders. This rationale cannot be used to justify the exemption of small private companies from the external review of their directors' declaration of solvency, since the latter has a quite different purpose from the annual accounts.
Any consideration of this matter must also take into account the DTI's plans to increase substantially the threshold for audit exemption, to a possible new turnover level of over £4 million. If these plans are realised, there will be a significant increase in the number of companies that do not have auditors and which would be consequentially exempt from any requirement to have their declaration of solvency independently reviewed.
Accordingly, it is our view that all private companies that seek to reduce their capital under the proposed new procedure should be required to have their declaration of solvency subjected to external review.
We would also make a point of general application to the subject matter of this particular document. If and when new measures are brought in to replace the current rules on, inter alia, constitutional documentation, it should be made quite clear whether the new statutory rules apply universally or only to those companies which incorporate subsequent to the implementation of the new rules. In the recent past, there has been some confusion as to whether changes in individual statutory rules - such as the introduction of audit exemption for small private companies - override existing and apparently conflicting constitutional provisions.