Companies Bill 2005
Kim Corlett
Treasury
Income Tax Division
Government Office
Bucks Road
Douglas
Isle of Man
IM1 3TX
28 September 2005
Dear Mrs Corlett
COMPANIES BILL 2005 CONSULTATION
I write to convey the comments of ACCA on the above consultation paper.
We are disappointed that this consultation process falls short of what has been the norm in regards to other legislation that have gone out for consultation in the past in that insufficient time has been permitted to allow a through review of the clauses in this bill. Furthermore no consideration appears to have been given to the circumstances of the accountancy profession and the time pressures it is currently having to meet with respect to submission of the newly introduced income tax returns deadline of 6 October 2005.
On reading the introduction to the document there was an expectation that it was to be a new Companies Act and on that basis it would look somewhat different. The Introduction suggests that the Bill would be a stand-alone statute for the purposes of creating a distinct new corporate vehicle (the NMV) and that this would operate alongside existing Companies Acts 1931 to 2004.
It is hard though to recognise the entity provided for in the Bill as being a distinct type of corporate body. Most obviously, there is no special name for the new type of company, not even the NMV. Surely if the intention is to create a new type of company, with special characteristics which are not currently available under existing legislation, it would make sense to give it a name of its own? As it is, it seems that the only way to legally differentiate between ‘old Act’ companies and ‘2005’ companies are that the latter company will be incorporated under the 2005 legislation. This does not seem to be sufficient differentiation to serve the interests of third parties.
It seems also that ‘2005’ companies would have exactly the same range of available formats (limited by shares, limited by guarantee etc) as existing companies, and would have the same affixes (ltd, limited etc) as existing companies. We would suggest it is in the public interest that the new vehicle has a distinct identity and its own means of identification, so that third parties are able to look at an NMV and understand that that company does not have to, e.g. file an annual return.
As for the technical content of the Bill, we query whether there is sufficient derogation from the current legislation to warrant a new stand-alone statute. It looks as if there is a great amount of duplication of material. We agree that stand-alone statutes are usually user friendly but in this case we wonder whether a much shorter statute making modifications to the current statute could achieve the object of the exercise.
Furthermore by having two pieces of Legislation on the statute book which a business can use to incorporate could lead to misunderstanding. There is growing evidence of uncertainty among existing shareholders of companies incorporated under the 1931 to 2004 Companies Acts as to the duties and obligations of directors/shareholders and the administrative requirements of running a company e.g. Annual Return etc, This situation needs to be resolved - having two pieces of duplicatory or conflicting legislation will only add to this confusion.
We comment below on specific aspects of the consultation paper.
REGISTERED AGENT
As the company requires a Registered Agent who may hold official documents of the Company on its behalf, then details of the Registered Agent should be disclosed along with its registered office. There is no requirement for this in the current draft.
Under clause 73 (6) a person who is not licensed under the Fiduciary Services Act 2000 and 2005 as a registered agent must file an annual return on behalf of the company. This could be detrimental to local businesses who may have a local registered office and a named individual as Director but do not wish to incur the additional cost of a Registered Agent. This appears to be unfair and inequitable for local trading companies.
SHARE CAPITAL
It was noted at a recent presentation that a company using the proposed legislation would have the ability to opt out of issuing a share capital certificate or even placing a par value on the stock issue. This could make the verifying of who owns a business entity difficult. – it will be recalled that practising accountants have obligations to take steps to establish the identity of their client and the beneficial owners of a corporate entity, There is also the issue of creditor protection in that there may be insufficient non-distributable capital to protect creditors and other third party interests.
CORPORATE DIRECTORS
Re the proposed provisions for corporate directors (clause 89(7), this seems reasonable, for in the UK the company law reform project is likely to allow Corporate Directors as long as one director is a named individual. This may be appropriate for the IOM to consider adopting, as there is a weakness in the proposed legislation in that there is no requirement for a Director to be a resident of the Isle of Man. There could still be a requirement of only one Director on the basis that it is a named individual, and that corporate directors would be the second or more if required. Should this proposal be adopted then it would be optional which of the Directors are resident in the IOM. The proposed legislation is not to dissimilar to the existing non-resident companies legislation that the FSC has tried to discourage in recent years with a moratorium placed on the formation of this type of company.
DISTRIBUTIONS
The solvency test to be applied to distributions is, we think, progressive. (The EU capital maintenance rules are currently being reviewed as a consequence of IFRS and the effects they are having and will continue to have on reported accounting profits. It is possible that the EU will move to an alternative distribution test in the next few years.) We suggest only that the directors should be required to make a formal resolution to the effect that their company will still pass the solvency test consequent to the distribution.
MEMBERS RIGHTS
We do not understand why any company would choose to file its register with the Registrar of Companies if it was not required to do so! Optional registration seems not worth providing for – it would be better to require companies to keep registers and to make these open to inspection by specified parties or by any part on payment of a fee.
Furthermore if a company decides to not file its register, this places the responsibility on the Directors of the Company to ensure that records are maintained even if they are not resident in the IOM. This could be a problem in that the Registered Agent must be kept informed of changes, as a copy must be held at the Registered Agents place of business. If a Director is non resident and does not advise the Registered Agent of changes in the company who is responsible for this error, but more importantly how can one keep a proper trace of movements for non-resident directors?
NO PRESCRIBED ACCOUNTING/AUDITING REQUIREMENTS
This is a significant issue for us. ACCA’s view is that, as the NMV is to be a limited liability entity, with a separation of ownership and management, the entity should be required to prepare accounts, even if these are not to be filed publicly. We accept that the company has to keep accounting records (clause 79), and these are the minimum that would be required for directors to be in a position to make their assessment for the purposes of the solvency test. But the interests of shareholders are not properly protected if the company’s directors are never required to convert the information in the accounting records into financial statements, which are prepared in accordance with set standards of measurement and disclosure. Without any responsibility to prepare accounts, external accountants and/or auditors will not be around to exercise any systematic checks, e.g. on money laundering, which might be more widely considered to be socially desirable. A minimum standard for the preparation of annual accounts by the new company should be imposed, particularly if a distribution is to take place.
Attention should be made by the Treasury in that under this proposal there are no requirements for audit or any independent verification of accounts submitted to it for tax purposes. This will place an undue burden in work and assessments within the Income Tax Division on information supplied by local trading companies, particularly as the Directors could submit these accounts without any formal review. Consequently ACCA anticipates that significant reassessments will be carried out in light of the zero tax policy that is available to limited companies in the 2006/07 tax year for those companies incorporated under the new legislation.
There is an additional factor in that if the Treasury insists on an audit or independent review for local trading companies incorporated under the proposed legislation, then an inconsistency in taxation and an uneven ground will exist between local resident companies and non-resident companies. This may fall foul of EU and OECD agreements requiring a “level playing” for all types of business.
REREGISTRATION AND MERGER
Detailed in the proposal is the option to register an existing company under the new Companies Act. Reference is made to there being sufficient solvency requirements in place. However no consideration is given to existing creditors nor is their approval sought. This section is weak as a company could reconstitute itself thereby avoiding any redress for any significant liabilities incurred by the former company.
LIQUIDATION AND DISSOLUTION
In light of the considerable time and effort to draft this piece of proposed legislation it is a pity that a “Golden Opportunity” to overcome the deficiencies in the existing Companies Acts as regards liquidation and dissolution procedures has not been taken. The proposals to adopt existing legislation are inadequate given the fact that should this proposal be accepted then it will be many years before the issue of insolvency regulation will be addressed.
At a meeting co-sponsored by IOM Finance it was announced that it is intended that the existing strike off regime for non-compliant companies will continue. It is also envisaged that the period of time between strike off and formal dissolution be expanded to a period of 12 (Twelve) years.
This would mean that defaulting companies would appear on the Companies Registry for many years. This ruling would create an administrative burden in maintaining this “strike off” register. We are unsure of the strike off figures in recent years but envisage many thousands of new companies will appear on this Strike off Register in a relatively short number of years.
It would make sense to reduce this proposed period of time to say 6 (six) years. This would be more appropriate as the statutory period to recover a liability expires after this period. This we believe is sufficient time for a dissenting company to re-establish itself in the event that it unwittingly appears on the default register.
One final consideration is that if a dissenting company appears on a default register for a long period of time do we really want to reinstate it?
OTHER CONSIDERATIONS
It was noted at the recent presentation that the IOM Companies Bill 2005 is heavily drafted on the 2005 British Virgin Island (BVI) Companies Act. No clear acceptance by either the EU or OECD has been forthcoming at this moment in time and it is too early to say that this new BVI model will be as successful as those used in the past.
Furthermore, it is apparent that considerable time effort and cost has been incurred by the IOM Government and local businesses in improving the quality and regulation of the financial services sector. From the proposed legislation it is unclear as who the party will be in ensuring that the new company will meet existing regulatory requirements on the IOM, particularly if that company is operating out of another jurisdiction. On that basis will it be local legislation or IOM legislation that will prevail? As any breach would result in bad publicity for the IOM.