Company Law - Flexibility and Accessibility
Comments from ACCA
July 2004
ACCA is pleased to comment on the above consultation paper, in which the Department sets out its proposals for a new type of secondary legislation which would be used to reform and �re-state' primary company law.
At the outset, we would say that we are encouraged that, according to the consultation paper, work on the new Companies Bill is progressing and that full consultation will take place in due course on the Bill's contents.
Our reaction to the Department's new proposal to create new legislative powers to re-state parts of the Companies Act in the interests of SMEs is, however, one of surprise. Our understanding has been that one of the key objectives of the current reform exercise is precisely to simplify companies legislation so as to make it more accessible and comprehensible to users, particularly SMEs and their advisers. The drafting exercise in which the Department is currently engaged, which has already taken three years since the Company Law Review (CLR) produced its final report, offers a great opportunity to achieve a more digestible re-statement of the substance of the primary law.
It may be inferred from the new proposal, though it is not stated anywhere, that the Department now considers that the simplification goal cannot be achieved. But if improvements in accessibility and comprehensibility cannot be achieved via the current project to re-draft the Companies Act, we do not see how the Department could hope to achieve it via secondary legislation, the purpose of which, in any case, would be only to re-present primary law. To an extent, therefore, the proposal appears to be an admission of defeat, which we find a cause for concern. Rather than making open-ended provision for primary law to be re-presented, for one reason or another, we would prefer the Department to concentrate its efforts on achieving simplification of company law in the current re-drafting exercise. If this cannot be achieved, we would argue that other ways of helping SMEs to interpret the law should be explored.
With regard to the proposal to allow primary legislation to be reformed via secondary legislation, we appreciate that Parliamentary time is scarce and that the on-going demands of Europe in particular create difficulties for the Government in all areas of legislation. But company law is not alone in being materially affected by EU legislation and we do not think that the consultation paper makes a convincing case for the introduction of a radical new reform power which would apply uniquely to it. The proposal is especially difficult to understand given the comprehensive review of company law carried out by the CLR between 1998 and 2001 and the fact that the legislation to implement the reforms emanating from that review is still some way off. Given the breadth of scope of the CLR's work, we are not aware that there are substantial outstanding matters which have not yet been addressed or are likely to emerge in the near future. If there are any substantial new reforms which the Department is currently minded to make, then they could and should be included in the Companies Bill of 2006 or 2007.
Our responses to the specific consultation questions are as follows:
Q1 Do you agree that, in designing the legislation, we should aim to keep provisions on a particular subject matter as far as possible in one place?
We agree that, in the re-drafting of the Companies Act, associated provisions should be grouped together as far as possible.
Q2 Do you agree that a power to reform the law through a special form of secondary legislation would be a useful mechanism for ensuring future flexibility?
We accept that the flow of new legislation from the EU causes member state governments problems in finding the Parliamentary time to incorporate the measures concerned into domestic law. EU legislation is largely responsible for creating the current disparate state of UK company law. This flow is likely to continue but the scale of it should not, we suggest, be exaggerated and it alone should not be used to justify radical new legal instruments which would apply to company law alone. We consider it to be significant that the European Commission, reacting to the concerns of member states as much as business and consumers, committed itself, in its 2003 Action Plan on company law, to explore in future regulatory options other than Directives. If this undertaking is realised, it should create a situation in which there is increased scope for member states to implement EU measures by non-statutory means, e.g. by listing rules or codes of practice. This should have the effect of reducing future pressure on the Department to make piecemeal changes to the Companies Act.
Q3 Do you agree that a power to re-state the law through a special form of secondary legislation would be a useful mechanism for ensuring future flexibility?
As indicated in our general comments above, we support the aim of making company law more accessible.
But we think that to formally re-state specified sections of the primary law could create problems. For example, would SMEs have the option of complying with the re-stated law rather than the original law, and would they have to declare which of the two they had complied with?
Presumably, also, some at least of the terminology to be used in any re-stated law would be less technical and legalistic than the equivalent wording of the original law. But terminology is crucial to the application of the law and so much of how the law develops revolves around evolving interpretations of terminology. For example, following the Brumark decision of 2000 insolvency practitioners and banks still await a definitive interpretation from the courts of the terms �fixed' and �floating' charges. When the courts revise the law's understanding of what particular terms mean, what will be the consequences for the equivalent terms and provisions contained in the re-stated law? We suggest that it would not be safe to rely on the courts always to infer that a particular term used in re-stated law was to be taken to mean exactly the same thing as a term in the original law, especially when the interpretation of the original term has evolved. We accept that, under the proposed new powers, steps could be taken to try to resolve problems of this kind. But the basic problem, as we see it, is that the proposal would create the prospect of uncertainty as to the true consistency between the original law and the re-stated law: such uncertainty would not be welcome.
If the Department is concerned solely to help SMEs by offering them additional guidance on how to interpret the law, it could consider preparing a new generation of guidance notes or even compliance standards, and making them available to small companies via Companies House.
We would point out in this context also that the CLR previously considered, and decided against, a suggestion to introduce effectively two Companies Acts: one for small companies and another for all others. The CLR concluded that it would not be desirable to have two separate statutes partly because company law needed to provide scope for small companies to grow and thereby become subject to the rules applicable to larger companies.
Q4 Do you have any suggestions for areas of the current law which would most benefit from re-statement in clearer form?
Two areas of the Companies Act which are particularly complex and would certainly benefit from simplification are the rules on distributions and loans to directors.
Q5 Do you agree that the consultation and scrutiny processes should be more extensive than those that are usual for secondary legislation?
If the proposed powers are taken forward, then the consultation and scrutiny processes should be more extensive to reflect their greater scope and effect. With regard to the proposed approval procedures, we suggest that the Government should make the initial consultation fully open, and not restrict it to selected invitees.
Q6 Do you agree that there should be broad criteria setting out the purposes for which the new powers can be used?
There should certainly be qualifying criteria attached to the use of the proposed new powers. The criteria should be specific and restrictive rather than the very general criteria set out in the paper. For example, the criterion �will contribute to prosperity' could be claimed for any reform proposal.
Q7 Do you agree that the powers should be exercisable in relation to core company law but not in relation to other legislation that might impose obligations on companies?
The proposed powers could only be used in respect of companies legislation. We do not envisage technical problems with respect to LLPs since specified passages of company law apply directly to such firms.
Q8 Do you agree that, where the Law Commissions have made recommendations following the statutory referral of a matter to them, the reform power should be capable of being used to implement those recommendations?
There should always be consultation before the Department proposes to implement any recommendations made by the Law Commissions. This is because any such recommendations would be bringing in new provisions, not amending current ones.
As a final point, we would argue that one of the issues which businesses and practitioners find particularly difficult to cope with at the moment is that so many piecemeal changes have been made to the primary companies legislation over the past 25 years that it now lacks coherence. The CLR has offered the opportunity for new legislation to be drafted afresh which is more accessible to small companies and which is sufficiently flexible to adapt to changing business conditions. We believe that to build into the new regime a streamlined power for the legislation to be changed and re-interpreted would risk propagating the problem of incoherence.