REVIEW OF CORPORATE REGULATION AND GOVERNANCE
Draft report prepared by the Company Legislation and Regulatory Framework Committee (CLRFC).
Comments from the Association of Chartered Certified Accountants
July 2002
ACCA considers that the Committee has produced an excellent template for the future of company law in Singapore. In committing itself to a modernising agenda the Committee has clearly been receptive to parallel developments taking place internationally. We consider that the likely end result of this project will be to confirm Singapore's position as a well-regulated but business-friendly environment.
ACCA welcomes in particular the proposals to streamline companies legislation so as to reduce unnecessary administration and regulation. This being said, the inevitable corollary of this trend will be to increase significantly the duties and potential liabilities of company directors. We predict that the Government, regulators, educational authorities and professional bodies will need to devote significant efforts to ensuring that those who act as directors in the years to come are conversant with their responsibilities and competent to exercise them.
Our comments on Chapters 1 to 4 of the Committee's report are attached below.
Chapter 1: Business Vehicles and Small Business
1.1
ACCA supports the proposal to introduce the Limited Liability Partnership (LLP) in Singapore. It seems probable that the LLP will, in the coming years, increase in popularity as a vehicle for both professional and commercial businesses world-wide. Singapore should not ignore this international trend. We have reservations, though, about the proposal to adopt the 'Delaware' approach with respect to the LLP. The LLP is, after all, a limited liability entity, and as such commercial risk is reduced for its owners and passed on to its creditors. In view of this, we believe that the LLP should, as a matter of principle, be required to publish information on its affairs and its financial performance. In fact, we believe that the LLP should be subject to the same, or similar, reporting obligations as the law imposes on limited companies. If this approach were adopted, then exemptions which were available to limited companies on the basis of their size or ownership could be made available to LLPs on the same grounds.
1.4
We support the proposal to introduce a new form of corporate structure for charitable organisations. The limited company format, even the guarantee company format, was devised with commercial organisations primarily in mind. It would be sensible to introduce free-standing legislation for charities, devised in the context of the specific circumstances of charities.
1.5
We believe that the exempt private company concept, in which exemption from standard regulatory requirements is based on ownership rather than accounting size, works well and should be retained. If any revision were to be made to this approach to the definition of 'small companies', we believe the Government should consider reducing the number of shareholders that are taken into account: twenty seems rather a high figure for a 'small' company.
1.6
We understand the motive to streamline the compliance regime. In our view, however, deletion of the current restrictions in s18 on private companies raising funds direct from the public must call into question whether companies which do this should remain entitled to the exemptions available to private companies. We consider that companies which raise funds from the public should owe additional disclosure responsibilities.
1.7
We agree with the proposal to allow the RCB to direct a change of corporate name within 12 months.
1.8
The proposed consolidated registration form would be very helpful.
1.9 & 1.10
The proposals regarding the giving of consent to act by directors and secretaries appear reasonable.
1.11
We support the proposed abolition of ultra vires, subject to the retention of powers for shareholders to restrain and seek redress for acts of directors which would contravene the company's constitutional provisions. We have no difficulty with the proposal to consolidate the memorandum and articles into one constitutional document.
1.12
We support the proposal to allow companies to be formed with one shareholder and one director.
1.13
We accept the argument that speed of modern communications draws into question the need for there to be 21 days notice of a special resolution (as opposed to the 14 days notice which is required for an ordinary resolution). We feel, however, that there should remain a meaningful distinction between the ordinary and the special resolution. The latter is used in relation to issues which have a more substantial character than those which are routinely dealt with by the ordinary resolution. We feel it is reasonable to provide for the possibility that, in anticipation of a special resolution, shareholders may need more time to consult with each other beforehand and to prepare for their participation at the meeting than they would with regard to an ordinary resolution. In our view, 21 days should remain the notice period for special resolutions.
1.14
We support the proposals regarding written resolutions.
1.15
In our view, allotment of shares should be regarded as falling within directors' powers of management. We would favour allowing them to make allotments, without the need for shareholders' separate approval, as long as they exercised this power for a proper purpose and shareholders had the right to dispute whether they were acting in a way which was consistent with this.
1.16
We believe that the company secretary has an important role to play in ensuring high standards of administration, compliance and governance. We therefore welcome the proposal to retain the requirement for all companies to appoint a company secretary. We are however concerned that the proposal to remove the requirement for secretaries to be professionally qualified, taken together with other proposals to reduce minimum membership to one and to exempt certain companies from the requirement to have their accounts audited, may have an adverse impact on standards of company management.
In very many small companies, directors rely on the input of a professionally qualified secretary and/or the company's auditor to help them ensure that they comply with their responsibilities and to continue to administer their companies' affairs in the right way.
The cumulative result of the CLRFC's proposals would be that there could in the near future be many companies in Singapore which were run by one or two directors, with no restraining or advisory influence being exerted by either a professionally-qualified secretary or auditor. We do not suggest that there is likely to be a material increase in deliberate misdemeanours on the part of shareholders and directors. We fear however that the high levels of corporate conduct for which Singapore is renowned could suffer as the result of the absence of on-going professional support. We recommend that, as an alternative to complete abolition of the requirement for private company secretaries to be qualified, the CLRFC rules that, where a company does not appoint an auditor, it should appoint a professionally-qualified secretary; where it does have an auditor, it would be exempted from the need to have a qualified secretary. In this way, small companies would continue to have constant access to expert support.
1.17
We support the proposals regarding accounting records.
1.18
We support the introduction of a statutory Operating and Financial Review (OFR), which would, as we understand it, amount to a presentation on the part of a company's directors of the principal factors which have influenced the company's financial results and of the company's polices and future plans. We look forward to its development. We consider in particular that the specific elements of the UK proposal with regard to social and environmental impacts should be incorporated also in Singapore.
With respect to the proposed OFR for private companies, care should be taken in the preparation of a 'modified' format. The OFR should always be a document which provides information to informed readers about the significant factors which have contributed to the company's performance and which are likely to contribute to the company's future performance. The character of the OFR is such that it should not be thought that a short summary version would necessarily suffice in the case of a private company. We would certainly favour the application of the standard OFR to large private companies.
1.19
We do not object to the proposal to exempt dormant companies from the requirement to have their accounts audited. ACCA believes, though, that the interests of stakeholders in active companies are best served by the company undergoing an annual audit. While the express object of the audit is to report to the company's shareholders on whether the accounts have been properly prepared, it should not be forgotten that other stakeholders have a material interest in this matter. It should not, in our view, be assumed that simply because the audit report is addressed to shareholders that they have a monopoly of interest in the truth and fairness of the company's accounts.
Our preference would therefore be to retain the present requirement for all active companies to have their accounts audited on a statutory basis. Even if the accounts and the audit report are not filed on the public record, the fact that the accounts have been audited is, in our view, a significant comfort to all those who deal or may deal with the company.
Having made our position clear on the principle of the matter, we welcome the CLRFC's concern to provide certain safeguards. The proposal to allow the Registrar of Companies and Businesses to demand that audited accounts be prepared and submitted to it is a good one, although since exempt private companies are not generally required to file accounts we wonder how this would work in practice. We also support the proposal to require companies to have an audit if a set minority of shareholders ask for this to be done. We would go further than the CLRFC and provide that an audit should be carried out if any single shareholder demands it.
1.20
We would prefer to retain the existing requirement for an Annual Return to be filed by exempt private companies. This contains information which is useful to third parties. Moreover, since the current requirement imposes a negligible compliance burden on companies, we see no good de-regulatory reason for its abolition.
1.21
We support the idea of moving towards an electronic filing system for statutory documentation. Whether this can safely replace existing requirements for companies to keep their own registers will depend, to a large extent, on whether it was considered that the information needs of interested parties would be adversely affected by the move.
1.22
We agree that the existing time-frames for reinstatement applications should be retained.
Chapter 2: Capital Raising, Capital Maintenance and Company Charges
2.16
We support the recommendation to abolish the concepts of par value and authorised share capital. We see no reason why companies should be required either to issue shares at a fixed value, which may be substantially below their current market value, or to be constrained artificially as to the number of shares it may issue. The proposed changes, in our view, are important steps in the modernisation of company law.
2.17
In our experience, once a capital reduction has been agreed to by a company's shareholders, the involvement of the court is invariably a formality. We do not therefore contest the proposal to dispense with the current statutory requirement for court approval. The revised legislation should however make clear what are to be the consequences for directors of the company should it become insolvent within the period covered by their statutory declaration.
2.18
Instead of the current UK rule, whereby distributions are allowable only if the company has reported 'net realisable profits', calculated in accordance with generally accepted accounting principles, we would favour the adoption of the solvency test which applies in New Zealand.
The UK test tends to be technical and cumbersome. It can lead to particular difficulties in the case of group structures. Before a parent company can make a decision on how much, if anything, it can distribute to its members by way of dividend, it may have to ascertain whether some or all of its subsidiaries are able to make distributions to it. The parent's decision may therefore only be taken after individual calculations are undertaken by each company in the group. We believe it would be more straightforward and more in keeping with the modernisation agenda if the distribution decision were made by reference to a simple test of solvency. We envisage that the directors would make a declaration of solvency before deciding on the level of distribution they would make. The law would make clear that, should the company be insolvent, either at the date of the decision or as the result of the distribution, then the directors would be personally liable to repay the amounts concerned to the company.
2.19
Provided that stakeholders interests' are safeguarded, we do not believe that blanket restrictions on companies providing financial assistance are justified. We consider that the safeguards proposed, which appear to be based on current New Zealand legislation, are reasonable.
2.20
As stated in our response to 2.18, we believe that the Government should adopt a solvency test, rather than a net realised profits test, to govern distributable profits.
2.21
We support the proposal to introduce so-called treasury shares, as long as all associated membership rights are suspended for as long as the shares concerned are held in treasury.
Chapter 3: Corporate Governance
3.1
We would agree that the definition of 'director' needs to be consistent throughout companies legislation.
3.2
The proposed 'migration' of s210B would be acceptable provided that it was considered that there was no need for any statutory underpinning of the concept of the audit committee. ACCA tends to the view that the audit committee has become such an essential organ of corporate governance that, unless total compliance can be guaranteed via best practice guidance, the law should intervene and make express provision for the establishment of an audit committee.
3.3
We strongly support the proposals to make available to directors and prospective directors more training on directors' functions and responsibilities, and to put in place procedures for issuing codes of best practice.
3.4
Our preference would be to adopt the UK recommendation on this matter, and replace the statutory age limit with a requirement for companies to disclose details of candidates' ages before board elections take place. This would provide shareholders in a company with all the relevant information they needed to appoint whomever they wished to the board.
3.5
We agree with the proposal to file with the RCB a copy of any written permission given for an undischarged bankrupt to act as a company director.
3.6
We believe that the provisional UK statement of directors' responsibilities is an excellent presentation of current common law principles. We support the proposed adoption of a statement along these lines in Singapore: having a definitive and accessible statement of directors' duties set out in statute law will, we feel, help the authorities to set about improving standards of directors' conduct. It should be noted, however, that in important respects the UK statement introduces changes to the current law on directors' responsibilities.
3.7
We do not oppose the principle of exempting directors from liability where they have acted reasonably. We would however suggest that any new provision along the lines proposed be consistent with the provisions of paragraphs 3 and 4 of the draft statement of directors' responsibilities.
3.8
We support the proposal to reproduce the statement of responsibilities, in summary form, on directors' consent to act forms.
3.11
We support the proposal to restrict housing loans on the suggested basis.
3.12
As stated in our response to 3.7 above, a new provision along the lines proposed needs to be consistent with the final form of the statement of directors' responsibilities. As it stands, there seems to be a possibility that the New Zealand provision would conflict with paragraphs 3, 4 and 5 of the draft statement. There is also the possibility that the New Zealand wording would make the 'nominator' a shadow director of the company: presumably, this outcome would not be considered desirable.
3.13
We support the adoption of the provisions of s727 of the UK Companies Act. In the light of this recommendation, though, we query whether there is also a need for the new provision called for in recommendation 3.7.
3.14
We support the review of criminal sanctions for breach of directors' duties. Given that directors' duties are owed primarily to their company, it is logical that the focus of the law should, to a great extent, be on affording company members the right and opportunity to take remedial action against errant directors. The law should however retain criminal sanctions in respect of non-compliance with provisions of the law which affect third parties as much as members. Such provisions would include failure to publish statutory information and fraud.
3.15
We support the proposal to introduce a statutory statement on the distribution of company powers as between the board and the general meeting.
3.17
Provided that any single member can at any time subsequently demand that an AGM be held in a particular year, we have no objection to private companies being entitled to elect to dispense with the holding of an AGM.
3.18
We agree in principle that the law should be neutral as regards the media through which companies and their shareholders communicate with each other. Individual shareholders should not be disenfranchised however and the law should still entitle them to ask for hard copies of any statutory information to which they are entitled.
Chapter 4: Corporate Insolvency
4.1
We support the introduction of omnibus insolvency legislation in Singapore. This will help to develop an integrated approach to insolvency procedures and creditor rights.
4.2
The Company Voluntary Arrangement (CVA) procedure have thus far not been used by UK companies as much as had been originally expected. It is hoped that the recent reform there, which provides for a statutory moratorium on claims while the company and the insolvency practitioner develop proposals for saving the company, will address this issue. The proposed Singapore legislation should also be careful to address in particular two technical issues which have proved problematic in the UK, namely i) the circumstances in which the CVA is judged to have failed, and what the CVA supervisor is supposed to do on failure; and ii) the status of those funds which have been collected by the CVA supervisor when the company is subsequently put into liquidation.
4.3
We welcome the proposal to develop procedures for licensing insolvency practitioners. Most observers in the UK consider that standards of insolvency administration there have risen significantly since the UK's licensing system was introduced in 1986. It should be noted, however, that the improvements made in the UK have been made possible by the establishment of a well-developed and resourced system of regulation, which involves a special insolvency examination, procedures for the regular monitoring of the standard of work carried out by licensed practitioners, procedures for dealing with complaints about the conduct of licensed practitioners, and procedures for issuing professional guidance to practitioners. It is probably fair to say that the nature of insolvency work is such that it is always likely to cause those who have lost money as the result of insolvencies to blame the insolvency practitioner for not recovering the funds that they have lost. Public confidence in any system of insolvency regulation will therefore depend, to a great extent, on aggrieved parties being able to have their grievances examined fully and fairly and on there being procedures available to take disciplinary or regulatory action against practitioners who are found to be in default.