Emile Woolf: Law reform: it's in need of reform

It's not surprising that the Company Law Reform Bill is way down the government's list of urgent issues, finds Emile Woolf.

Emile Woolf.

Can anyone remember when the perennially delayed company law reform proposals were first discussed? Limiting auditors' liability and all that?

I can't, but it hardly matters.

We have to recognise that there is a limit to what a busy government can achieve in preciously rationed parliamentary time, especially when there are so many pressing EU regulations to enforce and even domestic priorities, such as the Animal Welfare Bill, to cite one high-ranking item in the legislative pipeline.

Most cat owners I know are more than adequately obsessed with their pets' welfare, but the new law is to be accompanied by an extensive code of conduct that includes 18 pages of guidance on how to ensure that Felix has sufficient mental stimulation, privacy and does not succumb to feline obesity.

No, it is not 1 April, and I am not making this up. A Bill that might, legitimately, have addressed the few headline cases of animal cruelty, finishes up amply reflective of the familiar mindset of control without trust. It assumes that an army of 'pet police' are needed - to make sure that we don't traumatise the goldfish by parading nude in sight of its bowl.

The Bill has provoked much outcry in parliament - not, as you might wish, on the grounds that its promoters should be consigned to the funny farm, but because it does not go far enough. Fear not: the government's response is an assurance that the new law can be expanded later to cover invertebrates too. Subject only to availability of parliamentary time.

Where's the business brain?

When you consider that not a single member of the cabinet has any experience of running a business, or has even held a senior executive job in the private sector, it is no wonder that any legislation to facilitate commerce, ease administrative burdens or redress abusive practices comes way down on the list of urgent issues. Of the 23 cabinet ministers in the government, seven were previously lawyers, 11 were academic researchers or lecturers, three were trade union officials, leaving one former management consultant and one erstwhile economist.

Anyway, the low-priority Company Law Reform Bill, now entering its committee stage, has been gestating for so long that many of its proposed reforms are themselves in need of reform, while some of them have been cut adrift from the principles that spawned them back in 1998. Other key reforms have simply been lost in transit. For example, the Bill is silent on earlier proposals that sought to codify the scope of auditors' liability to third parties, thus leaving this important issue subject to the interpretative vagaries of the courts, as per the likes of Caparo and Bannerman.

The Bill includes a messy provision for allowing auditors and client companies to agree a liability cap, when the original proposals more sensibly favoured the proportional liability approach. This would have had the key advantage of causing directors to be far more circumspect before bringing spurious actions in the name of the company, that they themselves had pillaged, against its auditors. But it seems that permitting a simple liability cap served as an easier option.

Did I say simple? According to the Bill, any capping agreement must not be 'effective to limit the auditor's liability to less than such amount as is fair and reasonable in all the circumstances of the case having regard to (a) the auditor's responsibilities under this part, (b) the nature and purpose of the auditor's contractual obligations to the company, and (c) the professional standards expected of him.' (Whatever that may mean.)

The cap won't fit

The whole idea of establishing, by negotiation as necessary, a cap reasonably agreed between client and auditor, is that both parties would then know the potential monetary extent of contractual liability.

But not under this Bill. No one would have a clue whether the agreed cap was effective until expensively and wastefully determined - yes, by the courts.

Emile Woolf is head of Kingston Smith's forensic accounting services, specialising in professional negligence and valuation claims. He is also a director of the Hyperion Insurance Group. The views expressed in this article are those of the author.

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