Small Companies: Small reforms

Katharine Bagshaw looks at the Company Law Review's recommendations for small companies, which are intended to make life simpler and easier for them

The final report of the Company Law Review Steering Group took the form of another lengthy 'green brick'. Its recommendations were extensive and September's edition of Accountancy (pp 132-133) dealt with the key proposals. Many recommendations of particular relevance to small companies were made and this article looks at the detailed implications for small companies, and their accountants and auditors.

One of the main structural reforms proposed involves the creation of a Company Law and Reporting Commission (CLRC) that would oversee the development of company law. The CLRC would be advised by a Private Companies Committee, which would help ensure that the needs of private companies are met. The CLRC, and another of its subsidiaries, the Standards Board, would be required to take account of the advice of the Private Companies Committee, but the Committee would not have rule-making or enforcement powers.

Extensive debate took place on whether the focus should be on small companies, or private companies. Recommendations have been made for private, rather than small, companies partly because of the European dimension, and partly because of the difficulty in defining 'small' and the inevitable inequities that arise for those companies on the borderline. Nevertheless, many recommendations for private companies are principally for the benefit of small companies and distinctions have been made between small and large private companies for a variety of purposes. A number of recommendations in relation to the administration of private companies should eliminate or reduce some of the wholly unproductive formalities that currently burden small companies.

New constitution

It is recommended that a new, single-document model constitution should be available for private companies. This model is designed specifically with private companies in mind and contains no objects clause and no requirement for the retirement of directors by rotation. A draft that is shorter and simpler than the existing model (65 clauses as against 118) is set out in an appendix to the report. It is also recommended that a formal statement by a director or secretary would be required to form a company rather than a statutory declaration. Both of these proposals should reduce the costs, complexity and uncertainty of small company formation. The requirement for directors to make a statement to the effect that they have read the proposed statutory statement of directors' duties should also help raise general awareness of the relevant issues.

A separate form of incorporation specifically for charities, possibly known as a Charitable Incorporated Organisation (CIO) is proposed.

Another area involving difficult provisions for both private and public companies is that of capital maintenance. It is recommended that the complex provisions prohibiting a company from giving any form of financial assistance for the acquisition of its own shares should be abolished for private companies, and that the special procedures by which private companies may redeem or purchase their own shares out of capital should be repealed. These provisions often come into play where a family member wishes to take his or her capital out of the business on retirement. A solvency statement is proposed as an alternative to the current requirement for court procedures for capital reductions for both public and private companies. All of this should help small companies, or at least small company advisers.

Byzantine law

The costs and distress involved in litigation for small companies where shareholders or directors are in dispute can be crippling. It is recommended that the Byzantine law in this area, which has developed over many decades, should be improved, and access to alternative dispute resolution (ADR) should be encouraged.

Other recommendations deal with formalities that are often largely irrelevant to many small companies. They are as follows:

•   private companies should not be required to appoint a company secretary;

•   agms, annual laying of accounts and annual re-appointment of auditors should not be necessary unless companies positively opt for them, or shareholders ask for them in any particular year (effectively entrenching the elective regime);

•   written resolutions should require the same level of consent as ordinary or special resolutions to be effective, rather than unanimity;

•   when shareholders unanimously agree a decision, they should be able to do so informally without the need to observe the provisions of the Companies Act or the company's constitution;

•   where a single address is used as the registered office for more than, say, 10 companies, a sign stating that the building is the registered office of a number of limited companies should suffice in place of the current requirement to list all of the companies registered there.

The recommendations relating to audit and accounts for private companies have been widely publicised. These include;

•   a seven-month filing limit (as against the current 10-month limit);

•   thresholds for companies permitted to use the small company accounting regime should be increased to the maximum possible under EU law;

•   the format and contents of small company accounts should be simplified, but abbreviated accounts for both small and medium-sized companies should be abolished.


The Steering Group did not come to a firm conclusion on the independent professional review (IPR), partly because the Auditing Practices Board's research on the subject was not complete at the time of publication. The report does, however, recommend that the audit threshold should be raised once a decision on the IPR is reached and that the effectiveness of the IPR, if it is introduced, should be reviewed after five years.

The report recommends that existing audit regulation structures should be used for the regulation of those carrying out IPRs, if they are introduced. The suggestion appears to be that a lighter version of audit regulation would be used, and that practitioners could register as IPR practitioners only, without also having to be registered auditors.

Katharine Bagshaw is a technical manager at the Audit and Assurance Faculty of the ICAEW. The views expressed are her own.

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