The reformation

The business benefit of setting up as a limited company is generally understood to be that business debts belong to the company rather than the owner. The small private company is by far the most common type of limited company. Striking the right balance between encouraging business activity and providing reasonable safeguards is something in which governments have an obvious interest.

It is this issue that is at the heart of the government's Company Law Reform Bill, which was presented to Parliament in November 2005. The Bill proposes several changes to current company law rules, which are of significance to small private companies.

Annual accounts

All limited companies must continue to prepare their annual accounts in accordance with the statutory disclosure rules and the overriding ‘true and fair' requirement. But the time allowed for private companies to file their accounts with Companies House is reducing from ten to seven months.

And while companies will still be able to file so-called ‘abbreviated accounts' with Companies House, in future these will have to include details of turnover.

Bear in mind that it is the legal responsibility of a company director to ensure that its annual accounts comply with the legal disclosure rules and the requirement to give a true and fair view. If they approve a set of accounts they know do not comply or are ‘reckless' as to whether they comply, they will commit a criminal offence.

For this reason, irrelevant of whether a company's accounts are audited independently, for the majority of small companies it will remain essential that they are prepared by a qualified external accountant.

The company secretary

Currently all limited companies, whether listed or small husband and wife concerns, must appoint a company secretary. The Bill proposes that in future this should not be required of private companies.

It must be acknowledged that in the private company environment the post of company secretary is seen as something of a formality. Traditionally, it has been occupied by the spouse of the business owner. Many companies may therefore welcome this change as being one less bit of red tape.

Even with the streamlining of red tape that the Bill promotes, being in charge of a company still carries important, and in some cases onerous, obligations for directors. These are being strengthened under the Bill. Having a qualified secretary can be extremely useful to directors and shareholders in terms of ensuring that they comply with their responsibilities and do not fall foul of them.

AGM issues

Currently, all companies are required to hold an agm once a year. At this, standard business is to be conducted - placing the annual accounts before members, reviewing progress over the year and appointing auditors for the next year.

When it comes to the legal responsibilities of directors, under the new Bill there will be no distinction between private and public companies

The trouble is, for most private companies, in which owners and managers are often one and the same, this meeting serves no useful purpose. In many cases, of course, the agm never actually happens but is simply recorded as a fictional minute in the company's books.

A recent change in the law already gives private companies the opportunity to opt out of the agm. The new Bill goes further and exempts private companies from any legal requirement to hold an agm.

Making resolutions

The new Bill will allow private companies to pass legally-binding resolutions by means of written resolutions, thus removing the obligation to convene formal general meetings to do so.

Unlike at present, a written resolution will not need the unanimous support of all the company's members. As long as the resolution has the same level of support (either a simple majority or 75% of what would be necessary if it were being proposed at a formal meeting) that will be sufficient to make the decision legally valid.

Directors' duties

When it comes to the legal responsibilities of company directors, under the new Bill there will be no distinction between private and public companies. And not only will the legal responsibilities be the same across the board, they are to be substantially strengthened.

For the first time company legislation will set out the legal responsibilities of all directors. To some extent, this will simply reiterate the legal principles that have been laid down by the courts over the last 150 years. But there are to be important new aspects to directors' duties.

Directors are now to be judged by reference to an ‘objective' standard of skill and care as well as by their actual skills and experience. This means that the law will expect all directors to act in accordance with a minimum standard of skill and care, whatever their backgrounds and involvement with the company.

Directors will in future owe their legal duties to their company, not to any outside interests. They will be required to take into account a number of prescribed factors that are designed to improve the quality of company decision making.

Having spent so long at the drafting stage, the Bill is not expected to be politically contentious. We can expect it to arrive on the statute book by Spring 2006 and come into force shortly thereafter.