Question 4 Zone B 2018

Is the registered company a good legal form through which to run a small business? Do any of the
rules of company law need to be changed, to serve better the distinctive needs of smaller businesses?

Introduction

The objective of any corporate law reform is always to strike a balance between two things: the
promotion of enterprise and effectual accountability.

(a) It adopts a “one size fits all” approach catered for the big listed companies.

(b) Thus, smaller companies suffer from over-regulation – bad for promotion of enterprise.

(c) Not cost-effective.

(d) CA 1985 – not user-friendly, not accessible, not readily understandable.

(e) Needless and confusing provisions – too many insertions and amendments that conflict with
each other.

Arguably, effectual accountability is the emphasis, although the question of whether it is satisfactorily
achieved under the CA 1985 is a separate matter. But there is less doubt that the promotion of
enterprise suffers.

CA 2006 – “Think Small First” approach

(i) Different standards of regulation for different types of companies to meet different
requirements.

(ii) CA 2006 basically has 2 regimes: one set of rules catering to the smaller companies and
another set catering to the bigger ones.

(iii) Considering that the vast majority of companies in the UK are small, this is a welcome
change.
Specific Examples

(i) Articles of Association (AA)

Model articles have been provided since 1856. This model articles is called the “Table A” in CA 1985. The
Table A will be the default set of articles if a company (limited by shares) does not register its own AA or
to the extent that the company does not exclude or modify some provisions. Weaknesses include:

CA 1985

(a) User-Unfriendly, poorly laid-out, and unintelligible to the non-specialist.

(b) Too remote for the concerns of smaller companies (because it was drafted with bigger
companies in mind).

(c) Does not take into account relatively recent changes in law, e.g. the introduction of single
member companies.

CA 2006:

(a) Provides a radically simplified model AA which reflects the way they operate.

(b) Comprehensive, clear and concise guidance for small companies who want to use the model
AA.

(c) A separate model for public companies but drafted in a much clearer way

(ii) Share Capital

Capital Maintenance (Provisions against financial assistance) In the CA 1985, financial assistance to
purchase a company’s own shares is prohibited for all companies and then there are exceptions for
private companies. The capital maintenance doctrine is largely irrelevant to private companies and even
though there are exceptions, private companies have to first understand all the rules and then identify
which exception applies to them. In the CA 2006 however, the prohibition applies to public companies
only; there’s no need for private companies to consider exceptions

Capital Reduction

(a) In the CA 1985, the need for confirmation by court applied to both public and private
companies.

(b) This can be too time consuming and expensive for private companies with relatively small
capital – the cost incurred may be more than capital intended to be reduced – a ridiculous
situation.

(c) In the CA 2006, private companies need only pass a special resolution supported by a
solvency statement by the directors.
 (d) The rules for private companies for purchasing their own shares are repealed.

(e) But as a safeguard, it is a criminal offence for a director to make a solvency statement
without reasonable grounds (for expressing the company’s solvency).

(f) This procedure was also proposed for public companies but to meet unavoidable EU
requirements, the procedure would not have made things simpler anyway.

(iii) Corporate Administration

Resolution and Meetings Private companies can now opt to dispense with AGMs if all members agree to
do so:

(a) This is more in line with the realities of small businesses where decisions are made among a
small number of members regularly throughout the financial year – there is no real need for an
AGM to make decisions.

(b) There would also be no need to appoint and auditor or to lay accounts at the AGM.

(c) Private companies also are no longer required to appoint a company secretary. This is
unnecessary in the vast majority of companies; especially those with only one member.

Written Resolutions

(a) Previously to pass a written resolution, 100% unanimity of all members was required. But now under
the CA 06 what is required is only a simple or 75% majority is required for an ordinary and special
resolution respectively.

(b) This makes decision making more efficient and quick and furthermore, there should be no reason
why a written resolution should be passed differently from a meeting resolution.

Notice Periods

Previously:

(a) For ordinary resolution – 14 days’ notice

(b) For special resolution – 21 days’ notice

(c) Rationale: longer time needed to deliberate on issues to be decided at special resolution
meeting.

(d) But in reality, special resolutions are held due to CA requirements only – nothing “special”
about it. Now: CA 06 minimum 14 days’ notice for all company meetings.
Previously:

(a) In order to shorten notice period – 95% majority must agree to shorten it but private
companies can choose to lower it to 90%. Now under the CA 06 90% is the default figure for
private companies.

(iv) E-Filing

(With the Companies House) New forms of e-communication are exploited under the CA 2006 to make
the system for filing with the Companies House more efficient and business friendly. This will also
ensure that the information on its register is timely, updated and more accurate. Furthermore, private
companies do not need a company secretary for this – saving cost.

Has Effectual Accountability been compromised?

No! – While the CA 2006 promotes entrepreneurship and enterprise, it also has other reforms which try
to ensure that companies are still accountable to their shareholder.

(i) Directors’ Duties (DD)

(a) DD is clearer in the CA 2006 – which also means it is easier to enforce.

(b) Clears up a lot of confusion in the CL in this area – directors and shareholders are clear on
what DDs are – easier to follow, hence breaches also easier to prove. (e.g. it is easier to
determine conflicts of interest or how a director can properly disclose his interest in a proposed
transaction.)

(c) Directors are also required to take into account stakeholders’ interest as well instead of just
only the shareholders’.

(ii) Minority Protection

(a)Minority shareholder has the easier option of Statutory Derivative Action instead of the
Common Law Derivative Claim where they stand to lose more than gain; especially if they lose
the case.

(b) S994 – unfair prejudicial conduct. No need to prove that the wrongdoer controls the
company or prove any fraud or negligence.

(iii) Corporate Governance

(a) Combined Code (now incorporated into the UK Corporate Governance Code) places central
emphasis on NEDs as the main “check and balance” to the executive directors.
 (b) It refines the definition of “independence” of NEDs to ensure they act fairly in monitoring
executive performance.

(c) Increases accountability to shareholders.

(d) Although admittedly NEDs are still problematic, it is a step in the right direction.

(e) UK Corporate Governance Code 2010 – emphasis on risk management, excessive pay of
directors/performance related bonus – annual re-election of directors – diversity in the
Boardroom and other provisions.

Conclusion

- The question again is whether the CA 2006 has struck the right balance between effectual
accountability and the promotion of enterprise.
- Basically, the CA 1985 does not cater to smaller companies; all its provisions apply to all
companies which can be difficult for smaller companies. The CA 2006 however, has 2 sets of
provisions: one for bigger companies, and one for smaller ones. This is seen as a positive change.