Legislative Consent Memorandum
Company Law Reform Bill
Draft Legislative Consent Motion
The draft motion, which will be lodged by the Deputy First Minister and Minister for Enterprise and Lifelong Learning, is:
"That the Parliament agrees that the relevant provisions of the Company Law Reform Bill, introduced in the House of Lords on 1st November 2005, which will legislate in devolved areas in respect of sole traders, accounting standards and audit for charitable companies; and which will alter the executive competence of the Scottish Ministers to allow them to issue guidance to regulatory enforcers and to specify companies to be audited by the Auditor General, should be considered by the UK Parliament."
Background
1. This memorandum has been lodged by Nicol Stephen, Deputy First Minister and Minister for Enterprise and Lifelong Learning, under Rule 9B.3.1(a) of the Parliament's standing orders. The Company Law Reform Bill was introduced at Westminster on 1 November 2005. It is predominantly concerned with matters outwith the legislative competence of the Scottish Parliament. The Bill can be found at:
http://www.publications.parliament.uk/pa/ld200506/ldbills/034/2006034.htm
2. The Legislative Consent Motion supports the Partnership Agreement and in particular the Scottish Executive's commitment to working with the UK Government to maximise the conditions for economic growth in Scotland.
3. The Bill follows a wholescale review of company law. It seeks to ensure that British business operates within a legal and regulatory framework that promotes enterprise, growth, investment and employment. In order to deliver this, the Bill has four key objectives:
- To enhance shareholder engagement and a long-term investment culture
- To ensure better regulation and a "Think Small First" approach
- To make it easier to set up and run a company
- To provide flexibility for the future.
4. Over time company law can become outdated and there is a real risk that the legal framework can become divorced from the needs of business - in particular the needs of smaller private businesses. The legal framework can become an obstacle to ways that companies want and need to operate in an evolving business environment. For example, entrepreneurship could be stifled as start-up companies find themselves weighed down by regulation and denied access to capital. In an increasingly globalised economy where companies have more freedom to choose their place of incorporation the UK Government wishes to ensure that the UK does not lose out as a location for business. The reform programme is intended to address the separation of business need and legal framework.
5. The purpose of this memorandum is to outline the terms of the five provisions in the Bill that are subject to the consent of the Scottish Parliament, by virtue of the Sewel Convention, because they apply to Scotland and are for devolved purposes, or alter the executive competence of the Scottish Ministers.
The relevant provisions are as follows:
- Provision on sole traders
- Conferment of a power on the Lord Advocate
- Applicable accounting framework (prohibition for charitable companies)
- Audit (for charitable companies)
- Scottish public sector companies: audit by the Auditor General for Scotland
Consultation
6. In March 1998, the Department of Trade and Industry ( DTI) launched a long-term fundamental review of company law. An independent Steering Group led the Company Law Review ( CLR); its aim was to develop a simple, efficient and cost effective framework for British business in the twenty-first century. The CLR presented its Final Report to the Secretary of State for Trade and Industry on 26 July 2001.
7. The Government published its response to the CLR's major recommendations in the White Paper "Modernising Company Law" (Cm 5553) published on 16 July 2002. The final phase of stakeholder consultation began in March 2005 with the publication of the White Paper "Company Law Reform."
8. Both White Papers, and some other formal consultation documents, have included Regulatory Impact Assessments. In addition, DTI sent questionnaires on the most significant proposals to a sample of public and private companies, both large and small. Focus groups, and other forms of informal consultation, were also held with representatives of small companies. There was further consultation on likely costs and benefits of the proposals.
9. The five provisions in the Bill are minor and technical in nature. While they have not generally been subject to consultation outwith the exercises mentioned above, both the Lord Advocate and Audit Scotland have been consulted on the provisions relating to them and have expressed support for them. There has also been a public consultation on the accounting regulations for charities which referred to the ability of Scottish charitable companies under a certain income threshold to opt to have an accountants report instead of an audit.
Financial Implications
10. DTI estimates, based wherever possible on input from stakeholders, indicate that the total direct benefits of the company law reform measures in the UK could be of the region of £160 million to £340 million per year. In addition to these direct benefits, company law reform has the potential to improve performance across the economy as a whole.
11. Against these savings there are a few areas where the Bill will introduce new or stricter regulatory requirements. These are almost exclusively confined to public/quoted companies. These costs are estimated to amount in total to between £2 million and £11 million per year throughout the UK.
12. The five proposed provisions in the Bill are expected to have neutral or marginal cost implications in Scotland.
Provisions in the Bill for which Consent is Sought
13. The following paragraphs describe the specific provisions for which consent of the Scottish Parliament is sought and provide background on their application in Scotland.
Provisions on sole traders
- Clause 794 Name containing inappropriate indication of company type or legal form
- Clause 795 Name giving misleading indication of activities
- Clause 796 Savings for existing lawful business names
14. Policy Intent
To extend to Scotland a new provision to regulate the trade names of sole traders. The objective is to protect the consumer from a company trading under a misleading name.
15. Background
At present, the Secretary of State for Trade and Industry may direct a company to change its registered name if it gives so misleading an indication of the nature of its activities as to be likely to cause harm to the public. In practice, this power is used 5 - 10 times a year. Most of the cases occur where the name misleadingly implies some sort of official approval or connection, for example, a name that suggested the company "certified" accountants when the only certificate was, in practice, no more than a receipt.
16. But there is no control relating to trading names which are misleading, even though the likelihood of harm to the public comes from the name being used in trading rather than its appearance on the register of company names. The Bill therefore includes a new offence of trading under a name that gives so misleading an indication of the trader's activities as to be likely to cause harm to the public. This proposal would apply to any person carrying out business in the UK except for individuals if they trade either alone or in partnership under their surnames augmented only by their forenames and/or initials.
17. The regulation of sole traders is devolved. If the Bill did not extend to sole traders operating in Scotland, then the consequence would be that - in the absence of equivalent provision being made in a Scottish Bill - Scottish consumers would not be as well protected against sole traders trading under misleading names as consumers in England and Wales.
18. Advantages of utilising this Bill
This is a technical matter limited to extending a new provision on sole traders to Scotland. It is the simplest way of ensuring that Scottish consumers are protected against sole traders using misleading trading names.
Conferment of a power on the Lord Advocate
Clause 496 Guidance for regulatory authorities: Scotland
19. Policy intent
To confer a new power on the Lord Advocate enabling the Lord Advocate to issue guidance to regulatory enforcers on a reserved matter.
20. Background
The Bill will introduce a new offence of deliberately making a false audit report. This would be reserved. It is, however, proposed that guidance should be issued to regulatory enforcers about how they are to exercise their functions in a case which constitutes both an offence and grounds for non-criminal enforcement. This proposal is modelled on section 130 of the Financial Services and Markets Act 2000. It requires the consent of the Scottish Parliament because it confers a power in a reserved area on a Scottish Minister since the guidance for Scotland would be issued by the Lord Advocate.
21. Advantages of utilising this Bill
It is sensible for the power to issue guidance to be associated with the provision creating the offence. Clearly, it would be a decision for the Lord Advocate as to whether such guidance should be issued.
Applicable accounting framework (prohibition for charitable companies)
- Clauses 368 Individual accounts: applicable accounting framework
- Clause 376 Group accounts: applicable accounting framework
22. Policy Intent
To extend to Scotland the prohibition on charitable companies producing individual or group accounts in accordance with International Accounting Standards.
23. Background
Currently the Companies Act 1985 provides that a company may prepare Companies Act individual or group accounts or may opt instead to produce accounts which comply with international accounting standards ( IAS). English and Welsh charitable companies are however barred by the Companies Act 1985 (International Accounting Standards and other Accounting Amendments) Regulations 2004, from producing IAS accounts because they are not deemed to be a suitable form for them because they are designed for large companies and are therefore not appropriate for charities that are generally much smaller than their commercial counterparts. The relevant provision in this Order does not, however, apply to Scottish charitable companies. The Company Law Reform Bill will restate the provisions on IAS accounts, and it is proposed that it should extend the prohibition to Scottish charitable companies.
24. Advantages of using this Bill
It is essential that the prohibition preventing charitable companies producing IAS accounts is extended to Scotland as the form is not suitable for charities and could conflict with the provisions in Charity Law. It is particularly important that the legislation that charities must follow is clear because many charities are run by volunteers who do not necessarily have a legal or accounting background. Using this Bill is the clearest and most straightforward way to set out the Company law requirements in relation to IAS individual and group accounts for Scottish charitable companies.
Audit (for charitable companies)
- Clause 454 Small companies: conditions for exemption from audit
- Clause 455 Companies excluded from small companies' exemption
- Clause 456 Availability of small companies exemption in case of group company
- Clause 459 Small charities: accountant's report in lieu of audit
- Clause 460 Companies excluded from report exemption
- Clause 461 Availability of report exemption in case of group company
- Clause 462 The accountant's report
25. Policy Intent
To ensure the application in Scotland of the simplified provisions exempting small charitable companies from having an audit and allowing them to have an accountants report instead of an audit.
26. Background
Under the Companies Act 1985 charitable companies with a gross income of under £90,000 a year are exempt from having an audit. The Act also allows charitable companies with an income of between £90,000 and £250,000 to have an accountants report instead of an audit. The Company Law Reform Bill intends to make the provisions relating to audit clearer for small companies and charities to understand and will do so by restating the provisions in a simplified and clearer form. This will not change the legal effect of the provisions but will merely make it easier to understand.
Clause 391 Contents of directors' report: statement as to disclosure to auditors
27. Policy Intent
To extend to Scotland the exemption for charitable companies taking advantage of the audit exemption from the requirement for the directors of a company to make a statement in the director's report about the disclosure of information to auditors.
28. Background
The provision requiring a statement about the disclosure of information to auditors was inserted into the Companies Act 1985 by the Companies (Audit, Investigations and Community Enterprise) Act 2004. It provides an exemption for small companies exempted from having an audit but does not give charitable companies which do not have to have an audit the same exemption. It is now felt that the 2004 Act should have extended the exemption to charitable companies and so in addition to restating the current provisions the Bill will extend the exemption to charitable companies.
29. Advantages of using this Bill
The provisions will ensure that charitable companies in Scotland are not disadvantaged compared to their counterparts in England and Wales. If the provisions in the Bill do not include Scotland the current provisions will continue to apply. These are extremely unclear. The nature of charities means they are often run by volunteers and so it is important that their responsibilities are clearly laid out. Using this Bill will provide the most straightforward way of setting out the Company Law requirements for Scottish charitable companies.
Scottish public sector companies: audit by the Auditor General for Scotland
Clause 469 Scottish public sector companies: audit by the Auditor General for Scotland
30. Policy Intent
It is proposed that a power should be conferred on the Scottish Ministers to allow them to specify, by order in the Scottish Parliament, relevant companies that would be required to have their accounts audited by the Auditor General for Scotland ( AGS).
31. Background
The requirement for the accounts of Scottish statutory public bodies to be audited by the AGS is included in the founding legislation of the bodies concerned, amended where necessary by the Public Finance and Accountability (Scotland) Act 2000 (the PFA Act). The PFA Act also sets out the accountability arrangements and audit requirements in respect of bodies where accounts are required by any enactment or prerogative instrument to be audited by the AGS. However, the arrangements for the audit of accounts in relation to companies, including Scottish public bodies or their subsidiaries established as companies, is a reserved matter by virtue of section C1 of Part II of Schedule 5 to the Scotland Act 1998. To date the requirements of the relevant UK legislation (the Companies Acts) has not allowed for the AGS - or the Auditors General for the other parts of the UK - to audit the accounts of companies.
32. Provisions elsewhere in the Company Law Reform Bill would allow for the statutory audits (i.e. the audit of accounts) of companies now to be undertaken, where considered appropriate, by the Auditors General. Provisions also allow for non-profit making companies to be exempted from the audit requirements in the Companies Acts provided that any such companies are specified by order as being subject to public sector audit. Specifying companies that would be required to have their accounts audited by the AGS would have the effect of bringing such companies within the scope of the PFA Act. It was considered therefore, in consultation with the Department for Trade and Industry and the Treasury that it would be appropriate for such specification to be undertaken, as necessary, by the Scottish Ministers and approved by the Scottish Parliament.
33. Advantages of utilising this Bill The inclusion of the order-making power in the Bill would close a gap in the arrangements for public sector audit in Scotland and give powers to the Scottish Ministers and Scottish Parliament in this reserved area.
Scottish Executive
15 December 2005