Think Small First - Essay Example

 Think Small First Promoters of small business started shying away from incorporating their businesses because of difficulties encountered on daily basis in complying with the provisions of earlier Companies Act 1985. It was a set of complicated array of legislation that reached a stage with regular promulgation of amendments where it was almost difficult to know as to what was cooking in our own kitchen. The entire process of running a corporation appeared as if the entire company administration was not running a business but doing clerical jobs with official departments managing company affairs. Smaller companies were not regarding worth consideration whenever any change or amendment was required in company legislation, whereas the fact is that bigger companies emerge only from smaller setups. It was a sort of degradation of corporate system of business administration. The present company legislation has changed the entire scenario and brought in simplified procedures and practices to encourage small entities to incorporate businesses following the revolutionary provisions promulgated under the Companies Act 2006. The provisions of the Companies Act, 2006 will be fully effective from October 2009. The motto is to think small first in order to grow bigger. With this back ground the different provisions of the Companies Act 2006 are examined here under to find out the realities. One of the objectives of the Companies Act 2006 is to ‘think small first.’ This ‘key theme behind the Act is to reflect realities of companies in operation today. Much of the current system is predicted on the basis of large companies, whereas the vast majority of the companies are owner- managed with five or fewer persons involved. Therefore, one of the stated aims of reform is to simplify the creation and operations of private companies, based around a ‘think small first’ approach.’(J Scott Slorach and Jasson G Ellis, page 42)1 In this way reform of regulation of smaller and private companies has taken the central stage with the changes brought in by the Companies Act, 2006. The main changes brought in by the Companies Act,2006 for small companies relate to formation of the company, carrying out routine business like resolutions and meetings, accounts and auditing, and financial assistance and capital maintenance. Let us start with formation of the company under the reformed companies act 2006.The formation of the company has become a simple procedure now as compared to earlier legislation. There is no need for an entrepreneur to find another promoter and a co- subscriber to memorandum of association. Only a single person by subscribing his or her name to the memorandum of association and complying with other requirements will be able to incorporate a company, provided the company is not formed for an unlawful purpose. Other compliances merely include filing of a statement of capital and initial shareholdings or a statement of guarantee (in cases where the company is to be limited by guarantee), as the case may be, along with statement of compliance under section 10 of the companies act 2006. The important simplification is that memorandum of association will not contain the restrictive ‘authorized share capital’ clause. Under the new act ‘information about shares subscribed for by the subscribers to the memorandum, which is currently set out in the memorandum itself, will be provided to the registrar in the statement of capital and initial shareholdings.’(Verlag Goyang Media Ltd., page 7)2 The new statement of compliance has replaced earlier form no. 12. Simplification of registration process provides an indication how seriously and effectively this legislation has perceived that simplicity is the way to principle of ‘thinks small company first.’ It may be noted that memorandum of association is now only a formal document to be filed at the time of registration. The main constitutional document is articles of association and that is not necessarily required be filed at the time of registration of the company. Procedure to change name of the company will now be the simplest. Section 77 of the 2006 companies act permits a company to change its name either by passing a special resolution or in other way as provided in its articles of association. That means the company can formulate its own procedure to change the name. For changing name as per its articles of association the company has to give a notice of change to the registrar of companies. In this ‘think small first’ approach the framings of rules and regulation in shape of articles of association for private companies have received a great impetus. Table A of the 1985 act that contained model ‘articles’ for companies limited by shares was a document with little practical approach. Private companies used to adopt Table A model articles as default articles more out of necessity and urgency, and then kept on amending as per their practical requirements. Companies Act 2006 has now provided a simplified and more practical set of model articles for private and public companies limited by shares. Even a separate set of model articles have been provided for the companies limited by guarantee. Under 1985 act the companies were required to set out the objects in the memorandum or were supposed to register the objects of the company separately. ‘Under the new regime a company has unlimited objects unless the company choose to restrict its objects by setting out its capacity in the articles of association. If a company did restrict its objects, these objects would appear in the articles of association.’(Lorraine Talbot, page 78)3 Of course the company cannot pursue illegal objects as no company can be incorporated for illegal purposes as per section 7(2) of 2006 act. There will now be no need for a private company to appoint a company secretary. But when a private company appoints a company secretary then the secretary will have the same authority as that of a limited company. This will certainly reduce the operational costs of private companies. However ‘if a private company does not have a company secretary, the directors must ensures that someone carries out the statutory task that would previously have been performed by the company secretary.’(Lfp, page 437)4 In fact simplifications under the new act have made the secretary’s work almost negligible in small private companies. That is the reason that it has been made optional for companies to appoint secretary. It is necessary to review the article of association carefully by existing private companies before taking a steps for removal of its already appointed secretary. Existing private companies can take advantage of this privilege granted under the 2006 companies act only when this is not barred by articles of association; otherwise such companies need to amend the restrictive clauses of the articles of association. Routine business decision making for private limited companies has been greatly simplified under the 2006 act. There will nowbe no need of holding annual general meeting. However, members holding 10% or more of voting powers (5% if more than 12 months have elapsed since the last AGM) can seek the company to hold annual general meeting. Still there are certain businesses that can only be performed in an annual general meeting like removal of a director before expiration of his period of office; or removal of auditor before expiration of his term of office as provided under section 288 (2) (a) and (b). In further simplification of regular business now unanimous consent of members will not be required for written resolution to be passed as those can be passed with simple or 75% majority consent as required under the respective articles of association. A written resolution can also be passed when consented through e-mail, fax, telex or other electronic media by members holding voting powers of specified percentage in the articles of association. The concepts of special resolution extraordinary resolutions or ordinary resolutions are not available in the Companies Act 2006. Further holding of shareholders meetings will now be possible on short notice of 14 days unless restricted by the articles of association. Under that situation 90% of the members can agree to hold shareholders meeting at short notices. Earlier this percentage was 95% percent. As small companies are not required to hold AGM, they need not seek the approval of general body for the annual accounts of the company. Henceforth private companies will be required to send annual accounts or summary financial statements to shareholders but such accounts or summary of accounts must reach the shareholders before the due date of filing accounts with Registrar of companies. However, the time for filing the accounts with Registrar of companies has been reduced from 10 months to 9 months from the closure of year for private limited companies (ltd.). In respect of public limited companies (plc) this filing period has also been reduced from 7 months to 6 months. In absence of requirement of holding AGM for private companies, the present auditors would deem to have been reappointed as auditors for the coming accounting period. But a private company can still remove an existing auditor and appoint another auditor in place of existing auditor following the specific provisions of the law. In an interesting development a company by passing an ordinary resolution may agree to limit the liabilities of an auditor for a particular accounting period. ‘Shareholders must authorize the principal terms of the agreement, and can also cancel it. The act also contains provisions aimed at increasing auditors’ independence, including naming of individual lead auditor, as well as the audit firm, in audit reports.’(Freshfields Bruckhaus Deringer, page 5)5 The provisions of law state that the agreed limit of liability of the auditor should be ‘fair and reasonable’ to be effective; but what will be ‘fair and reasonable’ has not been made clear. An amendment made on 6 April 2008 is that the audit report will now be signed by ‘senior statutory auditor’ in his own name for and on behalf of the audit firm. The result is that in case of smaller firm not requiring holding AGM the decision now for the appointment of auditors will be more or less a personal, as directors get a chance to appoint auditors of their personal choice. How far such a decision will affect the auditor’s opinion on accounts of smaller companies is a matter that depends on professionalism of auditors. In a greater simplification move ‘small private companies’ as defined under the act need not get their accounts audited. As per the provisions of section 382(3) of the act private companies are treated as smaller companies when they comply with two or more of following requirements: Turnover Not more than £5.6 million Balance Sheet Total Not more than £ 2.8 million Number of employees Not more than 50. These limits have been increased through an amendment made on 6 April 2008 as under: Turnover Not more than £6.5 million Balance Sheet Total Not more than £ 3.26 million Number of employees Not more than 50. As per these changes a small company has to comply with all the three conditions in order to avail exemption from audit. “It is important to state that if the company fails even only one of the conditions it will not be able to be exempted from audit. Furthermore there is no equivalent of two year rule as far as audit exemption is concerned and the relevant conditions need to be fulfilled in the specific year for which the exemption is to be claimed, whilst the fact that the condition has been met or failed in prior years has no relevance.”(ACCA, 01/07/08)6 The onus is keeping financial matter accurate and up to date is on the directors.” Broadly the companies Act 2006 requires directors to ensure that accounting records are kept from day to day, that annual accounts and reports in a specific form are drawn every year, and in the case of larger companies that they be audited by a duly qualified auditor. Copies must be sent to every member, approved and signed by the directors and in the case of public companies presented to the members in general meeting, and finally to be filed with the Registrar of Companies. This is an area of law where size matters. Thus small companies as defined above have lesser obligations in the form and extent of annual accounts they have to prepare and the exemptions from obligations to audit the annual accounts now mean that only the larger companies have to have their accounts audited.”(Andrew Hicks and S H Goo, page 528)7 Another simplification move is with regard to capital maintenance. Sykes Anderson LLP8 has reported in ‘bytestart.co.uk.’ that a Company Law Review (CLR) set up in 1998 submitted its report in July 2001. The report recommended that a number of capital maintenance provisions already in force should not be made applicable to smaller companies as those are irrelevant as majority of small companies are having issued capital of less than £100. Keeping in view the recommendations of CLR, the companies’ act 2006 has made the following relaxations for smaller companies with regard to capital maintenance provisions: Subject to restrictions in the articles of association, a private limited company will now be able to provide financial assistance for purchase of its own shares. In accordance with the provisions of sections 641 and 642 of the 2006 act, a private limited need not take court permission for reduction of its share capital. The private limited company can now make reduction of its share capital on the basis of a solvency statement of its directors by passing a resolution in a general meeting. “While public companies still have to apply to the court to confirm a reduction of capital, in the case of private companies, all that is now required for a reduction of share capital is a special resolution supported by a solvency declaration made by the directors.”(Andrew Hicks and S H Goo, page 309)9 “In broad terms the solvency confirms that the company is a going concern and will be able to pay its debts in the following years” (Jonathan Cooklin, page 1)10. The directors may not be making a wrong solvency statement as Jonathan Cooklin further states that “there are criminal sanctions for making a solvency statement without having a reasonable grounds for the opinion expressed in it.” Directors have been empowered to allot shares that will be subject to pre- emption rights. Shareholders’ approval is not required for allotment of shares. The only condition is that the company will have only one class of shares after such allotment of shares without the permission of shareholders. “When twinned with the fact that the requirement of authorized share capital has been abolished, this means that directors of a private company with one class of shares have greater freedom to allot shares without going back to members than previously.” (Michael Griffith and others, page 484)11 Certainly the Companies Act 2006 now in force is a reflection of the practical approach required as per prevalent business scenario in the corporate sector. Smaller companies far exceed the larger companies. Earlier company laws were enacted with objective of regulating and helping the larger companies. The Companies Act 2006 has brought in changes with revolutionary approach that think small first. Word Count: 2530 References Read More