HL Deb 07 November 1989 vol 512 cc599-602

24 After Clause 11, insert the following clause—

Remedies for failure to comply with accounting requirements 1985 c.6

The following sections are inserted in Part VII of the Companies Act 1985—

"Revision of defective accounts and reports Voluntary revision of annual accounts or directors' report.

245.—(1) If it appears to the directors of a company that any annual accounts of the company, or any directors' report, did not comply with the requirements of this Act, they may prepare revised accounts or a revised report.

(2) Where copies of the previous accounts or report have been laid before the company in general meeting or delivered to the registrar, the revisions shall be confined to —

  1. (a) the correction of those respects in which the previous accounts or report did not comply with the requirements of this Act, and
  2. (b) the making of any necessary consequential alterations.

(3) The Secretary of State may make provision by regulations as to the application of the provisions of this Act in relation to revised annual accounts or a revised directors' report.

(4) The regulations may, in particular —

  1. (a) make different provision according to whether the previous accounts or report are replaced or are supplemented by a document indicating the corrections to be made;
  2. (b) make provision with respect to the functions of the company's auditors in relation to the revised accounts or report;
  3. (c) require the directors to take such steps as may be specified in the regulations where the previous accounts or report have been —
    1. (i) sent out to members and others under section 238(1),
    2. (ii) laid before the company in general meeting, or
    3. (iii) delivered to the registrar,
    or where a summary financial statement based on the previous accounts or report has been sent to members under section 252;
  4. (d) apply the provisions of this Act (including those creating criminal offences) subject to such additions, exceptions and modifications as are specified in the regulations.

(5) Regulations under this section shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.

Secretary of State's notice in respect of annual accounts.

254A.—(1) Where copies of a company's annual accounts have been sent out under section 238, or a copy of a company's annual accounts has been laid before the company in general meeting or delivered to the registrar, and it appears to the Secretary of State that there is, or may be, a question whether the accounts comply with the requirements of this Act, he may give notice to the directors of the company indicating the respects in which it appears to him that such a question arises, or may arise.

(2) The notice shall specify a period of not less than one month for the directors to give him an explanation of the accounts or prepare revised accounts.

(3) If at the end of the specified period, or such longer period as he may allow, it appears to the Secretary of State that no satisfactory explanation of the accounts has been given and that the accounts have not been revised so as to comply with the requirements of this Act, he may if he thinks fit apply to the court.

(4) The provisions of this section apply equally to revised annunal accounts, in which case the references to revised accounts shall be read as references to further revised accounts.

Application to court in respect of defective accounts.

254B.—(1) An application may be made to the court—

  1. (a) by the Secretary of State, after having complied with section 245A, or
  2. (b) by a person authorised by the Secretary of State for the purposes of this section,
for a declaration or declarator that the annual accounts of a company do not comply with the requirements of this Act and for an order requiring the directors of the company to prepare revised accounts.

(2) Notice of the application, together with a general statement of the matters at issue in the proceedings, shall be given by the applicant to the registrar for registration.

(3) If the court orders the preparation of revised accounts, it may give directions with respect to—

  1. (a) the auditing of the accounts,
  2. (b) the revision of any directors' report or summary financial statement, and
  3. (c) the taking of steps by the directors to bring the making of the order to the notice of persons likely to rely on the previous accounts,
and such other matters as the court thinks fit.

(4) If the court finds that the accounts did not comply with the requirements of this Act it may order that all or part of—

  1. (a) the costs (or in Scotland expenses) of and incidental to the application, and
  2. (b) any reasonable expenses incurred by the company in connection with or in consequence of the preparation of revised accounts,
shall be borne by such of the directors as were party to the approval of the defective accounts.

For this purpose every director of the company at the time the accounts were approved shall be taken to have been a party to their approval unless he shows that he took all reasonable steps to prevent their being approved.

(5) Where the court makes an order under subsection (4) it shall have regard to whether the directors party to the approval of the defective accounts knew or ought to have known that the accounts did not comply with the requirements of this Act, and it may exclude one or more directors from the order or order the payment of different amounts by different directors.

(6) On the conclusion of proceedings on an application under this section, the applicant shall give to the registrar for registration an office copy of the court order or, as the case may be, notice that the application has failed or been withdrawn.

(7) The provisions of this section apply equally to revised annual accounts, in which case the references to revised accounts shall be read as references to further revised accounts.

Other persons authorised to apply to court.

245C.—(1) The Secretary of State may authorise for the purposes of section 245B any person appearing to him —

  1. (a) to have an interest in, and to have satisfactory procedures directed to securing, compliance by companies with the accounting requirements of this Act,
  2. (b) to have satisfactory procedures for receiving and investigating complaints about the annual accounts of companies, and
  3. (c) otherwise to be a fit and proper person to be authorised.

(2) A person may be authorised generally or in respect of particular classes of case, and different persons may be authorised in respect of different classes of case.

(3) The Secretary of State may refuse to authorise a person if he considers that his authorisation is unnecessary having regard to the fact that there are one or more other persons who have been or are likely to be authorised.

(4) Authorisation shall be by order made by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.

(5) Where authorisation is revoked, the revoking order may make such provision as the Secretary of State thinks fit with respect to pending proceedings.

(6) Neither a person authorised under this section, nor any officer, servant or member of the governing body of such a person, shall be liable in damages for anything done or purporting to be done for the purposes of or in connection with —

  1. (a) the taking of steps to discover whether there are grounds for an application to the court,
  2. (b) the determination whether or not to make such an application, or
  3. (c) the publication of its reasons for any such decision,
unless the act or omission is shown to have been in bad faith.".'.

Lord Trefgarne

My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 24.

The amendment gives effect to one of the central recommendations of the Dearing Report on the Making of Accounting Standards —that there should be a new power for the Secretary of State, or a body authorised by him, to apply to the courts for an order requiring the revision of accounts which do not comply with the requirements of the Act. It inserts important new sections into the 1985 Act which result in a stronger framework within which companies must prepare accounts giving a true and fair view. The sections form a logical sequence.

First, in considering the Dearing recommendations, we reached the conclusion that the directors of a company who realised that their accounts were defective should be able to prepare revised statutory accounts without any more ado. That is the purpose of new Section 245.

The second step is more formal but still stops short of an application to the courts. New Section 245A gives the Secretary of State the power to issue a formal notice to the directors of a company where he suspects that accounts prepared by them do not comply with the requirements of the Act. Companies will have to explain why they believe the Secretary of State is wrong; alternatively, they can simply prepare revised accounts using the voluntary procedures and satisfy the Secretary of State in that way.

The new civil procedure itself is the third step and is set out in new Section 245B. The Government strongly agree with the Dearing Committee that that is the appropriate form of reserve power. It should be available to the Secretary of State, and he should also be able to authorise other bodies, as Dearing recommends. The civil procedure enables the court not only to declare that a company's accounts do not comply with the requirements of the Act but to require the directors to prepare revised accounts. Like Dearing, we see the power as one to be used sparingly. Nevertheless, it provides the underpinning of the whole framework and is extremely important on that count.

I referred a moment ago to the proposal that the civil sanction should also be available to a person authorised by the Secretary of State. New Section 245C sets that out: it does not in itself prescribe such persons; it is permissive. I believe that it is the right approach.

These are important changes. I believe that Sir Ronald has already made clear that he envisages that the review panel, when it is set up, should be given the power to apply to the courts to require a large company to revise its accounts where they do not provide a true and fair view.

I hope that with those explanations your Lordships will agree to the proposals.

Moved, That the House do agree with the Commons in the said amendment. —(Lord Trefgarne.)