The accounting records should comprise an orderly, classified collection of information capable of timely retrieval, containing details of the company’s transactions, assets and liabilities. An unorganised collection of vouchers and documents will not suffice. Whatever the physical form of the records, the information should be so organised as to enable a trial balance to be constructed. If, for example, the information is held in electronic form as a subset of a set of wider information, the software should be capable of retrieving the appropriate data.
Accounts and reports regulations
This refers to the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008 (and in relation to small companies, The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008).
Administration is a procedure during which creditors are prevented from taking action to enforce claim against the company (IA1986 Schedule B1). It allows a reorganisation or realisation of assets that would be more advantageous than a liquidation to be put in place. An administrator is appointed to manage a company’s affairs, business and property for the benefit of the creditors. The person appointed must be an insolvency practitioner and has the status of an officer of the court (whether or not appointed by the court).
An insolvency practitioner appointed to act as an administrator in an administration.
- Appointed director
A company is required to have an annual audit, unless an exemption applies (CA2006 s475-484). Small companies (including micro-entities) may be exempt from audit requirements (with some exceptions, eg, public companies and banking or insurance companies).
The auditor’s objectives include obtaining reasonable assurance about whether the annual accounts as a whole give a true and fair view and are therefore free from material misstatement. The auditor must issue an auditor’s report to that effect, and also including an auditor’s statement on directors’ report (and strategic report, if produced) (CA2006 s495-497A).
Auditors have a statutory right of access, at all times, to a company’s books, accounts and vouchers. They can also require officers and employees of the company to provide such information as the auditors think necessary for the performance of their duties (with an exception for information subject to lawyers’ privilege) (CA2006 s499).
The directors are also required to include statements in their directors’ report regarding the completeness of information provided to the company’s auditors. Breach of relevant requirements may be a criminal offence by the directors.
The UK Companies Act 1985. Nearly all of CA1985 has been repealed and superseded by CA2006, but certain provisions, including those on company inspections, remain in force.
The UK Companies Act 1986 (CA1986).
Cash flow test
A test of solvency of a company based on whether it can pay its debts as they fall due (s123 IA 1986).
The Company Directors Disqualification Act 1986 (CDDA1986).
Community interest company
A form of company incorporated and registered under CA2006 which is a company limited by guarantee, a private company limited by shares, or a public limited company, but which has specified community interest purposes and is subject to additional regulations.
Companies House is the government agency that provides the public register for UK companies. It keeps records of companies registered in England and Wales and of documents required to be submitted to it by companies, for instance, regarding shareholders, directors, people with significant control and annual accounts and reports. Most of this information is available to the public and can be found through online searches of the Companies House website. However, some information may only be available to relevant authorities or credit reference agencies (eg, the day of birth and private address of directors). Certain time limits and procedures apply regarding submission of information to Companies House.
Conflicts of interest
There is no fixed definition of what constitutes a conflict of interest in CA2006, but it is broadly drafted and includes indirect interests and applies where there is a conflict, or possible conflict, between the duties the directors owe the company and either their personal interests or other duties they owe to someone else. Examples might include where a director:
- is interested in a supplier, customer or competitor of the company (for instance, as director or shareholder);
- is also a director of a significant shareholder and the company is considering a transaction involving shareholders (for instance, a takeover offer);
- has a role with one of the company’s advisers; or
- is a director of the company’s pension fund (see ICAEW Tech 06/07 "Acting as a trustee for the pension fund of your employer").
GC100 (a group principally of general counsel and company secretaries of FTSE 100 companies) published guidance in 2008 on the duty and practical issues that directors may wish to consider in deciding whether or not to authorise a conflict of interest.
De facto director
A person may be a director (with the responsibilities involved) even if not formally or validly appointed or where, although validly appointed, the person continues to act as a director after their appointment has ceased. If the person acts as if a director, company law requirements (including as to filings) generally apply to de facto directors as they do to appointed directors.
A court may permit shareholders to bring a claim in their own name on behalf of the company in relation to a wrong to the company arising from the negligence, default, breach of duty or breach of trust of a director (including a shadow director), unless the wrong has been duly ratified by the company. Such a claim is known as a derivative claim. The claim may be against a director or third party. There are a number of conditions to be met in pursuing these claims. In particular, a claim cannot be pursued if a person acting in accordance with the statutory duty to promote the success of the company would not seek to continue the claim.
(CA2006 s830) A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made (with additional provisions applying to public companies, investment companies and certain insurance companies). See also ICAEW and ICAS detailed guidance on this issue in Technical Release 02/17BL.
International financial reporting standards issued by the International Accounting Standards Board, as adopted by the EU. Certain companies, eg, companies with securities admitted to trading on an EU regulated market, are required to adopt these standards for preparation of their annual accounts. Others may opt to do so in place of UK GAAP.
- Executive director
If it appears that any business of a company has been carried on with the intent to defraud creditors, or for any other fraudulent purpose, then the directors (or anyone else) who were knowingly party to the carrying on of the company’s business, may be liable for fraudulent trading (IA1986 s213) (CA2006 s993). Fraudulent trading is a criminal offence under CA2006. In addition, if the company has gone into liquidation or administration, those responsible may be liable to make such contributions (if any) to the company’s assets as the court thinks proper under IA1986.
A group principally of general counsel and company secretaries of FTSE 100 companies.
- IA 1986
Insolvency office holder
The official receiver or a liquidator, administrative receiver or administrator as the context requires.
Insolvency office holders report
An insolvency officeholder is under a duty to review the actions of the directors of the relevant insolvent company and file a report to the relevant authorities. Reports must be filed on all directors (including de facto and shadow directors) who held the post at the time the company went into administration / liquidation or in the three years preceding the insolvency process.
A company that does not meet the criteria for a micro-entity, small company or medium-sized company.
Where a company has “limited liability” it generally means that the shareholders/owners are not responsible for the debts or liabilities of the company beyond a set level, even if it becomes insolvent. The shareholders of a private company limited by shares are liable only for any amount unpaid on the shares they hold. There are exceptions to this, including certain cases of fraud and environmental liabilities. Limited liability does not apply to directors.
A company goes into liquidation if it passes a resolution for voluntary winding up or an order for its winding up is made by the court at a time when it has not already gone into liquidation by passing such a resolution (IA1986 s247). Winding up by the court is also known as “compulsory liquidation” and the process may be started by a creditor petitioning for winding up of the company.
While this term is commonly used to refer to any company with securities traded on a market or exchange, strictly speaking it means a company whose securities are admitted to the Official List.
Each EU member state has an Official List. The UK’s is maintained by the Financial Conduct Authority (FCA) and is for nearly all practical purposes synonymous with having securities traded on the main market of the London Stock Exchange. The FCA’s Listing Rules apply to such companies.
A company meets the size criteria for a medium-sized company under Accounts and Reports Regulations if it falls within at least two of the three following limits for the prescribed periods of time: (a) turnover not more than £36 million; (b) balance sheet total not more than £18 million; and (c) monthly average number of employees not more than 250. There are other criteria for being a ‘medium-sized company including not being a PLC or carrying on certain businesses or being a member of certain groups of company.
A company meets the size criteria for micro-companies under (CA2006 s384A-384B) if it falls within at least two of the following three limits for the prescribed periods of time: turnover not more than £632,000; (b) gross assets not more than £316,000; and (c) average number of employees not more than 10. There are other criteria for being a ‘micro-entity’ including not being a PLC or carrying on certain businesses or being a member of certain groups of company.
For most purposes, “officer” includes director, manager or secretary of a company (CA2006 s1173(1)).
Officer in default
An officer is “in default” in the context of many offences arising under CA2006 if the officer authorises or permits, participates in, or fails to take all reasonable steps to prevent, the contravention.
A preference (IA1986 s239) is given if a company does or suffers anything to be done which has the effect of putting a creditor, surety or guarantor into a position which, in the event of the company’s insolvent liquidation, would be better than would have been the case without such action and, in so acting, the company was influenced by a desire to prefer that result. There is a rebuttable presumption of a desire to prefer if the person or company to whom the preference was given was connected with the company at that time. If a company enters into administration or liquidation, the court could, on the application of the administrator or liquidator (or an assignee), set aside a transaction which amounts to a preference given to a creditor, surety or guarantor, within six months (or two years if given to a connected person) prior to the onset of formal insolvency proceedings.
Private company limited by guarantee
A form of company incorporated and registered under CA2006. The members’ liability is limited to the amount they agree to contribute to the company’s assets if it is wound up. Until 1980 it was possible to incorporate a company limited by guarantee and having a share capital in parts of the UK, but that is no longer possible and such companies are now a relative rarity.
- Private company limited by shares
Private unlimited company
A form of company incorporated and registered under CA2006 which may or may not have a share capital but there is no limit to the members’ liability.
Public limited company
Also, "PLC", a form of company incorporated and registered under CA2006 with capital divided into shares and where the liability of each shareholder (or member) is limited to the amount, if any, unpaid on their shares. It must have a minimum share capital and may offer its shares for sale to the public. A company that is listed or quoted on the stock exchange must be a PLC, but a PLC does not have to be listed or quoted.
Register of people with significant control
(CA2006 s790M-790VA) This register records persons, among others, who may have an indirect interest in the shares of a company, for instance, beneficiaries under a trust that holds shares, or people controlling a company that holds shares, where relevant tests are met. Government has published guidance on the complex requirements regarding this register.
- Register of shareholders
A shadow director is “a person in accordance with whose directions or instructions the directors of a company are accustomed to act”. A person is not deemed to be a shadow director by reason only that the directors act on advice given by them in a professional capacity. It is not necessary that the whole board of directors acts under the direction of a person for that person to be a shadow director. Depending on the facts, it is possible for a bank or a “company doctor” to be a shadow director. Where a shadow director is itself a company, it does not necessarily follow that directors of the corporate shadow director are themselves shadow directors. Instead each such person’s own actions are looked at separately. Shadow directors are not “directors” (in the way that appointed and de facto directors are), but are subject to many of the same statutory obligations that apply to appointed directors and may be subject to director disqualification proceedings.
CA2006 s381-384B) if it falls within at least two of the three following limits for the prescribed periods of time: (a) turnover not more than £10.2 million; (b) balance sheet total not more than £5.1 million; and (c) monthly average number of employees not more than 50. There are other criteria for being a ‘small company’ including not being a PLC or carrying on certain businesses or being a member of certain groups of company.
The information required in the strategic report depends upon whether the company is medium-sized, large, or quoted. In general, it should contain a fair review of the company’s business and a description of the principal risks and uncertainties facing the company. The Financial Reporting Council has issued a best practice statement "Guidance on the Strategic Report" to assist companies in the preparation of their strategic report.
Transaction at an undervalue
(IA1986 s238). A transaction is at an undervalue if the transaction constitutes a gift or if the value of the consideration obtained by an insolvent company is significantly less than the value of the consideration which it provided. If a company enters into administration or insolvent liquidation, the court could, on the application of the administrator or liquidator (or an assignee), set aside a transaction at an undervalue entered into by the company within two years before the onset of its insolvency. The court may make such order as it thinks fit for restoring the parties to the position that would otherwise have existed, but for the transaction. However, the court will not make an order if it is satisfied that: (a) the company entered into the transaction in good faith and for the purpose of carrying on its business and there were reasonable grounds for believing that the transaction would benefit the company; or (b) the company was able at the time of the transaction to pay its debts as they fell due and did not become unable to do so in consequence of the transaction. There is a rebuttable presumption that this solvency test is not satisfied if the parties to the transaction are connected.
True and fair
A company’s accounts are required to show a true and fair view of the assets, liabilities, financial position and profit and loss of a company. This applies whether the accounts are prepared under UK GAAP or EU-adopted IFRSs. However, accounts prepared using the micro-entities regime are presumed to give a true and fair view if they include the specific, very limited information required by law. The Financial Reporting Council has published a statement on the importance of the true and fair requirements, and the use of professional judgement, rather than a mechanistic following of accounting standards, to ensure that financial statements give a true and fair view.
UK accounting standards to be applied in the preparation of UK company accounts, unless EU-adopted IFRS standards are applied. Relevant standards include FRS 102 for companies other than micro-entities, FRS 105 for micro-entities and FRS 101 (reduced disclosure framework for defined qualifying entities).
Very large company
Companies (including subsidiaries) which satisfy either or both of the following requirements:
- have more than 2000 employees globally; and
- a turnover of more than £200 million globally; and
- a balance sheet total of more than £2 billion globally.
There is an exemption for Community Interest and Charitable Companies, and for companies which already report on their corporate governance arrangements.