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Companies (Audit, Investigations and Community Enterprise) Act 2004

Summary and background

58.Sections 10-12 with sections 14 and 15 deal with the enforcement of accounting requirements. They strengthen the role of the person authorised under section 245C of the Companies Act 1985 to apply to the court to order a company to revise its accounts.  The person currently authorised is the FRRP.   The statutory role of the Secretary of State or the authorised person  has previously been restricted to examining companies’ annual accounts and applying to the courts to order their revision  as necessary. Sections 10-12 and 14 and 15 enhance this regime in a number of ways: by (a) providing for a prescribed body (which will be the FRRP) to be appointed to monitor aspects of accounts or reports required under Listing Rules, such as interim financial statements;  (b) providing for the authorised person and the prescribed body  (the FRRP in both cases) to have a power to obtain information in order to carry out their functions;  (c) opening an information gateway from the Inland Revenue to the FRRP.

59.In future the "Review Panel" (a body formed under the constitution of the FRRP) will be authorised under section 245C and also appointed undersection 14 to monitor aspects of accounts or reports required under Listing Rules.  It is not envisaged that any other person or body is likely to be authorised or appointed.  For that reason these notes refer to the FRRP or the Review Panel of the FRRP throughout, although the legislation itself does not name the FRRP.

60.Strengthening the role of the FRRP was a key recommendation of the Coordinating Group on Audit and Accounting Issues, one of the reviews set up by the Government in response to the financial reporting scandals in the US at companies such as Enron.  The Group reported to the Government in January 2003. The changes to the role of the FRRP also need to be seen in the context of overall changes to the Financial Reporting Council Ltd and its associated companies, of which the FRRP is one.

Section 10 - Persons authorised to apply to court in connection with defective accounts

61.Section 10 makes certain changes to section 245C of the Companies Act 1985 in relation to an order authorising a person to apply to the court to correct defective accounts. The person currently authorised under section 245C is the Financial Reporting Review Panel Ltd.  It is expected that the person who will be authorised under section 10 will be the Review Panel of the FRRP.  Unlike the FRRP Ltd, the Review Panel is not an incorporated body but is formed under the constitution of the FRRP.  Section 10 provides that where the authorised person is an unincorporated association (as the Review Panel will be), any proceedings brought in connection with the exercise of its functions may be brought in the name of the body corporate whose constitution provides for its  establishment . This means, for example,  that the Review Panel may bring proceedings in the name of the FRRP Ltd.  Section 10 also makes alterations to the authorisation power under section 245C to allow the Secretary of State, if she considers it appropriate, to prescribe how the authorised person will exercise its functions.

Section 11 - Disclosure of tax information by Inland Revenue to facilitate application for declaration that accounts are defective

62.This section provides for the passage of information from the Inland Revenue (IR) to a person authorised under section 245C of the Companies Act 1985 and makes equivalent provision in Northern Ireland. That person is currently the FRRP.  It adds new sections and Articles after section 245C of the Companies Act 1985 and Article 253C of the Companies (Northern Ireland) Order 1986.  The new provisions permit the disclosure of information by the IR to a person authorised, under section 245C of the Companies Act 1985 and Article 253C of the 1986 Order, to apply to the court for a declaration that a company's accounts do not comply with the legislation in question.  They also provide restrictions on use and further disclosure of the information.

63.Subsection (1): 245D - Disclosure of information held by Inland Revenue to persons authorised to apply to court.  This subsection adds a new section 245D after section 245C of the Companies Act 1985, permitting the Inland Revenue to pass information to the authorised person if the disclosure is made for a permitted purpose. Subsection (3) of new section 245D defines what counts as a permitted purpose: to enable the authorised person to discover whether there are grounds for an application to the court, or to determine whether or not to make such an application. Subsection (2)(b) of new section 245D provides that  personal data may not be disclosed in contravention of the Data Protection Act 1998.   Under subsection (4) the Inland Revenue Commissioners may delegate the power to authorise disclosure to an officer of the Board of  Inland Revenue.

64.Subsection (1): 245E - Restrictions on use and further disclosure of information disclosed under section 245D.  Subsection (1) also adds a new section 245E to the Companies Act 1985, which places restrictions on the uses to which disclosed information may be put; and on further disclosure by the authorised person.  Under subsection (1) of new section 245E, the uses to which the information may be put are to enable the authorised person to discover whether there are grounds for an application to the court, to determine whether or not to make such an application, and in proceedings on any such application.

65.Subsection (2) of new section 245E prevents information being disclosed by the authorised person to anyone else, except to the person to whom the information relates, or in connection with court proceedings.  Subsection (3) of new section 245E  makes it a criminal offence to breach the restrictions on use or further disclosure set out in subsections (1) and (2), and should be read in conjunction with the amendments in paragraph 10(3) of Schedule 2,  to Schedule 24 of the Companies  Act 1985.  A person guilty of use or further disclosure in contravention of the restrictions is liable on summary conviction to imprisonment for a term not exceeding twelve months or a fine not exceeding £5,000, or both; or, on conviction on indictment, to imprisonment for a term not exceeding two years or a fine, or both.

66.Subsection (4) of new section 245E provides a person with a defence if he can  prove that he did not know or had no reason to suspect that the information in question had been disclosed under this legislation; or that he took reasonable steps to prevent wrongful use or disclosure.

67.Subsection (5) of new section 245E applies to offences under new section 245E, sections 723, 733(2) and (3) and section 734 of the Companies Act 1985. Section 732 concerns restrictions on the institution of proceedings for offences. Section 733(2) and (3) concern the liability of individuals for corporate defaults. Section 734 makes provision for criminal proceedings against unincorporated bodies.

68.Subsection (2)  253D - Disclosure of information held by Inland Revenue to persons authorised to apply to court; and 253E - Restrictions on use and further disclosure of information disclosed under Article 253D.  Subsection (2) inserts, after Article 253C of the Companies (Northern Ireland) Order 1986, two new Articles 253D and 253E whose purpose and effect, in respect of their application in Northern Ireland,  are equivalent to that of new sections 245D and 245E discussed above, in respect of Great Britain.

Section 12 -  Power of person authorised to require documents,  information and explanations; and Schedule 1 -  New Schedule 7B to the Companies Act 1985

69.The FRRP (as the person authorised under section 245C of the Companies Act 1985) previously had no power to require a company to provide it with the information it needed to carry out its functions.  Hitherto, it  relied on the voluntary co-operation of the company in question to provide explanations and documents which were not publicly available.

70.The view of the Government and the FRRP was that with the FRRP moving to a more proactive approach, in which the FRRP would be considering more cases, such co-operation could not be relied on in every instance.  Moreover, the Committee of European Securities Regulators has set out a number of key enforcement principles, including that any competent enforcement authority should have adequate powers. Section 12 therefore provides the FRRP with a statutory power to obtain relevant material.

71.Subsection (1) inserts a new section 245F into the Companies Act 1985. Subsections (1) to (3) of this new section provide the FRRP with a statutory power to require a company and its officers, employees and auditors to provide documents and information.  The effect of subsection (1) is that the FRRP may use its power to obtain information, explanations and documents only when it considers that there is a question as to whether the accounts or reports comply with the relevant requirements relating to that report or those accounts.  It will not be able to exercise the powers as part of a random sampling or sector-wide review of accounts where there is  no reason to believe there is any particular problem with the accounts of the company in question.

72.The person against whom the power is used must produce any document that the FRRP may reasonably require in relation to such accounts or reports or  provide any relevant information that the FRRP may reasonably require.  Subsection (8) ensures that a "document" can refer to information stored on computer as well as hard copies.

73.Where a person refuses to provide information or documents to the FRRP, the  FRRP may apply to the court for an order.  The court may make an order requiring disclosure.  Failure to comply with such an order would be contempt of court.

74.Restrictions on further disclosure of information obtained under section 245F.

A new section 245G is also inserted into the Companies Act 1985, ensuring that information obtained by the FRRP under the new powers will be subject to restrictions on onward disclosure.  Information may not be disclosed by the FRRP without the consent of the individual or business in question, except for the purposes of carrying out its functions, or unless it is disclosed to specified persons or for specified purposes set out in a new Schedule 7B of the Act which is inserted by Schedule 1.

75.New Schedule 7B sets out the disclosures of information obtained by the authorised person under new section 245F which are permitted under new section 245G.  It lists the specified persons to whom disclosures are permitted and the specified descriptions of disclosures which are permitted. It also sets out the circumstances in which a disclosure to an overseas regulatory authority is permitted.  Under subsection (4) of new section 245G, the Secretary of State has the power to amend the Schedule.  Under subsection (5) the Schedule can only be amended to specify persons exercising functions of a public nature or to specify descriptions of disclosure, where the purpose for which the disclosure is permitted is likely to assist in the exercise of a function of a public nature.

76.Subsection (7) of new section 245G makes it an offence to disclose information in contravention of the new section.  A person guilty of such an offence is liable on conviction on indictment to two years' imprisonment or a fine or both; and on summary conviction to twelve months' imprisonment or a fine.  Subsection (8) provides a person with a defence if he can prove that he did not know or had no reason to suspect that the information in question had been disclosed under this legislation; or that he took reasonable steps to prevent wrongful use or disclosure.

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