A comprehensive review of law relevant to companies would include insolvency law and securities regulation (also known as capital markets law or financial services law) to the extent that they apply to companies. In the last 25 years, each of these areas of law has become a highly developed and voluminous legal subject in its own right. Realistically neither can be covered in any depth in a company law textbook of moderate length.
Company Law
Securities Regulation
Insolvency Law
Figure 1.1 Company law includes parts of securities regulation and insolvency law core company
law
the law governing the creation and operation of registered companies
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WHAT WE MEAN BY ‘COMPANY LAW’
Corporate governance has attracted a great deal of attention as an important aspect of company law and it is appropriate to say a few words about it in the context of setting out what we mean by company law. Corporate governance is not a legal term, rather, it is a label, or heading under which to analyse the questions how, by whom, and to what end corporate decisions must or should be taken. Within that debate, the issue of how far the law can and should be used to achieve good corporate governance arises.
Those who support extensive use of law and regulation to improve corporate governance are said to support the ‘juridification’ of corporate governance, those against are said to prefer ‘private ordering’. Company law and corporate governance overlap to the extent that a large part of company law is about how and by whom corporate decisions can or must be made.
Securities Regulation
Insolvency Law Corporate
Governance Company Law
Figure 1.2 Corporate governance
Textbooks on company law differ in the extent to which they deal with insolvency law, securities regulation and corporate governance. The approach taken in this book to each is set out in the following three sections.
1.2.2 Insolvency law
Even though in theory they could, companies do not tend to continue in existence forever.
They either outlive their usefulness or become financially unviable. Before a company ceases to exist, or is ‘dissolved’, to use the legal term, its ongoing operations are brought to an end, its assets are sold and the proceeds of sale are used to pay those to whom it owes money. This process is called ‘winding up’ or ‘liquidating’ the company.
Some companies that are wound up or liquidated are able to pay all their debts in full, that is, they are ‘solvent’, yet the law governing winding up of solvent companies is set out in the Insolvency Act 1986 (and rules made pursuant to that Act, the most important of which are the Insolvency Rules 1986). The explanation for this is that most winding ups involve insolvent companies and when, in the mid-1980s, the law governing insolvent company winding ups was moved out of company law legislation into specific insolvency legislation, it made sense to deal with solvent winding ups in the same statute. This avoided the need for duplication of those winding up provisions relevant to both solvent and insolvent companies in both the Companies Act 1985 (now replaced by the Companies Act 2006) and the Insolvency Act 1986.
Note that insolvency is a term relevant to both companies and individuals but in the UK the term bankruptcy is used only to refer to the insolvency of individuals, not companies. It is legally incorrect to refer to a company going bankrupt.
Insolvency law is a highly detailed and specialised area of legal practice requiring study of specialist texts for a full understanding of its scope and complexity. Of the
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CHAPTER 1 INTRODUCTION TO COMPANY LAW
four key formal processes: voluntary arrangements, receivership, administration and liquidation (the process by which companies are wound up), voluntary arrangements and administration are outlined in Chapter 15 (in which receivership is also mentioned), and liquidation is examined in Chapter 16.
During the liquidation process, the person appointed to conduct the winding up of a company, the ‘liquidator’, has the power (amongst others), to apply to court for orders that certain individuals, often directors or people closely connected with directors, contribute sums to the company to swell the assets available for distribution to creditors.
It is important for anyone seeking to understand the law governing directors to understand the full range of potential liabilities and exposures of directors and for this reason the relevant provisions of the Insolvency Act 1986 are included in Chapter 16.
Liquidators also have powers to review and challenge the validity of certain transactions entered into by the company in the ‘twilight zone’, that is, in the period of up to two years leading up to the commencement of winding up proceedings. Clearly, it is important for anybody seeking to understand the rights of those who deal with companies, to understand the potential for twilight zone transactions to be challenged by a liquidator and for this reason the relevant provisions are also covered, in Chapter 16, of this book.
Finally, once the assets of a company have been turned into money and any contributions secured, a liquidator is required to follow a statutory order of distribution which determines the priority of payment of different types of creditors. Given the significance of this statutory ordering to the decision whether or not to deal with a company and the terms on which to do so, Chapter 16 also covers the statutory order of distribution on liquidation.
1.2.3 Securities regulation
It is difficult to decide which, if any, part of securities regulation to include in a core company law textbook. The object of securities law is essentially to provide protections to those who decide to invest their money in securities (which are basically shares and corporate bonds), and the large number of complex investment products financial service providers have built around securities.
Securities regulation is part of what is often called finance law. For our purposes, finance law can be viewed as made up of three parts: banking law; the regulation of those who conduct investment business and the markets on which investments are traded;
and, increasingly, the regulation of companies whose securities (shares and bonds) are offered to the public. Regulatory shortcomings highlighted by the global financial crisis of 2008 and its aftermath have resulted in extensive, ongoing reform of finance law.
Most of the changes relate to the regulation of banks and the re-alignment of regulatory responsibilities amongst the Financial Services Authority (FSA), the Bank of England and the Treasury. This realignment will be effected by the Financial Services Bill (2012 Bill) which is making its way through Parliament at the time of writing. It is expected to become law at some time in 2012 to take effect in 2013. A new ‘macro-prudential authority’ will be established, called the Financial Policy Committee (FPC), and the two key regulators sitting underneath this umbrella will be the Prudential Regulation Authority (PRA), which will be a subsidiary of the Bank of England, and the Financial Conduct Authority (FCA) which will be the re-focused FSA. Fortunately, apart from the relevant regulator being renamed, the framework of securities regulation will remain intact.
The key securities regulation statute in the UK is the Financial Services and Markets Act 2000 (FSMA), as amended (most recently by the Financial Services Act 2010), and to be further amended by the 2012 Bill. That Act established and empowers the main securities regulator to make detailed rules governing securities. At the time of writing, the name of the regulator remains the Financial Services Authority (FSA) and the detailed rules are found in the FSA Handbook. Once the 2012 Bill comes into effect, the functions of the FSA will be split, with some functions being performed by the Prudential Regulation
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WHAT WE MEAN BY ‘COMPANY LAW’
Authority (PRA). The securities regulatory functions of the FSA will be performed by the Financial Conduct Authority (FCA) which can be viewed as the FSA with a new name.
The heart of securities regulation is disclosure of accurate information. This theme has been supplemented in recent years, in no small part because securities regulation is being used to implement legal initiatives to achieve good corporate governance, which is seen as supportive of efficient capital markets and essential to achieve economic growth. As for the sources of securities regulation, statutory provisions in the FMSA are supported by detailed rules (the FSA Handbook) produced by the FSA pursuant to powers under the FSMA, which rules are underpinned and supplemented by soft law such as the UK Corporate Governance Code and the Stewardship Code.
Aspects of securities regulation touched upon in this book are the prospectus rules, which are outlined in Chapter 7, and the ongoing disclosure obligations, which are outlined in Chapter 17 and touched upon at various points in the text where the Companies Act 2006 disclosures that they supplement are discussed.
1.2.4 Corporate governance
Corporate governance means different things to different people in different contexts.
Whenever the term is used, the first question to ask is, in what sense is it being used by the writer? If this is not made clear, it is usually helpful to examine the context in which the term is being used. Subject to this caveat, two definitions of corporate governance are often referenced (as, for example, in the recent European Commission Green Paper, The EU Corporate Governance Framework (COM(2011) 164 final).
The first is a definition laid down in 1992 in the Report of the Cadbury Committee, a Committee established by the Financial Reporting Council, the London Stock Exchange and the Accountancy Profession to consider the Financial Aspects of Corporate Governance. According to the Cadbury Committee (at para 2.5), ‘Corporate Governance is the system by which companies are directed and controlled’.
The second definition is that first provided by the Organisation of Economic Cooperation and Development (OECD) in 1999 and repeated in the preamble to its revised Principles of Corporate Governance in 2004 in which corporate governance is identified as one key element in improving economic efficiency and growth as well as enhancing investor confidence.
QUOTATION
‘Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.’
OECD, Principles of Corporate Governance (2004) at p.11