The Companies Act 2006 (the “Act”) represented the biggest overhaul in UK company law since 1948. The Act’s far reaching changes will have a major impact on all companies, both private and public, making it essential that those involved in business are familiar with its provisions. Two of its changes are highlighted below:

Auditors

An auditor will now be deemed to be reappointed in the case of private companies, although members will have a right to prevent such automatic reappointment.

A new criminal offence has been created, punishable by fine, in relation to inaccurate auditors’ reports. A person commits an offence if he knowingly or recklessly causes an auditors’ report to include any matter that is misleading, false or deceptive in a material particular or if he omits a statement required under the Act that relates to problems with the accounts.

There is a new obligation on auditors to send copies of their leaving statements to an appropriate audit authority (defined in the Act) and a new duty on companies to notify the appropriate audit authority whenever an auditor resigns or is dismissed. The audit authority must then inform the accounting authorities about the departing auditor.

Liability Limitation Agreements

Auditors and companies will be allowed to enter into “liability limitation agreements” to limit an auditor’s liability to a company for negligence, default or breach of duty or trust in relation to the audit of the accounts.

The liability limitation agreement is not effective to limit the auditor’s liability to less than an amount that is fair and reasonable in all the circumstances of the case having regard to:

• The auditor’s responsibilities
• The nature and purpose of the auditor’s contractual obligations to the company
• The professional standards expected of the auditor.

Liability limitation agreements must be approved by ordinary resolution (or private companies may resolve to waive the need for such approval) and must be limited to one financial year’s audit.

The Secretary of State may make regulations on what is or is not to be included in a liability limitation agreement and to require disclosure of any such arrangements in a company’s accounts. A company will have to disclose, by means of a note to its annual accounts, the principal terms of the agreement and the date of the resolution approving it or waiving the need for approval.

The Financial Reporting Council has established an independent working group to produce guidance on the use of liability limitation agreements, including a suggested standard form of liability limitation agreement, and a process for the implementation of such an agreement.

Part 16 of the Act (audit) will come into force on 06 April 2008, except for sections 485 to 488 (appointment of auditors by a private company), which came into force on 01 October 2007 in relation to appointments for financial years beginning on or after that date.

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