Company law in need of renovation

Robin Potts QC, barrister, Erskine Chambers

Peter Charlton, partner, Clifford Chance

Peter Graham, head of company department, Paisner & Co

Company law is out of date, over-complicated and bears little relation to modern commercial reality. So says the Government's company law review steering group.

The review committee, led by the Department of Trade and Industry, wants company law to have a simpler language and structure. It says the current law is phrased in complex, ancient language, and relevant sections are sometimes "hard to find and understand and expensive to administer".

The long-awaited review threatens to scrap much of the existing legislation. So what is the way forward for company law, and why has it taken so long for the Government to act?

Company law barrister Robin Potts QC of Erskine Chambers says: "The last major overhaul of company law was conducted in 1989 and successive governments have found it a very difficult area to change."

He agrees that the law is overcomplicated, particularly for small companies, and "in relation to provisions dealing with the purchasing of company shares.

"The legal fees generated per year are a staggering £20m on section 151 alone of the Companies Act, originally introduced in 1929," he says. "There was a shot at reforming it in 1981, but that created even more problems.

"Where the Government can make significant changes is in relation to small companies. In particular, the detail for submission of accounts is currently far too onerous on directors."

However, Potts' opinions do not go as far as one of the proposed recommendations, which questions whether small companies need to have public accounts at all.

Peter Charlton, Clifford Chance partner heading the firm's corporate group, says: "It's about time company law was changed. There are lots of inconsistencies and it's archaic."

He claims Potts' figure of £20m is "almost an understatement – it generates far more in fees.

"That section is based on a historical concept. In the US it is perfectly legitimate to exercise that provision without breaking the law. Lawyers have to worry about it in the UK because it carries criminal sanctions and clients are very surprised at this."

Charlton believes company law is essentially Victorian. "Today, it's a combination of historical tenets, a statutory overlay and a European dimension," he says. "It's been produced in a piecemeal manner, turning into a bit of a mix. Much of the legislation brought in has been in a political response to specific situations, without any depth of thought. No one has sat down properly and looked at the whole of company law."

Charlton is not put off by the possibility of reduced legal fees if reforms take place. "Lawyers will always have to advise on transactions, and there will always be a certain level of complexity," he says.

Peter Graham, head of Paisner & Co's company department and member of the Law Society's company law committee, says: "Company law is a difficult area to change because there are external factors, such as European directives."

He is reluctant to agree that all company law is out of date and overcomplicated. "Certainly, for small companies, the law is in need of change," he says. "They need far less regulation, but for large companies the situation remains tenable.

"Company law is artificial and was created to protect certain interests of shareholders and creditors, not really employees and suppliers. Really, employment law should be covering those areas," he adds.

"The approaches by successive governments have been slow, mainly because company law lacks priority for government and secondly because there needs to be a balance between the competing interests of creditors and employers."

Graham doubts that the Government will produce a vastly simplified version of company law. "We can simplify solutions," he says. "But we cannot simplify the problems."