What happens if you're not ready to meet statutory requirements on time?
"If our company accounts will not be finalised and signed off in time to meet the statutory requirements of the Companies Act 2006 (the Act) to lay accounts before members in general meeting, what is the position?"
This is a question we are faced with from time to time and more regularly than you would expect.
Whilst directors and officers of a company have a good understanding of their fiduciary duties and responsibilities they are often unaware or only have a vague awareness of the consequences of breaches of the Act by their companies and their officers.
What are the Requirements?
Under section 336 every public company must hold a general meeting as its annual general meeting (AGM) in each period of six months beginning with the day following its accounting reference date regardless of any other meetings held during that period.
For example a company with a 31st December year-end would need to hold its AGM by no later than 30th June the following year. This six month period is extended to nine months for private companies.
Section 437 of the Act requires that the directors of a public company must lay before the company in a general meeting a copy of its annual accounts and reports. The Act goes on to state that this section of the Act must be complied with no later than the end of the period for filing the accounts and reports in question.
Section 442 of the Act specifies that the period allowed for the directors of a public company to comply with their obligations under section 441 of the Act, duty to file accounts with the registrar is six months after the end of the period in question.
So again for a company with an accounting year ended on 31st
December the signed accounts must be filed on or before 30th June
the following year to avoid a late filing penalty and
An important point to note here is that if a filing deadline falls on a Sunday or a bank holiday the law will still require the company to file account on or before the deadline to avoid a penalty.
What Are the Ramifications?
For breaching each of the above mentioned sections of the Act the directors will be liable for fines with both sections 437 and 442 attracting daily default fines until such time as the breaches have been remedied.
In addition to the potential fines the company could be liable for a civil penalty for breaching section 437 or 441 which is calculated on the length of time that elapses between the breach and the point in which the breach is remedied. For instance a breach lasting a period of one month or less would attract a penalty of £750 per breach increasing to £1500 per breach for a period of one month, one day to three months.
Is There Any Defence?
In some circumstances where a company can demonstrate and prove that all reasonable steps were taken and every effort was made to comply with the Act and to avoid a breach, a company may be able to successfully defend a breach but it should be noted that there is no hard and fast rule and each case would be judged on its own merit.
What Are Our Options?
There is provision in the Companies Act (s442(5)) which allows for the period of delivery of accounts to the registrar to be extended by the Secretary of State.
It should be noted that such an application must be made in writing and must be submitted prior to the expiry of the filing period specified by section 442.
It is important to note that the granting of such extensions are very few and far between and you will have to demonstrate that the events leading to the potential late filing of the accounts was outside of the control of the company, its directors and its auditors. The written notice will need to provide a full explanation of the reasons behind the extension, the action taken by the company to mitigate the breach and also stipulate the length of extension being requested. There is a limit on the length of extension that can be requested being not more than twelve months after the end of the relevant accounting period (section 442(5A).
It should be noted that if an extension is granted the company and its directors would not incur a filing penalty for late filing of the accounts but the requirements of sections 336 and 437 would remain and therefore a breach of these sections would still occur.
Although not strictly in the spirit of the Act another option for consideration, possibly as a last resort, would be to amend the company's accounting reference date.
If this course of action is available to a company and deemed appropriate in the circumstances then the amendment would have to be approved by the board of directors and form AA02 filed at Companies House prior to the end of the filing period stipulated by section 442.
Although this option does provide a company with a resolution to the potential breaches of S437 and S442, the company may still need to proceed and hold an AGM within the period stipulated to satisfy the requirements of the Act or as otherwise set out within its articles of association.
Will Action Be Taken?
In our experience only a very small number of offences of this kind committed under the Act result in any action being taken, let alone prosecution.
This is because in many cases offences will have gone unnoticed and no action will be taken by any party. In fact, action is only generally likely to follow as a result of certain triggers, mainly the involvement of third parties.
However the possibility of action being taken will always exist when a breach has occurred so directors and officers should be minded to pay close attention to these sections of the Act and acknowledge and be fully aware of the potential consequences.
Ben Harber FCIS ia a Partner and Head of Company Secretarial Services, Shakespeare Martineau
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.