Company Law Reform Bill [HL]

We have already discussed the right of a company to apply to the court if it believes that the statement deposited with it by a departing auditor should not be circulated to the members. It may be that the directors take the view that what the auditor has written will be of no value to the shareholders, is calculated simply to vent the auditor’s anger at the directors, and could even damage the company if it were made public. On the other hand, as discussed earlier, the directors may be using the court process as a way of delaying the auditor’s perfectly valid criticisms in the hope that if they are circulated rather later they will have lost their force. Clause 507(3) requires the company to notify only the auditor if it applies to the court. Amendment No. 326A would require the company also to notify its shareholders and the other people to whom it would have sent the statement. I can see some attraction in this proposal if we are considering only the case where the directors are using the court process as a way of keeping from the shareholders information that would be valuable to them. Having to inform the shareholders that they were trying to block the auditor’s statement could in itself be useful information to the shareholders. However, I believe there are two arguments against this. That an auditor is leaving a company is not a secret. If an auditor resigns, a copy of his notice of resignation is filed at Companies House. Certainly the astute shareholder will be aware of the resignation and, in a quoted company, should be expecting a statement of circumstances. If that does not appear, he could infer that the company is seeking to block its publication. It is also important to consider the case where the directors apply to the court because the auditor’s statement is simply defamatory and of no value to the shareholders. It is not clear then what purpose is served by imposing on the company the cost of notifying every shareholder that it has applied to the court. This is an interesting proposal. I can sympathise with the reasons for putting it forward but, on balance, I do not think that it is the right way to go.