Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 22, in page 7, line 28, at end insert-

' ''prescribed description'' means in accordance with the Memorandum and Articles of the Company.

''prescribed person'' excludes-

(i) the Secretary of State; and

(ii) any member or officer of a local education authority.'.

I add the warm appreciation of Opposition Members at seeing you here, Mrs. Adams. Our sympathies are with you; we have all suffered from the queues to the car park.

The amendment seeks to add two definitions to subsection (8)-the definition of ''prescribed description'', which appears in clause 11(3)(a), and ''prescribed person'', which appears in clause 11(4). In our previous discussion, it became clear that at the heart of the series of amendments on chapter 3 is the lack of clarity and specificity about the nature of the corporate entity that it is intended will come into being with the encouragement of the Secretary of State or under the other powers conveyed under the chapter.

Clarity and specificity must be put in place because we are dealing with risk. Wherever there is a corporate entity, directors have a duty to assess risk. They have a fiduciary duty, not only to the board and the company but in terms of their authority in committing the company to risks and liabilities. The commitment that they give each time they contract with any supplier or provide any service to customers must be undertaken on the basis that those treating with the company know its assets and the level of liability that can be met, and can therefore judge risk. We need to probe in detail what corporate entities the Government envisage. It would be helpful to have a set of pro forma regulations as we deal with this chapter. So much is left in airy-fairy terms that it is difficult to know whether the Government are aware that the regulations would deal with a raft of matters that we will be discussing later. The amendments, some of which are probing, are appropriate.

In vain, I have searched for help in the explanatory notes, which I thought might have been some of assistance. However, they do not help in the slightest. I hope that I am wrong, but the Government appear to believe that if one calls something a company, all will be in rosy in the garden. No one with corporate experience would believe that.

In using the phrase ''if regulations so provide'' in clause 11(3)(a), the Government are maintaining a discretion not to issue regulations, which makes my points all the more germane. The Minister said earlier that regulations will be promulgated, and although he could not commit to having them available this morning, he hoped that they would be before the Bill went to the other place. It would be exceptionally helpful if they could be available before the Committee progresses, as they are critical to so many points. If the regulations were satisfactory, it would curtail the time required to consider the Bill.

Clause 11(3)(a) states:

''The company must, if regulations so provide-

(a) be prohibited by its constitution from admitting to its membership any person who is not of a prescribed description''.

The amendment would ensure that that ''prescribed description'' means in accordance with the memorandum and articles of any company. One might expect that to be axiomatic and that regulations would provide for it, but in their absence it is necessary to make that point. A cursory understanding of company law clarifies that anything of a prescribed description not encompassed within the memorandum and articles of association-under table A in former days as the pro forma type of memorandum and articles-would technically be ultra vires. We must ensure that we do not pass law that has the potential to make regulations forcing any company-not just ones limited by guarantee-to conform to requirements at odds with its memorandum and articles. We must ensure that we are not creating the potential for ultra vires measures. We have discussed lawyers' charters in the past, but any judge who had to make a decision based on the Bill would rightly be critical of a Committee that did not highlight this issue and get a satisfactory answer from the Government.

I turn to the critical issue of ''prescribed description'' being in accordance with the memorandum and articles of association of the company. There is always a section in the articles about the rights, duties and, indeed, capacity of directors. While the articles do not have to define in detail the type of person the director is, the overall duties of a director, in particular the producing duties, where they are owed, must be defined. Given that we are talking about companies which will provide services and facilities to schools, and that the Government have already admitted that they can easily be expected to own assets which might well be owned by the LEA or by the school itself, to whom are the primary duties owed: shareholders, employees or customers?

The facile answer frequently used by the Government in rhetorical utterances-which has even become the fashion in the City of London-is the stakeholders. That is a convenient way of saying, ''I do not have to give you an answer at present. I am waiting to see which way the wind will blow and I will try to create a sense of partnership with everyone and try to be all things to all people.'' In corporate life strict duties are owed to shareholders for the capital employed, in customer service and above all, as a company director, to employees and staff, the terms and conditions pertaining to their employment and, increasingly, their well-being, under a raft of regulatory and further statutory provisions.

It is not clear whether, unless persons are vetted under the term ''prescribed description'' in accordance with the memorandum and articles before a company can be approved, there would be a duty to pupils. I aired my greatest concern in my debate with the hon. Member for Harrogate and Knaresborough (Mr. Willis) on the previous clause-it is a matter to which we will come and I had to beg his indulgence to wait for further amendments. When such companies come into existence, I would be staggered, and I dare say so would the Government, if there was not rapid consolidation of the market within a five-year view. There will be takeovers and corporate activity. At that point, where are the pupils' interests protected? As regards borrowing money, if a company is at risk of financial difficulty, the greatest danger is faced by the pupils. That is notwithstanding the fact that they have had to earn the right of being an LEA-approved facility, which can be trusted because it has demonstrated a good track record. These things can often go in cycles; they depend on individuals and particularly on the head teacher at the time. Who is to say that there will not be a failure? Will the pupils be at great risk if the company suddenly becomes at risk? In those circumstances the Secretary of State is meant to have powers to intervene and there are various probing amendments on that matter.

The Bill should contain a provision suggesting that the ''prescribed description'' is in accordance with the memorandum and articles of the company. I am by nature a deregulatory person, but if regulations are to be issued, one of the prerequisites for such a company should be that in the memorandum and articles heed must be paid to pupils' interests. Squaring that with the responsibility to shareholders would be a matter of judgment. In the case of unexpected financial difficulty in the company, pupils going through a school will therefore not be the victims. At the moment there is no such protection. This amendment is intended to flesh out that necessary priority. We as a Committee have a common interest in ensuring that pupils' interests are not at the mercy of the risks of corporate life.

Mr Stephen Timms (Minister of State (School Standards), Department for Education and Skills; East Ham, Labour)

I reaffirm the commitment that I made to the Committee last week that we will set out the policy that underlies the proposed regulations before the Bill leaves the House.

Amendment No. 22 would remove part of the system that we want to put in place to protect school companies. Restricting ''prescribed description'' to mean in accordance with the company's memorandum of articles would remove the ability to prevent certain bodies from joining companies, which we want to retain. We want companies to operate with as much flexibility as possible, but we still want a basic framework of protection that will cover who can join companies. Membership of a company will be significant to its operation, so we want the power to protect companies, when necessary, from having certain bodies as members. The amendment would impede that.

Such protection would be necessary where there was a clear conflict of interest. A stationery company might want to join and so become the sole supplier of stationery to the school company, which would be likely to limit the freedom of the school company to select the best deal for its members. We want to exclude potential conflicts of interests, and the regulations would allow us to do that.

We also want to exclude unsuitable individuals, such as those who have been barred from teaching or those with certain criminal records. The amendment would prevent us from making such exclusions. I hope that the hon. Member for Eddisbury (Mr. O'Brien) will think that it is right that amendment No. 22 should not be accepted.

We also want to protect companies by prohibiting them from borrowing money without permission. The best protection from running up large debts would be to require permission to borrow from those in a position to make a decision and to give advice based on the company's financial health. The amendment to ''prescribed company'' would prevent the Secretary of State, or an LEA, from exercising that power. Before we finalise the regulations, we want to consult widely on where that power should rest. The best organisation is likely to be the LEA, which the amendment would exclude. On reflection, the Committee may want to ensure that that power remains. In the light of that explanation, I hope that the hon. Gentleman will decide not to press the amendment.

Mr Stephen O'Brien (Eddisbury, Conservative)

I thank the Minister for trying to address my concern, and I accept that I may not have explored the definition of ''prescribed person'' as fully as I should have in my opening remarks. We suggest that it should exclude:

''(i) the Secretary of State; and

(ii) any member or officer of a local education authority.''.

The Minister probably made a slip of the tongue when he referred to a ''prescribed company'', rather than a ''prescribed person'', as intended.

The Minister addressed the purpose of the amendment, which is to delve more deeply into the nature of the intervention, or the interference, especially in the case of a school that has qualified to go down that route and has been trusted to have a delegated budget. Where is the element of trust in the relationship between the school, the company, the Secretary of State and the LEA? Is it just a means of retaining control and not giving corporate freedom, as intended? If one sets up a corporate vehicle, one intends to have the benefit of incorporation, which means that the entity can be assessed by its track record and merits and enter into contracts. It is a legal entity in its own right, as a person is, and stands or falls on the basis of its performance. Either it is to be trusted as a mechanism to deliver better services, economies of scale and all the benefits to which the Government have alluded, or it is a halfway house, over which the Secretary of State and LEAs intend to exercise tight control.

Based on the regulations that are implied by the Bill, I am concerned that the companies will not have much freedom of discretion and activity. That begs the question, why have the corporate entity structure? Would not it be better to accept that the entity is a convenience, or a halfway house? Some might interpret it as no more than smoke and mirrors, or a disguise by which the Secretary of State is able to retain centralised control.

That goes to the heart of a complaint that the Opposition have about the Bill. During the recent general election campaign, about which I do not want to go into too much detail, there was wailing and gnashing of teeth by Government Members about the Conservative party's free schools policy. It is difficult to imagine how that policy could have been implemented by any measure other than this one, except that our measure would not have allowed the same level of interference. However, we cannot be sure about that, because the regulations have not been published.

It is fair to say that history has been significantly rewritten. The Labour party has forgotten what it complained about in the past. Autonomy was precisely what made the Conservative's policy on education-if not on other issues-right and popular. It is right to seek economies of scale for things such as bus services, accountancy and legal support and the provision of school meals.

I am concerned that the Bill does not address that tension and that the Minister avoided answering my point about ultra vires issues. I am not satisfied that a ''prescribed description'' would be constrained by the memorandum and articles. During the by-election campaign, which I won, the Labour party sought to denigrate me by saying that I was on the board of directors of 273 companies. That was absolutely true; I am the group company secretary of a UK FTSE 100 company. Thus, I am familiar with all types of corporate entity in the UK and in 35 other countries. My experience leads me to believe that a level of ignorance has crept into this measure. Articles can be amended and made specific to purposes. A memorandum of association carries the overall architecture and intent of a company and defines its vires, whereas the articles of association outline the operational aspect of the company. That was germane to our discussion of the Limited Liability Partnerships Bill-I was honoured to sit on that Committee.

The Minister has not satisfied me on the issue. I am disinclined to press the amendment to a vote because it is futile to press something that might be addressed by the regulations, which are not available to us. This probing amendment gave us an opportunity to put our concerns on the record. If the Government are not able to provide clarification when the Bill is considered in another place-assuming that it moves beyond Committee stage-they will rightly be condemned for trying to slip the measure through without having thought about its implications for the quality of education. As I said, I am not prepared to press the amendment to a vote, but it would be helpful to have an answer about the ultra vires point before I withdraw the amendment.

Mr Stephen Timms (Minister of State (School Standards), Department for Education and Skills; East Ham, Labour)

I am happy to provide a little clarification. We want companies to have maximum freedom, but we also want some basic protections in place. The amendment would change the provisions about membership of companies and borrowing, which we view as an important part of the available protections. I will argue later that the hon. Gentleman's proposals are unduly onerous in view of our concern that companies should be as free as possible.

I was grateful to the hon. Gentleman for reminding us of the free schools policy, but I was hoping that he would tell us whether that remains the Conservative party's policy. We certainly look forward to clarification on that.

On the issue of ultra vires, company law will apply to all companies, so there is no question of them being able to contravene any aspect of company law. The general framework of company law is highly likely to address the hon. Gentleman's concern. We may return to the same issues when we debate later amendments, but I presently see no danger on that front.

I was impressed by the research capabilities at Millbank, which established that the hon. Gentleman is on the board of 273 companies. I look forward to the Committee gaining from the expertise that that accomplishment provides.

Mr Stephen O'Brien (Eddisbury, Conservative)

I thank the Minister and assure him that I was paid in respect of only one job, and that the rest were gratis. The Minister has acknowledged that, in terms of ultra vires, companies would have to operate within company law, particularly the Companies Act 1985, but there remains the danger of shareholders raising issues at annual general meetings. I am attempting to envisage what I believe will be a rapid consolidation in this market once it gets under way. Within five years, other companies will spot opportunities where there have been ultra vires actions because the constraints are not set out effectively in the articles. Directors of companies have ostensible authority-not to mention board resolutions-and there is a danger that ultra vires issues could lead to damage and liability falling on those directors, resulting in takeovers and other forms of administration, which need to be seen as part of the overall risk. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr Stephen O'Brien (Eddisbury, Conservative)

I beg to move amendment No. 23, in page 7, line 31, at end add

'and the freedom to raise finance secured on the assets of the company'.

The Minister touched on these issues earlier. The amendment would add a provision to subsection (9) to provide a company with the freedom to raise finance or borrow money secured on that company's assets. It is always possible to borrow money without assets, but the amendment would provide some recourse in the event of a default.

Paragraph 66 of the explanatory notes states:

''Companies may not borrow money without consent.''

I hope that clause 11 and the anticipated regulations, which are becoming gloriously embroidered as we move forward, will provide some opportunity for companies to borrow money. At present, it is not clear. The difficulty is that the quality of teaching, the certainty of directors, the ability for a more entrepreneurial spirit to capture the synergies and economies of scale necessary to release funds more for education than just support services will mean that there is a danger that companies will run into cash flow problems, irrespective of whether they initially intended to borrow money.

Later amendments deal with the issue of not unreasonably delaying decisions or withholding consent. Under the Bill, it is possible for consent to be withheld or for decisions to be delayed, which could throw a company into cash flow difficulties. Support services and facilities and even the provision of assets could be put at risk-not because of an intention to default on a loan but because of cash flow problems. Do the Government want such a company to have to gain consent, in already difficult circumstances, in order to be allowed to borrow money, or does the Secretary of State view it, under the regulations, as a company limited by guarantee? We all know that such companies are limited in terms of the amount of the guarantee. For charitable purposes, they are often limited to £1 for each member of the company.

The Government response will be interesting. What is the intended level of guarantee and who will be the guarantors? Do the Government or the LEA intend, by regulation or other means, that the public purse will be the indemnifier of the shortfall in a cash flow crisis where there is no immediate prospect of recovery and when the guarantors in a company limited by guarantee have insufficient funds to continue with the provision of education?

Cash flow problems can result from a customer's failure to pay, which could be the result of delay, or because of a company's obligation to pay its staff on the due date in accordance with its terms and conditions on remuneration and expenses. Who will suffer in a cash flow crisis? Will it be the guarantors? If the guarantee is not enough, will it be the indemnifiers under the definition of the public purse?

It could be that we are talking about a school whose budget has been delegated and is to be trusted. If so, we are entering a much riskier world for education-that could be the concept behind the Bill. Is it a mechanism through which financial difficulties-the Bill contains provision for the monitoring of the condition and performance of any company and some prescriptions for reporting-can be dealt with?

We have noticed the Government's difficulties-to many people's woes-with Railtrack. That company was put into administration because of a perception of financial difficulties. We now find that Railtrack's declared and audited profitability was such as to beg the question whether administration was justified. I am not in a position to judge whether the expected amount was reasonable, but there was a proper expectation that the public purse would continue to provide a proper level of funding in support of Railtrack's operations. The amount and the purposes to which the money was put are obviously being disputed, but the reasonable expectation was clear. The sudden stop forced a crisis and, apparently, justified the Government's decision to place a major infrastructure operator of our nation into administration. They now have a major problem on their hands, as indeed have all of us who have at heart the national interest in transportation.

What a disincentive for entrepreneurs. Does it beg a duty for directors that is not in the Bill? Initially, the companies will be quite small, but within five years, after consolidation across the nation, they could be huge. Will directors be under a duty to warn the Secretary of State, irrespective of when the regulations are issued, that there is a remote possibility that a company could be at risk if there were to be a delay or some kind of interest rate upheaval in the economy? They may not have borrowed money, but they may be dependent upon trust fund income. Plenty of endowment trusts are geared to certain schools.

If there were a crisis affecting the return on that trust is there a duty upon the directors, beyond the normal fiduciary duties set out in the memorandum and articles, to warn the Secretary of State and the LEA that it could be in financial difficulties so as to provide the LEA with enough time to ask the Secretary of State to step in to stop pupils' education being put at risk? Under normal corporate procedures, by the time the financial stress is apparent, it is often too late to stop the processes of administration or financial crisis affecting the customer, supplier or services provision base. Paragraph (xv) of amendment No. 61, which we will come to later, is intended to try to flesh that out. Presenting the case is awkward, as many of the amendments have to cut right across chapter 3.

I do not think that I have deliberately misunderstood, but the Bill is deeply confusing about the Government's motivation. Do they anticipate intervening early enough so as not to prejudice educational services? If so, what are the duties of the directors in the absence of the regulations or indeed any of the amendments that we have just discussed? If it is a company, there should be trust placed in it to enable the process to be free from the Government's control. If that is the case, it must face up to the fact that, in corporate life, not everything will continue as planned. Major jerks and hiccups can take place in all corporate life because cash flow is everything to corporate survival.

The duties of directors have become increasingly unclear. The purpose of amendment No. 23 was to establish the true freedom of a normal corporate entity under the Companies Act as specified in the clause. Incomplete qualifications are set out in the Bill. Under the Bill, money can be borrowed because it may be needed to continue the provision. It may be a duty of directors to seek to continue the survival of the company in the interests of shareholders, customers, suppliers and, above all, staff and pupils. If it is a question of borrowing money on the assets, who has the lien on the assets? If it is a company limited by guarantee, the assets may be far more valuable than the combined value of the guarantees, in which case do the Government have a right of lien by way of indemnity if they accept that there has to be some liability to ensure that the provision of education continues? Is it to the degree guaranteed, or is for the total value of the assets over time?

If directors have a duty to forewarn at an early stage, at what point do their duties in relation to fraudulent trading come into play? I am concerned that directors could be guilty of fraudulent trading if they try to continue the uninterrupted education of the pupils, without having a duty to warn the Government when there is a remote financial risk, which anyone could define in theory. It might be necessary for them to warn the Government so that they can step in to intervene through the Secretary of State's powers as set out in clause 12. Anyone who trades within six months of a company going into receivership is at risk. Every director knows that. It is rightly of deep concern to any director. One reason why people feel that they can trust companies and trade with them is that directors dare not put themselves into that position by seeking to trade when they are insolvent.

Those are the questions that the amendment seeks to flush out. There is deep confusion at the heart of the Government's thinking, and I look forward to the Minister's response. I hope that he will accept the amendment for all the reasons that I have tried to outline.

Mr Stephen Timms (Minister of State (School Standards), Department for Education and Skills; East Ham, Labour)

I do not think that there is the confusion. As I said earlier, we want companies to operate as flexibly as possible but with several basic safeguards to offer protection. Those safeguards include preventing schools from borrowing money without permission. The hon. Member for Eddisbury asked several reasonable questions about the borrowing abilities of the company, and I should perhaps point out first that we envisage two types of company. One is formed to undertake procurement activities on behalf of several schools, and the other is a service provider company in which several schools come together to provide services to either themselves or other schools. There is a distinction between the two. Local education authorities will be liable for some of the debts of procurement companies, but not for those of the service provider companies.

The hon. Gentleman asked about limited liability companies. That will be set out in the policy statement that I promised the Committee. It is likely that many purchasing companies will be limited by guarantee, but much less likely for service delivery companies. If we decide that companies should be limited by guarantee, my expectation would be that the liability would be limited to a nominal amount-£10, or along the lines that the hon. Gentleman suggested.

To reclaim VAT, which a company providing procurement for schools would need to be able to do, such companies will be deemed to be acting as agents of the LEA, which is why the LEA becomes liable in those circumstances. That does not arise with service provider companies. Purchaser companies will be spending their member schools' budget share; service delivery companies will not-they will be charging for their services. We will introduce a system through regulations whereby LEAs can monitor companies and act appropriately on that monitoring. Regulations will provide for the supervision and auditing of companies, which may involve designating a supervising LEA. Companies will be required to make financial information available to LEAs, so that risk can be minimised. If a company is financially mismanaged, regulations will provide a warning mechanism and, should it be necessary, arrangements for schools to leave the company or for winding up the company.

The amendment would grant governing bodies of member schools and companies the ability to borrow money secured on the company's assets, without having to seek permission. That would reduce the effectiveness of the basic financial safeguards that I described. Our proposition is that schools must seek permission to borrow because, in the circumstances that I outlined, liabilities could arise on an LEA. If the schools have permission, they will be able to secure the borrowing on the assets of the company. There is nothing to prevent that, and it might be appropriate.

It is worth noting that the companies are unlikely to be asset rich. For example, the land and buildings of the individual school members will not transfer to the company, so no loan could be secured on them. Ownership of land and buildings depends on the category of school in the framework. No maintained school would be free to transfer them. The LEA owns the land and buildings of community schools; trustees, which are subject to charity law, own the land and buildings of voluntary schools; and the governing body of a foundation school, which is also subject to charity law, owns the land and buildings of foundation schools.

Mr Graham Brady (Altrincham & Sale West, Conservative)

The Minister's reply is helpful, as my hon. Friend the Member for Eddisbury will agree. In the instance of a governing body establishing a company to provide an educational service, which might be operating a school, possibly in an area where another school has failed, it would presumably be possible for that company to purchase assets, schools buildings and so on, in order to carry out its functions.

Mr Stephen Timms (Minister of State (School Standards), Department for Education and Skills; East Ham, Labour)

I am grateful to the hon. Gentleman for intervening on that point, as we do not envisage companies running schools. It will remain the governing body's task to run the school. Companies will be established to provide services to support the governing bodies in that work. Given that construct, the circumstances that the hon. Gentleman described will not arise. Indeed, his hon. Friend the Member for Eddisbury expressed anxieties about education being put at risk. The Committee should not worry about that; education will continue as normal. The school budget share is separate and will continue to be so. We do not envisage the companies running schools but providing services to support governing bodies in the work that they carry out.

Mr Stephen O'Brien (Eddisbury, Conservative)

The Minister shed some light on the nature of the ownership of assets, which was not clear from the Bill or the explanatory notes without having the regulations or the policy statement. The amendments are important in flushing out what the Bill intends, as it lacks clarity.

For example, under existing law and regulations, a private company has offered a high school in my constituency-one of the top five in the country-an information technology centre. The school has been exceptionally positive in wanting to accept it, but the LEA, which takes its responsibilities seriously, took a long time to negotiate the form of support and the contract. In this case, the assets are not land and buildings but the services being provided by the private company for the pupils.

Information technology assets tend to depreciate rapidly, which is an accounting issue, but, none the less, they are assets and in the early days before depreciation bites, they could be of great value. Have the Government taken account of the fact that assets are not just land and buildings?

Mr Stephen Timms (Minister of State (School Standards), Department for Education and Skills; East Ham, Labour)

I do not have details of the hon. Gentleman's example. He is right; there could be computer assets. It is unlikely that people would want to borrow on those assets, although that must be considered. I agree with the hon. Gentleman that it is helpful for questions and answers on what I accept are probing amendments to be placed on the record. There would be serious concerns if significant land and buildings were involved; I hope that I have reassured the hon. Gentleman that that is not the case.

Mr Andrew Turner (Isle of Wight, Conservative)

I assume, when the Minister says that companies will not be allowed to run schools, that he means they will not be able to take the place of the governing body, which is the legal entity, but that otherwise the delivery of services to schools is more or less unlimited. That may be with the exception of clauses 34 and 35, relating to the provision of staffing, which is perhaps the most important service that a school can require. Have I understood the Government's approach correctly?

Mr Stephen Timms (Minister of State (School Standards), Department for Education and Skills; East Ham, Labour)

Yes, the hon. Gentleman is right. We envisage that governing bodies will continue to have their current role and will not be replaced. There could be models in which a company replaced a governing body, but it is important for the Committee to recognise that we do not envisage such a model in this respect.

Mr Stephen O'Brien (Eddisbury, Conservative)

I noted the Minister's explanation that an LEA would be liable for some of the debts of a procurement company, because it would be acting as the agent of the LEA. I was not sure where the definition of ''some'' would come. I hope that I heard him correctly. That situation will need to be explored. Although that is intended to be the use of a budget, a crisis will be caused when the money has been spent, the budget used and there is an inability to recover a payment. There will be such failures, because we do not live in a perfect world.

It would be inappropriate to delve into the detail, but the conceptual difficulty has been placed on the record. I very much hope that the Minister and his Department will reflect on it and that we shall hear more later, whether in Committee or in another place. In the light of our discussion, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 10 ordered to stand part of the Bill.