Clause 11 - Limits on powers conferred by section 10
Education Bill
12:15 pm
Mr Stephen O'Brien (Eddisbury, Conservative)
If I am tired of my voice, everyone else must be doubly tired of it. I apologise for what appears to be a string of my amendments.
Amendment No. 26 would insert sub-paragraph (iii) at the point where the prescribed requirements are identified in clause 11(3)(c)(ii). Sub-paragraph (iii) would provide that those requirements would have to show satisfaction with
''a satisfactorily completed process of due diligence, absence of conflict of interests, due process and the taking of references''.
By any test, that is the obvious and common-sense nature of engaging in risk. One would expect best practice and a good track record that has generated a higher degree of commercial confidence than before, when commercial matters were not as transparent as they are today in corporate life. All too often, however, there is a justified accusation that obvious due processes are ignored by the ignorant or the greedy when engaging in corporate or commercial risk. I do not seek to over-regulate, but the amendment would make a sensible addition, as the restriction is not set out in regulations.
The Minister's response may be that what the amendments propose will be set out in the regulations. I do not want to rehearse yet again my deep frustration at the lack of regulations, but even pro forma, or privately drafted, regulations would help to give confidence and guidance as to what process we can expect by which the freedoms and controls will interplay with the incentives to set up corporate entities that will affect the ability to provide educational services. That is why it is important to debate these amendments.
We touched on the other aspect of the issue under the previous group of amendments. Without the references in amendment No. 26 to due diligence, absence of conflict of interests, due process and the taking of references, there is the presumption that it will be more difficult for someone who feels aggrieved to apply for judicial review. If the Government, public servants or local government have not followed basic processes in making decisions, people should always be allowed to challenge them. The amendment would also aid all those involved in decision making by providing a handy checklist to ensure that they could not be challenged at a later date.
As we reach amendment No. 61, I see some crestfallen faces around me, as there is quite a lot of wordage. The extra sub-paragraphs (iv) to (xv) are intended to demonstrate the degree to which we, and all those who come after us, need to know the expected risks, opportunities, responsibilities, liabilities, and potential guarantees and indemnities. We also need to know about the ability to service a business that will make the procurement or service provision available in the interests of education and schools, who will carry the benefit and who is responsible for the burden of those corporate responsibilities.
I do not apologise for the fact that the amendment is something of a shopping list of things that occurred to me as I read the Bill and wondered where certain provisions were. Having some experience in the corporate world, I expected to see those provisions and duties set out clearly in the Bill.
Under the Companies Acts and memorandums and articles of companies, there are obligations such as the first one in the amendment: to maintain an asset register. That should be made explicit in the Bill because those who will operate the legislation will not have had the benefit of sitting in Committee, riveted, as we are, by the Minister's answers and knowing that the provision does not necessarily mean that schools can own land and buildings. An asset register therefore becomes all the more important. It identifies the assets that those who are contracting with companies, particularly those exercising purchasing power, can enforce against.
Under a previous clause, the hon. Member for Harrogate and Knaresborough asked about the potential for the takeover of companies, and I told him that he needed to be patient until we reached these amendments. Unless I am mistaken, which I readily admit I could be, nothing in company law forbids a company that is limited by guarantee-that which is envisaged, subject to consultation, under the Bill-from being subject to takeover or a bid. Indeed, the shareholders might be happy to be on the end of an attractive offer. What director facing heavy mortgage payments would not be glad to accept such a bid? I well understand that individuals will make their personal decisions as and when that comes about, and shareholders and directors would expect to do the same.
The point of sub-paragraph (v) is that there must be provision
''for the conversion of the company to a corporate entity . . . other than a company limited by guarantee or a limited liability partnership''.
I tabled this amendment because I anticipated, somewhat woefully, that the Government would readily accept my limited liability partnership amendment. That little bit is now otiose, given what has just taken place.
Sub-paragraph (vi) deals with the ''flotation of any company'', and sub-paragraph (vii) deals with
''provisions for the limitation on the company in the event of an acquisition, merger, split and disposal of the company''.
Purchasing power arrangements for bus services, school milk and other services, which the Minister has rightly identified as being among those that the Bill is intended to include, are inadequately expressed in the wording.
In the past, take-or-pay contracts put the gas companies under stress because of the need to extract North sea gas on a sustainable basis, and they were lumbered with liabilities. What would prevent companies from entering into a five or seven-year contract for bus services? That may be beneficial, but in the absence of such provisions there may be risks. Of course, such measures may be subject to regulations longer than the Bill, if it becomes an Act. It is important, subject to the laws that apply to such corporate activities, that long-term contracts should protect the interests of children and educational quality.
The amendment is designed to trawl around a huge field of potential corporate activity. The marketplace will rapidly consolidate; five schools in my constituency could choose to take advantage of the powers under the Bill for combined services. The Conservative party argued for that in the general election and I am glad to see it rightly adopted as Government policy. We should not waste taxpayers' money if economies of scale can be secured, especially for support that is not direct classroom provision. If five schools combine, it is easy to imagine five counties working together. Distance is not a factor, as is demonstrated by the power of the distribution companies that supply supermarkets throughout the country.
Only 20 years ago, if a brick were made in Throckley factory in Newcastle, it would not be sold in Sussex. One can now obtain bricks made in Newcastle more cheaply than those made down the road in Pevensey Bay. The economics of distribution have shifted to the point where providing services across five counties will be cheaper. Economies of scale require an understanding of takeovers, flotations, splits and disposals, and how companies can operate without prejudice in the interests of educational provision.
I am concerned that the provisions have not been thought through. Unless the Minister says that a prohibition against such corporate activity will be in the regulations-in which case it should be in the Bill-rapid consolidation will occur because the economies of scale will quickly become national.
The Minister has already indicated the restrictions. Proposed new sub-paragraph (viii) would prevent
''the diversion of revenues and assets of the company''
The Minister said that that should be subject to regulation and suggested that the companies he has in mind would prevent it from happening. We hope that by setting it out as part of the prescribed requirements provision, it can be addressed explicitly.
I noted that the Minister was careful to say that not all companies would be driven by profit. Some, and in time, the vast majority, will be mindful of the excess to running costs that they generate. It is a matter for them if they choose, for politically correct reasons, not to call that a profit. For the benefit of the audit trail, they will find that their accountants will refer to a profit and loss account whether they like it or not. Proposed new sub-paragraph (x) makes provisions for:
''best practice for the nomination and remuneration of directors of the company''.
That is a requirement under the Companies Act 1986, but given our discussions about potential company members, it is necessary to have best practice in terms of nominations for due diligence and to ensure that the right opportunities are created for those of talent, expertise and relevance to the board of the company that will deliver the services. If the Government are concerned about proper motives, they can at least ensure through the nomination procedure and the remuneration of those directors, be they non-executive or executive, that those appointed are highly motivated in terms of public service, and are not necessarily motivated by the company's profit in the hope of benefiting themselves.
Proposed new sub-paragraph (xi) is probably gilding the lily in requiring the provision of annual reports, as that is already a legal requirement. Proposed new sub-paragraph (xii) raises a concern about the initial start-up phase. A number of companies will have no track record. In previous answers, the Government made it clear that borrowing would be restricted by commission only. As the new companies will not go through the discipline of presentations to bankers when seeking to borrow money, interim audited reports should be provided in the initial financial period. That is why I seek to put that protection in place. I hope that the Government will find that an attractive way of imposing early controls on the companies.
We have touched on the winding up of companies. While the Government are learning lessons from the Railtrack administration debacle, directors risk not knowing their duties in cases where there is a potential funding shortfall and a necessity to wind up the company, but where service provision must be continued so as not to prejudice children's education. We have already dealt with the provision of guarantees for the discharge of liabilities.
The most important issue is contained in proposed new sub-paragraph (xv). I urge the Minister to look carefully at it, because it goes to the heart of the matter. Reference to Railtrack might seem provocative, but it is a live example of a company being forced into administration by an entity outside the board. What duties did Railtrack directors have to enable someone from outside the board to affect the company's activities? The amendment would show that companies operating under the Bill might well affect the continued provision of education, and the quality required and expected. If the directors do not have some form of duty in addition to that expected of them under current law, children's education could be prejudiced.
Clumsy as that provision is, it is intended to convey an important point, which I hope the Government will consider carefully. Amendment No. 61 is grouped with amendment No. 62, which seeks to require the Secretary of State to
''intervene to place upon a company a scheme of arrangement or to order divestment of assets with due fair market value compensation''.
I hope that the Minister recognises that there are lessons to be learned from the Railtrack experience. This is not a substitute for refusing to admit that there has been a dogmatic discussion about nationalisation or privatisation of these services. Where corporate identity exists and someone causes an event to take place which forces a company either into administration or to face potential winding-up, assets and obligations are owed to a number of what would be described in these politically correct times as stakeholders, be they customers, suppliers or shareholders.
It cannot be said that shareholders are evil, because the Government will look for shareholders to create the companies in the first place. They should not say, ''Thanks, we'll have your money now, but when things get tough and go wrong, you're the first we're going to drop''. That will be the case unless amendment No. 62 is put in place to recognise that shareholders take a risk. They do not expect to be taking such a risk if the Government are to sponsor and encourage the acceptance of a corporate feel to the marketplace, allowing them to release money for public services, as we all wish to see.
The Government must take responsibility when they choose to affect the future of corporate entities. They must not fail to pay fair compensation to the shareholders on whose money they relied to get the scheme off the ground in the first place. Amendment No. 26 makes a serious point: if the Government do not accept it, a powerful disincentive may be created and the mechanism will fail to deliver the benefits that we all want.