Clause 39
Company Law Reform Bill [Lords]
5:30 pm
Quentin Davies (Grantham and Stamford, Conservative)
I must apologise that, because of sheer negligence, I omitted to refer to my interests, which are declared in the Register of Members’ Interests, when I spoke on the Bill in Committee for the first time this morning. I spelled those interests out on Second Reading, so I hope that I will be spared doing so now, although I am happy to do so if required.
I do not rise to make a substantive point on the clause but because I think an explanation is required. I may be, and probably am, missing something obvious, but I do not believe that I am the only person likely to be confused when reading the Bill. Earlier, we passed clause 32, subsection (1) which says:
“Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.”
The clear implication is that, if the company’s articles do restrict the objects of the company, the company will be so restricted by those articles.
Clause 39(1) states:
“The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution.”
In the clauses that we have discussed this afternoon, “constitution” has encompassed the articles, but subsection (1) states that nothing in the articles can restrict the company in any way. However, as I read it and as others will naturally read it, clause 32 states, at least by implication, that the company’s articles restrict the company’s activities if the articles are defined and drafted in such a fashion as to embody that restriction.
I am perplexed by the apparent contradiction between clauses 32 and 39. If the Bill becomes law, as I trust it will, it will be in the public interest that anyone reading the new Act should not suffer the same confusion. We do not want to waste the public’s timeor that of the legal profession. If there is no contradiction, I should be grateful if the Minister explained why. If there is a danger of there being one, perhaps she could do something about it on Report.
Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)
I shall read what I have been given on the purpose of clause 39, which I think gives the explanation that the hon. Gentleman seeks. If I get further information, I shall help him with it.
Clause 39 is about protecting third parties from the internal restrictions on a company’s capacity that may be contained in a company’s constitution. It provides that the validity of a company’s acts should not be questioned on the grounds of a lack of capacity because of anything in a company’s constitution. The clause replaces section 35(1) of the 1985 Act, which makes similar provision for restrictions on a company’s capacity contained in the memorandum. Under the Bill, the memorandum serves a more limited purpose, and the provisions in section 35(1) have been updated to reflect the fact that in future any restrictions on what a company can do—that is, restrictions on a company’s objects—will be set out in the articles of association.
The clause does not contain provisions corresponding to section 35(2) and (3) of the 1985 Act, which we are transposing, as the combination of the fact that under the Bill a company may have unrestricted objects and the fact that a specific duty on directors to abide by the company’s constitution is provided for in clause 157, renders those subsections unnecessary. Like section 35 of the 1985 Act, clause 39(2) makes it clear that special rules apply to charities. The provision is important and protects third parties that have dealings with companies. In that context, it should stand part of the Bill.
Quentin Davies (Grantham and Stamford, Conservative)
I have been listening to the Minister with great attention and interest, but I am not aware of having received any answer, even an attempted one, to the point that I raised, which was about the apparent incoherence between clauses 32 and 39.
Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)
If I understand it properly, the point is that, under the clause, people acting in good faith will have some relief.
Quentin Davies (Grantham and Stamford, Conservative)
Frankly, I do not think that that is good enough. We must produce clear legislation, not a minefield of confusion for the future. There is nothing about good faith in modifying or in any way qualifying clause 39(1). There is a clear contradiction betweenthe two clauses, and I hope that the Minister willaddress it.
Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)
My understanding is that there is not. I know that that is what is asserted but the clause specifically refers to third parties and to people acting in good faith. It is a complete transposition, except in the ways that I have said, of legislation in section 35 of the 1985 Act. It might be helpful if the hon. Gentleman turned to clause 40, which specifically discusses the powers of directors that will bind the articles of the company. Clause 39 concerns others acting in good faith and third parties.
David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)
I think that there is a fundamental distinction between clause 39 and clause 40. Clause 39 does not refer to good faith, and deliberately so. The point is that we should not go back to the bad old days of the ultra vires doctrine, under which disputes broke out in the context of contract litigation about whether the company had the power to make the contract in the first place and as either side of the contract might want to try to get out of the deal on the basis that the company lacked capacity to make it. The purpose of clause 39, and of its predecessor, is to end all such litigation and to ensure that nothing in the company’s constitution can be raised in litigation to undermine such a contract. Clause 40, on the other hand is about what happened—
Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)
I had actually completed what I was saying.
John Bercow (Buckingham, Conservative)
I apologise to the Minister. I had the distinct impression that she was giving way to the hon. Member for Cambridge. If that was not the case, I am happy to tender my apologies to the hon. Gentleman.
David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)
Thank you, Mr. Bercow. I had almost finished.
Clause 40 deals with directors dealing on behalf of the company and is quite separate from the question of the company’s constitution.
Quentin Davies (Grantham and Stamford, Conservative)
I am grateful for the opportunity briefly to come back to the subject.
As the hon. Member for Cambridge rightly says, clause 40 deals with quite a different matter, which we are coming on to and which is important. It deals with directors and whether they can be deemed to be acting ultra vires and, if so, what happens.
The hon. Gentleman did not address my point about the lack of coherence—I call it contradiction, and advisedly so—between clauses 32 and 39. Clause 39, with which I have no problem, states that it is not possible to set aside a decision or an obligation of a company on the grounds that it was entered into ultra vires. That seems inconsistent with clause 32, which states:
“Unless a company’s articles specifically restrict the objects of the company, its objects are unrestricted.”
That implies that if a company’s articles do so restrict, the company is consequently restricted by them. In other words, it upholds restrictions in the articles.
What will happen under the Bill, if it becomes law, if there is a contradiction between a company’s acts and the restrictions in its articles? Would it not be easier to have a separate clause that says that that is not a reason to set aside a contract and that the company is still liable for the undertakings in the contract, but nevertheless that maybe some sanctions should be taken against the director who acted inconsistently with the article of the company and that there would be just cause for the shareholders to pursue them on those grounds? I am merely setting out that example because it is important that we do not leave any degree of confusion in our wake.
David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)
The hon. Gentleman has set out an understanding of how the two clauses will act together. Clause 32 refers only to internal conflicts within the company, say between shareholders and directors who have acted in a way that is not authorised by the company’s constitution. The later clause has to do with third-party ability. He has explained exactly how it works. He might be right on the drafting of the clauses, but in practice I think that the position is well understood.
Quentin Davies (Grantham and Stamford, Conservative)
In practice, the position might be well understood, but the whole point of having a new company law Act is to enshrine in statute law even what might be well understood in existing jurisprudence. If not, is there any point in legislating? If in fact, existing jurisprudence is sufficient and perfectly clear, why are we wasting our time?
That exchange has been most revealing. There might be a basis for something of an alliance, at least on the Opposition Benches in the Committee, in order to improve the drafting. We have no substantive difference of opinion from the Government, but we would like some improvement in the drafting on Report.