Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I beg to move amendment No. 16, in clause 32, page 12, line 40, leave out subsection (1) and insert—

‘(1) The objects of every company shall be unrestricted'.

The clause deals with the statement of a company’s objects. The amendment probes the new provisions, but essentially reflects the fact that the ultra vires principle is of declining importance to what a company can do, or how or for what purpose it is run. Almost the only time that it arises is when banking lawyers check that a company is not restricted from borrowing. Frankly, in today’s corporate world, I can see little reason why such checks should be necessary.

I appreciate, of course, that that thinking is partly behind the merger of the memorandum and articles of association, as proposed in the Bill. However, the slow death of the objects, which the clause will induce, could cause transitional confusion, particularly when objects are hidden in articles. Is it not time therefore to bite the bullet and have the general objects provisions, which most new companies adopt, become the standard?

Finally, once the memorandum and articles of association are merged, can we be sure that we will continue to know what constitutes an object? Will the Government be issuing guidance on how those should be described in the articles of association, in order to avoid confusion?

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

My view of the amendment is similar to my view on entrenchment, which we have already discussed. Although I am sympathetic with the direction of change throughout normal commercial events in the world outside, I am still concerned about removing from companies the option of restricting their objects, if they find that commercially convenient. That situation might arise in joint ventures. Two business partners might find it useful to restrict the purposes to which a vehicle that they are using is put.

An argument could be made for saying that changes in company law over a long period have been towards general purpose companies—companies whose objects are not restricted—but that is no reason to remove the option. There are no effects on third parties. Because of the abolition of the ultra vires rules in almost all circumstances, there is no need to worry about the effects of restricting the objects on the outside world.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

The hon. Gentleman makes an important point. My understanding, however, is that where a company has general objects, pretty much anything goes, and most new companies have general objects. However, when a company retains specific objects, those must still be adhered to. As we move increasingly towards general objects, those that get left behind will increasingly lead to confusion.

David Howarth (Shadow Minister (Energy), Trade & Industry; Cambridge, Liberal Democrat)

The hon. Gentleman makes an interesting point. The deep conservatism of the drafting of company objects over the decades means that previous legal positions are left in companies’ objects at a lower layer and new objects or ways of thinking are layered over those, and we end up in an extraordinary situation where we have restricted objects, with fewer and fewer restricted objects placed above them. That is confusing.

I return to the basic principle that members of companies are entitled to do as they wish with their companies and with the way in which they set up their  businesses. The problem with the way in which lawyers have given advice to companies on the subject is a separate problem.

Margaret Hodge (Minister of State (Industry and the Regions), Department of Trade and Industry; Barking, Labour)

The hon. Gentleman makes my points for me. We seem to be revisiting this morning’s debate on entrenchment. In the clause we are not trying in any way to undermine the general thrust towards companies’ making more general provisions around their objects but to recognise that some companies want flexibility and that that will be reflected in their objects.

A company can choose to restrict its objects. Its directors will then be obliged to observe those restrictions. In clause 157 in particular, we impose a duty on the directors to act in accordance with the company’s constitution. No doubt we can come back to that point when we discuss the clause. As now, any restriction that applies to a company’s objects will have no effect on third parties dealing with companies because of the effect of clauses 39 and 40.

The proposed amendment would remove the flexibility allowing companies that choose to restrict their objects to do so. Although it would limit the choice, it is available to members of companies who might have good reason to wish to restrict their objects. Joint ventures, charities and specialist company vehicles, such as community interest companies, might all want to restrict their objects. The Bill gives them the freedom so to do, and the amendment would remove that freedom. We see no reason to remove the flexibility of companies to restrict their objects and consequently the powers of their directors to comply with those objects. I hope that the hon. Gentleman will not press the amendment to a vote.

Jonathan Djanogly (Shadow Solicitor General (Also Shadow Minister for Trade and Industry), Law Officers (Assist the Home Affairs Team); Huntingdon, Conservative)

I shall not press the amendment to a vote, but it was important to make the point. I do not believe that the issue is the same as entrenchment: entrenchment is a new issue, whereas what we are dealing with now has been an ongoing process over centuries. We have reached a stage where, from a policy point of view, it would be helpful to move on. However, the Minister has made her point and I beg to ask leave to withdraw the amendment.