James Brokenshire (Hornchurch, Conservative)

I beg to move amendment No. 58, in clause 62, page 25, line 2, leave out

‘, or any return of capital,’.

We return to an issue originally highlighted in the other place. Although I heard the comments made by the Minister for Industry and the Regions about returning to issues that were debated in another place, it is valid for this Committee to examine issues and ensure that the right conclusions were reached. It is our duty and responsibility to hold the Government to account, so I feel no compunction at all about raising issues on which there may have been some debate in the other place.

The clause makes provision for certain companies to continue to use a name that does not end with “limited” or any other permitted alternative. The clause sets out certain conditions, the first of which is that the object of the relevant company must be the promotion of certain things, such as art, science, religion or charity. There is a further requirement for companies’  articles to include certain provisions, including the prohibition of payment of any dividends and of any return of capital to its members. In the other place, my noble Friend Lord Hodgson rightly pointed out that the requirement prohibiting a return of capital is new and departs from the provisions of section 19 of the Companies Act 1985. That means that some companies would be required to change their articles to maintain compliance with the expanded requirement.

Although I recognise that there are very few companies still benefiting from a licence under section 19 of the 1985 Act, I was not persuaded by Lord McKenzie’s reply, in which he mentioned the deregulatory nature of the clause, as it seems clear that the companies concerned will be obliged to change their articles if they are to continue to rely on the clause. That may now be easier, as exempt companies no longer need to apply to the Department of Trade and Industry for approval when they amend their articles, but it is slightly peculiar to suggest that that is deregulatory, when the relevant companies will be required to take positive steps to retain their status and will potentially incur cost and expense.

Lord McKenzie said in Grand Committee that the change was justified

“to ensure that exempt companies do not act in a way that is inconsistent with their status”.—[Official Report, House of Lords, 30 January 2006; Vol. 678, c. GC51-52.]

Could the Minister give an example of an exempt company that has used its powers inappropriately? If not, why is an additional burden being placed on a small group of companies? Amendment No. 58 would delete the reference to the return of capital to bring clause 62 in line with section 19 of the 1985 Act.

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

I just want to comment briefly on this amendment. I have had a great deal of sympathy with the Conservative amendments so far, but I have a problem with this one, and I ask the hon. Gentleman to reply to the following point in his closing remarks.

The clause is in line with a basic principle of company law: the protection of creditors. If a company has the word “limited” after its name, that puts potential creditors on notice that they might not get their money and they cannot pursue shareholders for it. It is at least arguable that a company that can return capital is one that puts at risk the creditor’s position. Therefore, it is reasonable for the clause to stand as it does, because it is protecting potential creditors from that particular possible abuse, although to a small extent only, because there are not many of these companies. I recognise that it will not be a very important matter in practice, but in theory this is the right thing to do.

Vera Baird (Parliamentary Under-Secretary, Department for Constitutional Affairs; Redcar, Labour)

I am grateful for that thoughtful contribution made by the hon. Gentleman on behalf of the Liberal Democrats. He is correct to say that the clause runs with the grain of company law generally. Apparently, it is likely to affect 21 active companies—that is the number I have been told—which represents a small group, because most not-for-profit companies that are exempt from the requirement to have the word “limited” are companies limited by guarantee.

Under the Companies Act 1985—the present legislation—none of those 21 companies can return  capital to their members, because they do not have the authority in their articles to do so, and they cannot change their articles without consent from the DTI. However, under part 19 of the Bill, it will no longer be necessary for companies’ articles to authorise reductions of capital or to authorise companies purchasing their own shares. Furthermore, exempt companies will no longer need to apply to the DTI for approval when they amend their articles, although the Bill ensures that, as at present, companies limited by shares exempt from the requirement for their name to end in “limited” may not return capital to members. I broadly embrace the point made by the hon. Gentleman that to allow them to do so would be wholly inconsistent with the grounds for the exemption. The amendment would remove exactly the safeguard that he has pinpointed.

I suppose that it is a sort of trade-off. The company’s articles cannot allow it to do inappropriate things with its money, so just as it is inappropriate for not-for-profit companies to pay dividends it is inappropriate for them to return money to their shareholders in other ways, for instance by buying back the shares. There is a clear and strong purpose for this provision to remain as it is, and I invite the hon. Member for Hornchurch to withdraw his amendment.

James Brokenshire (Hornchurch, Conservative)

I thank the Minister and the hon. Member for Cambridge (David Howarth) for their comments.

Vera Baird (Parliamentary Under-Secretary, Department for Constitutional Affairs; Redcar, Labour)

I owe the hon. Member for Hornchurch an apology, as he asked me whether there was an example. There is not, because there is no power to return capital at present without provision in the articles so the situation never arises.

James Brokenshire (Hornchurch, Conservative)

I am grateful to the Minister for that explanation of the rationale for this particular change in the law, which did not come out as clearly as it might have in the reading of the debate in the other place. I am also grateful for the clarification provided by the hon. Member for Cambridge. We raised this point to ensure that we were not entering into regulation where it was not required, particularly, as the Minister rightly said, because we are talking about only 20 companies. I know that a small number only would potentially be affected by this provision, but this is about ensuring that, in dealing with this type of problem, we are not using a sledgehammer to crack a nut. In light of the Minister’s comments, I beg to ask leave to withdraw the amendment.