Company Law Reform Bill [HL]

– in the House of Lords at 3:06 pm on 16 May 2006.

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Moved accordingly, and, on Question, Motion agreed to.

Clause 502 [Special notice required for resolution removing auditor from office]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 336:

Page 238, line 30, at end insert—

"( ) The notice of the resolution must state the reasons for the proposed removal of the auditor from office."

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, Amendment No. 336 inserts a new subsection into Clause 502, which deals with the special notice procedure for removing an auditor from office. I am pleased to see that so many noble Lords are interested in this issue. My amendment requires the notice of the resolution to include the reasons for the proposed removal. In most cases members appoint auditors at the annual general meeting. In some cases the directors appoint new auditors if one resigns during the year. Quite rightly the auditors cannot be removed by the directors during the year; instead they must seek the members' approval. The auditors can submit their own representations, and in most cases the directors have to circulate them. However, the directors are not required to say why they are seeking a resolution to get rid of the auditors. Indeed, if the auditors prepare no representations, there might be no information at all available to shareholders, who need to decide how to cast their proxy votes, or whether to make the effort to attend the meeting.

The current procedure seems designed to keep the shareholders in the dark, placing the entire burden of information on the auditors' representations. But the auditors are not seeking their own removal. In any event, the directors do not in all cases have to circulate the representations.

A related point is Part 1 of Article 36 of the eighth directive, which the Minister told us in Grand Committee the Government do not know how to implement. This says that auditors must not be removed on the grounds of divergence of opinion on accounting treatments or audit procedures. It is highly likely that at present, when auditors are removed, it is precisely for these reasons. I rather suspect that the Government resisted my amendment in Grand Committee because it would make transparent the fact that auditor removal occurs in the very circumstances which will be prohibited by the directive.

In Grand Committee, the Minister merely told us that implementing the directive caused problems because it might stop members getting rid of an auditor they no longer trust. The truth is that members have no role in initiating the removal of auditors, other than to approve the directors' recommendation. It is not the members' trust but that of the directors that is at issue. In the absence of members being protected from directors removing auditors if they disagree with them over auditing or accounting, we believe that the case for disclosure of reasons is doubly strong. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, as has been outlined by the noble Baroness, at present a company is entitled to remove its auditor at any time by ordinary resolution and does not need to justify its decision. This provision is currently in Section 391 of the Companies Act 1985, and it is repeated here in Clause 501. The audit directive—the replacement for the eighth company law directive, which was finally adopted on 25 April—will oblige us to ensure that auditors may be dismissed only where there are proper grounds.

We are implementing some of the new provisions in the new audit directive in this part of the Bill, notably those relating to the senior statutory auditor and to auditors' resignation statements. Other implementing provisions are to be found in Part 32. For the rest, we shall consult fully after publication of the final text of the directive before deciding how to implement it.

The provision about the dismissal of auditors is difficult to implement in the UK. There is no distinction in the UK between the company and the members acting in general meeting. In other European jurisdictions, however, the general meeting of the members of the company can be an organ of the company, distinct from the company itself. The directive, or at least the provision in it about dismissal of auditors, appears to be predicated upon the distinction between the company and its members in accordance with which a company could act against the interests of the members by dismissing the auditors by resolution of the directors. This, however, is not possible in the UK, where not only is the company identical with the members in general meeting but it is only by resolution in general meeting that auditors may be dismissed. We shall need to do some work to find a way of constraining the company's ability to dismiss its auditors without preventing the members in general meeting being free to dismiss auditors in whom they no longer have confidence.

In Grand Committee, and again today, it was suggested that it is fanciful to imagine the members deciding to get rid of an auditor, but in the real world the directors decide such a thing and the shareholders probably take little interest.

It is important to remember that the provisions in UK company law and the audit directive about dismissal of auditors apply to all companies. It is not just about the small minority of companies with hundreds of thousands of shareholders; most of the companies affected are relatively small private companies, and in most of those the shareholders are few and engaged.

At present, such shareholders can dismiss their auditor without having to justify their decision. We believe it is right that they should be able to do that, so we need to think carefully about how to implement the new audit directive. It has to be implemented by June 2008, and we see no reason for haste on this aspect. We need to consult those affected and to find the best way of doing it. We may find that we need to introduce a statement of reasons into a notice of a resolution for removal, as in Amendment No. 336; or we may be able to use the statement of reasons that the company has to send to the audit authority under Clause 514 when an auditor leaves. In any case, there will need to be some method by which the reasons are disclosed and recorded. But that in itself is not enough: to comply with the directive, we shall also have to provide a rule that the reasons must meet certain criteria, so as to be "good reason". We will somehow need to work in the reasons that according to the directive are not to be counted as good reason.

We shall also need to decide whether to provide specific mechanisms for challenging the reasons given and whether to provide specific remedies in the event of reasons being found to be adequate or of challenges being found to be unjustified. It is our strong view that it would be best to work out the best overall approach to this requirement in the directive, to consult widely with all of those who will be affected and then to implement it as an overall solution rather than to introduce parts of a possible piecemeal approach. Accordingly, I ask the noble Baroness not to press the amendment.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 3:15, 16 May 2006

My Lords, will the noble Lord say something about the timescale for consultation and the manner in which the eighth directive will be implemented?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, as I said, the directive has to be introduced by June 2008, so the consultation clearly has to take place between now and then. The process will be the normal one that applies. We expect it to consult all those who are interested in a wide and consistent manner. But it is important that we address each of the issues that I have outlined. I hope that the noble Baroness will accept that the amendment which is before us would not be particularly helpful standing alone without all those other issues that need to be looked at as part of the implementation of the directive.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I thank the Minister for that reply. I was disappointed by the highly legalistic nature of the arguments that he made. This, of course, is not an issue about private companies; it is fundamentally about companies with dispersed shareholdings and in particular those companies which have listings, because it is in those circumstances that there is a wider interest in the reasons for removal. But I will consider carefully what the Minister has said. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 337:

Page 239, line 9, leave out from second "the" to end of line 10 and insert "auditor is using the provisions of this section to secure needless publicity for defamatory matter"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in moving Amendment No. 337, I wish to speak also to the other amendments in the group.

In Grand Committee we agreed to take on board an amendment to what is now Clause 505, which was put forward by the noble Baroness, Lady Goudie, and supported by the noble Baroness, Lady Noakes.

We have looked at the various places in the Bill where a company is obliged to circulate a statement made by an auditor who is ceasing to hold office. We have agreed that the test for whether a company can be relieved from its obligation should be if the auditor is seeking to secure,

"needless publicity for defamatory matter".

I am grateful to noble Lords who have put down similar amendments to four of the five clauses but I do not believe that the effect of them would be very different from our amendments. I suggest that we go with the wording provided by parliamentary counsel. I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I have three amendments in this group. I am delighted that the Government took the measure away and brought forward their own better and more comprehensive amendments.

Photo of Baroness Goudie Baroness Goudie Labour

My Lords, I am very happy with these government amendments. I will not move my amendment when we reach it.

On Question, amendment agreed to.

Clause 505 [Failure to re-appoint auditor: special procedure required for written resolution]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 338:

Page 240, line 22, leave out from "the" to end and insert "auditor is using the provisions of this section to secure needless publicity for defamatory matter"

On Question, amendment agreed to.

[Amendments Nos. 339 and 340 not moved.]

Clause 506 [Failure to re-appoint auditor: special notice required for resolution at general meeting]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 341:

Page 241, line 19, leave out from second "the" to end of line 20 and insert "auditor is using the provisions of this section to secure needless publicity for defamatory matter"

On Question, amendment agreed to.

[Amendments Nos. 342 and 343 not moved.]

Clause 509 [Rights of resigning auditor]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 344:

Page 242, line 40, leave out from second "the" to end of line 41 and insert "auditor is using the provisions of this section to secure needless publicity for defamatory matter"

On Question, amendment agreed to.

[Amendments Nos. 345 and 346 not moved.]

Clause 510 [Statement by auditor to be deposited with company]:

Photo of Baroness Goudie Baroness Goudie Labour

moved Amendment No. 347:

Page 243, line 10, leave out from "of" to end of line 14 and insert "any circumstances connected with his ceasing to hold office which he considers should be brought to the attention of the members or creditors of the company, or if he considers that there are no circumstances, a statement that there are none"

Photo of Baroness Goudie Baroness Goudie Labour

My Lords, in moving Amendment No. 347, I wish to speak also to my other amendment which is grouped with it.

While the intention to change the existing Companies Act makes it more difficult for auditors to be candid about the circumstances of the loss of office, the proposed amendment reinstates the relevant voting. My second amendment makes Clause 506 redundant. I would like the Government to look at the matter again. I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, my name appears on Amendment No. 349, with that of the noble Baroness, Lady Goudie, but I also support her other amendments in this group.

In Grand Committee the Minister explained that the Government positively wanted auditors of quoted companies to make a statement of circumstances connected with their leaving office. Amendment No. 349, to which I have added my name, makes it clear that this is a subjective test, which is an extremely important issue.

In Grand Committee the noble Lord, Lord McKenzie, said that the objective test was correct because the auditors were protected from having committed an offence by having taken reasonable steps. I suggest that that misses the point. That defence addresses a different issue of whether they took reasonable steps to issue the statement, but it does not address the auditor setting out his own views and not the views of someone else, or some hypothetical auditor on the Clapham omnibus. The issue is that the statement should be of the circumstances that the auditor thinks are appropriate, so I support the amendments.

Photo of Baroness Goudie Baroness Goudie Labour

My Lords, may I come back on Amendment No. 349 as well? The policy proposed by the Audit Quality Forum recommends a statement of the circumstances which the auditor considers are connected with his seeking to hold office. That qualification is important as it is a statement from the auditors and therefore involves judgment, and the current wording does not make that clear.

Photo of Lord Lyell Lord Lyell Conservative

My Lords, I support the noble Baroness, Lady Goudie, and my noble friend in what they have said; particularly my noble friend, since she has considerable experience. Indeed, my own experience of auditing goes back rather like the admiral in that admirable musical "Evita" who says, "They still call me an admiral but I left the sea many years ago". It is vital that the auditor should have the freedom—I hope not the licence, but the freedom—to say what needs to be said and perhaps to give all the explanations and to put totally at rest any doubts with the company shareholders or indeed with the wider world; with others who might be interested. That is why my noble friend and indeed the noble Baroness, Lady Goudie, have addressed the matter with great clarity. I hope the Government will see their way to support it.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, I would like to support Amendment No. 349. Although the distinction may seem initially to be very slight, to a lawyer I think it would be very substantial. The statement which an auditor makes under Clause 510(3) will be protected by privilege if he is sued for libel in respect of it. If the statement can relate only to the circumstances that were actually connected with his ceasing to hold office, he cannot express the circumstances where he feels that he has been removed because members of the company think that he is getting a little too close to the awkward truth.

Surely what is needed is that he can say, "I feel that I am being removed because I am very unhappy about transaction xyz and I wish to investigate it further, and I think I am being removed because they don't want me to do that". If he can only say what has actually happened and not announce his suspicions he will be prevented by his partners from going down the latter route for fear of landing them in a massive defamation suit. Therefore, Amendment No. 349 is worthy of serious support.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I do not believe that there is anything in the clause as drafted that would prevent an auditor saying what he thought was appropriate if, in the terminology, he was getting close to the awkward truth.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, I am not saying that he is prevented: he can say that he has been removed because they do not like his face. The question is whether the statement is made within the scope of the Act and therefore whether it is one for which he will receive qualified privilege. If he rambles on about the chairman's drinking habits or something, he is not forbidden from doing so, but it is hardly a statement within the scope of the Act. What is important is that he is allowed to make the statement that he needs to make, and to ensure that it is properly protected from defamation proceedings.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, notwithstanding that, I still do not believe that anything in the Bill would prevent the auditor making a full statement on all the issues he believes are connected with his ability to hold office.

Clause 510 deals with the important obligation on an auditor to provide an explanation of why he is no longer going to audit a company for the benefit of the shareholders and creditors. Auditors already have this duty, and the Bill modifies it so that it is more likely that an explanation will be provided. As we explained in Grand Committee, under Section 394 of the Companies Act 1985, an auditor who ceases to hold office for any reason is required to make a statement of the circumstances only if he positively considers that there are circumstances that should be brought to the attention of the members or creditors of the company he is leaving. By contrast, for unquoted companies, Clause 510 requires the auditor to make a statement as the general rule, with the exception that he need not make a statement if he positively decides that there are no circumstances to be brought to the attention of the members or creditors.

As we explained in Grand Committee, we are making these changes because of the importance of ensuring that whenever auditors are leaving because they believe there is a problem with the accounts or with the management of the company, they should make that known to the shareholders and to the public. The change from the 1985 Act shifts the balance in favour of disclosure, not against it. An undecided auditor at present might persuade himself that there are no circumstances that he considers should be brought to the attention of the members or creditors. He may find it more difficult to persuade himself that there are no circumstances that need be brought to their attention.

Amendments Nos. 347 and 348 would together revert the Bill to the existing position under the Act, and the Government continue to believe that the proposals in the Bill are an improvement and help disclosure. For quoted companies, the Bill provides that auditors who are leaving are to be required to make a statement of circumstances in all cases, without any option.

Amendment No. 349 would change the content of the statement from

"circumstances connected with his ceasing to hold office" to

"circumstances which he considers are connected with his ceasing to hold office", which is the nub of the noble Baroness's point. This can be seen as weakening the requirement unnecessarily. It goes without saying that an auditor, or anyone else making a statement of circumstances, will inevitably use his judgment in deciding what is relevant to include. I do not believe that any risk here would be avoided by the amendment. As we said in Grand Committee, there is a defence for an auditor who took all reasonable steps and exercised all due diligence, but I accept the point made by the noble Baroness on the relevance of that provision.

Given that defence, it is not clear whether there are circumstances in which the amendment would have a practical effect. I do not believe that there is a real problem to be solved. Nevertheless, in light of the opinions that have been expressed around the House, we will take this matter away and consider it further, because we want to ensure that we reach the right position. There is no disagreement about what we are trying to achieve. We do not see a need for the amendment, but, given the points made by all noble Lords who have spoken on this matter, I shall take it away and give it further thought, without commitment—it is an issue that we should discuss again at the next stage.

Photo of Baroness Goudie Baroness Goudie Labour

My Lords, I thank the Minister and look forward to hearing from him at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 348 and 349 not moved.]

Clause 511 [Company's duties in relation to statement]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions 3:30, 16 May 2006

moved Amendment No. 350:

Page 244, line 1, leave out "the auditor of the application" and insert—

"(a) the auditor, and

(b) every person who under section 404 is entitled to be sent copies of the accounts. of the application."

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, this small amendment, which seeks to enhance the information that members receive about a departing auditor, was suggested by the UK Shareholders Association. In Grand Committee, the Government were keen to emphasise the relationship between members and the auditors; but that is something of a myth, because, in practice, the relationship is between the directors and the auditors. If the auditor leaves office for any reason, it is right that shareholders are informed.

We support in principle Clause 511, which requires the company to circulate an auditor's statements of circumstances and will be an invariable requirement for quoted companies. But the company can apply to the court not to circulate the notice. If it does so, the shareholder is left completely in the dark until the court has made its decision. That could put weeks, or even months, into the process. My amendment merely asks that the shareholders and others entitled to receive the accounts are informed of the application to the court so that they are on notice that there is an issue.

The very fact that there is a dispute between the outgoing auditors and the directors is an indication that shareholders should have concerns, especially if there should be—as the Government appear to believe—a relationship of trust and confidence between the shareholder and the auditor. It is nonsense to suggest, as the Minister did in Grand Committee, that an

"astute shareholder will be aware of the resignation".—[Official Report, 14/3/06; col. GC 425.]

That is simply not true and it is far from the truth for the vast majority of shareholders.

If the Government believe that shareholders have a genuine role in the auditor/company relationship, they should welcome my amendment. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, again we do not have a complete meeting of minds on this issue. As I said in Grand Committee, we have sympathy with the idea behind this amendment but, on balance, would prefer to leave arrangements as they are and not adopt it. As has been explained, Clause 511 puts a duty on a company to circulate the statement made by a departing auditor. It then provides the company with an opportunity not to circulate it if it can persuade the court that the auditor is abusing his right, or—as it is intended to be amended by the very next amendment, which we have already debated—if he is seeking to secure,

"needless publicity for defamatory matter".

There have apparently been cases where directors have gone to court for permission not to circulate an auditor's statement and not because they genuinely believed the auditor's purpose was to secure needless publicity for a defamatory matter. The directors hoped rather to delay the release of the auditor's statement because it included reasonable criticism of the directors that would be valuable to the shareholders. The directors' hope was that by the time the court had turned down their application, the auditor's statement would be stale and would not have the impact it would have had if circulated straightaway.

In considering such a case, there is an argument that the company must inform the shareholders, although it is not clear how much good it does. All they learn extra is that the directors do not want to circulate to them the statement the auditors have made. This might be of interest to them but it may not be of great value. More importantly, we should look at the main purpose of the clause, which is to enable the company not to circulate material that is unnecessarily defamatory and unlikely to be of use to the shareholders. In such cases, it is plainly of no value to the company to have to go to the expense of informing all its shareholders that it has gone to court.

Whereas we can see that there are cases where circulating this information might have some value, on balance we believe that it would generally have no value, and that it would therefore be inappropriate to force this extra expense on companies. I reiterate: we do have sympathy with the thrust of this point, but ultimately it is just a balance of which is the best way to take it forward. We would prefer to stick with the current formulation.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I thank the Minister for his reply. I accept that it is a question of balance between imposing unnecessary costs on companies on the one hand and on the other hand giving information to shareholders and perhaps even strengthening the hand of the auditors who might be being removed for reasons that are not entirely good. That has happened in the few cases which have gone to court to date where—certainly in the most recent one—the court punished the company by awarding costs against it. That did not go quite far enough because in that case the issue was kept from shareholders for a very long time.

I accept that there is a point of balance and I will consult again with the UK Shareholders Association, but for today, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 351:

Page 244, line 3, leave out from "is" to end of line 4 and insert "using the provisions of section 510 to secure needless publicity for defamatory matter"

On Question, amendment agreed to.

[Amendment No. 352 not moved.]

Clause 513 [Copy of statement to be sent to appropriate audit authority]:

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

moved Amendment No. 353:

Page 245, line 3, leave out "and the company"

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, in moving Amendment No. 353, I shall speak also to the other amendments in my name in this group. This is a slightly complicated group of amendments because, as the House will see, the Government have tabled Amendments Nos. 361 and 362, which introduce two new clauses in place of Clause 513. These new clauses highlight the points made by my amendments in this group, but I fear that, far from answering them, they accentuate the points that I was making.

We have been concerned about the duplication of information flows. Clause 513 and, indeed, the replacement clauses require both the auditor and the company to send identical information to the appropriate audit authorities. We do not believe in waste, and we can see no practical purpose for double information flows unless it is simply to provide evidence that either the company or the auditor has not done what Clause 513 requires for the purposes of a prosecution.

I am aware that the information flows from a company are reduced in the Government's amendments but, unless the Minister makes a convincing case that these duplicate flows should remain, we shall have reservations about accepting the Government's amendments in this group.

I have one question to put to the Minister about his Amendment No. 370, which is in the next group of amendments but has a bearing on these amendments. Amendment No. 370 defines the appropriate audit authority in subsection (1)(a) of the new clause after Clause 514. In the case of a major audit, this is either the Secretary of State or another body, which I believe will be the Public Oversight Board for Accountants. Can the Minister clarify whether it is for the company and the auditors under his new clauses to choose to whom the notifications and statements are sent? If so, what happens if the company sends material to the Secretary of State and the auditors send material to POBA? Do they have to check with each other and do they have to send information to one or both? Are we not creating the possibility of some dreadful paper chases between Whitehall and the City?

We do not oppose the thrust behind Clause 513 and we agree that information about auditor resignations should be passed to the appropriate audit authorities. But we believe that the associated processes should be as efficient as possible and should be based on the principle of avoiding rather than creating bureaucracy. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I start by dealing with the specific question on Amendment No. 370 concerning which body is the appropriate audit authority in relation to a major audit. We believe that, where that delegation has taken place, it is the body to which the Secretary of State has delegated that function, which I think would now be the POB—the "A" has recently disappeared from its title. So we believe that there should be no confusion or duplication with the various flows going in two different routes, as the noble Baroness suggested might arise.

I shall speak to Amendments Nos. 360, 361, 362, 498 and 500 and respond to the other amendments in this group that have already been spoken to. I shall move Amendment No. 360 and so on in due course. We have brought our amendments forward having reflected on the debate on Clause 513 in Grand Committee in relation to amendments similar to those to which the noble Baroness has spoken.

Clause 513 introduces new requirements about the statements that auditors and companies must send to the appropriate audit authority when an auditor's appointment comes to an end. That is in line with the EU audit directive, which was agreed last year and formally adopted on 25 April.

Debate in Grand Committee revealed that the clause is confusing in conflating the duties on the auditor and the company, and the purpose of the new clauses introduced by Amendments Nos. 361 and 362 is to set out these duties separately and clearly. The first new clause deals with the auditor's duty to inform the audit authority when he ceases to be auditor of a company and divides it into two categories, based on the type of company being audited.

If it is a listed company, or another company of major public interest according to criteria issued by the Financial Reporting Council, all statements should be sent to the Secretary of State or to the body to which he has delegated auditor supervisory functions. As that delegation has taken place, it would be to the Professional Oversight Board.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, can the Minister clarify this point? It is important and I would like to pursue it.

Amendment No. 370 states that,

"in the case of a major audit, the Secretary of State or the body to whom the Secretary of State has delegated functions".

It does not indicate that it has to be the body to which the functions have been delegated. It implies that those persons lodging the appropriate statements can choose to which of those two they give them. The Minister repeated that point twice and I would like to be clear about it.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the drafting is not as clear as it might be on that point, but the provisions before us do not only deal with the current delegations that have taken place. Who knows what might happen in the future? That is why it is important to provide the alternative. I would like to repeat that and put in on record. If anything else is needed, I am happy to write on that matter. As that delegation has taken place, the POB is the body to which those submissions should be made.

If the company that the auditor has left is an unlisted company and not otherwise of major public interest, a statement need only be submitted in the case of an auditor's resignation or dismissal by the company and the statement is sent to the auditor's own supervisory body—for example, one of the institutes of chartered accountants—rather than to the POB.

The second new clause sets out the company's duties when its auditor resigns or when it dismisses its auditor. The company has to inform the appropriate audit authority and send it a statement. This can either be a copy of the auditor's statement or a separate statement by the company explaining the reasons for the auditor's departure.

The reason why the company and auditor are both required to send their statements is that when an auditor resigns or is dismissed, it is quite possible that the auditor and the company will have different accounts of the circumstances. This is a requirement of the newly adopted audit directive.

Amendments Nos. 354 and 355 would remove reference to the supervisory bodies so in practice all the statements would go to the POB. Burdening the POB—a relatively small organisation—with details of the circumstance of every auditor who resigns or is dismissed would not be of value.

The relevant part of the audit directive refers to authorities responsible for public oversight and I am advised that the supervisory bodies can be included as they are part of the public oversight system for auditors. The supervisory bodies may have a closer interest in any case as some of the circumstances around dismissal may suggest a problem with an auditor, particularly if there is a pattern. Our intention is that the company should have the choice of whether to send any statement made by an auditor or to send its own. That is what the two paragraphs of subsection (2) of the new clause to be inserted by Amendment No. 362—linked by the word "or"—are meant to achieve.

If the Secretary of State has delegated the functions of supervisory statutory auditors to a body, it is that body to which the auditor or the company should send their statement. That will be clear from the wording of Amendment No. 370, but we will reflect to see if anything further needs to be said. That is the clear intention and I am happy to put it on the record. I am grateful to the noble Baroness for probing this issue so we can be clear on it.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I thank the Minister for his reply and for updating me on the new name of what used to be called POBA. It just shows how difficult it is to keep up these days.

I appreciate what the Minister has said. I would like to read it again in Hansard, but he has answered the point that I made on the duplication of information flow. I hope that he will look again at the drafting as it is ambiguous, whether or not there is a choice of which route information should go. If there is a choice, it is a recipe for administrative problems. I put it no higher than that. I beg leave to withdraw.

Amendment, by leave, withdrawn.

[Amendments Nos. 354 to 359 not moved.]

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 360:

Leave out Clause 513.

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 361 and 362:

After Clause 513, insert the following new clause—

"DUTY OF AUDITOR TO NOTIFY APPROPRIATE AUDIT AUTHORITY

(1) Where—

(a) in the case of a major audit, an auditor ceases for any reason to hold office, or

(b) in the case of an audit that is not a major audit, an auditor ceases to hold office before the end of his term of office, the auditor ceasing to hold office must notify the appropriate audit authority.

(2) The notice must—

(a) inform the appropriate audit authority that he has ceased to hold office, and

(b) be accompanied by a copy of the statement deposited by him at the company's registered office in accordance with section 510.

(3) If the statement so deposited is to the effect that he considers that there are no circumstances in connection with his ceasing to hold office that need to be brought to the attention of members or creditors of the company, the notice must also be accompanied by a statement of the reasons for his ceasing to hold office.

(4) The auditor must comply with this section—

(a) in the case of a major audit, at the same time as he deposits a statement at the company's registered office in accordance with section 510;

(b) in the case of an audit that is not a major audit, at such time (not being earlier than the time mentioned in paragraph (a)) as the appropriate audit authority may require.

(5) A person ceasing to hold office as auditor who fails to comply with this section commits an offence.

(6) If that person is a firm an offence is committed by—

(a) the firm, and

(b) every officer of the firm who is in default.

(7) In proceedings for an offence under this section it is a defence for the person charged to show that he took all reasonable steps and exercised all due diligence to avoid the commission of the offence.

(8) A person guilty of an offence under this section is liable—

(a) on conviction on indictment, to a fine;

(b) on summary conviction, to a fine not exceeding the statutory maximum."

After Clause 513, insert the following new clause—

"DUTY OF COMPANY TO NOTIFY APPROPRIATE AUDIT AUTHORITY

(1) Where an auditor ceases to hold office before the end of his term of office, the company must notify the appropriate audit authority.

(2) The notice must—

(a) inform the appropriate audit authority that the auditor has ceased to hold office, and

(b) be accompanied by—

(i) a statement by the company of the reasons for his ceasing to hold office, or

(ii) if the copy of the statement deposited by the auditor at the company's registered office in accordance with section 510 contains a statement of circumstances in connection with his ceasing to hold office that need to be brought to the attention of members or creditors of the company, a copy of that statement.

(3) The company must give notice under this section not later than 14 days after the date on which the auditor's statement is deposited at the company's registered office in accordance with section 510.

(4) If a company fails to comply with this section, an offence is committed by—

(a) the company, and

(b) every officer of the company who is in default.

(5) In proceedings for such an offence it is a defence for the person charged to show that he took all reasonable steps and exercised all due diligence to avoid the commission of the offence.

(6) A person guilty of an offence under this section is liable—

(a) on conviction on indictment, to a fine;

(b) on summary conviction, to a fine not exceeding the statutory maximum."

On Question, amendments agreed to.

Clause 514 [Information to be given to accounting authorities]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip 3:45, 16 May 2006

moved Amendment No. 363:

Page 246, line 4, leave out subsection (1) and insert—

"(1) The appropriate audit authority on receiving notice under section (Duty of auditor to notify appropriate audit authority) or (Duty of company to notify appropriate audit authority) of an auditor's ceasing to hold office—

(a) must inform the accounting authorities, and

(b) may if it thinks fit forward to those authorities a copy of the statement or statements accompanying the notice."

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, in moving government Amendment No. 363, I shall speak also to government Amendments Nos. 369 and 370 and the other amendments in the group.

Clause 514 provides for the audit authority—typically POB or one of the supervisory bodies—on receiving statements from an auditor who is ceasing to audit a company to inform the accounting authorities; that is, the Secretary of State and his delegate, currently the FRRP.

Amendments Nos. 363, 369 and 370 are technical amendments, mainly consequential on the government amendments in the group we have just discussed. Unless there are questions about them, I shall move on to discussing the other amendments in the group.

On reviewing the debate on the similar amendments in Grand Committee, I think that there may have been some misunderstanding about the Government's intentions in Clause 514. The statements made by resigning or otherwise departing auditors and the corresponding companies are to be sent to the audit authorities because their role is to oversee auditors, and they should take an interest in the reasons for their dismissal or resignation.

On occasions, it is possible that these statements will reveal that the auditors believe that there has been some significant accounting irregularity and, when it happens, we think it appropriate for the audit authority to bring it to the attention of the accounting authorities. The Financial Reporting Review Panel will want to know about such accounting irregularities, as will the Department of Trade and Industry. The FRRP may want to apply to the court for an order requiring revision of the accounts. On the other hand, the DTI can consider investigation, inspection or prosecution. There are two accounting authorities mentioned in the Bill because they have different roles and powers.

The FRRP will not want to receive statements about most situations where the auditor and company may have had a difference of view but where the published accounts have been agreed. Nor will the DTI, so the task we are giving the DTI is not to deal with a flood of paperwork of modest interest, as I think was suggested in Grand Committee, but to receive occasional reports of serious irregularities.

I am sorry that we did not explain what was envisaged more clearly in the Explanatory Notes or in Grand Committee. I hope that, with this explanation, the noble Baroness will accept that it is entirely reasonable that the audit authorities should have discretion about what statements to forward to the audit authorities, and that those few statements that are worth sending should go to both the FRRP and the DTI. I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

had given notice of her intention to move, as an amendment to Amendment No. 363, Amendment No. 364:

Line 5, leave out "authorities" and insert "authority"

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, the Minister has dealt much better on Report with the issues raised by the amendments in this group than he did in Grand Committee. Had he given that explanation in Grand Committee, I would not have tabled the amendments at this stage. As the noble Lord knows, I am a fighter against waste in government and I was seeking to avoid the DTI creating a new department of auditor resignations, replete with staff at all grades, ready with their filing systems and processes to take lots of reports. In the light of the Minister's explanation, I am satisfied on that point and I shall not move the amendment.

[Amendment No. 364, as an amendment to Amendment No. 363, not moved.]

[Amendments Nos. 365 and 366, as amendments to Amendment No. 363, not moved.]

On Question, Amendment No. 363 agreed to.

[Amendments Nos. 367 and 368 not moved.]

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 369:

Page 246, line 15, leave out "under section 513"

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 370:

After Clause 514, insert the following new clause—

"MEANING OF "APPROPRIATE AUDIT AUTHORITY" AND "MAJOR AUDIT"

(1) In sections (Duty of auditor to notify appropriate audit authority), (Duty of company to notify appropriate audit authority) and 514 "appropriate audit authority" means—

(a) in the case of a major audit, the Secretary of State or the body to whom the Secretary of State has delegated functions under section 846 or 847 of this Act;

(b) in the case of an audit that is not a major audit, the relevant supervisory body.

(2) In sections (Duty of auditor to notify appropriate audit authority) and this section "major audit" means a statutory audit conducted in respect of—

(a) a company any of whose securities have been admitted to the official list (within the meaning of Part 6 of the Financial Services and Markets Act 2000 (c. 8)), or

(b) any other person in whose financial condition there is a major public interest.

(3) In determining whether an audit is a major audit within subsection (2)(b), regard shall be had to any guidance issued by any of the authorities mentioned in subsection (1)."

On Question, amendment agreed to.

Clause 515 [Effect of casual vacancies]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 371:

Page 246, line 24, leave out from beginning to "any" and insert "If an auditor ceases to hold office for any reason,"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I was wondering whether we might have an extensive debate on the definition of "casual vacancies", but I hope that the House will accept that this is a small but useful technical drafting improvement. It was proposed by the noble Baroness, Lady Noakes, in Grand Committee and, on reflection, we have seen the light and its merits. I beg to move.

On Question, amendment agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 372:

After Clause 519, insert the following new clause—

"MEANING OF "QUOTED COMPANY"

(1) For the purposes of this Chapter a company is a quoted company if it is a quoted company in accordance with section 363 (quoted and unquoted companies for the purposes of Part 15) in relation to the financial year to which the accounts to be laid at the next accounts meeting relate.

(2) The provisions of subsections (4) to (6) of that section (power to amend definition by regulations) apply in relation to the provisions of this Chapter as in relation to the provisions of that Part."

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, this is a minor technical amendment. It brings the definition of a quoted company in Part 15, including the provisions for amending that definition, into chapter 5 of Part 16. I beg to move.

On Question, amendment agreed to.

Clause 520 [Provisions protecting auditors from liability]:

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 373:

Page 248, line 31, after "company" insert "occurring in the course of the audit of accounts"

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, I will also speak to the nine other government amendments to chapter 6 of Part 16. In Committee, I agreed that we would take these provisions away. We believe that, together, the amendments clarify and improve the provisions on auditors' liability. They will both meet the concerns that were expressed in Committee and achieve the effects intended by the other 13 amendments to this chapter.

For the record, the other government amendments that I need to speak to are Amendments Nos. 374 and 375, 379 to 381, 387, 391, 392 and 394. I will also speak to Amendments Nos. 376 to 378, 382 to 386, 388 to 390 and 393, and in due course Amendment No. 391A, which is grouped with them.

The main changes intended by the government amendments are these. In the new clause to be inserted after Clause 522 by Amendment No. 380, subsection (4) would make it clear that liability limitation agreements can be expressed in any way and are not—as some feared might be the case, based on earlier wording—restricted to being expressed as pure monetary amounts or such amounts expressed with reference to a formula.

Amendment No. 391 clarifies that, when the court is considering what is "fair and reasonable", it should not take into account,

"the possibility of recovering compensation from", any other people involved, nor any other,

"matters arising after the loss or damage . . . has been incurred".

I hope your Lordships will agree that those two changes improve the drafting of how these clauses achieve the intended policy objective. Noble Lords had raised a number of concerns about possible misinterpretation of the text, so we thought it best to try and put that beyond doubt.

In addition, subsections (2) and (3) of the new clause inserted by Amendment No. 380 introduce a new power for the Secretary of State to make regulations about how liability limitation agreements are expressed. I should explain why we propose to bring that in. It has been suggested to us, mainly by the mid-tier accountancy firms, if I may so describe them, that there is a risk of liability limitations developing in a way that would damage competition in the audit market—particularly if limitations are expressed as fixed monetary amounts. While we would not expect liability limitations to have that effect on the market, we have thought it prudent to take this power so as to be able to respond if there should be problems. In that way, it would enable us to bring forward regulations that either prescribe what sort of provisions must be included in agreements, or specify provisions which must not be so included.

There are a number of more minor improvements in the drafting of these provisions that I will be happy to explain in detail if necessary. Meanwhile, I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I have many amendments in this group which I tabled again because we were advised by those affected by the provisions that the Government's original drafting would not achieve the result that people wanted, which they thought had been agreed—proportionate liability agreements. I am very pleased that the Government have tabled their amendments in this group. As I understand it, there is now substantial agreement across the piece that the clauses that we shall have after the amendments are passed satisfactorily achieve limitation of liability provisions.

On behalf of all those who have been involved in discussions with the Government, I place on record their thanks for the positive and constructive way in which the Government have dealt with the issue. It marks a real move forward. I am also grateful for what the noble and learned Lord said about taking power to deal with issues that may arise from the competitive impact if fixed-sum capping ever produced a competitive disadvantage to certain types of firm. I am sure that that is the right way forward.

I do not need to speak to the majority of my amendments in this group, but I shall speak to Amendment No. 391A, which amends government Amendment No. 391. It is a probing amendment. Amendment No. 391 responds to concern about when fairness and reasonableness of the agreement is to be determined. The government amendment states that,

"no account is to be taken of . . . matters arising after the loss or damage . . . has been incurred".

The issue is what that actually means. Loss or damage is normally suffered rather than incurred but, if we leave that on one side, we are unclear whether that is intended to mean the point at which the course of action arises—hence, when the damage first occurs—or the last date at which damage occurs. Damage flowing from the course of action will often take place over a long period. Indeed, it may be continuing at the time that the court considers the issue.

I ask the Minister to set out clearly what the Government intend to be the effect of Amendment No. 391. If they agree that there is undesirable ambiguity in their amendment, I invite them either to agree to Amendment No. 391A—which, I accept, is unlikely—or to table something else at Third Reading.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I shall not repeat everything that the noble Baroness said about our thanks for how the Government have responded to the concerns expressed in Committee. We now have a workable series of clauses that respond to our original concerns. Although my name is not attached to Amendment No. 391A, the issue that remains—albeit one for which there should be an explanation—is from what point in time the damage accrues. In these sorts of cases, we will be dealing with loss or profit, which may continue over a long period—for example, if an audit mistake is made at point X but the claim is that the profits or losses occurred sometime after that. An explanation of that will be very valuable.

Photo of Viscount Bledisloe Viscount Bledisloe Crossbench

My Lords, can the Minister enlighten me on one point? Suppose that an auditor is invited to take on an audit at short notice in an emergency—let us say, because the previous auditor has walked out—and he says, "I am prepared to do this only with a liability limitation agreement". The company says, "We quite understand that", and gives him the agreement. He must start work immediately, because time is pressing. When it gets to the general meeting, the motion is not passed, so he says, "I will give up". If he is sued in respect of negligence in that intervening period because of the work that he has or has not done, is he to be deprived of the benefit of the agreement, which is the only basis on which he entered into the work?

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

My Lords, let me first try to deal with the question raised by the noble Viscount, Lord Bledisloe. In the example that he gave, which I heard for the first time only a few seconds ago, the auditor will never have completed the task because he is unhappy that the company has not signed off on the agreement that he had. If he has not completed the task, any claim against him for negligence will be quite difficult to bring in any event, because the auditor will be able to say, "Well, you're complaining that I didn't do this or do that, but I never got to the end of the audit, so it isn't really fair to criticise me at all". The court would have to sort that out in those circumstances.

The counsel for the auditor is to say in those circumstances that, if the auditor is not prepared to do the work without that limitation agreement, he should not do it until it has been approved by the company. It does not have to wait for an annual general meeting; there are other ways of doing it. If the company's directors are so concerned to get the auditor on board, they will have to take steps to ensure that the auditor has the protection which the noble Viscount described in his example as the only basis on which he is prepared to work.

I turn to the points made by the noble Baroness, Lady Noakes, and the noble Lord, Lord Sharman. I appreciate their welcome for the Government's amendments. I am pleased that we have reached that position. I turn to Amendment No. 391A. We make a deliberate choice of timing. We pick the moment when the loss or damage has been incurred rather than the cause of action. Sometimes, those will occur at the same moment; sometimes, they will not. They might occur at the same moment if the cause of action is put not in contract but in tort. In tort, until the damage is suffered, the cause of action is not complete. In that event, the cause of action and the incurring or suffering of the loss would be coterminous. In contract, it may not be.

In proposing the amendment, the Government were seeking to recognise the fundamental concern raised in Grand Committee. It was, as I recall it, that if you allow all circumstances to be taken into account, the risk is that by the time you get to court, it will be apparent that the only person who has got any money to meet the judgment is the auditor; all the rest will have gone off wherever they have gone or be out of any money. The risk is that the court would say that it is reasonable, having regard to the fact that the only pocket left is that of the auditor, that the auditor should pay for everything and the liability agreement should be set aside. That is the concern with which we were seeking principally to deal by stating that one can have regard to matters up to the time that the loss is suffered. However, it is right to be able to take account of circumstances arising in between breach of contract and the loss being incurred.

I give one example. The auditor might break his contract one year, but nothing is discovered until the following year. As noble Lords will know, it is not unusual for a problem to become apparent in the course of the following audit. It may be reasonable to take into account, when deciding whether the agreement should stand, that it was the auditor himself who discovered the error the following year, who brought it to the attention of the company and who perhaps took steps to deal with the consequences. If, on the other hand, the auditor spotted the problem but did not deal with it and allowed the problem to get worse, it might be reasonable for the court to take that into account in deciding whether the limitation agreement was right.

No solution is absolutely perfect in this respect—I acknowledge one or two of the examples that were given by the noble Baroness, Lady Noakes, and the noble Lord, Lord Sharman—but putting the time bar where we propose meets the thrust of the concerns that were previously expressed about the clause. On that basis, I hope that the noble Baroness will be content with the amendment as it stands. I do not think that there are any other points which I need to address. I commend the amendment to the House.

On Question, amendment agreed to.

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers) 4:00, 16 May 2006

moved Amendments Nos. 374 and 375:

Page 248, line 36, at end insert "occurring in the course of the audit of accounts"

Page 248, line 40, leave out "527" and insert "(Authorisation of agreement by members of the company)"

On Question, amendments agreed to.

Clause 522 [Liability limitation agreements]:

[Amendments Nos. 376 to 378 not moved.]

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 379:

Leave out Clause 522 and insert the following new Clause—

"LIABILITY LIMITATION AGREEMENTS

(1) A "liability limitation agreement" is an agreement that purports to limit the amount of a liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust, occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company.

(2) Section 520 (general voidness of provisions protecting auditors from liability) does not affect the validity of a liability limitation agreement that—

(a) complies with section (Terms of liability limitation agreement) (terms of liability limitation agreement) and of any regulations under that section, and

(b) is authorised by the members of the company (see section (Authorisation of agreement by members of the company)).

(3) Such an agreement—

(a) is effective to the extent provided by section 524, and

(b) is not subject—

(i) in England and Wales or Northern Ireland, to section 2(2) or 3(2)(a) of the Unfair Contract Terms Act 1977 (c. 50);

(ii) in Scotland, to section 16(1)(b) or 17(1)(a) of that Act."

On Question, amendment agreed to.

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 380:

After Clause 522, insert the following new clause—

"TERMS OF LIABILITY LIMITATION AGREEMENT

(1) A liability limitation agreement—

(a) must not apply in respect of acts or omissions occurring in the course of the audit of accounts for more than one financial year, and

(b) must specify the financial year in relation to which it applies.

(2) The Secretary of State may by regulations—

(a) require liability limitation agreements to contain specified provisions or provisions of a specified description;

(b) prohibit liability limitation agreements from containing specified provisions or provisions of a specified description.

"Specified" here means specified in the regulations.

(3) Without prejudice to the generality of the power conferred by subsection (2), that power may be exercised with a view to preventing adverse effects on competition.

(4) Subject to the preceding provisions of this section, it is immaterial how a liability limitation agreement is framed.

In particular, the limit on the amount of the auditor's liability need not be a sum of money, or a formula, specified in the agreement.

(5) Regulations under this section are subject to negative resolution procedure."

On Question, amendment agreed to.

Clause 523 [Authorisation of agreement by members of the company]:

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 381:

Leave out Clause 523 and insert the following new Clause—

"AUTHORISATION OF AGREEMENT BY MEMBERS OF THE COMPANY

(1) A liability limitation agreement is authorised by the members of the company if it has been authorised under this section and that authorisation has not been withdrawn.

(2) A liability limitation agreement between a private company and its auditor may be authorised—

(a) by the company passing a resolution, before it enters into the agreement, waiving the need for approval,

(b) by the company passing a resolution, before it enters into the agreement, approving the agreement's principal terms, or

(c) by the company passing a resolution, after it enters into the agreement, approving the agreement.

(3) A liability limitation agreement between a public company and its auditor may be authorised—

(a) by the company passing a resolution in general meeting, before it enters into the agreement, approving the agreement's principal terms, or

(b) by the company passing a resolution in general meeting, after it enters into the agreement, approving the agreement.

(4) The resolution required is an ordinary resolution, subject to any provision of the company's articles requiring a higher majority (or unanimity).

(5) The "principal terms" of an agreement are terms specifying, or relevant to the determination of—

(a) the kind (or kinds) of acts or omissions covered,

(b) the financial year to which the agreement relates, or

(c) the limit to which the auditor's liability is subject.

(6) Authorisation under this section may be withdrawn by the company passing an ordinary resolution to that effect—

(a) at any time before the company enters into the agreement, or

(b) if the company has already entered into the agreement, before the beginning of the financial year to which the agreement relates.

Paragraph (b) has effect notwithstanding anything in the agreement."

On Question, amendment agreed to.

[Amendments Nos. 382 and 383 not moved.]

Clause 524 [Effect of liability limitation agreement]:

[Amendments Nos. 384 to 386 not moved.]

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 387:

Page 250, line 13, after "regard" insert "(in particular)"

On Question, amendment agreed to.

[Amendments Nos. 388 to 390 not moved.]

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 391:

Page 250, line 20, at end insert—

"( ) In determining what is fair and reasonable in all the circumstances of the case no account is to be taken of—

(a) matters arising after the loss or damage in question has been incurred, or

(b) matters (whenever arising) affecting the possibility of recovering compensation from other persons liable in respect of the same loss or damage."

[Amendment No. 391A, as an amendment to Amendment No. 391, not moved.]

On Question, Amendment No. 391 agreed to.

Clause 526 [Exclusion of agreements for more than one year]:

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 392:

Leave out Clause 526.

On Question, amendment agreed to.

Clause 527 [Termination of agreement by members of company]:

[Amendment No. 393 not moved.]

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 394:

Leave out Clause 527.

On Question, amendment agreed to.

Clause 528 [Minor definitions]:

Photo of Lord Goldsmith Lord Goldsmith Attorney General, Law Officers' Department, Attorney General (Law Officers)

moved Amendment No. 395:

Page 251, line 41, leave out subsection (2).

On Question, amendment agreed to.

Clause 529 [Prohibition of public offers by private company]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 396:

Page 252, line 26, leave out subsection (5).

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, we have reached Part 17, which contains the prohibition on private companies offering their shares to the public. I am moving these amendments in response to the concerns raised in Grand Committee on the prescriptive nature of the remedies following breach of the prohibition. I will also explain why these amendments are preferable to the noble Lord's related amendment.

Under Clause 532, the court must make an order for the company to reregister as a public company unless it appears to the court that the company does not meet the requirements for reregistration and it is impracticable or undesirable to require it to take steps to do so. If the court does not make an order for reregistration, it must instead make an order for the compulsory winding-up of the company. The amendments provide the court with further alternatives if an order for reregistration is not made.

The starting position remains that if it appears to the court that the company has acted in contravention of the prohibition on public offers, the court must order the reregistration of the company as a public company unless the company does not meet the requirements for reregistration and it is impractical or undesirable to require it to take steps to do so. Members cannot frustrate the company from seeking to comply with a reregistration order.

The court will have all its usual powers available for the enforcement of its orders. Where the court does not order reregistration, the amendments give the court a choice. It might decide to make an order for the compulsory winding-up of the company, or the court may make a remedial order for the purpose of putting anyone affected by the breach of the public offer prohibition back in the position they would have been in if the breach had not occurred. In particular, under a remedial order, the court can order those persons knowingly concerned in the breach to offer to purchase the shares or debentures that were the subject of the offer on such terms as the court thinks fit, or the court has discretion to make no order at all. This might be appropriate, for example, where the company has breached the prohibition but has not allotted shares, has withdrawn the offer and has undertaken not to do it again. These amendments greatly widen the options available to the court following a breach of the public offer prohibition where reregistration is not appropriate. All the other government amendments in this group are consequential on the new options given to the court.

Amendment No. 408 would allow the court to make such order as it thought fit. It would give the court a wide discretion but without any assistance as to how it might use it. The amendment goes unnecessarily far, moving away from the consistency of approach we have been aiming to achieve. The government amendments provide a framework for the court—one wide enough for the orders that may be made when reregistration is not appropriate, including the option of making no order at all. The government amendments address the concerns raised in Grand Committee and I hope noble Lords will not press Amendment No. 408. I beg to move.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I thank the Minister for the response that the Government have made to the concerns I raised in Committee. Amendment No. 408 was proposed to us by the Law Society. I accept that it is a wide enabling amendment. I would like to consider carefully the impact of the government amendment and, if appropriate, return to this on Third Reading, but in the circumstances I will not move the amendment at this stage.

On Question, amendment agreed to.

Clause 530 [Meaning of "offer to the public"]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 397:

Page 252, line 30, leave out from "in" to "by" in line 31 and insert "this Chapter"

On Question, amendment agreed to.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

moved Amendment No. 398:

Page 252, line 36, leave out "calculated" and insert "intended"

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I rise to move Amendment No. 398 and to speak to Amendments Nos. 399 to 403. These amendments go back to an issue we raised in Committee. The amendments, all in Clause 530, deal with the intention behind the issue of shares. The purpose is to ensure that a test should be one of intent, rather than an objective test of whether the securities are likely to get into the hands of the public at some stage in the future.

Amendments Nos. 398, 401 and 403 propose that "calculated" be replaced by "intended". In Grand Committee, the noble Lord, Lord McKenzie, rejected these arguments by giving us an explanation from the Oxford English Dictionary—the meaning of "calculated to" was "designed or suitable, intended". He went on to say that,

"if it came to court, an objective assessment would be required of whether the motivation or purpose behind the offer was to make the shares . . . available".

He added:

"it is not a question of how likely or probable it was that the shares would become available to other persons", and said that,

"we want the provision to provide an objective test of intentions".—[Official Report, 14/3/06; cols. GC 462-63.]

However, I am advised that there is judicial authority to the effect that "calculated to" means "likely to" and not "intended to". That is apparent from the judgment of Dyson J in Norweb plc v Dixon. There is clearly therefore a conflict between the view of the courts and the view of the Oxford English Dictionary as interpreted by the noble Lord. To clarify the position, we feel that the Bill should be amended to use "intended" rather than "calculated", since this is the meaning that the Government intend.

Amendments Nos. 399, 400 and 402 are to address the effect of shares or debentures becoming available to third parties outside the arrangements relating to the offer. Again, in Grand Committee the noble Lord, Lord McKenzie, accepted that a company should not be held responsible for what the recipients of shares or debentures do with them after they have received them, as long as part of the arrangements or understanding reached at the time the offer was made was not that the shares or debentures would be passed on. These amendments are proposed in order to give effect to that view.

We are concerned that the clause, as now drafted, goes further than the existing law—under Section 724A of the Companies Act 1985—and adds further restrictions on the ability of a private company to make a rights issue or to offer shares under an employee share scheme. I have said enough on that, but if no law is intended, we are too restrictive in what we have. I beg to move.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry 4:15, 16 May 2006

My Lords, although my name is not on these amendments, I think that the points the noble Lord, Lord Sharman, is driving at are sensible. I, too, have read carefully the definitions that the noble Lord, Lord McKenzie, read out to us from the Oxford English Dictionary in Grand Committee, but I do not think they answer the reality of what is going on in the City. Indeed, clarity in this area is very important because it is a critical part of the finance-raising function of the City of London. I hope the Government will look sympathetically at what the noble Lord has said.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, the nub of the debate is whether we believe there should be an objective or subjective test, whatever wording we use to express that. The Government are clear that we should maintain, as at present, the objective test.

When we discussed these amendments in Grand Committee, I explained why we do not wish to replace the word "calculated" with "intended". I maintain that "calculated" is the correct word for the purposes of Clause 530. The phrase,

"properly be regarded, in all the circumstances, as . . . not being calculated to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer", imposes an objective test. If it came to court, an objective assessment would be required of whether the motivation or purpose behind the offer was to make the shares or debentures available to persons other than those receiving the offer.

I am aware that the Law Society has raised the case of Norweb plc v Dixon, in which the court said that "calculated" means "likely" and does not mean "intended". The test imposed by the word "calculated" is not one of actual intention, which is what was being alleged in Norweb plc v Dixon, but nor is it purely a test of mechanical likelihood. It cannot possibly be solely a question of likelihood as, in almost all cases, it is likely that the shares will one day be transferred.

The test is whether a person looking objectively at the facts would conclude that it was intended. Amending "calculated" to "intended", as the amendments propose, would make a big change to the operation of the clause. It would replace the objective test with a wholly subjective test of intention. Rather than reaching a judgment as to what a reasonable person would conclude was the intention, the courts would require proof of actual intention. It would be very easy for those behind the offer to stand up and claim that nothing of the sort was intended, and very difficult for anyone to contradict them. Actual intentions would often be extremely difficult for those not directly involved to prove, rendering many breaches virtually unenforceable.

Likelihood is, of course, relevant to any objective assessment of intent, but it is by no means the sole factor or only way of establishing apparent intent. The likelihood of the shares becoming available to the public is simply one of the things that might be relevant, such as what was said and done at the time. It all goes to the evidence enabling the court to make its judgment. The courts will take into account the circumstances of the offer in their entirety, not only the likelihood of the shares becoming available to other persons.

"Calculated" is not the same as "likely" or "intended". If we wanted to mean precisely either of those things and nothing else, we agree that it would be better to say so. But we do not. The word has been quite deliberately chosen and has been used in this context for a long time. The law currently requires an objective assessment of intent. The Bill takes the same approach. I hope that the noble Lord will not press the amendment because it would change significantly the current position.

In seeking to clarify subsection (3), Amendment No. 399 risks widening it. Subsection (3) is an exemption setting out circumstances in which an offer will not be regarded as an offer to the public. In order to fall within the exemption, the offer must not be calculated to result in the shares or debentures becoming available to persons other than those receiving the offer. Of course, shares may be offered in the knowledge that they may one day be sold on. Companies do not have to impose restrictions on the transferability of their shares in order to take advantage of the exemption. But the exemption is not to be used as a means of evading the public offer prohibition by offering shares to a particular person, simply so that they can then offer them on to other people. It is a matter of the link or connection between the offer and the subsequent transfer of the shares to other persons. If there is no real link between the two, other than the fact of issuing the shares, the exemption may apply. Where there is a close connection between both events, however, of which formal agreements or mutual arrangements are probably the strongest example, the exemption should not apply.

The amendment focuses too narrowly on arrangements for understandings reached as part of the offer. The perspective of the company offering the shares can also be relevant, whether or not it amounts to an arrangement or understanding shared by the recipient of the securities. The amendment restricts the circumstances the court can look at to the offer itself and arrangements or agreements made in connection with it. It may be difficult to show the existence and contents of such arrangements or understandings. It is surely preferable that the court should be able to have regard to all the circumstances, as the opening words of the exemption provide.

I turn now to the other amendments to delete subsections (4)(c) and (5)(c) in Clause 530. Subsection (4) provides that an offer is not to be regarded as an offer to the public if certain requirements are met. It is an exemption for offers made to persons already connected with the company. One of the requirements is that the offer must not be calculated to result in the shares or debentures becoming available to persons already connected with the company.

The exemption set out in subsection (4) is expressed rather differently in Section 742A of the Companies Act 1985, from which this exemption is derived. Our intention was to set out more clearly how the exemption operated, but in doing so we agree that subsection (4)(c) has departed from the current law. Therefore we agree that the approach of the present law should be reinstated. That is not simply a matter of deleting subsection (4)(c); it will be necessary to put back in its place the elements of the current law that the subsection was intended to replace, and it might not be straightforward to draft. The same applies to subsection (5)(c). We therefore agree to consider Amendments Nos. 400 and 402.

I hope the noble Lord will withdraw Amendment No. 398 and will not press Amendments Nos. 399 to 403. I cannot stress strongly enough that what is proposed here would be a significant change in the law from the current position, and we do not believe that is the right way to go.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I am grateful for that very full reply from the Minister, and for his acknowledgement that the amendments he mentioned will be looked at. I hope that the Government will be bringing forward their own amendments to deal with those issues.

In my mind, the issue is still unresolved. I would like to read carefully what the Minister has said and then take some advice on it, but it seems that we have a conflict between the Law Society and the Government, and I would like to reflect further on that.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, before the noble Lord sits down, can we agree that there may be some discussion about what is the appropriate wording to produce what we intend to be the law? Will the noble Lord accept that the current law requires an objective test, and that the Government's position is that that is what we want to maintain? Does he also accept that going down the route of a subjective test is a change from the current position?

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

Yes, my Lords, I do. The only issue between us is precisely the one he mentioned up front; that is, the question of whether the words reflect what we are seeking to achieve. In the opinion of the Law Society that is not the case. I will look at what he said, and I will probably discuss it with the Law Society before I decide whether I wish to push the thing any further. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 399 to 403 not moved.]

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

moved Amendment No. 404:

Page 253, line 33, at end insert—

"(8) An offer is not regarded as an offer to the public if—

(a) it is made to fewer than 100 persons,

(b) it is made on terms allowing the person to whom it is made to renounce his rights, which may only be renounced in favour of a person connected with the company or another person to whom the offer is made, and

(c) it cannot properly be regarded, in all circumstances, as being intended to result, directly or indirectly, in securities of the company becoming available to persons other than those receiving the offer or persons not already connected with the company.

(9) The Secretary of State may by regulations specify other conditions applicable to an offer which, to the extent satisfied, would result in an offer not being deemed to be an offer to the public for the purposes of this section 526.

(10) Any such regulations, as set out in subsection (9), shall be subject to affirmative resolution procedure."

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, this is another amendment to Clause 530, which defines what is meant by an offer to the public with regard to the prohibition of public offers by a private company. The starting point for this amendment is the point I made in Grand Committee; that the current interplay of the various regulations creates uncertainty concerning the number of individuals to whom an offer can be made by a private company. I could count in large numbers of filing cabinets the letters I have seen from firms of lawyers which, when asked whether a particular offer can be made by a private company, go on to describe regulations for three pages, but end up with the position still uncertain.

The purpose of this amendment is to clarify the position that an offer is not regarded as an offer to the public if it is made to fewer than 100 people by a private company, or under the other conditions set out in that amendment. When this amendment was discussed in Grand Committee, the Minister said:

"I stress again to the noble Lord that there is no number which is allowed".—[Official Report 15/3/06; col. GC 478.]

In another reply, he said:

"We do not consider that private companies should be offering their shares to strangers".—[Official Report 15/3/06; col. GC 472.]

I will let the noble Lord, Lord McKenzie, into a secret: it is entirely common practice in the City for private companies seeking seedcorn or development capital to do so from outside investors or private equity funds, without being obliged to register as public companies. Indeed, his answer would mean that an offer of shares to even two people unconnected to the company could be treated as an offer to the public—a view that goes beyond any understanding of either the existing law or what the law should be.

The second argument of the noble Lord, Lord McKenzie, was that in cases of doubt a company could easily re-register as a public company. I can do no better than refer the noble Lord to the final report of the Company Law Review, which said:

"We believe that private companies should not feel obliged to take the unnecessary precaution of registering as a public company, with the tighter regulation that this entails, simply because the existing provisions lack clarity".

There are significant disadvantages for companies with a small number of shareholders in having to re-register as public companies. It certainly goes beyond current practice in the City and elsewhere.

The final point I would like to make is that the Company Law Review went on to recommend the retention of the basic prohibition against private companies offering shares to the public, but with a power to prescribe detailed exceptions to the prohibition by statutory instrument. It referred to the definitions in the old Public Office of Securities Regulations. The second purpose of this amendment is to provide for an enabling power along those lines, which could then allow further consultation and consideration before regulations are brought in. I hope that, with the assistance of the Law Society and others, I have dealt with the reasons why the noble Lord, Lord McKenzie, rejected this amendment in Grand Committee and I hope he will reconsider. I beg to move.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, this amendment seeks to add a further exemption to the public offer prohibition. It is also provides for a power to prescribe further exemptions. Clause 530 defines the meaning of an offer to the public and provides for a number of exemptions to the general prohibition on private companies' offers to the public. The principle behind these exemptions is that an offer is not considered to be a public offer where there is a sufficient connection or relationship between the company and the persons to whom the securities are being offered.

Subsection (3) ensures that offers made to particular identified individuals are not treated as offers to the public, provided the shares are not offered to that person in order to be passed on to others. Nor will it be an offer to the public if the offer is otherwise a private concern of the person receiving it and the person making it. This exemption will be particularly relevant for private companies seeking seedcorn or development capital from outside investors. I should make it clear that we do not see these provisions as preventing that in any way. We are very much aware that it is an important means of raising finance.

Subsection (4) provides an exemption for offers made to persons already connected with the company. This recognises the ways in which private companies may grow organically. Subsection (5) provides a similar exemption for offers for securities to be held under an employees' share scheme.

I emphasise that it is the connection or relationship to the company that is the crucial issue. Within the requirements, the current definition has the flexibility to take into account the circumstances of the offer and the identity of the persons making and receiving it. So, for example, private companies may seek capital from an outside investor such as a business angel without necessarily breaching the prohibition. An offer may be permissible even if it is made to a very large number of people, perhaps hundreds of people, but we have no intention of preventing the many lawful ways in which private companies currently raise finance and attract investors.

The amendment would allow the offer to be made to up to 99 persons. These might be individuals, companies or financial institutions. They might hold the securities for themselves or they might take up the offer on behalf of others. They might, for example, hold them as trustees for a group of people. So an offer to 99 persons might in fact involve a much larger group of people. We would have no objection to this if the matter could still properly be regarded as a private concern of those involved. But the amendment imposes no such requirement; it would undermine the whole principle that a private company should not offer its shares to strangers or to the unconnected general public. The prohibition, which is a key distinction between public and private companies, would be so easy to get round that it would become irrelevant.

If companies wish to seek new investors from the general public, they should become a public company in order to do so. That would bring them within the regulation appropriate for a company with a generally wider shareholder base. The deregulation for private companies contained in the Bill makes it even more important that private companies do not make offers to the public. Deregulation for private companies is possible because the arrangements between the company and its members can be regarded as an essentially private matter. However, members of the public joining a company are more likely to need the increased protections that the additional regulation of public companies brings—for example, the right to an annual general meeting.

In attempting to describe every circumstance in which an offer is or is not to be regarded as an offer to the public, we would risk either dramatically widening the exemption or inadvertently excluding something which currently would not be regarded as an offer to the public. We would risk imposing an unduly rigid or restrictive distinction, thereby making the exemptions more limited and the legislation more restrictive. Alternatively, as with this amendment, we would risk making the exemptions so wide that they would no longer act as an effective distinction between private and public companies. We feel it is important not to introduce substantive changes to such long-standing provisions that might create fresh uncertainties. It is not our intention to make the provisions in the clause more restrictive or significantly more relaxed than the equivalent provisions in the Companies Act 1985.

We are seeking to preserve the current law on what is an offer to the public and not to prevent anything that is lawful now. There is flexibility in the current law which allows all the circumstances of an offer to the public to be taken into account, as well as the identities of the persons making and receiving it. In our view, the current law strikes the right balance. Given that we are not intending to make regulations on this issue, it would send out the wrong signals to include a power for the Secretary of State to make new exemptions.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry 4:30, 16 May 2006

My Lords, is the noble Lord saying that, under Clause 530(3)(a), any firm of stockbrokers can send out any number of offers of any number of shares to any number of individuals provided that there is no mechanism for those shares to be traded in any way and to be transferred from the individual who has received the offer? Does a private company with, for example, 120 shareholders have to re-register as a public company if it wants to create a market in its shares? Is that the noble Lord's understanding of the provision?

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, if the noble Lord asks whether I am saying that the stockbroker can act in that way to make any number of offers to a whole range of identified individuals, of itself I do not think that that satisfies the exemption. One would have to look at all the circumstances and all of the provisions in Clause 530. I hesitate to be drawn on specific examples because, as the noble Lord said in moving the amendment, these things can be complex. I do not want to mislead by putting something that is incorrect on the record. But, more specifically, it would not necessarily be a private concern. If it was a private concern, the answer might be yes. You would have to look at all the circumstances.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, I thank the Minister for his answer. This is obviously a detailed practical issue. I shall read what he has said in Hansard and perhaps have another conversation with him, to which I look forward. In the mean time, I have pleasure in begging leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 532 [Enforcement of prohibition: order for re-registration or winding up]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 405 to 407:

Page 254, line 2, at beginning insert "This section applies"

Page 254, line 7, leave out "the court shall make an order under this section"

Page 254, line 8, leave out subsection (2).

On Question, amendments agreed to.

[Amendment No. 408 not moved.]

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 409 to 411:

Page 254, line 11, leave out "for re-registration (rather than winding up)" and insert "requiring the company to re-register as a public company"

Page 254, line 15, at end insert—

"( ) If it does not make an order for re-registration, the court may make either or both of the following—

(a) a remedial order (see section (Enforcement of prohibition: remedial orders), or

(b) an order for the compulsory winding up of the company."

After Clause 532, insert the following new clause—

"ENFORCEMENT OF PROHIBITION: REMEDIAL ORDER

(1) A "remedial order" is an order for the purpose of putting a person affected by anything done in contravention of section 529 (prohibition of public offers by private company) in the position he would have been in if it had not been done.

(2) The following provisions are without prejudice to the generality of the power to make such an order.

(3) Where a private company has—

(a) allotted securities pursuant to an offer to the public, or

(b) allotted or agreed to allot securities with a view to their being offered to the public, a remedial order may require any person knowingly concerned in the contravention of section 529 to offer to purchase any of those securities at such price and on such other terms as the court thinks fit.

(4) A remedial order may be made—

(a) against any person knowingly concerned in the contravention, whether or not an officer of the company;

(b) notwithstanding anything in the company's constitution (which includes, for this purpose, the terms on which any securities of the company are allotted or held);

(c) whether or not the holder of the securities subject to the order is the person to whom the company allotted or agreed to allot them.

(5) Where a remedial order is made against the company itself, the court may provide for the reduction of the company's capital accordingly."

On Question, amendments agreed to.

Clause 538 [Exercise by directors of power to allot shares etc]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 412:

Page 256, line 19, leave out subsection (4).

On Question, amendment agreed to.

Clause 540 [Power of directors to allot shares etc: authorisation by company]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, Amendments Nos. 413 to 417 to Clause 540 are designed to deal with a point that was made during Grand Committee. This clause deals with the power of the directors to allot shares in public companies and private companies that will have more than one class of share after the proposed allotment. The concern is that, as currently drafted, an authority given under Clause 540, and any resolution renewing such an authority, must specify,

"the maximum number of shares" that may be allotted pursuant to the authority.

The noble Lord, Lord Razzall, pointed out in Grand Committee that that formulation of words does not take account of the fact that shares may be in different classes or of different denominations. The revised drafting is intended to address the noble Lord's concerns.

As noble Lords will see from these amendments, we have returned to the formulation of words used in Section 80 of the 1985 Act—that is, the "maximum amount" of shares—on which Clause 540 is based. This formulation would cover an authority limited to a specific number of shares, but would also cover an authority given to directors to grant shares up to a given maximum nominal amount. The current provision provides this flexibility and we would similarly not wish the Bill to be prescriptive about the form of the limit on the authority to allot shares—hence our reverting to the terminology used in current Section 80 with which companies and their advisers are no doubt familiar and comfortable.

Amendments Nos. 418 and 419 to Clause 541 are consequential on the amendments to Clause 540.

I trust that that deals with the noble Lord's concerns. I am very grateful to him for raising this issue with us and to the Law Society for considering this point. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, it would be churlish of me not to thank the Minister for meeting the point that I made.

On Question, amendment agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 414 to 417:

Page 257, line 22, leave out "number" and insert "amount"

Page 257, line 23, leave out "number" and insert "amount"

Page 257, line 27, leave out "number" and insert "amount"

Page 257, line 28, leave out "number" and insert "amount"

On Question, amendments agreed to.

Clause 541 [Public companies: allotment where issue not fully subscribed]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 418 and 419:

Page 258, line 1, leave out "number of"

Page 258, line 3, leave out "number of"

On Question, amendments agreed to.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

moved Amendment No. 419A:

Before Clause 552, insert the following new clause—

"OFFERS TO SHAREHOLDERS TO BE ON PRE-EMPTIVE BASIS

(1) Subject to the provisions of this section and the seven sections next following, a company proposing to allot equity securities (as defined in section (Interpretation of sections) (Offers to shareholders to be on pre-emptive basis) to (Saving for company's pre-emption procedure operative before 1982))—

(a) shall not allot any of them on any terms to a person unless it has made an offer to each person who holds relevant shares or relevant employee shares to allot to him on the same or more favourable terms a proportion of those securities which is as nearly as practicable equal to the proportion in nominal value held by him of the aggregate of relevant shares and relevant employee shares, and

(b) shall not allot any of those securities to a person unless the period during which any such offer may be accepted has expired or the company has received notice of the acceptance or refusal of every offer so made.

(2) Subsection (3) below applies to any provision of a company's memorandum or articles which requires the company, when proposing to allot equity securities consisting of relevant shares of any particular class, not to allot those securities on any terms unless it has complied with the condition that it makes such an offer as is described in subsection (1) to each person who holds relevant shares or relevant employee shares of that class.

(3) If in accordance with a provision to which this subsection applies—

(a) a company makes an offer to allot securities to such a holder, and

(b) he or anyone in whose favour he has renounced his right to their allotment accepts the offer, subsection (1) does not apply to the allotment of those securities, and the company may allot them accordingly; but this is without prejudice to the application of subsection (1) in any other case.

(4) Subsection (1) does not apply to a particular allotment of equity securities if these are, or are to be, wholly or partly paid up otherwise than in cash; and securities which a company has offered to allot to a holder of relevant shares or relevant employee shares may be allotted to him, or anyone in whose favour he has renounced his right to their allotment, without contravening subsection (1)(b).

(5) Subsection (1) does not apply to the allotment of securities which would, apart from a renunciation or assignment of the right to their allotment, be held under an employee's share scheme.

(6) Where a company holds relevant shares as treasury shares—

(a) for the purposes of subsections (1) and (2), the company is not a "person who holds relevant shares"; and

(b) for the purposes of subsection (1), the shares held as treasury shares do not form part of "the aggregate of relevant shares and relevant employee shares"."

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, in moving the amendment I shall speak also to Amendments Nos. 419B to 419G inclusive. These insert new clauses before Clause 552 in Part 18 of the Bill, which is concerned with the allotment of shares. At the same time, I shall speak to Amendments Nos. 439A to 439E, which are concerned with Part 19, on share capital, particularly Clauses 590, 591, 592 and 593, all of which are concerned with the transfer of securities.

The amendments comprise two shots at one issue—we come back to the issue of consolidation, which we have discussed and battled over from the moment that the Bill was launched. We remain of the view, as stated at Second Reading, that the Bill should be as far as possible a comprehensive consolidation of company law, and that it defies belief that despite all the hard work that has gone into it from the Bill team, officials in the Minister's department, we would still be left with three other Companies Acts when this one leaves your Lordships' House.

The first set of amendments to Part 18 aim to clarify the law regarding pre-emption and allotment. Our practitioner advisers have told us that this is an area that is frequently consulted and to have it spread out over the Bill and the other Companies Acts is an unhelpful and undesirable position. The second set, which concerns Part 20, is intended to ensure that the provisions relating to the transfer of securities are in one place; in particular, Section 207 of the Companies Act 1989, which inexplicably has been split between that Act and this Bill as currently drafted.

We tabled these amendments in Committee and we were disappointed by the Minister's reply. I dare say that he is not going to accept the amendments tonight, but I hope that he will be able to give us some better news about the prospects and about the Government's plans to achieve further consolidation, either next week or through the passage in another place. Since it is the opening of the cricket season, I regard the amendment as a slow full toss bowled on the leg stump, which I hope he will dispatch immediately to the boundary. In that spirit I beg to move.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, as someone who hated cricket with a passion I will resist responding in similar terms. I hope that I can meet the noble Lord's points. These amendments would all largely have the effect of bringing up elements of the existing law unchanged into the new Bill. They would thus take a further step towards putting the new legislation on to a consolidated basis. We discussed this general issue in Grand Committee, and I said there that I recognised that there were strong arguments in favour of restating elements of the remaining 1985 Act provisions in the Bill.

I can confirm that we are now looking at all of the remaining elements of the 1985 Act to see whether they could sensibly be brought into the Bill. There will be certain areas which do not lend themselves to this treatment; for example, areas of the law that have an application wider than companies, and which it would not make sense to bring up into a new Bill, which would in effect be a consolidated code of companies legislation. In certain other areas where there is a specific power to set out the law in regulations, and where we expect to make such regulations in the medium term, it may not make sense to consolidate the existing primary legislation into the new Bill now.

These sorts of exceptions apart, I can assure the House that we are looking at what remains of the 1985 Act very much with an eye to bringing it into the new Bill wherever possible. I think the introduction of amendments giving effect to this approach, if it is to be managed in a coherent and co-ordinated way, may need to wait until the Bill is in another place. But I would certainly hope to be able to say more at Third Reading about the areas we are currently identifying as candidates for further consolidation, and I would certainly expect that the areas which are the subject of these amendments—pre-emption rights and share transfers—would be prime candidates for future consolidating amendments.

In particular, I said in Grand Committee that we support the principle that provisions relating to the transfer of securities should be brought together in one place, and I confirm that the Government will bring forward their own consolidating amendments to Part 20. Unfortunately, there have been other significant issues to be dealt with by way of government amendment on Report and we have not had time to deal with the proposed amendments to Part 20 at this stage. We would also like to consult key City stakeholders on the draft amendments in view of the technical complexity of this part of the Bill.

I would like to make one final point regarding consolidation. This is already a very substantial Bill and I suspect that there would be a general reluctance to see amendments introduced at any stage that greatly added to the requirement for parliamentary scrutiny during its passage. While I certainly do not seek in any way to constrain the debates that will be held here and in another place, I hope we all recognise that amendments that effectively did no more than restate existing provisions in the law without substantial change would not require the same level of scrutiny as those elements of the Bill that do make changes.

I hope that what I have said has demonstrated how actively the Government are pursuing the principle that lies behind these amendments, and I hope on that basis that noble Lords and noble Baronesses will agree not to press their respective amendments for the moment. I will of course be happy to say more when we return at Third Reading.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry 4:45, 16 May 2006

My Lords, that was a handsome offer. The Minister may not like cricket, but he certainly hit the ball to the boundary very effectively. I accept his warning about the extent to which consolidation can be achieved and that parts of the Bill which do not directly concern companies may be left over. Steps to bring all the company-relevant legislation into one place would be helpful. Provided that the Minister is prepared to say on the Floor of the House that further consolidation does not entail substantial change in the law, we would be happy to facilitate the passage of such legislation—always provided that we do not hear from an outside body such as the Law Society that there is an issue here which has been waiting to be sorted out for 20 years. It might be worthwhile to address such an issue in this Bill, but, as far as wading through the detail of the legislation, and provided that the Minister can say that there is no plan to change the law, I am sure that we can facilitate the passage of the legislation through this House.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, from these Benches I echo the point made by the noble Lord, Lord Hodgson. The Minister has been kind enough to explain the Government's plans on consolidation to us and indeed to the Tory Opposition. We certainly do not intend to hold up the Bill's passage by arguing the finer points of consolidation, unless those who advise us say there is some noticeable howler in it—which I am sure the Minister would take on board. Apart from that, I concur with the words of the noble Lord, Lord Hodgson.

Amendment, by leave, withdrawn.

[Amendments Nos. 419B to 419G not moved.]

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 420 and 421:

After Clause 552, insert the following new clause—

"PROVISIONS NOT APPLICABLE TO SHARES TAKEN ON FORMATION

The provisions of—

(a) sections 538 to 551 of this Act, and

(b) sections 89 to 96 of the Companies Act 1985 (c. 6) (pre-emption rights), have no application in relation to the taking of shares by the subscribers to the memorandum on the formation of the company."

Before Clause 553, insert the following new clause—

"COMPANIES HAVING A SHARE CAPITAL

(1) References in the Companies Acts to a company having a share capital are to a company that has power under its constitution to issue shares.

(2) References in the Companies Acts—

(a) to "issued share capital" are to shares of a company that have been issued;

(b) to "allotted share capital" are to shares of a company that have been allotted.

(3) References in the Companies Acts to issued or allotted shares, or to issued or allotted share capital, include shares taken on the formation of the company by the subscribers to the company's memorandum."

On Question, amendments agreed to.

Clause 554 [Alteration of share capital of limited company]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 422:

Page 264, line 27, at end insert—

"( ) section (Enforcement of prohibition: remedial orders) of this Act (remedial order in case of breach of prohibition of public offers by private company),"

On Question, amendment agreed to.

Clause 566 [Circumstances in which companies may reduce share capital]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 423:

Page 270, line 36, leave out from beginning to end of line 7 on page 271 and insert—

"(1) A limited company having a share capital may reduce its share capital—

(a) in the case of a private company limited by shares, by special resolution supported by a solvency statement in accordance with section 135A;

(b) in any case, by special resolution confirmed by the court in accordance with sections 136 to 139.

(1A) A company may not reduce its capital under subsection (1)(a) if as a result of the reduction there would no longer be any member of the company holding shares other than redeemable shares.

(1B) Subject to that, a company may reduce its share capital under this section in any way."."

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in Grand Committee the noble Lord, Lord Hodgson, tabled an amendment to Clause 566 which if accepted would have completely removed the proviso presently in subsection (1B) of this clause that a company can reduce its share capital in any way under Clause 566 providing that,

"as a result of the reduction at least one member of the company would hold shares other than redeemable shares or shares held as treasury shares".

We were unable to accept that amendment in Grand Committee as it would have enabled private companies that wished to use the new solvency statement procedure to use that procedure to reduce their share capital to zero. That is undesirable.

In Committee the noble Lord, Lord Hodgson, explained that there may be circumstances where a company would want to reduce its share capital to zero; for example where the company is the target of a takeover bid and wants to cancel all of its own shares and issue new shares in the acquiring company. The noble Lord also explained that it is relatively common practice for a reduction of capital which is approved by the court to involve a reduction of the shares' capital to zero. We understand, however, that this is only on terms that the court can see that very shortly after the reduction taking effect, either a reserve will be capitalised in favour of someone who becomes the member or one or more shares are subscribed conditional upon the reduction taking effect. Thus the concern which prompted us to incorporate the provision—namely, a company being left without any issued shares—is not one that arises in the context of reductions confirmed by the court.

Having discussed this matter with the Law Society, we agree that subsection (1B) of Clause 566 does not achieve the desired effect. In particular, we do not intend either to fetter the powers of court or to reduce the flexibility that is currently afforded to companies limited by shares which apply to court to reduce their share capital under Section 135 of the 1985 Act, which is amended by Clause 566. I am grateful to both the noble Lord and the Law Society for raising this point.

Amendment No. 423 is designed to address the noble Lord's concerns. It limits the qualification that is presently in subsection (1B) of Clause 566 to private companies that wish to use the new solvency statement procedure to effect a reduction of capital. Amendment No. 424 provides a different drafting solution to the perceived problem, but, with the exception of what I am about to say about the reference to treasury shares in subsection (1B), the drafting solution which we have proposed in Amendment No. 423 achieves the same effect as this amendment. I therefore trust that noble Lords will agree to the amendment.

The deletion of the reference to treasury shares in subsection (1B) has been proposed because a private company may not hold its own shares in treasury, and since the redrafted proviso now applies only to private companies seeking to reduce their share capital under the new solvency procedure statement—whereas previously the proviso applied to both public and private companies—it is no longer necessary to refer to treasury shares. I beg to move.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I am grateful to the Minister for responding to the amendments, which were tabled by the noble Lord, Lord Hodgson. In addressing this issue I shall speak also to Amendment No. 424, which is in my name. I simply want to say that the noble Lord's Amendment No. 423 substantially addresses the issue that we have raised and I am grateful for that.

Photo of Lord Hodgson of Astley Abbotts Lord Hodgson of Astley Abbotts Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry

My Lords, I too am grateful to the Minister for responding to a quite technical matter that has concerned a number of practitioners. Without wishing to look a gift horse in the mouth, the only issue I would raise is that it seems a shame that we have 12 lines of drafting where two lines, in Amendment No. 424, seem to achieve the same effect. No doubt the whizzes of the parliamentary draftsmen will make it clear that our drafting, although short, is not as perfect as they achieve in 12 lines.

On Question, amendment agreed to.

[Amendment No. 424 not moved.]

[Amendment No. 425 had been withdrawn from the Marshalled List.]

Clause 567 [Reduction of capital supported by solvency statement]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, this is a minor drafting amendment to clarify that the solvency statement required in connection with a reduction of capital under Clause 567 must be in the prescribed form. I trust that noble Lords will have no objection to it. In this context, "prescribed" means prescribed by the Secretary of State by statutory instrument under Section 744 of the 1985 Act. I beg to move.

On Question, amendment agreed to.

Clause 571 [Circumstances in which financial assistance is not prohibited]:

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

moved Amendment No. 427:

Page 276, line 26, leave out "principal purpose" and insert "predominant reason"

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, in moving Amendment No. 427, I shall speak also to Amendment No. 428, which is grouped with it. We return to the issue of a definition, and we are advised in this matter by the Law Society.

Amendments Nos. 427 and 428 would replace the words "principal purpose" with the words "predominant reason", and their purpose is to overcome a problem in the interpretation of the expression "principal purpose". This matter was considered by the House of Lords in Brady v Brady 1988, in which the expression "principal purpose" was construed so narrowly that lawyers are reluctant ever to rely on this exemption. The Law Society continues to press for the amendments put forward in Grand Committee to substitute "predominant reason" for "principal purpose" in lines 26 and 34 of Clause 571. In the judgment in Brady v Brady, Lord Oliver said that,

"it is important to distinguish between a purpose and the reason why a purpose is formed".

He then went on at length to explain the distinction. I shall not trouble your Lordships with it as I am sure that the noble Lords, Lord McKenzie and Lord Sainsbury, are familiar with the judgment.

A consequence of this narrow construction is that transactions and arrangements which may well be commercially justifiable are precluded by the financial assistance provisions or, in the case of private companies, can be carried out only after going through the expense of what is commonly known as the "whitewash" procedure.

The Company Law Review accepted the desirability of reformulating the principal purpose exemption in terms of "predominant reason". We considered that such a reformulation would be in accordance with Article 23 of the second directive, which prohibits a company from entering into certain transactions with a view to the acquisition of its shares, as it seems apparent that the formulation of Article 23 means that it is necessary to look to the result that the company has in view by giving the assistance rather than the reason for entering into the transaction constituting the assistance. The directive prohibits only financial assistance given with a view to the acquisition, and, provided the company has some other tangible and overriding end in view in giving the assistance, the assistance should not be prohibited. I beg to move.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, these amendments relate to the existing "principal purpose" exception to the general prohibition on the giving of financial assistance by a public company contained in Section 153 of the 1985 Act. The exception is retained by Clause 570 of the Bill.

The exception provides that such assistance is not prohibited if the "principal purpose" of the assistance is not to give it for the acquisition of shares or where the assistance is incidental to some other larger purpose of the company. In those circumstances, the assistance is permitted and no offence is committed by the company or its officers.

The concern that has prompted these amendments, and various others tabled in Grand Committee, is that the courts, and in particular this House in its judicial capacity, have interpreted the words "principal purpose" too narrowly. We have some sympathy with that view, but first I shall explain why we think that this amendment is not the answer. On that, I can only reiterate what I said in Grand Committee: namely, that the Government are not convinced that the suggested wording means anything other than what is intended by the current wording. We have discussed this issue at some length with the Law Society—we are most grateful for its input—but have not been persuaded that any transactions which companies might wish to enter into, and which would be compatible with the second directive, fall outside the current test but within the suggested reformulated exception.

If we are to take this matter forward, a clear indication is required of the intended effect of the suggested words rather than the substitution of one pair of words by another pair, which, on the face of it, mean the same. In other words, we cannot have a rational debate about this subject unless we can agree about the difference between "principal purpose" and "predominant reason". Until we can agree that, we cannot debate whether things that we all might want to do would be allowed by the change.

As I commented in Grand Committee, this may point to a reworking of the provision so as to have the intended effect. Such a new provision could refer to concepts along the current lines or may be framed on an entirely different basis so long as it remained consistent with the implementation of Article 23 of the second company directive. In this connection I would remind noble Lords that the Government are proposing to take a power to make, by secondary legislation, provisions relating to capital maintenance and we believe that such a reworking would be more suitably addressed by use of that power than by piecemeal amendment to the existing sections.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry 5:00, 16 May 2006

My Lords, I am grateful to the Minister for his full explanation of this matter. I am content with it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 428 not moved.]

Clause 576 [Power of private companies to redeem or purchase own shares out of capital]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, Amendments Nos. 429 to 431 in this group are required to achieve consistency with the approach taken elsewhere in the Bill with regard to the replacement of the current requirement for a statutory declaration with a requirement for a simple statement by the directors. They replace various references, currently in Sections 172 to 179 of the 1985 Act—which relate to the purchase or redemption of shares by a private company out of capital—to "statutory declaration" or "declaration" with references to "directors' statement" or "statement".

Amendment No. 432 is consequential on Amendment No. 429. It simply restates existing subsection (3) of Clause 576 which deals with the requirements as to notice where a company makes a payment out of capital in respect of a purchase or redemption of its own shares.

Amendment No. 488 brings two offences which are still extant in the 1985 Act and which relate to a purchase or redemption of own shares out of capital into Schedule 4 to the Bill. These offences are currently set out in Schedule 24 to the 1985 Act—which is to be repealed. These are minor amendments which improve the drafting of the Bill and I trust that noble Lords will have no objections to them.

On Question, amendment agreed to.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendments Nos. 430 to 432:

After Clause 576, insert the following new clause—

"POWER OF PRIVATE COMPANIES TO REDEEM OR PURCHASE OWN SHARES OUT OF CAPITAL

In section 171 of the Companies Act 1985 (c. 6) (power of private companies to redeem or purchase own shares out of capital), for subsection (1) substitute—

"(1) A private limited company may in accordance with this section, but subject to any restriction or prohibition in the company's articles, make a payment in respect of the redemption or purchase of its own shares otherwise than out of distributable profits or the proceeds of a fresh issue of shares."."

After Clause 576, insert the following new clause—

"CONDITIONS FOR REDEMPTION OR PURCHASE OF OWN SHARES OUT OF CAPITAL

(1) Section 173 of the Companies Act 1985 (c. 6) (conditions for payment out of capital for redemption or purchase by a private company of its own shares) is amended as follows.

(2) In subsection (3) (under which the directors are required to make a statutory declaration as to the company's financial position) for "a statutory declaration" substitute "a statement".

(3) For subsection (4) (directors' opinion as to solvency: liabilities to be taken into account) substitute—

"(4) In forming their opinion for the purposes of subsection (3)(a), the directors must take into account all of the company's liabilities (including any contingent or prospective liabilities).".

(4) In subsection (5) (further requirements)—

(a) in the opening words, for "statutory declaration" substitute "statement";

(b) in paragraphs (b) and (c) for "declaration" substitute "statement".

(5) For subsection (6) (offence of making declaration without reasonable grounds) substitute—

"(6) If the directors make a statement under this section without having reasonable grounds for the opinion expressed in it, an offence is committed by every director who is in default.

(7) A person guilty of an offence under subsection (6) is liable—

(a) on conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both);

(b) on summary conviction—

(i) in England and Wales, to imprisonment for a term not exceeding twelve months or to a fine not exceeding the statutory maximum (or both);

(ii) in Scotland or Northern Ireland, to imprisonment for a term not exceeding six months, or to a fine not exceeding the statutory maximum (or both).".

(6) The following amendments are consequential on that in subsection (2) above—

(a) in section 172(6) of the Companies Act 1985 (c. 6) for "statutory declaration of the directors" substitute "directors' statement";

(b) in section 174 of that Act—

(i) in subsection (1), for "statutory declaration" substitute "statement", and

(ii) in subsection (4), for "statutory declaration" substitute "directors' statement";

(c) in section 175 of that Act—

(i) in subsections (1)(c) and (5), for "statutory declaration of the directors" substitute "directors' statement";

(ii) in subsection (6) for "statutory declaration", substitute "directors' statement", and

(iii) in subsection (8), for "declaration" (twice) substitute "statement";

(d) in section 179 of that Act—

(i) in subsection (1)(d), for "statutory declaration of the directors'" substitute "directors' statement", and

(ii) in subsection (1)(e), for "declaration" substitute "statement"."

After Clause 576, insert the following new clause—

"NOTICE TO REGISTRAR OF PAYMENT OUT OF CAPITAL FOR REDEMPTION OR PURCHASE OF OWN SHARES

After section 177 of the Companies Act 1985 (c. 6) insert—

"177A NOTICE TO REGISTRAR OF PAYMENT OUT OF CAPITAL FOR REDEMPTION OR PURCHASE OF OWN SHARES

(1) A private limited company that makes a payment out of capital for the redemption or purchase of its own shares must, within 15 days after making the payment, give notice to the registrar.

(2) The notice must be accompanied by a statement of capital.

(3) The statement of capital must state with respect to the company's share capital immediately following the payment out of capital—

(a) the total number of shares of the company,

(b) the aggregate nominal value of those shares,

(c) for each class of shares—

(i) prescribed particulars of the rights attached to the shares,

(ii) the total number of shares of that class, and

(iii) the aggregate nominal value of shares of that class, and

(d) the amount paid up and the amount (if any) unpaid on each share (whether on account of the nominal value of the share or by way of premium).

(4) If default is made in complying with this section, an offence is committed by—

(a) the company, and

(b) every officer of the company who is in default.

(5) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale."."

On Question, amendments agreed to.

Clause 583 [Redenomination of share capital]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, this amendment is intended to address the concerns expressed by the noble Lords, Lord Razzall and Lord Hodgson, in Grand Committee, regarding subsection (6) of Clause 583. The concern with the current drafting of subsection (6) is that it does not give companies a sufficiently long period of time to comply with any conditions that may be attached to a resolution to redenominate a company's share capital.

Amendment No. 433 extends the period during which a company may comply with the terms of such a conditional resolution from 15 days to 28 days. This does not go as far as the respective amendments proposed by the noble Lords in Grand Committee—the noble Lords' amendments sought an extension from 15 days to three months and 12 months respectively—but having looked at the issue again we think this is as far as we can go. In particular, we still regard it as important that there is reasonable proximity between the date of the redenomination taking effect and the relevant rate of exchange adopted for the purpose of such redenomination of share capital. In short we think that the respective periods suggested by the noble Lords were simply too long.

I am however very grateful to the noble Lords for raising this issue and I trust this amendment goes some way towards allaying their concerns. I beg to move.

Photo of Lord Razzall Lord Razzall Spokesperson in the Lords, Trade & Industry

My Lords, I am grateful to the Minister—I speak for the Liberal Democrats—for taking on board at least some of the points that we made. As he rightly says, we tried to go a little further; but I am sure that this is a happy compromise.

On Question, amendment agreed to.

Clause 584 [Calculation of new nominal values]:

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

moved Amendment No. 434:

Page 287, leave out lines 32 to 34 and insert—

"Divide the resulting figure by the number of shares in the class."

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, in Grand Committee the noble Lord, Lord Hodgson, expressed concern that step three of Clause 584 seemed to allow an inadvertent reduction of capital. Having looked at this again we agree that there are potential difficulties with this step of the process for calculating the new nominal value of the shares that have been redenominated under Clause 583.

We think that this step can be omitted from the prescribed method for calculating the new nominal values of the shares without detracting from the redenomination process as a whole—and this is what Amendment No. 343 does. I am grateful to the noble Lord for drawing this to our attention and trust that the amendment addresses his concerns.

On Question, amendment agreed to.

Photo of Baroness Goudie Baroness Goudie Labour

moved Amendment No. 435:

After Clause 589, insert the following new clause—

"PART 19A LIMITS OF PRIVATE COMPANY'S POWER OF DISTRIBUTION

CERTAIN DISTRIBUTIONS PROHIBITED

In this Part, "distribution" means every description of distribution of a company's assets to its members, whether in cash or otherwise, except distribution by way of—

(a) an issue of shares as fully or partly paid bonus shares,

(b) the redemption or purchase of any of the company's own shares out of capital (including the proceeds of any fresh issue of shares) or out of unrealised profits in accordance with Chapter VII of Part V,

(c) the reduction of share capital by extinguishing or reducing the liability of any of the members on any of the company's shares in respect of share capital not paid up, or by paying off paid up share capital, and

(d) a distribution of assets to members of the company on its winding up."

Photo of Baroness Goudie Baroness Goudie Labour

My Lords, in moving Amendment No. 435, I shall speak also to Amendments Nos. 436 to 439. They all relate to the new Part 19A that I would like to add to the Bill.

This new clause meets in considerable part the urgent need to reform the rules on dividends. The present rules in Part VIII of the Companies Act 1985 are now in disrepute because, first, the link between distributions and accounts has created considerable practical problems leading to more than 100 pages of additional guidance from the Institute of Chartered Accountants in England and Wales and the Institute of Accountants of Scotland. They are also in dispute because, secondly, private companies that are subsidiaries of public companies are keen to move to using solely international financial reporting standards (IFRS). They are being forced to keep two sets of accounting records—for example, the IFRS one and the existing UK accounting standards one—because the link between dividends and accounts is not catered for under the IFRS. Dividend blocks would be created, leading to a shortage of dividends to the public parent company, leading inevitably to restrictions on the parent's ability to pay dividends to shareholders, which of course include many pension funds.

On the distribution of assets, the amendment removes a piece of the 1980 UK gold-plating EC second company law directive. That directive applies only to public companies. The UK chose to apply its distributions' provision to both public and private companies. Public groups have been forced to use IFRS from 2005. UK accounting is likely to converge with IFRS by 2009. The UK cannot wait for an EC solution to emerge. Ministers will see how urgent this will become.

Amendment No. 436 results in a consistent regime applying to private company distributions—as that proposed for private companies' reduction of share capital set out in Part 19 of the Bill. The focus is on insolvency. Paragraph (b) ensures that directors consider their general fiduciary duties. This is the "solvency" test. Amendment No. 437 preserves the current penalty in the 1985 Act.

The further clauses seek to exempt private companies from existing rules. Special companies—for example, investment and insurance companies—will stay within the existing regime as of this time. The other provisions are the equivalent of Section 281 of the Companies Act 1985, amended as appropriate to fit the proposed new regime. I think that my final amendments speak for themselves. I hope that Ministers will consider these and come back at Third Reading, if they do not agree this evening. I beg to move.

Photo of Baroness Noakes Baroness Noakes Shadow Minister, Treasury, Shadow Minister, Work & Pensions

My Lords, I will not weary the House with a dissertation on the impact of IFRS. Even were I fully competent to do that, it is an incredibly difficult area. We support what the noble Baroness, Lady Goudie, seeks to do with these amendments since that area really needs some urgent legal attention.

Photo of Lord Sharman Lord Sharman Spokesperson in the Lords, Trade & Industry

My Lords, I am extremely grateful that the noble Baroness, Lady Noakes, did not give us the benefit of her wisdom on IFRS or we should still be here tomorrow. However, I agree with the noble Baronesses, Lady Goudie and Lady Noakes, that this area desperately needs attention. Incidentally, it has a much broader application than being for public companies alone but, as the noble Baroness, Lady Goudie, has already remarked, this forum cannot deal with the broader issue on public companies.

If one looks carefully at what is happening in the public company arena, the impact of IFRS is that a great many companies and groups are being forced to engage in reconstructions that I regard as completely artificial. Their purpose is to get the reserves in the right place to be able to make the distribution, so a solvency-based test, which has worked well in other parts of the world, is an eminently good solution.

Photo of Lord Sainsbury of Turville Lord Sainsbury of Turville Parliamentary Under-Secretary, Department of Trade and Industry, Parliamentary Under-Secretary (Trade and Industry) (Science and Innovation)

My Lords, as we discussed in Committee, these amendments concern the distribution of profits and the payment of dividends. I am grateful to my noble friend Lady Goudie for raising this important issue. We are very aware of concerns about the current rules that link the payment of dividends to realised profits. These have become more acute for public companies because of the application of new international accounting standards to the treatment of some elements of income and expenditure, and the consequent effects on a company's accounts.

The proposed Part 19A would, of course, apply only to private companies, not to public ones. However, it would have relevance for public companies as it would affect their private company subsidiaries. As noble Lords may be aware, the EC's second company directive constrains what we can provide in respect of public companies. The Commission has undertaken to review distributions in the context of wider capital maintenance issues, and is beginning the process with a study of the issues. The likely outcome of that work is not yet clear.

In the mean time, companies' experience of the International Financial Reporting Standards is in its early stages, the first full year of IFRS accounts having just finished, and views on the issues that cause most difficulty in presenting accounts are still evolving. We have continued to keep in contact with representative bodies and companies that have made representations to us in the course of the Bill's passage. They are gathering and assessing data from the last year, which we will discuss further with them when more information is available. In that respect, the work that the accounting institutes, among others, have done in promoting awareness of the issues with the International Accounting Standards Board has been successful. Recent indications are that the board will, at least, look at ways of easing difficulties in determining the cost of a subsidiary on transition to IFRS.

We believe that we should assess the need for any change in the light of all information available to us, including the new information that interested parties are collecting. We do not believe that the proposed new clause has the right way forward. The proposed solvency test would only require directors to consider debts falling due in the next year, thus allowing the company to pay a dividend even though its long-term liabilities might exceed its assets. For the longer term, there would be no clear rules—none in the Bill, certainly—to prevent the dissipation of assets for long-term obligations such as pensions.

While the amendments' approach is thus not the right one, we agree that it would indeed be desirable to have flexibility to tackle the issue. Therefore, in the light of our decision to drop the reform power, we will be bringing forward a power in relation to capital maintenance matters. While we agree that this area requires attention, that needs to be done in a slightly broader context than the one here. These amendments do not meet the issue without having some other undesirable side-effects. I hope that, in this light, the noble Baroness will not press her amendment.

Photo of Baroness Goudie Baroness Goudie Labour

My Lords, in the light of my noble friend's reply, I am happy not to press my amendments and look forward to Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 436 to 439 not moved.]

Clause 590 [Transfer of securities: power to make regulations]:

[Amendment No. 439A not moved.]

Clause 591 [Transfer of securities: extension of powers]:

[Amendment No. 439B not moved.]

Clause 592 [Transfer of securities: order-making power]:

[Amendment No. 439C not moved.]

Clause 593 [Transfer of securities: supplementary provisions]:

[Amendments Nos. 439D and 439E not moved.]

Clause 595 [Shares to which this Part applies]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendment No. 440:

Page 292, line 4, leave out "(excluding" and insert "(including"

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I shall speak also to Amendments Nos. 441 and 442. Amendment No. 440 is designed to address a problem raised in Grand Committee by the noble Lord, Lord Hodgson, on behalf of the Law Society. References in the clause to a company's shares currently exclude any shares held as Treasury shares. The effect is to prevent companies being able to discover who had an interest in any of the past three years in those of their shares which they now hold as Treasury shares. The amendment would remove that unnecessary exemption of treasury shares from Clause 595.

Amendments Nos. 441 and 442 address further points raised by the noble Lord, Lord Hodgson. He tabled an amendment in Grand Committee which sought to clarify the time limit in respect of the requirements of Clause 605(3). Amendments Nos. 441 and 442 achieve that clarification by moving the time limit to subsection (2), so that it applies to the basic entry of information on the register of interests disclosed, which must now be made within three days of receipt.

Before we leave Part 21, I take this opportunity to advise noble Lords that we undertake to table at Third Reading further amendments to Clauses 859 to 861, which currently appear in Part 33 and which implement the transparency directive in UK law. I am happy to expand on that if noble Lords press me, but I take this opportunity to put them on notice. In the mean time, I beg to move.

On Question, amendment agreed to.

Clause 605 [Register of interests disclosed]:

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

moved Amendments Nos. 441 and 442:

Page 296, line 13, leave out from beginning to "enter" and insert "A company which receives any such information must, within three days of the receipt,"

Page 296, line 21, leave out subsection (4).

On Question, amendments agreed to.

Photo of Lord McKenzie of Luton Lord McKenzie of Luton Government Whip, Government Whip

My Lords, I beg to move that further consideration on Report be now adjourned.

Moved accordingly, and, on Question, Motion agreed to.