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Clause 8

Company Law Reform Bill [Lords] – in a Public Bill Committee at 12:00 pm on 20th June 2006.

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Memorandum of association

Question proposed, That the clause stand part ofthe Bill.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

Following a somewhat unsatisfactory set of preliminaries, in which I sat in awe at the dexterity and skill of my hon. Friend the Member for Reigate (Mr. Blunt), we move on.

I welcome you to the Chair, Mr. Illsley, and look forward to receiving your help over the coming weeks, as well as that of Mr. Bercow. I want to make a few brief preliminary remarks, starting by declaring my interests as they appear in the register.

We welcome the Minister to her first Department of Trade and Industry Bill in her new role and look forward to working with her and other members of the Committee in the spirit of co-operation that she expressed last Thursday on behalf of the Government.

For the largest Bill on record, we have assembled a crack team of my hon. Friends, boasting no fewer than four lawyers, of whom three have corporate experience; a corporate accountant; and a colleague with good experience as a company director. Their experience will, I am sure, greatly help our deliberations. We have put on record our concerns and noted the lack of understanding in relation to the programme motion, but short as time may therefore be, I am sure that we shall all end up somewhat the wiser at the end of the process.

The issues in the Bill are many. Perhaps they are mainly technical, but they are certainly important in establishing and improving the framework in which British companies can operate in a secure, efficient, low regulatory and competitive environment. So the journey begins, and I address first the question, which is clause 8 stand part.

The clause in effect replaces section 2 of the Companies Act 1985 and deals with the memorandum of association. That document, of course, deals with the company’s relationship with the outside world, as opposed to the articles of association, which regulate the relationship between the company, its members and its officers. The clause retains the requirement that individuals who wish to form a company must subscribe their names to the memorandum of association.

The memorandum now serves a more limited purpose and evidences the intention of the subscribers to the memorandum to form a company and to become members of that company on formation. In the case of a company that is to be limited by shares, the memorandum will also provide evidence of the members’ agreement to take at least one share each in the company.

In Grand Committee in the Lords, addressing a different amendment, Lord Sainsbury explained how that came about:

“It may be worth setting out what the memorandum of a company will be under the Bill. The Company Law Review looked very carefully at the question of the company’s constitution. It was keen to see the company’s internal rules as far as possible set out logically in one place and pointed out the potential for overlap under current arrangements between a company’s memorandum and its articles.

In taking forward those valuable suggestions, we wanted to do away with any scope for confusion between the memorandum and the articles, and introduce a clear distinction between the information in the memorandum, which will be in effect an historical snapshot, which, once provided, has no continuing relevance, and the constitution of the company properly-so-called, as contained essentially in its articles, which will be of real significance in the company’s life.”—[Official Report, House of Lords, 30 January 2006; Vol. 678, c. GC3-4.]

We agree with all that. The importance of the memorandum in the context of setting out a company’s relationship with outside parties and the once hallowed ultra vires implications have in practice been somewhat whittled down over the years by a mixture of precedent and statute. In reality, the wide use of non-specific object clauses means that confusion was setting in with the mainly older and specialist companies that retain specific objects. However, the Bill represents a halfway house.

We say that the mere formality of noting a corporation is fine, but ask why it needs a different document. That was partially addressed on Report in the Lords by Government amendment No. 3, which merged clause 9(4)(a)(i) and (ii) and reduced two filing documents to one. But why do we need a memorandum at all? Let us simply get rid of it and insert the information required by clause 8 in the first articles of association, which will always need to be filed at the same time in any event. That would bring further simplicity and be in the deregulatory spirit of the Bill.

I tabled an amendment to that effect—perhaps the poor drafting meant it could not be accepted—but notwithstanding that and accepting the fact that it was not accepted, I would be grateful to hear the Minister’s views on the content of the clause.

Photo of David Howarth David Howarth Shadow Minister (Energy), Trade & Industry 10:15 am, 20th June 2006

I welcome you, Mr. Illsley, to the Chair of this important and  potentially long-running Committee, and I welcome the Minister to her new post. This must be the most strenuous first Bill that a Minister could have faced in a new job.

I echo the remarks of the hon. Gentleman, who said that the Bill not only clarifies many issues of company law, but is economically important. If such a Bill were to go wrong, it might lose companies millions of pounds in litigation. That is why I support what he said about clause 8.

The company law review has taken a long time, and it has taken up vast amounts of effort—not least the time of many of my erstwhile academic colleagues. Its purpose is to simplify company law. It is surprising that something as obvious as the difference between articles and memorandums of association has not been abolished. Multiplying various documents does not seem to be an obvious way to regulate company law. I therefore ask the Minister why the Government still think it important to have a number of separate documents on registration in respect of not only the clause, but other clauses in this part of the Bill.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

I welcome the general remarks made by those who speak for the Opposition parties. I look forward to getting on with the meat of this complex Bill.

It might not surprise the Committee that I asked precisely the same question about clause 8. I do not know whether my question was the result of my naivety in trying to get to grips with the matter or whether it was sensible. All I can do is offer the response given by my officials.

I was told that after discussions across the board with interested parties, and after the Law Commission review of company law, everyone felt that it was important to preserve the fundamental principle of company law—it has been part of our law for ever—that a company is an association. As a result, we decided to keep the memorandum. It is almost a historical document. Once set, it can never be amended. It is a record of the fact that people have come together in an association and agreed to form a company.

That principle provides the flexibility that I am told is the key feature that underpins company law. However, information on how functions and powers are allocated between directors and members of companies will in future be in not the memorandum, but the articles of association. Other information contained in the 1985-style memorandum will be provided in the form of a statement. To underpin that principle, which informs all company law, we have kept the memorandum, although its purpose will be very different.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice), Shadow Solicitor General

I hear what the Minister says, and I thank her for her response. She spoke about preserving and underpinning the principle, but if there is no practical or legal reason for it, why should not the Government reconsider the matter? She might like to have another look at it.

We support the principle of moving away from a memorandum. If we are going to go half way—this will come up in later amendments—it could be confusing to have half of it left over. Why not get rid of it and move on? I hear what the Minister says, but she might like to have a rethink before consideration on Report.

Photo of Margaret Hodge Margaret Hodge Minister of State (Industry and the Regions)

What I will do is undertake to write to the hon. Gentleman and the hon. Member for Cambridge (David Howarth) expressing the legal reasons that have been given for maintaining the memorandum. If they are still unhappy with my explanation, we can return to the issue on Report.

Question put and agreed to.

Clause 8 ordered to stand part of the Bill.