Clause 34

Company Law Reform Bill [Lords] – in a Public Bill Committee at 5:30 pm on 20th June 2006.

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Effect of company’s constitution

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

I beg to move amendment No. 21, in clause 34, page 14, line 8, after ‘part', insert ‘of the company and'.

This is a lawyers’ fest amendment. We have not had any of those so far. Amendments have been on practical issues, whereas this is the sort of thing on which law books are written. Hon. Members will be pleased to hear that I do not intend to read out a law book. The amendment is for the hon. Member for Cambridge (David Howarth) and no doubt he will wish to have his penny’s worth on it. It is covered by existing legislation—section 14 of the Companies Act.

Lord Wedderburn of Charlton, who has written a book on the subject, moved this amendment in the other place. He debated with skill and no little experience and put this vital clause into its historical context. He started at sections 7 to 10 of the Joint Stock Companies Act 1856. Simply put, no one now believes that this clause means other than that the constitution binds its members and the company as if they were covenants signed and sealed on the part of the company and of each member.

Lord Grabiner accepted Lord Wedderburn’s argument. Lord Sainsbury certainly did not disagree with it, but ended the debate by saying:

“I say now that the effect of a company’s constitution is not an area in which we want to introduce substantive changes.” —[Official Report, House of Lords, 30 January 2006; Vol. 678, GC. 37.]

I found that somewhat bizarre, not least considering the debates that we have had so far on the Bill, which have mainly centred on that point. Also, this is not what we should be doing in a 20-year reform of company law. If the clause has implications for the Foss v. Harbottle rule, should we not look at that now? I ask the Minister for her further comments.

Photo of David Howarth David Howarth Shadow Minister (Energy), Trade & Industry

I shall resist the temptation to rehearse my entire one-hour lecture on the clause, but I can send the notes to anyone who might request them. As the hon. Member for Huntingdon said, this is an old chestnut in company law. My interest, which I should declare, is that if I ever had to go back to teaching company law and the amendment goes through, I would be denied the most obvious essay title for the second week of the course that I ever had.

The hon. Gentleman talked about the point that Lord Wedderburn made in the Lords; Lord Wedderburn wrote a famous article about this in the Cambridge Law Journal as long ago as 1957, so we are about to mark the 50th anniversary of his interest in the matter. That the clause has the meaning put forward in the amendment is widely accepted, but there is another point to make. The case on which that assumption rests is a first-instance judgment of Mr. Justice Astbury in 1915. The Minister has already referred to the case, Hickman v. Kent or Romney Marsh Sheep Breeders’ Association, with which she is now fully familiar.

The serious point, to quote Professor Len Sealy, who is a leading and eminent writer on company law, is quite how remarkable it is that so shaky a first-instance decision has been tacitly accepted for the greater part of a century. There are articles in the academic literature that heavily criticise the decision—I seem to remember an article by Gregory in the 1981 Modern Law Review.

It is an extraordinary situation that something everyone assumes to be the law rests on so flimsy a foundation. The reason why the Government should give way and put these words into the statute is simply to give that foundation the firmness that it deserves.

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

The provision was certainly an initiation for me into a wonderful bit of case law, the 1915 case of Hickman v. Kent or Romney Marsh Sheep Breeders’ Association. When that was put into a speaking note before I prepared, I tried to delve back into what on earth that famous case was about.

The Opposition may be pleased to know that I think that they have a point. Having looked at the debate and having seen Lord Wedderburn’s erudite contribution when the matter was debated in another place—I would like to thank him for his contribution—he has informed the view that we have taken today. The point behind the amendment is that if the clause and case law, including the famous judgment, acknowledge that the company’s constitution has the effect as if it were a contract between the company and its members, the law and the clause should say so. We are therefore happy to accept the amendment, although we will reflect further as to whether in the light of it we should  revisit—a lawyers’ paradise—the use of the phrase “signed and sealed”. Subject to that, we will accept the amendment.

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

I am staggered. I hardly thought that we would be making a bit of legal history this afternoon. Here we are—the Wedderburn-Djanogly amendment? I can dine out on this one for years to come. We are happy and delighted that the Minister has chosen to review the issue. We think that the new measure will more closely reflect practice.

Amendment agreed to.

Clause 34, as amended, ordered to stand part of the Bill.