Clause 274

Company Law Reform Bill [Lords] – in a Public Bill Committee at 9:45 am on 29th June 2006.

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Circulation of written resolutions proposed by directors

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

I beg to move amendmentNo. 335, in clause 274, page 126, line 9, leave out subsections (5) and (6).

Photo of John Bercow John Bercow Conservative, Buckingham

With this it will be convenient to discuss the following amendments: No. 344, in clause 324, page 144, line 18, leave out subsections (3) and (4).

No. 347, in clause 340, page 152, line 4, leave out subsections (3) and (4).

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

We move on to clause 274, which deals with the circulation of written resolutions proposed by directors and, in particular, the sanctions and provisions that might apply in those circumstances. Subsection (7) refers clearly to what happens in the event of a defect:

“The validity of the resolution, if passed, is not affected by a failure to comply with this section.”

In other words, notwithstanding the defect and the fact that a shareholder has not been notified of the written resolutions, if a resolution is still passed by the appropriate majority, it will stand.

In many respects, we have in this subsection a codification of the errors and omissions-type provisions that have been common in the articles of association of companies up to now in respect of general meetings or general written resolutions to provide the certainty in the outcome of resolutions that we have discussed more generally today. However, there is a criminal sanction on directors for failure to comply, even though a minor issue, an error or an oversight might be involved and there was no deliberate intention to arrive at that situation.

It is interesting that in clause 270, which we have discussed in relation to the chairman’s role in determining the outcome of meetings, there is no  specific sanction on the chairman if the chairman gets it wrong. I am highlighting a consistency argument.

Perhaps the other relevant provision to consider in that context is clause 296, which in some ways reflects a similar approach. It talks about

“accidental failure to give notice” of a resolution or meeting, and says that such an accidental failure

“shall be disregarded for the purpose of determining whether notice of the meeting or the resolution...is duly given.”

In many ways, it reflects the approach of the written resolution route. However, there is no criminal sanction in that context, so that if there is a general meeting and failure to give notice to a shareholder, the resolution is ultimately still held to be valid, although there is no criminal sanction for failing to give notice. However, if there is a failure to give a copy of a written resolution to a shareholder, there is a criminal sanction. This is a question whether that is the right approach.

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

My hon. Friend is making an important point. The fact of the matter is that if a written resolution is not circulated to one of 50 shareholders, it might simply be a mistake. These things happen in real life. On the other hand, it might be a serious attempt at fraud, and an effective one in terms of disrupting the business of the company. As things stand, the clause does not provide for that balance to be taken into account.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

My hon. Friend makes the right point about fraud. In tabling the amendments, I was not in any way seeking to downplay the need for compliance and ensuring that shareholders receive proper notification in such circumstances. This is about genuine error.

Written resolutions, as we have discussed this morning, are limited to private companies, not public. However, it is still possible for private companies to have a considerable number of shareholders. In many respects, it is possible to have a private offering that is not on offer to the public and still gain a large number of shareholders.

In my experience, I have encountered private companies that surprisingly have 100 members. An administrative error might occur under such circumstances in relation to ensuring that all shareholders are given proper notification of meetings or written resolutions.

This is a matter of how to strike the right balance. Interestingly, in other contexts—for example, under the Financial Services and Markets Act 2000—there is the concept of a civil penalty, which is almost like a civil fine. With that sanction, it is possible to bring some financial penalty against a person for failing to comply with the regulation without giving them the criminal record that the clause refers to.

Amendment No. 344 makes a similar point in the context of disclosing the results of a poll under clause 324, and amendment No. 347 makes it about the records of decisions by a sole member for the purposes of clause 340. In that last case, it is difficult to see whom the provision is trying to protect, as the sole member is the person who has taken the decision and  that decision can affect only his or her interests. It is therefore interesting to wonder who needs to be protected by the criminal sanctions.

How do we ensure compliance? How do we ensure that shareholders are properly protected, that there is no fraud and that companies are administered appropriately, effectively and in accordance with the law, without at the same time unduly penalising directors who make a genuine and minor mistake resulting in failure to notify?

I question whether the approach to written resolutions and notification of general meetings strikes the right balance. What factors underlie the Government’s decision to treat written resolutions differently from general meetings of shareholders?

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

The hon. Gentleman has raised several issues. First, he mentioned the fact that whatever happens and whatever sanctions exist, the resolution remains valid if passed. That relates to the point that we discussed earlier: the company must have certainty to be able to pursue its business effectively and efficiently. That is why that part of clause 276 has been included.

The hon. Gentleman’s second issue was that our approach to sanctions is inconsistent. During debate on an earlier clause, we talked about the possibility of taking action if it is felt that the chairman has abused his powers in considering the company’s business and resolutions. Members can take action in that context. The chairman could be in breach of his duties under common law, or a member could claim to have suffered unfair prejudice. In such circumstances, the courts have a wide range of orders, so there is some consistency.

The hon. Gentleman’s third issue dealt with giving notice. I say to him simply that there is a sanction. It is a civil sanction, not a criminal sanction, and I accept the difference.

The Government’s view is that resolutions are particularly important because of their potential impact on how the company proceeds in running its affairs, and it is therefore right that there should be a tougher sanction for that. It would be slightly excessive to assume that simply failing to give a notice, which may or may not be deliberate, requires the same sort of criminal sanction to be attached to it.

The fourth issue that the hon. Gentleman raised was sole members, but of course if a resolution is not circulated to a sole member, it will not happen, so there is no need for us to cover that case.

Let me talk about the sanctions generally. This issue was discussed in the context of the work undertaken by the company law review, and the hon. Gentleman may have read the report arising from that. The review suggested that it was better to bring into the legal provision a clear, accessible and consistent approach. The CLR recommended that, in future, company law should as a general principle state clearly in relation to every rule what the consequences of a breach should be. When we reviewed the minor criminal offences used to enforce regulatory requirements in current law, the CLR concluded that those were justified by the  cost-effectiveness achieved, compared with the relative inefficiency of any alternative approach.

In clauses 274, 324 and 340, we set out the consequences of failing to comply with the requirements of those clauses. We consider that the offences represent proportionate and effective sanctions and appropriate enforcement. I hope that, with that explanation and the response to the various issues that he raised, the hon. Gentleman will feel able to withdraw the amendment.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch 10:00 am, 29th June 2006

I am not happy with the Minister’s response on this issue. It is interesting that she drew a distinction between resolutions and notices and suggested that a default in relation to the provision of a notice was considered perhaps a slightly lesser issue than one in relation to providing a copy of the written resolution. That misses the point. The purpose of a notice to a shareholder is to inform them of a general meeting at which a resolution is to be passed. Therefore, if they do not receive such a notice, they will be unable to exercise their vote on the resolution and have their say. In the same way, if a shareholder does not receive a copy of the written resolution, they are unable to cast their vote on the resolution. They are two means of achieving exactly the same thing.

It is peculiar to draw a distinction between not supplying a notice of a general meeting and not receiving a copy of the written resolution, because the result is exactly the same for the shareholder. In both circumstances, the shareholder is denied their right to vote, whether by putting their squiggle on the bottom of a piece of paper, by physically attending a meeting, putting their hand up and voting, or by voting by proxy.

I do not accept that distinction. I do not see why one action is treated as a criminal offence, with everything that that entails, and the other is treated as a civil offence. I do not see the fundamental distinction drawn between the two. There should be broad equivalence. Either both should be criminal offences, or both should be subject to civil sanction. The fact that minority shareholder protection rights are available in relation to a breach of the notice provisions is fine, but we are still talking about a civil sanction, not a criminal sanction.

It is worth noting that directors and officers may seek to rely on third parties, whether they be solicitors, agents or registrars, in sending out notices of meetings or written resolutions. If there is a default in one case, the director is potentially criminally liable, but in the other case, they are not. Circumstances may be outside the control of the director. A minor error may occur. It therefore seems strange, to say the least, that the director should be criminally liable in one set of circumstances, but not the other. That is why I feel discomfort at the approach taken in the Bill.

In making those comments, however, I should re-emphasise that I in no way wish to indicate that there should not be compliance—there clearly should be. We have talked about a situation in which there might be fraud, and it is absolutely right that protections should be adopted. All that I am saying is that we need greater consistency in the treatment of the two routes for passing a resolution. They both have the  same end result, and I am trying to test the inconsistency in their treatment through the amendment.

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

If the hon. Gentleman looks at clause 296, he will see that it relates to a different set of circumstances. It talks about the

“Accidental failure to give notice of resolution or meeting”,

not the deliberate or fraudulent failure to which he alluded. If the failure is accidental, it is much more appropriate to have a civil, not a criminal remedy. I cannot remember whether the hon. Gentleman is a lawyer or an accountant, but let me simply give him the legal advice that I have received: there can be no equivalent civil remedy with written resolutions; otherwise, the mechanism does not work. That is the legal advice, and it is another reason for going down the route proposed in the Bill. The hon. Gentleman looks puzzled, but all I can say is that that is the legal advice I have received.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

I am grateful to the Minister for that intervention, but as my furrowed brow suggested, I did not quite follow the legal argument. If she could write to me with that legal advice on the written resolution route, that would certainly help to provide clarification as to why that route has been adopted.

The Minister makes an interesting distinction in relation to clause 296. She says that it relates to

“Accidental failure to give notice of resolution or meeting”,

and that is perhaps the right way to address the issue. There might be an accidental failure to give a shareholder a written resolution notification, and it seems strange and inconsistent that such a provision could not be adopted for use with a written resolution approach. The Government seem to accept that a mistake could be made in one set of circumstances, but not in the circumstances that we are discussing.

It would be appropriate for the Minister to reflect on my comments, and I genuinely look forward to seeing the legal statements that she has received on the legal basis for the provisions. It would be helpful to reflect further because, although she might not be entirely persuaded now, this is a serious issue. A minor error could result in a director suffering a significant criminal penalty, and I find it strange that that is the intention.

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

I will write to the hon. Gentleman and I look forward to his musings on the legal advice that the Government are getting. I certainly hope that that will give him some comfort that the provisions are correct. Otherwise, we can return to the issue on Report.

Photo of James Brokenshire James Brokenshire Conservative, Hornchurch

In response to the Minister’s comment that she will provide the legal advice, and in the context of what she so eloquently described as my musings—I hope that they were more substantive and cogent than mere musings—I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 274 ordered to stand part of the Bill.