Clause 164

Company Law Reform Bill [Lords] – in a Public Bill Committee at 6:45 pm on 11th July 2006.

Alert me about debates like this

Civil consequences of breach of general duties

Question proposed, That the clause stand part of the Bill.

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

The clause states that the civil consequences of breaching a duty in clauses 157 to 163 will be the same as for breaching the corresponding common-law rule or equitable principle. The Law Society’s parliamentary brief points out that clause 164(2) implies that fiduciary duties other than those codified in chapter 2 apply to directors and remain outstanding, and that that confusion should be cleared up. Other commentators have noted that the clause is poorly drafted, saying that it will not cover situations in which a director has breached a statutory duty for which there is no corresponding common-law rule or equitable principle. Norton Rose’s briefing note raises that issue, stating that it is unclear how the civil remedies will apply as most of the duties concerned are not identical to those established by case law. The courts’ existing remedies may be inappropriate when applied to statutory duties that have been cast in different terms.

Have the Government considered those issues in more detail since their consideration in the Lords?

Photo of Mike O'Brien Mike O'Brien Solicitor General, Law Officers' Department

The clause explains what will happen if a director breaches his general duties. Subsection (1) states that the consequences will be the same as those that currently apply. There will be no criminal consequences. Subsection (2) is intended to remove any doubt that general duties can be enforced in the same way as the common-law rules and equitable principles that they replace. The fiduciary remedies currently available will still be available following a breach.

Clause 156(3) will tell the courts that each duty contained in the statutory statement is based on a common-law rule or equitable principle. Where those duties have been codified the courts will be able to identify the relevant rule or principle. Where they have been changed the courts will need to find the rule or principle that covers the same subject matter as the general duty contained in the statutory statement. If necessary, the explanatory notes and the comments made here today can assist in that exercise. However, once the corresponding rule or principle has been identified in the courts the question will be what the consequences should be if it is breached in particular circumstances and whether a general duty has been breached.

Clause 164 preserves current law on the consequences, including remedies, flowing from any breach of duties. The fact that the general duties might depart from common-law rules and equitable principles in certain ways will not alter the circumstances flowing from their breach. The question will not be whether the rule or principle has been breached but what the consequences should be once it has been breached.

The consequences of a breach of the fiduciary duty can include damages, compensation, restoration of a company’s property, rescission of a transaction or a requirement of a director to account for any profits made as a result. They may also include injunctions or declarations, although those methods are primarily employed when a breach is threatened but has not yet occurred. The consequences of a breach of the duty of care and skill may include the court awarding compensation or damages.

I hope that the hon. Gentleman will feel that the Law Society’s concerns have been met.

Question put and agreed to.

Clause 164 ordered to stand part of the Bill.

Clauses 165 and 166 ordered to stand part of the Bill.