Clause 554

Company Law Reform Bill [Lords] – in a Public Bill Committee at 9:00 am on 20th July 2006.

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Commissions, discounts and allowances

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

I beg to move amendment No. 529, in clause554,page267,line3,leave out ‘conditions are’ and insert ‘condition is’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenientto take the following amendments: No. 530, in clause554,page267,line8,leave out ‘conditions are’ and insert ‘condition is that’.

No. 528, in clause554,page267,line10,leave out paragraph (b).

No. 532, in clause554,page267,line12,at end insert ‘or

(iii) the amount or rate approved by members,’.

No. 531, in clause554,page267,line13,leave out ‘less’ and insert ‘least’.

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

We now move on to commissions, discounts and allowances. The clause deals with companies paying commission, and states that the payment must be authorised in the articles and must not exceed 10 per cent. of the share issue price. In practice, the provision, which seems to have been around for ever and a day, has little purpose in this day and age. If a company wants to get round it in its commission arrangements with, say, an investment bank on a placing, in addition to the 10 per cent. commission a corporate finance fee could be charged, effectively topping up the amount paid to the stockbrokers doing the placing.

More to the point, if there is to be a cap on commission, what is the relevance of the figure of 10 per cent? In the Lords Grand Committee, Lord Sainsbury simply said words to the effect that the  provisions had been around for 100 years and the Government were not persuaded to change them. I see some merit in making it necessary for commission payments to be authorised in a company’s articles, but not in making it necessary to operate a cap on the amounts payable. On that basis, we have tabled our preferred amendment No. 528, which would delete the requirement for a cap on commission. As a second preference we have tabled amendment No. 532, which provides for the cap to be overruled with the specific approval of the company’s members. In such circumstances we see no reason why a cap should apply.

Photo of Vera Baird Vera Baird Parliamentary Under-Secretary, Department for Constitutional Affairs

As the hon. Gentleman said, the clause restates the existing rules in sections 97 and 98 of the 1985 Act, which limit the amount of commission that a company can pay to those who subscribe for its shares to 10 per cent., or such lower amount as may be specified in the articles. Amendments Nos. 528 530 and 528 would relax the provision by removing the 10 per cent. cap, and by allowing commission at any level as long as its payment was authorised by the articles. It would thus create a way round the prohibition on issuing shares at a discount. That prohibition is part of the capital maintenance rules, the purpose of which is to protect creditors. When a company is new, creditors can assume that it has raised at least the value of its nominal capital. Allowing deep discounting, even if that is disguised as a large commission, enables the unscrupulous company promoters to create an empty shell that has the appearance of a well funded company but which in fact is not one. That can be a particular disadvantage for longer-term creditors.

The other amendments in the group would marginally tighten the rules, enabling members to approve a rate of commission that would be effective as a limit if it was smaller than 10 per cent. I am not sure whether that is intended to be an extra element of the authority given to directors under clause 542, but the option of a provision in the articles and a 10 per cent. maximum are, in our view, sufficient. Setting the rate in the articles also has the benefit of increased transparency. Given that explanation, I hope that the hon. Gentleman will withdraw the amendment.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice) 9:15 am, 20th July 2006

I accept the Minister’s explanation, but the purpose of the clause would be to stop unscrupulous companies charging high commissions. As I explained, one could drive a coach and horses through that in any event by charging fees rather than commissions. I feel that my point is still valid, but I hear what the Minister said. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 554 disagreed to.

Clauses 555 to 557 disagreed to.