Clause 574

Company Law Reform Bill [Lords] – in a Public Bill Committee at 10:00 am on 20th July 2006.

Alert me about debates like this

Financial assistance by company for acquisition of shares

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

I beg to move amendment No. 349, in clause574,page279,line30,after ‘person’, insert

‘(other than the company itself)’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss the following amendments: No. 350, in clause574,page279,line35,after ‘person’, insert

‘(other than the company itself)’.

No. 351, in clause574,page280,line18,after ‘person’, insert

‘(other than the company itself)’.

No. 352, in clause574,page280,line24,after ‘person’, insert

‘(other than the company itself)’.

No. 353, in schedule16,page543,line30,at end insert

‘in section 153(3)(d), the words “or purchase”.’.

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

We come to the provisions on financial assistance. As every practitioner will know, this is one of the more complex and difficult provisions in the 1985 Act. It is the bugbear of many a corporate lawyer, and causes bewilderment to many a company. The basic premise of the Government’s approach is therefore welcome.

Clause 574 will replace section 151 of the 1985 Act with proposed new sections 151 and 151A—I presume that those numbers will change on consolidation. The prohibition on the giving of financial assistance by private companies for the purchase of shares is to be abolished. Proposed new section 151(1) retains the prohibition on public companies giving financial assistance, and extends the provision on post-acquisition assistance. The latter is prohibited for public companies if they are public at the time the assistance is given. That will be hugely welcomed by companies and practitioners, who have to spend a lot of time dealing with such matters.

The amendments, which were suggested by the Law Society, are designed to make it clear that the financial assistance rules do not apply to the purchase by a company of its own shares on the basis that a statutory regime applying capital maintenance to the purchase of own shares already exists.

The prevailing legal view is that the financial assistance rules do not apply to the purchase of own shares, but although section 155(3)(d) of the 1985 Act provides specifically that section 151 does not prohibit  the redemption or purchase of shares in accordance with that Act, there is some doubt, reinforced by comments made in the Chaston case, as to whether the financial assistance rules have no application in those circumstances, or whether anything done for the purpose of enabling a purchase of own shares to take place might nevertheless contravene the financial assistance rules.

A typical example is when, to finance the purchase of own shares, a company borrows money or gives security. Considerable additional legal costs and expenses are being incurred by companies and their financiers on that point.

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

The prohibition is on the giving of financial assistance to a person acquiring shares in a company when the financial assistance in question is by the company. The amendments would mean that references to “person” did not include the company, and anything that the company did to buy back its own shares would therefore not constitute unlawful financial assistance.

The hon. Gentleman has acknowledged the predominant view, which is that construing references to “person” to include the company is not commonly accepted. It is at odds with article 23 of the second directive, implemented by section 151, which envisages a “person” as being a third party. In our view, references to “person” do not include the company itself.

The hon. Gentleman might say that we should put the matter beyond doubt by accepting the amendments, but he, like all lawyers, knows the risk of amending existing statutory provisions; it implies that the existing provisions meant something else—for instance, that references to “person” included the company before the change occurred. In the long run, that might lead to more difficulties.

Amendment No. 353 is consequential to the other amendments, so I shall not argue them separately. I hope that the hon. Gentleman agrees that the proposed change is unnecessary and the ever-present danger that I have pointed out makes it undesirable.

The hon. Gentleman will be amused to hear that I have read the case of Chaston—the first company law case that I have read since I was a 19-year-old undergraduate. I am massively impressed by the learned reasoning of Lady Justice Arden, who seems to be the ultimate company lawyer. If it is helpful—I know that the case was raised in the Law Society’s submission—I shall do my best to take him through what I have concluded her paragraph 47 refers to. I have been immensely assisted by the advice of officials.

Paragraph 47 of the judgment of Lady Justice Arden on Chaston v. SWP Group plc could appear to contemplate that a company could provide assistance to itself. It has to be read in context. Lady Justice Arden explains why the reasoning of Mr. Justice Davis in paragraph 14 of Chaston—he referred to it as the second reason for his finding—which Lady Justice Arden and her colleagues were overturning was wrong or too strongly expressed. Mr. Justice Davis, the first instance judge, had pointed to the words “by that or  another person” in section 151(2) in support of his view that a liability incurred bona fide in what the directors believed was the best interests of the company was not directly or indirectly for the purpose of acquisition of its shares. With respect to the learned judge at first instance, that seems to be an over-broad view to take. Lady Justice Arden points out that if Mr. Justice Davis’ construction—that the liability being referred to could not be that of the company—was correct, it would have the result that even liabilities incurred by the directors in the name of the company in breach of duty would be outside the reach of section 151. That would be both undesirable and nonsensical, so she shows that the reasoning of Mr. Justice Davis was defective by going beyond what was needed for his finding.

Having conceded the possibility that, as a matter of statutory construction, “person” in section 151(2) could include the company—we have already argued that for reasons of consistency with EU law that is not the way in which it should be read—Lady Justice Arden goes on to refer to the grant of a security by an unlimited company. She contextualises it pretty effectively in paragraph 47 of her judgment, in which she says, referring to the first instance judge:

“The judge’s second reason was based on section 151(2). I agree it would be an unusual case where a company provides assistance to itself. On the other hand, it is possible that an acquisition of shares may be an acquisition of shares by the company itself.”

She compares the use of the word acquire in that instance to its use in other sections of the 1985 Act and continues,

“In those circumstances, the liability referred to in the opening clause of section 151(2) may be a liability incurred by the company itself in order to purchase shares in itself, for example, the grant of security by an unlimited company to secure a borrowing raised to purchase its own shares.”

Of course, unlimited companies are not subject to the general prohibition on companies acquiring their own shares and it follows that there is no need for unlimited companies to be subject to the special rules enabling limited companies to purchase their own shares in particular circumstances. If Lady Justice Arden thought that a purchase of own shares in accordance with the special rules applying to limited companies could fall foul of section 151, there would have been no reason for her, extraordinarily, to refer to unlimited companies, which are relatively rare and are not subject to those rules at all. She seems to have set up an argument in order to show that Mr. Justice Davies was wrong and then posited very unusual circumstances—the only way in which her argument could apply. She sets the case up only to undermine it and knock it down; at the same time she very successfully demonstrates the flaw in Mr. Justice Davies’s argument. It seems pretty clear to us, although it is a complicated process of reading and following to arrive at it, that the hon. Gentleman has nothing whatever to worry about.

Photo of Jonathan Djanogly Jonathan Djanogly Shadow Minister (Business, Innovation and Skills), Shadow Solicitor General, Shadow Minister (Justice) 10:15 am, 20th July 2006

I thank the Minister for that very comprehensive response. I find her arguments very convincing. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment No. 354, in clause574,page279,line31,after ‘subsidiaries’, insert

‘incorporated in the United Kingdom’.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss amendment No. 355, in clause574,page279,line39, after ‘subsidiaries’, insert

‘incorporated in the United Kingdom’.

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

The purpose of the amendment is to make it clear that the prohibition does not apply to financial assistance given by a foreign subsidiary of a UK company. The amendment is designed to give statutory effect to the decision in Arab Bank plcv. Mercantile Holdings Ltd 1994 in which it was held that the statutory prohibition on a company giving financial assistance for the purpose of acquiring shares in the company or its holding company does not apply to the giving of assistance by a subsidiary incorporated in an overseas jurisdiction to a person acquiring shares in its British parent company, not least because we are now revising the law and would not wish to leave room for this to be interpreted again. It would be helpful if the decision were reflected in the statute. The textbooks have that position as stated law and the amendment is a belt-and-braces provision.

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

We agree. If the hon. Gentleman would be kind enough to withdraw his amendment, we intend to look at the matter again and, in the context of the restatement exercise over the summer, to do what we can to address the problem.

Amendment, by leave, withdrawn.

Photo of Eric Illsley Eric Illsley Labour, Barnsley Central

With this it will be convenient to discuss amendment No. 472, in clause574,page280,line11,leave out ‘twelve’ and insert ‘six’.

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

The purpose of the amendment is, first, to query the appropriateness of criminal sanctions for offences under the clause. I thought that there were proposals to change them to civil penalties. It would be helpful if the Minister told us how many criminal charges there have been in this respect. I imagine it is not many. Secondly, if the offences are to remain criminal offences, why is the sentence half as long if the crime is committed in Scotland?

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

Amendment No. 471 would completely remove the penalty that attaches to the offence of a public company providing prohibited financial assistance. Obviously it would be pointless to say that something is unlawful if there is no sanction for doing it. Should the penalty be imprisonment or some lesser penalty? We believe that a constraint must be kept for public companies and that it would be most effective if associated with a criminal penalty at the proposed level.

The hon. Gentleman is asking why the offence is a criminal offence, but I think that I have summed up our view. Comment has been made on proportionality in relation to the law reforms that we are making. The Hampton review and the company law review considered decriminalising some regulatory offences and giving greater emphasis to administrative penalties. However, consultation and evaluation found that the use of criminal offences was the more proportionate and efficient way to enforce regulatory requirements. Offences are less likely to be committed if they are backed up by criminal penalties. Criminal sanctions are  appropriate, proportionate and essential for effective enforcement of breaches, but the underlying threat of prosecution enables authorities to exercise a progressive approach to enforcement that secures compliance without prosecution. The element of criminality behind the provision enables that approach.

It being twenty-five minutes past Ten o’clock,The Chairmanadjourned the Committee without Question put, pursuant to the Standing Order.

Adjourned till this day at half-past Twelve o’clock.