Clause 574

Company Law Reform Bill [Lords] – in a Public Bill Committee on 20th July 2006.

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Financial assistance by company for acquisition of shares

Amendment proposed [this day]: No. 471, in clause574,page280,leave out lines 6 to 15.—[Mr. Djanogly.]

Question again proposed, That the amendment be made.

Photo of John Bercow John Bercow Conservative, Buckingham

I remind the Committee that with this we are discussing amendment No. 472, in clause574,page280,line11,leave out ‘twelve’ and insert ‘six’.

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

I shall deal with amendment No. 472, because I believe that amendment No. 471 was dealt with before the break.

We have established that we believe it necessary to retain the criminal sanction for public companies, but hon. Members might be wondering why the penalty on summary conviction appears higher for an offence committed in England and Wales. We do not consider the offence more heinous if it is committed in England and Wales, but we wish to recognise here and elsewhere in the Bill the changes that were introduced by the Criminal Justice Act 2003. That Act increased the sentencing powers of magistrates courts in England and Wales so that the maximum sentence that they can impose has increased from six months to 12 months. We see no reason to limit the sentencing powers of such courts in the case of a breach of the financial assistance provisions, as there is no qualitative difference between the offences in question and any other criminal offence.

The apparent discrepancy between the sentencing powers in England and Wales and those in Scotland and Northern Ireland is simply because criminal law sentencing is a devolved matter. The clauses therefore reflect the different approaches adopted in Scotland and Northern Ireland. There would, however, be nothing to prevent the courts in Scotland and Northern Ireland from imposing a higher penalty than six months, but that would necessitate the offence being tried by jury.

Finally, I should add for the sake of completeness that section 154(4) of the 2003 Act has not yet been commenced. Accordingly, clause 784 of the Bill makes transitory provision for Companies Acts offences  committed before the commencement of that section. The maximum on summary conviction for an either-way offence will be six months. I hope that, in the light of that effective explanation of the reasons underlying the provision, hon. Members will not press the amendments.

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

This Minister has been saved by the bell. In her remarks this morning the Under-Secretary of State for Constitutional Affairs commented that as financial assistance is a criminal offence, people will not breach the law. In practice, that is not the case. The reality is that people are breaching the provision regularly across the corporate world. In the vast majority of cases they do not know that they are doing so, and normally it involves small amounts of money. However, breaches happen all the time, so I thought that changing criminal liability to civil liability would be appropriate. We will look at the Minister’s comments in more detail and might return to the matter on Report. On that basis, 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. 324, in clause574,page280,line44,at end insert—

‘(6) It is not unlawful, by reason only of any rule of law relating to maintenance of capital, for a private company to give financial assistance directly or indirectly for the purpose of an acquisition of shares in its capital or in the capital of its holding company or to give any such financial assistance of the kind referred to in subsection (2) of section 151 where the acquisition in question is an acquisition of shares in the company or its holding company, provided that either—

(a) the company has net assets which are not thereby reduced and which are not less than the aggregate of its paid up share capital, share premium account and capital redemption reserve (if any), or

(b) to the extent that the net assets of the company are thereby reduced the assistance is either provided out of distributable profits or is authorised as a reduction of capital in accordance with sections 135 to 139.

(7) In this section “net assets” has the meaning ascribed by section 154(2).’.

The amendment makes it clear that, notwithstanding any law to the contrary, a private company can provide assistance for the purchase of its own shares or those of its holding company, as long as its net assets are not thereby reduced or, where they are reduced, the assistance is paid out of distributable profits or, where the assistance gives rise to a reduction of capital, it is first approved.

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

The amendment relates to a matter raised with us by the Law Society. We are grateful to it for sending us a paper in connection with that point and for its help generally in scrutinising the Bill.

The general principle of capital loans is a part of company law and dates back a long time. Capital has to be maintained while profits can be distributed to shareholders as a return on their investments. The aim is to protect creditors and ensure fairness between shareholders, and under the rules on the distribution of profits, procedures are available for reducing capital.

Under the principle of capital maintenance, a company cannot buy its own shares. However, there is now a procedure, subject to safeguards, and under a statutory provision on the prohibition of such financial assistance, others may provide it. A company might have a good reason for providing financial assistance for the purposes of someone else buying shares that do not go against the general principle. The Bill will allow that for private companies.

Until now, financial assistance could be provided only in limited circumstances using the whitewash procedure, which enables private companies to provide assistance as long as there is confirmation that the company’s net assets will not be reduced as a result or, to the extent that the assistance reduces the company’s net assets, it is provided at a distributable profit.

The amendment raises the question of whether the whitewash procedure served a further purpose: the provision of a statutory exception to the general principles of capital maintenance. If so, and in the absence of an equivalent to the whitewash procedure in the Bill, removing the prohibition on private companies giving financial assistance for a purchase of its own shares would tighten up, rather than deregulate—the intention—the law on private companies.

I shall not go into the legal reasoning—we had plenty of that this morning. Our view is that the whitewash procedure did not enable or make it lawful for companies to do anything that under the Companies Act 1985 can be done only within certain safeguards. That is an exception on the prohibition on giving financial assistance, not a means by which to make lawful that which, apart from the prohibition, would not be so. I hope that that is sufficient to satisfy the hon. Gentleman.

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

The Minister’s explanation is helpful and makes absolute sense. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 574 disagreed to.