House of Commons Hansard Debates for 26 Oct 1989

(b) from indemnifying any such officer or auditor against any liability incurred by him--

(i) in defending any proceedings (whether civil or criminal) in which judgment is given in his favour or he is acquitted, or (

(ii) in connection with any application under section 144(3) or (4) (acquisition of shares by innocent nominee) or section 727 (general power to grant relief in case of honest and reasonable conduct) in which relief is granted to him by the court.".

(2) In Part I of Schedule 7 to the Companies Act 1985 (general matters to be dealt with in directors' report), after paragraph 5 insert--

" Insurance effected for officers or auditors 5A. Where in the financial year the company has purchased or maintained any such insurance as is mentioned in section 310(3)(a) (insurance of officers or auditors against liabilities in relation to the company), that fact shall be stated in the report.".'.-- [Mr. Redwood.]

Brought up, and read the First time.

Mr. Redwood : I beg to move, That the clause be read a second time.

Mr. Deputy Speaker : With this, it will be convenient to take Government amendment No. 257.

Mr. Redwood : There have been problems if companies pay for liability insurance for directors under the provisions of section 310 of the Companies Act. New clause 33 would enable companies to take out insurance against those liabilities for negligence, default or breach of trust on behalf of its officers and auditors, without that insurance being void. It also requires the existence of such insurance to be disclosed in the directors' report. The remainder of the new clause simply tidies up the drafting.

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Amendment No. 257 is a consequential amendment to the Building Societies Act 1986. This will enable the provision in that Act that is analogous to section 310 to be amended so as to ensure that companies and building societies continue to be subject to equivalent provisions.

I know that many hon. Members will welcome this change in the law. My hon. Friend the Member for Dorset, North (Mr. Baker) moved a similar amendment in Committee. It will be especially beneficial to non-executive directors, paid only a few thousand pounds a year for their services, but jointly liable in law with their executive colleagues for substantial sums. It may be of some help to the House, which showed considerable enthusiasm for non- executive directors in previous debates.

Mr. Nicholas Baker (Dorset, North) : I welcome the introduction of this new clause and I am delighted that my hon. Friend the Minister has moved it. I have two small worries, however, which he may want to look at, but perhaps at a later date. The first concerns the problem that, although there is permission for companies to enter into insurance policies under which legal costs of impending proceedings can be paid, this does not appear to be so if somebody loses the case. The new clause says that the cost will be paid if the case is won. Should not one consider the alternative, which is if the case is lost?

Secondly, section 310 of the Companies Act 1985 does not prohibit the relief provision, but renders it void. The drafting of the permission for this kind of insurance that the new clause provides does not take account of it. It is not clear what the position will be in relation to the policies in force. If they were rendered void under section 310, it is not clear whether the new clause brings them to life again. I hope that my hon. Friend will take away these small but significant concerns and see whether some later amendment should be made.

Mr. Hanley : The new clause amends section 310 of the Companies Act 1985 so as to clarify that a company is able to purchase insurance for its officers and auditors against any liability that may be incurred by the company. The effect of section 310 was uncertain and the clarification is most welcome. The amendment, however, does nothing to address auditors' fundamental liability problems. Through the operation of the legal principle of joint and several liability, an auditor is liable to be required to meet the whole of a loss for which he is only partially responsible. Secondly, for larger firms the professional indemnity insurance cover at levels that they would regard as desirable is almost impossible to secure at any price. Measures to limit the liability of auditors are therefore extremely necessary. I have raised this issue in new clause 50, which we shall reach later in our proceedings. This is an ideal opportunity to raise the matter, however, because it is linked to new clause 33. In 1986, a group known as the Heads of the Profession saw the then Secretary of State for Trade and Industry, my right hon. Friend the Member for Southend, West (Mr. Channon). The delegation met representatives of the DTI and of the Lord Chancellor's Department. The result was that in 1987 and 1988 the Government appointed a series of fact-finding studies into the liability problems of various professions, including the auditors. The report on the auditing profession is believed to have been in the

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Department's hands at least since May. Unfortunately, it has not yet been published and the Department has made no statement on it. Members of the Standing Committee that considered the Bill will remember that in June the then Minister with responsibilities for these matters, my hon. Friend the Member for Warwickshire, North (Mr. Maude), issued a consultation paper on one of the proposals set out in the study team's report. That proposal I have reproduced as new clause 50. In essence, it allows the shareholders of a company to fix a reasonable limit to the auditor's liability to the company. This is not a solution to the problem but it would be a step in the right direction. The Government have not taken up the proposal in their consultation paper and have made no statement on the results of their consultations.

It would be most helpful, therefore, if my hon. Friend the Minister could provide some information about the Government's actions in respect of liability problems of the auditors' profession and of the many other professions that participated in the consultation process to state their great difficulties. The problems were aired in a debate in another place at some length. I shall be grateful if my hon. Friend will explain the timescale for the results of the consultation process, which was set in place when the Bill was being considered in Committee. Many of us have been surprised that there is no reference to the matter being brought before the House on Report.

Mr. Redwood : I have taken some quick advice on the two issues raised by my hon. Friend the Member for Dorset, North (Mr. Baker). The new clause is as neutral as possible in respect of existing policies. The position would have to be determined in accordance with existing law. My hon. Friend will know that it is a moot point whether existing policies are valid under that law. My hon. Friend asks why there should not be protection if the case is lost. In that event, the director would have been found liable in respect of one of the points set out in section 310. I think that it would be inappropriate that the company should have to pay his costs. I can tell my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) that the Likierman report should be published soon, which I think that he will welcome. I cannot offer him any joy in respect of new clause 50 and the arguments that he is advancing in this debate. I believe that auditors have to be held liable, that auditors owe a duty and there has to be a fair trial in the courts if there is any potential negligence. The sums involved can be large but only because the amounts that may be lost by relying on inaccurate accounts can also be large. Any limitation on auditor's liability would inevitably mean that in some instances people who lost money in that way through no fault of their own would not be able to recover their losses in full. The onus must be on those who propose a change in the law to demonstrate that such a change would be in the overall public interest. I do not believe that that has been established. Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 34

Company contracts and execution of documents by companies

.--(1) In Chapter III of Part I of the Companies Act 1985

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(a company's capacity ; the formalities of carrying on business), for section 36 (form of company contracts) substitute--

"Company contracts : England and Wales. 36. Under the law of England and Wales a contract may be made--

(a) by a company, by writing under its common seal, or

(b) on behalf of a company, by any person acting under its authority, express or implied ;

and any formalities required by law in the case of a contract made by an individual also apply, unless a contrary intention appears, to a contract made by or on behalf of a company.".

(2) After that section insert--

"Execution of documents : England and Wales. 36A.--(1) Under the law of England and Wales the following provisions have effect with respect to the execution of documents by a company.

(2) A document is executed by a company by the affixing of its common seal.

(3) A company need not have a common seal, however, and the following subsections apply whether it does or not.

(4) A document signed by a director and the secretary of a company, or by two directors of a company, and expressed (in whatever form of words) to be executed by the company has the same effect as if executed under the common seal of the company.

(5) A document executed by a company which makes it clear on its face that it is intended by the person or persons making it to be a deed has effect, upon delivery, as a deed ; and it shall be presumed, unless a contrary intention is proved, to be delivered upon its being so executed.

(6) In favour of a purchaser a document shall be deemed to have been duly executed by a company if it purports to be signed by a director and the secretary of the company, or by two directors of the company, and, where it makes it clear on its face that it is intended by the person or persons making it to be a deed, to have been delivered upon its being executed.

A "purchaser" means a purchaser in good faith for valuable consideration and includes a lessee, mortgagee or other person who for valuable consideration acquires an interest in property.". (3) After the section inserted by subsection (2)insert-- "Execution of documents : Scotland 36B.- -(1) Under the law of Scotland the following provisions have effect with respect to the execution of documents by a company.

(2) A document--

(a) is signed by a company if it is signed on its behalf by a director, or by the secretary, of the company or by a person authorised to sign the document on its behalf, and

(b) is subscribed by a company if it is subscribed on its behalf by being signed in accordance with the provisions of paragraph (a) at the end of the last page.

(3) A document shall be presumed, unless the contrary is shown, to have been subscribed by a company in accordance with subsection (2) if--

(a) it bears to have been subscribed on behalf of the company by a director, or by the secretary, of the company or by a person bearing to have been authorised to subscribe the document on its behalf ; and

(b) it bears--

(i) to have been signed by a person as a witness of the subscription of the director, secretary or other person subscribing on behalf of the company ; or

(ii) (if the subscription is not so witnessed) to have been sealed with the common seal of the company.

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(4) A presumption under subsection (3) as to subscription of a document does not include a presumption--

(a) that a person bearing to subscribe the document as a director or the secretary of the company was such director or secretary ; or (

(b) that a person subscribing the document on behalf of the company bearing to have been authorised to do so was authorised to do so. (5) Notwithstanding subsection (3)(b)(ii), a company need not have a common seal.

(6) Any reference in any enactment (including an enactment contained in a subordinate instrument) to a probative document shall, in relation to a document executed by a company after the commencement of section (Company contracts and execution of documents by companies) of the Companies Act 1989, be construed as a reference to a document which is presumed under subsection (3) above to be subscribed by the company.

(7) Subsections (1) to (4) above do not apply where an enactment (including an enactment contained in a subordinate instrument) provides otherwise.".

(4) After the section inserted by subsection (3) insert-- "Pre- incorporation contracts, deeds and obligations 36C.--(1) A contract which purports to be made by or on behalf of a company at a time when the company has not been formed has effect, subject to any agreement to the contrary, as one made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract accordingly.

(2) Subsection (1) applies--

(a) to the making of a deed under the law of England and Wales, and

(b) to the undertaking of an obligation under the law of Scotland, as it applies to the making of a contract.".

(5) In Schedule 22 of the Companies Act 1985 (provisions applying to unregistered companies), at the appropriate place insert-- ( ) "Section 36 Company contracts. Subject to section 718(3). Sections 36A and 36B Execution of documents. Subject to section 718(3).

Section 36C Pre-incorporation contracts, deeds and obligations. Subject to section 718(3).".

(6) The Secretary of State may make provision by regulations applying sections 36 to 36C of the Companies Act 1985 (company contracts ; execution of documents ; pre-incorporation contracts, deeds and obligations) to companies incorporated outside Great Britain, subject to such exceptions, adaptations or modifications as may be specified in the regulations.

Regulations under this subsection shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.

(7) Schedule (Company contracts, seals &c. : further provisions) contains further minor and consequential amendments relating to company contracts, the execution of documents by companies and related matters.'.-- [Mr. Redwood.]

Brought up, and read the First time.

Mr. Redwood : I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker : With this it will be convenient to take Government amendments Nos. 123 and 151.

10 pm

Mr. Redwood : The present clause permits companies to dispense with the requirement of having a company seal and makes alternative provision for executing documents. The revised provisions make the following changes to the Companies Act. First, the new clause incorporates reforms proposed by the Scottish Law Commission on the

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execution of documents by companies under Scottish Law. Secondly, it takes up proposals suggested in another place that to execute documents other than by sealing, two directors or a director and the secretary should be permitted to sign instead of just a director and the secretary as first proposed. Thirdly, it clarifies and improves the proposals in the present clause 123 in respect of companies executing documents in England and Wales. Fourthly, it makes provisions with respect to the execution of documents by companies incorporated outside Great Britain.

In all those changes, we are grateful for the comments of several professional bodies in both Scotland and England. I should add that, in respect of Scotland, it had originally been intended that the provisions would be included in a separate private Member's Bill backed by the Scottish Law Commission on the Law of Writings. Unfortunately, that Bill failed to gain a Second Reading and we are therefore pleased, through the Bill, to pick up those provisions affecting companies. I hope that the House will welcome that.

Mr. Nicholas Baker : I welcome the new clause. I have one concern, which I hope my hon. Friend can allay. The new clause provides that companies will be deemed to have delivered deeds when they execute them. Subsection (5) states

"A document executed by a company which makes it clear on its face that it is intended by the person or persons making it to be a deed has effect, upon delivery, as a deed ; and it shall be presumed, unless a contrary intention is proved, to be delivered upon its being so executed."

In that form, it appears that completion meetings will have to change because, as I understand the clause, a company will not be able to execute a document before a meeting and then send it to that meeting a day or two later to have the date put on it and for it to be brought into effect upon that date.

The subsection would have the effect of making the document come into effect when it is executed--possibly two days before the meeting. That could make life difficult for many commercial transactions. Can my hon. Friend allay that concern?

Mr. Redwood : I wonder whether my hon. Friend would allow me to write to him on that point at my leisure, when I have had time to consider it.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 8

Damages

.--(1) Section 651 of the Companies Act 1985 (power of court to declare dissolution of company void) is amended as follows. (2) In subsection (1) omit the word "Where" and insert "Subject to the provision of section 651A below, where".

(3) After section 651 of the Companies Act 1985, insert new section 651A :

"(1) Any person seeking damages

(a) in respect of personal injuries (including any sum claimed by virtue of section 1(2)(c) of the Law Reform (Miscellaneous Provisions) Act 1934 (funeral expenses)), or

(b) under the Fatal Accidents Act 1976 or the Damages (Scotland) Act 1976,

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in consequence of any act or omission of a company which has been dissolved and removed from the Register of Companies shall be entitled at any time within the period permitted by the Statute of Limitations to bring or pursue such action directly against the relevant public or employer (as the case may be) liability insurers of that company who, but for the dissolution of that company, would have been contractually bound to indemnify the company in respect of that action for damages, and such insurers shall have no greater liability to that person than its contractual obligations to indemnify the dissolved company in respect of the action.

(2) This section shall apply to any claim or proceeding that exists at the date of or shall arise after the commencement of this Act.".'.-- [Ms. Quin.]

Brought up, and read the First time.

Ms. Quin I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker : With this we shall discuss the following amendments : No. 287, in clause 131, page 141, line 36, leave out from time' to but' in line 37.

No. 288, in clause 131, page 142, line 1, leave out from beginning to do' and insert--

(4) An application may be made under section 651(5) of the Companies Act 1985 as inserted by subsection (3) above (proceedings for damages for personal injury, &c.) in relation to a company dissolved before the commencement of this section notwithstanding that the time within which the dissolution might formerly have been declared void under that section had expired before commencement. But no such application shall be made in relation to a company dissolved more than twenty years before the commencement of this section.

(5) Except as provided by subsection (4), the amendments made by this section.'.

No. 283, in clause 131, page 142, line 2, leave out two' and insert twenty'.

Ms. Quin : The amendments in the name of the hon. Member for Dorset, North (Mr. Baker) are very much in line with our amendment No. 283. The issues raised by the new clause and the amendment were originally raised in Committee. We do not make any apology for raising them again on Report because they are important matters that were not satisfactorily resolved in Committee. They affect many individuals who are not only experiencing severe health problems, but find themselves in financial difficulties.

The new clause and the amendment are about the difficulty that an individual faces in claiming compensation in cases of personal injury or the contracting of industrial disease when the company for whom the individual worked has been dissolved.

We all know from cases in our constituencies just how prevalent some industrial diseases are, particularly asbestosis, pneumoconiosis, byssinosis, and so on. Those who, like me, represent an industrial constituency know the problems vividly, in particular, the physical and financial difficulties that many of our constituents are facing. Besides ourselves, many organisations are worried about the problems that the law creates, making it so difficult for people to claim compensation, particularly when they contract diseases several years after leaving the employment of a certain employer. I particularly want to mention the good work done by the citizen action compensation campaign in highlighting the issue. That has been rightly active in contacting

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members of the Committee and many other hon. Members on both sides of the House who are concerned with the issue.

The case that brought the problem to the fore is that of Bradley v. Eagle Star Insurance Company which dates from this year where it was decided that the claimant could not bring a claim against her past employers' insurance company for injuries that she alleged she had received while at work. Mrs. Bradley had contracted the respiratory disease byssinosis because of the work that she had done over several years in the card room of a Bolton cotton mill, the Dart mill.

In 1984 she brought a claim against the Eagle Star Insurance Company because her employers had gone out of business almost 10 years before. However, she could not re-register the company under the present provisions because of the two-year time limit. Mr. John Pickering, Mrs. Bradley's solicitor, described her position as a clear injustice which was evident to any man in the street. The victim exists, the insurance company exists and the right to seek compensation for the injury has been paid for. Despite that, Mrs. Bradley was unable to obtain justice or compensation. There is also the case of Norman Burden who worked for many years as a docker on the Newcastle quayside unloading bags of asbestos, as a result of which he contracted asbestosis. Because of the same legal difficulty, his family is left without compensation.

New clause 8 represents the optimum position. It is what we would ideally like to achieve if the Government were prepared to accept our new clause, simply because it provides for three things which do not exist at present.

The new clause would allow claimants to claim directly against the insurance company in the event that a former employee's company had been dissolved. That is important because it would overcome the problem of having to re-register the company for the purpose of making a claim against the insurer, which is the case at present and which can be a costly process --up to £400 for each re-registration. Companies must be continually re-registered, depending on the number of claims that claimants want to make against that particular company's insurers. Some trade unions find it expensive to cope with the cost of the re-registration of companies. For example, the General and Municipal Workers Union has to re-register the Upper Clyde Shipbuilders at a cost of £3,000 or more a year. That is expensive, and if the law were changed it would be an unnecessary procedure.

The new clause also raises the issue of retrospectivity. We wish the period during which a claim can be made against an insurer to be extended from two years to 20 years. As the Bill stands, a claim can be retrospective for only two years. We feel that, especially as so many industrial diseases take a long time to manifest themselves, an alteration to 20 years would be an important step. We also wish the period to be unlimited in the future, which is why the new clause refers to the statute of limitations rather than to a 20-year period.

We hope that the Minister will respond positively. In Committee, his predecessor seemed to feel that our demands were excessive and that we should show some sympathy for the insurance companies. We were pleased to note, however, that certain Conservative Members took a rather different view, including the hon. Member for

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Dorset, North (Mr. Baker), although we were disappointed that that independent view was not reflected in a vote. We hope that that will not happen again.

We do not feel that the concern felt by insurers about the new clause and amendment are justified. They wrote to members of the Committee, and one point raised in Committee was that insurers, when working out the cost of their premiums, take into account that a number of companies will go into liquidation. We do not think that that complaint is justifiable, particularly as before the Bradley v. Eagle Star ruling the legal position was not really clear, and it would therefore have been very unwise for insurance companies to make such a calculation. We feel that, when premiums have been paid and claims cannot be made because of the existing legislation, the insurance companies are benefiting from a windfall.

The insurers also say that it is very unfair for them to be held liable for diseases that may manifest themselves in the future, and could not be foreseen by the industries in question. Insurance companies, however, know that that is the position--industry cannot possibly be aware of future scientific discoveries, for example--and they must deal with their customers on the basis of present knowledge.

Mr. Cousins : Like me, my hon. Friend the Member for Gateshead, East (Ms. Quin) represents a constituency that has had to deal with industrial diseases such as "vibration white finger" and asbestosis, which were being discussed many years ago. Workers and their trade union representatives had to fight the social security and legal systems for many years to establish the identity of those conditions--and others like them--as recognised diseases requiring compensation. Does my hon. Friend feel, as I do, anger that we should be told now after so many years of fighting that those problems could not have been anticipated?

Ms. Quin : I fully accept what my hon. Friend has said, and I hope that the anger that many of us feel about people who are in difficulties because of their past employment will be shared by the Minister and his colleagues.

The insurers have also said that, in certain circumstances, it may be very difficult for companies to track down the files on claimants over a 20-year period. That may be a problem, but it is not sufficient reason not to change the law. It may mean difficulties for certain claimants, but those claimants for whom records exist will be able to obtain justice.

Finally, the insurers are saying that future premiums would become more expensive if the law is changed in the way that we are suggesting, but we are reinforced in our feelings on the subject by the representations made to hon. Members by Mr. Robert Kiln, an insurer with more than 50 years' experience who was an insurance adviser to the Department of Trade and Industry. He feels that any such effect would be marginal.

10.15 pm

Another case, the Cartledge case, of which I am sure the Minister is aware, resulted in one occasion in the past where a case of retrospectivity was accepted by both sides of the House. Because of that, we urge the Minister to respond positively to our desire for retrospectivity, at least within the 20-year period, on this occasion. I urge the Minister and his colleagues not simply to accept the views of industry, but to see it from the point of view of the many individuals whose future has been blighted and who are

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