|Companies (Audit, Investigations And Community Enterprise) Bill [HL] - continued||House of Commons|
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Bodies concerned with accounting standards etc
Clause 16 - Grants to bodies concerned with accounting standards etc
88. Section 256 (3) of the Companies Act 1985 allows the Secretary of State to make grants to bodies concerned with the making and enforcing of accounting standards. The Secretary of State currently pays grants under this section in respect of the work of the FRC and its companion bodies, the ASB and the FRRP.
89. Following its assumption of the functions of the Accountancy Foundation, the annual running costs of the FRC will be broadly shared by Government, business and the professional accountancy bodies (with the exception of the costs of disciplinary cases, which will continue to fall to the professional accountancy bodies; and the costs of an independent audit inspection unit which will be borne by audit firms).
90. Clause 16 replaces section 256(3) of the Companies Act 1985 to allow the Government to contribute to the funding of any of the activities of a body which carries out the activities specified in subsection (2). It is expected that the body to whom a grant will be made in connection with these activities will be the FRC. Subsection (4) makes clear that a grant can be paid to a body in respect of activities carried out by its subsidiary, or any body established under the constitution of its subsidiary (such as a Board or a Panel).
Clause 17 - Levy to pay expenses of bodies concerned with accounting standards etc
91. Clause 17 gives the Secretary of State the power to make regulations imposing a levy for meeting the costs of any body to whom the Secretary of State has paid or is proposing to pay a grant under clause 16. The aim of the power is to ensure that the body to whom a grant is made under clause 16 - expected to be the FRC - will have security of funding; and it is anticipated that a levy would only be imposed if the currently voluntary funding arrangement was no longer viable.
92. In determining the appropriate rate of the levy, the Secretary of State must take account of the level of the Government grant paid, or expected to be paid, under clause 16 (subsection (5)). An amount payable by a person as a result of the levy will constitute a debt owed by that person to the FRC and be recoverable by the FRC as a debt (subsection (6)).
93. It is anticipated that a levy would be imposed on:
These bodies already contribute to the funding of the FRC under the voluntary funding arrangement.
94. The first regulations made in respect of the levy power - and any further regulations which change the persons or bodies by whom the levy is payable - will be subject to the affirmative resolution procedure of both Houses of Parliament (subsections (10) and (11)). Any other subsequent regulations will be subject to the negative resolution procedure (subsection (12)).
Clause 18 - Exemption from liability
95. Clause 18 exempts a body receiving a grant under clause 16, its subsidiary bodies and their members, officers and staff from liability in damages for things done or not done for the purposes of, or in connection with, the activities listed in clause 16. It supersedes two existing exemptions: that enjoyed by a body authorised to apply to the courts in respect of defective accounts (currently the FRRP) under s245C(6) of the Companies Act 1985; and that available to a body to which the Secretary of State delegates her functions under Part 2 of the Companies Act 1989 (expected to be the Professional Oversight Board for Accountancy of the FRC) under s48(3) of that Act. These two exemptions are therefore repealed.
96. Subsection (1) provides that an exemption from liability in damages applies when a grant has been paid to a body under clause 16, and that it applies to acts or omissions occurring during the period of 12 months following the payment.
97. Subsection (3) provides for a body funded under clause 16, its subsidiaries and their members, officers and staff to be exempt from being liable in damages for things that they do or omit to do during the 12 month period since the grant was paid, for the purposes of, or in connection with, any of the activities listed in clause 16(2) (which is in effect a list of the FRC's regulatory functions). The exemption would not apply to any non-regulatory activities conducted by the regulator (for example, providing vocational training on a commercial basis or compiling a database of Non-Executive Directors).
98. Subsection (4) sets out the circumstances when the exemption will not apply - where the act or omission was in bad faith or where it was unlawful under section 6(1) of the Human Rights Act 1998.
Chapter 3: Investigations
Summary and Background
99. The Bill makes a number of targeted amendments intended to strengthen the company investigations regime as part of the package designed to help ensure confidence in the UK corporate framework.
Powers to investigate
100. The Secretary of State has a range of powers under companies legislation to investigate the affairs of a company and related matters. The vast majority of company investigations are carried out under section 447 of the Companies Act 1985. Members of DTI's Company Investigations Branch (CIB) or other competent individuals can be authorised, amongst other things, to seek the production of documents and are authorised to require explanations of any document from the person who produces it or from any past or present officer or employee of the company. These are confidential fact-finding inquiries, but there is a disclosure regime which allows, for example, information to be passed to other regulators. Investigations under section 447 are carried out where, for example, there are grounds for suspicion of fraud, misfeasance, misconduct, conduct unfairly prejudicial to shareholders or of failure to supply shareholders with information they may reasonably expect.
The changes that the Bill will make to the current regime
101. The Bill will amend existing legislation to strengthen the current regime, without changing the basis for inspections or making any change of substance to the grounds for an investigation. Changes will be made to:
102. The details of these changes and the circumstances in which the changes will apply are set out below.
Clause 19 - Power to require documents and information
103. This clause replaces section 447 of the Companies Act 1985. That section contains the powers which are used to carry out the majority of company investigations. In almost all cases, investigations under section 447 are carried out by DTI investigators authorised for that purpose by the Secretary of State. Their investigatory powers currently comprise:
104. These powers are limited in ways which are capable of slowing down investigations and undermining investigators' ability to uncover the facts, particularly in cases where companies are prepared to do no more than comply strictly with their legal obligations, narrowly interpreted. First, there is no general power to require answers to questions which are unrelated to documents produced. Second, while it is clear that persons other than the company under investigation can be required to produce company documents in their possession and other documents held to the order of the company, the question of what other kinds of documents they can be required to produce is open to argument. The primary purpose of new section 447 is to remove these limitations.
105. Existing section 447 also confers document-gathering powers on the Secretary of State. The Secretary of State has powers to direct a company to produce documents, to require other persons to produce documents (where she could require the company to produce them), to copy or take extracts from documents produced, to require explanations of documents produced from certain persons and to ask where documents are which have not been produced. The same limitations apply to the Secretary of State's powers as apply to those of investigators, but the main purpose of new section 447 in this regard is only to give the Secretary of State a new, general power to require answers to questions from companies.
106. Under existing section 447, the Secretary of State can exercise her powers (including her power to authorise the exercise of powers by an investigator) where there is "good reason" to do so. This restriction allows the Secretary of State to act except on a trivial or irrelevant ground, and accordingly does not add to the restrictions that apply to the exercise of the Secretary of State's power under general administrative law provisions as a general rule.
107. Existing section 452(2) prevents the powers in existing section 447 from being used to compel the production of documents which would be protected from disclosure in civil court proceedings on the grounds of legal professional privilege. Existing section 452(3) provides a measure of protection for documents held by banks which relate to the affairs of their customers.
108. Clause 19 replaces existing section 447(2) to (7) and (9). (Section 447(1) has already been repealed.)
109. New section 447(2) gives the Secretary of State the power to direct a company to produce documents or to provide information. Because of new section 447(1), it applies so that the power can only be exercised for reasons relating to the company in question. The Secretary of State can either specify or describe the documents she wants to see. The Secretary of State's power to require documents under new section 447(2) is narrower than her existing power to require documents under section 447 because it only enables her to obtain documents from the company concerned. But her general power to require information from a company is new.
110. New section 447(3) enables the Secretary of State to authorise a person to exercise certain investigatory powers (as existing section 447(3) does). Because of new section 447(1), the decision to authorise must relate to a company. Authorisation is, in effect, a decision to start an investigation of that company. For the first time a person authorised under section 447 is referred to as an "investigator", because that describes what his or her function is now and will continue to be. Investigators can still be appointed from the DTI's ranks or from outside. An investigator has the power to require the company under investigation, or any other person, to produce documents or provide information. The investigator can either specify or describe the documents he or she wants to see. These powers are wider than those currently available to investigators under section 447. The general power to require information from anyone is new. It subsumes the existing powers to ask where documents are which have not been produced and to require explanations of documents which have been produced. It also enables, for example, an investigator to require a person to explain his conduct, or give his opinion about something. The power to require the production of documents by persons other than the company is expressed in such a way as to make it clear that third parties can be required to produce any relevant document, not just documents in their possession which belong to the company under investigation or are held to the order of that company.
111. The changes made to the powers of the Secretary of State and investigators do not lessen the protection which exists in relation to legal professional privilege and banking confidentiality (see above). Section 452 is amended by paragraph 21 of Schedule 2 so that, among other things, the protection which it provides takes account of the new powers to require information.
112. References to "good reason" are omitted from new section 447, but this (for the reason mentioned in paragraph 106) is not a change of substance to the grounds for the use of these powers.
113. New section 447(5) provides that a requirement to produce documents or provide information must be complied with at such time and place as the Secretary of State or investigator specifies. Among other things, this enables investigators to require specified documents to be handed over immediately.
114. New section 447(6) provides that a lien on a document is not affected by the production of that document in compliance with a requirement imposed by the Secretary of State or an investigator. In this context a lien is, generally speaking, a legal right to keep possession of a document belonging to someone else until a claim is satisfied - for example, a claim for payment of professional fees. This subsection does not entitle a person to refuse to hand over a document to the Secretary of State or an investigator, but preserves the rights of (for example) the professional in question over those documents.
115. New section 447(8) and (9) re-enacts existing section 447(9). These subsections provide that the expression "document" in new section 447 includes information recorded in any form (for example, on paper or electronically). They also provide that, where information is recorded otherwise than in legible form (for example, electronically), the Secretary of State or an investigator can require a copy of it to be produced in legible form (for example in "hard copy") or in a form from which it can readily be produced in visible and legible form (for example, on a floppy disk).
116. New section 447 does not re-enact existing section 447(6) and (7). So the offence of failing to comply with a requirement imposed under section 447 is repealed. A new sanction is provided for by clause 22, which inserts new section 453C (failure to comply with certain requirements) into the Act.
117. Existing section 447(8), (8A) and (8B) is re-enacted with modifications by new section 447A, inserted by paragraph 17 of Schedule 2.
Clause 20 - Protection in relation to certain disclosures
118. Statutory powers are not generally used by the DTI for enquiries carried out when vetting complaints about companies. The vetting process is non-statutory and its purpose is to establish whether a formal investigation (usually under section 447) is appropriate. The process therefore precedes the appointment of investigators with formal powers. A requirement to produce documents or provide information imposed by an investigator using such formal powers overrides any duty of confidence which might in other circumstances prevent the person in question from handing over the document or revealing the information. In the vetting situation, however, there are no statutory provisions guaranteeing immunity from legal liability to a person who, in breach of a contractual or other duty of confidence, provides information in response to an informal DTI enquiry.
119. This is not necessarily to say that a person would not have a defence to a breach of confidence claim in such circumstances. However, the aim of this clause is to remove the potential deterrent of having to argue such a defence so that individuals and businesses feel able to volunteer information in response to an informal DTI enquiry, thereby giving the DTI wider access to information to help decisions to be made about whether or not to start formal investigations.
120. The clause inserts a new section 448A into the Companies Act 1985.
121. New section 448A(1) provides immunity from legal liability for breach of confidence to any person who makes a "relevant disclosure".
122. New section 448A(2) defines "relevant disclosure" for this purpose. A relevant disclosure is one which satisfies all of the five specified conditions in subsection (2). These are:
(i) the disclosure is in breach of a statutory duty of confidence (for example, under the Data Protection Act 1998) (subsection (3));
123. Thus, for example, new section 448A will not make it easier for the DTI, when vetting complaints, to obtain information about companies' private banking transactions from their banks, because banks will still be exposed to the risk of having to defend breach of confidence claims if they reveal such information in those circumstances.
124. The effect of new section 448A(5) is that reference to statutory duties of confidence includes duties contained in secondary legislation, in Acts of the Scottish Parliament and legislation made under such Acts and in legislation passed or made after new section 448A comes into force.
Clause 21 - Power to enter and remain on premises
125. It is often very useful for inspectors or investigators to be able to gain access to company premises or to other premises where records of the company are held or its business is carried on. The premises in question may be trading premises of the company, the address returned to the registrar of companies as the registered office of the company or the home address of one or more of the directors of the company.
126. To be able to gain access to, and spend time on, company premises during the course of an investigation carries great practical benefits. In particular, it enables inspectors or investigators to exercise more effectively their powers to require the production of documents and information under sections 434 and 447. More generally, it also offers inspectors and investigators the opportunity to see the company's operations in practice. Inspectors have relied for this purpose on their power to require, and the directors' duty to give, reasonable assistance in connection with an investigation, which are provided for by section 434. But investigators authorised under section 447 have no similar power and can only enter and remain on premises by agreement with the company. They may be asked to leave the premises at any time and would be trespassing if they did not do so.
127. Clause 21 therefore inserts new sections 453A and 453B into the Companies Act 1985 to provide powers for inspectors and investigators to require access to and to remain on premises which they believe are used for the purposes of the business of the company they are investigating.
128. New section 453A(1)(a) provides that the new powers cannot be used in a particular investigation unless the Secretary of State specifically authorises their use.
129. New section 453A(1)(b) provides that the new powers are exercisable by an inspector or investigator if he or she thinks that it will materially assist his or her investigation of a company. "Inspector" and "investigator" are defined in new section 453A(7) and (8). The effect of the definitions is that the powers are available to inspectors appointed under Part 14 of the Act (except for inspectors appointed only under section 446) and to investigators authorised under section 447.
130. New section 453A(2) sets out the new powers. An inspector or investigator can require entry to "relevant premises" and, having gained entry, can remain there for as long as he or she thinks necessary for the purpose of furthering his or her investigation. "Relevant premises" are defined in new section 453A(3). They are premises which the inspector or investigator believes are used for the purposes of the business of the company under investigation (including premises which are used for other purposes too). If only a part of a building is used for the company's business, the new powers will only be exercisable in relation to that part. This may involve passing through other parts of the building not used for the company's business. New section 453A will permit this. "Relevant premises" also include any part of a private house which the inspector or investigator believes is used for the purposes of the company's business, even if that part is also used for other purposes. The inspector or investigator will be able to move around "relevant premises" to which he or she has gained access and will not be confined only to a limited area (for example, one room).
131. The inspector or investigator can exercise his or her powers to enter and remain only at reasonable times. A visit to business premises outside the company's trading hours would not ordinarily be regarded as taking place at a reasonable time. Other factors would also determine whether the powers are being exercised at a reasonable time. For example, it might be unreasonable to require access to premises when a major product launch is taking place on those premises attended by all staff and potential customers of the company.
132. New section 453A(4) enables the inspector or investigator to bring other people with him or her when entering premises. For example, an inspector or investigator may need to be accompanied by one or more support staff to help with the copying of paper records, copying (with consent of the company) of computer records, taking notes of interviews or any other matters which may assist with the investigation.
133. When inspectors or investigators seek to enter relevant premises, they must produce evidence of their identity and their appointment or authorisation; and any person accompanying them must produce evidence of his or her identity (new section 453B(2) and (3)).
134. As soon as practicable after they enter premises, inspectors or investigators will be required to hand over to an "appropriate recipient" a written notice describing briefly their powers and the rights and obligations of the company, occupier and any persons present on the premises. "Appropriate recipient" is defined in subsections (8) and (9). Regulations will set out the contents of this notice (new section 453B(4)). If there is nobody from the company present on the premises during the visit, the statement must be sent to the company as soon as reasonably practicable afterwards together with notification of the fact and time of the visit (new section 453B(5)).
135. Intentional obstruction of an inspector or investigator will be an offence (new section 453A(5)). The penalty for committing the offence is provided for by a new entry in Schedule 24 to the Act added by Schedule 2, Part 3, paragraph 26(4). On conviction on indictment, the penalty is a fine with no maximum limit. On summary conviction, the penalty is a fine not exceeding the statutory maximum of £5,000. This new offence relates only to intentional obstruction. The main sanction for failing to admit an inspector or investigator to premises when required is provided for by new section 453C added by clause 22.
136. New section 453B(6) and (7) provides that as soon as reasonably practicable after a visit to premises by inspectors or investigators exercising their new powers, a written record of the visit containing information prescribed in regulations must be prepared. A copy of this record must be given to the company and (if different) an occupier of the premises on request.
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