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Question put and agreed to.
Bill ordered to be brought in by Roger Casale, Peter Bottomley, Mrs. Anne Campbell, Sir Sydney Chapman, Mr. Mike Hancock, Alan Howarth, Ms Christine Russell, Mr. Derek Wyatt and Richard Younger-Ross.
Roger Casale accordingly presented a Bill to enable the Secretary of State to require public bodies to hold design competitions when drawing up planning briefs in respect of the disposal of publicly owned land and property: And the same was read the First time; and ordered to be read a Second time on Friday 15 October, and to be printed [Bill 148].
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Orders of the Day
Companies (Audit, Investigations and Community Enterprise) Bill [Lords]
Order for Second Reading read.
5.9 pm
The Minister for Industry and the Regions (Jacqui Smith): I beg to move, That the Bill be now read a Second time.
The Bill comes to us having been thoroughly and expertly examined in the other place. Their lordships debated the Bill for some 27 hours and made 67 amendments, many of which were, at least in part, in response to points made by Opposition parties. I hope that this House can continue to deal with the Bill in such a constructive manner.
Good company law needs to provide the framework for enterprise—to provide a legal form for organisations to help them to do business, to build prosperity, and to create jobs and opportunity in our economy. Company law has a long history. Before Gladstone's Joint Stock Companies Act was passed in 1844, it was very difficult to form a company as a body corporate. Once it became possible to incorporate a company simply by registration, and especially when limited liability became available a decade later, the company form very quickly gained in popularity, and today there are some 1.8 million companies on the register in Great Britain.
We all need to feel confident in our dealings with business. As investors, creditors and consumers, we need to know that our money is secure, and to have trust in corporate Britain. Our company regulation is designed to balance the freedoms that promote enterprise and wealth creation with the necessary minimum safeguards to protect investors, creditors and others who do business with companies. The law therefore requires companies to comply with certain requirements and make available specified information. Almost all companies also opt for limited liability, meaning that if a company becomes insolvent, its shareholders are liable only for the amount that they have agreed to invest in the company. Limited liability companies must therefore provide additional financial information, so that those doing business with them can judge their soundness.
A sound system of company regulation is an important source of competitive advantage. By matching the degree of control to the amount of risk to the economy and society, a good system will encourage business start-ups and minimise regulatory burdens. It will ensure confidence in companies and financial markets and thus lower the cost of capital.
Company law not only sets out the conditions for incorporation and limited liability. As the author of one book on company law puts it, there are
"arguments for state-provided default solutions, so that each set of contracting parties"
"not have to re-invent the wheel".
The Bill sits firmly in the tradition of statutes that facilitate the framework for enterprise and set the terms of the company bargain. Part 2 creates a new type of
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company, the community interest company, as a tailor-made vehicle for social enterprise—for businesses trading with social objectives rather than to make private profit. We believe that social enterprises can play a distinct and valuable role in creating a stronger, sustainable and socially inclusive economy. They can help to drive up productivity and competitiveness, enable individuals and communities to work towards regenerating their local neighbourhoods, develop new ways to deliver goods and services, and encourage active citizenship. Social enterprises also help to drive innovation, not only in relation to their products and services, but in relation to the way in which they operate.
Research by the Small Business Service found that social enterprises made both a substantial contribution to local economic development, with 86 per cent creating additional jobs, and a wider social contribution—for example, involving volunteers and providing training and experience for socially excluded people. Social enterprises include Bulwell Hall Community Garden, a business that provides training opportunities for the long-term unemployed and work placements in gardens and allotments; at the same time, it grows and sells healthy produce and creates community space. Bulwell Hall supported the principle of the community interest company and agreed that it would help to raise the profile of the sector and help others to understand social enterprises. That organisation and others in the social enterprise sector told us that they wanted the advantages of the company form but found it difficult and expensive to set up a company with the special features that they needed, such as safeguarding the company's assets. Thus, we are doing exactly what the textbook prescribes and providing a default solution so that people who start a company for social enterprise do not have to reinvent the wheel. That will make it easier to set up social enterprises and will, over time, encourage the development of the social enterprise sector, which has much to offer our communities and economy.
The community interest company will be a new and additional choice for social enterprises. It is not meant to replace other options such as charities, or the industrial and provident society, which is the form used by many co-operatives. Indeed, the Government are committed to modernising all legal options used by voluntary and community organisations and helping people to choose their most appropriate option. The special value of the community interest company is that it will offer the flexibility of the company form, yet be more suitable for many social enterprises than existing types of companies. Responses to consultations show that there is about 80 per cent. support for the idea of the community interest company, and it is supported by bodies including the Social Enterprise Coalition, the National Council for Voluntary Organisations and the Association of Charitable Foundations.
Again, the community interest company is based on the idea of a bargain, and part 2 of the Bill creates the legislative basis for that balance. The people who run a community interest company will voluntarily accept certain constraints and a higher level of supervision and, in return, the company will acquire a status that signals to customers, investors, employees and bankers that the business is run for the benefit of the community, that its profits are wholly or largely applied for the benefit of the
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community, that its assets are protected for the benefit of the community and that it is subject to oversight from a regulator. The regulator will have the task of maintaining confidence in community interest companies and will also promote awareness of the potential of the new type of company.
Bob Spink (Castle Point) (Con): Of course we are all in favour of social enterprise and want the new CICs to succeed. How many of the new companies does the Minister expect to be formed over the first year and over the first five years? What will be the cost of the regulator for such companies?
Jacqui Smith: I genuinely do not know how many companies will be formed over the first year or five years. However, we have already received general support for the measure and from the sector, and specific requests for information from enterprises that think that the provision might be appropriate for them. Such enterprises range from educational companies to companies that provide community services, such as community transport companies. Many bodies think that the measure will be beneficial. As we made it clear in the regulatory impact assessment—I will correct myself if I am wrong—we suggest that the set-up costs will be about £500,000, that the cost of the regulator will be about £150,000 a year and that the cost of setting up an individual community interest company will be about £40.
Part 1 of the Bill will strengthen existing provisions on company accounts and audit, on the regulatory system for auditors and on company investigations in the wake of the Enron and WorldCom scandals. Although those scandals occurred in the United States, they raised fundamental questions about the reliability of the accounting and auditing system. However, we did not rush to legislate here. Instead the Government, acting jointly with business and the accounting profession, reviewed the whole British system of controls on financial reporting in the light of lessons learned from the American problems. We reviewed our corporate governance, company law and the role of the auditor in a measured and inclusive way. We consulted widely, listened to experts and set up the co-ordinating group on audit and accounting to consider issues of financial reporting and auditor independence. Of course, our system comprises not only company law itself but those parts of the financial services regulatory system that set standards for companies listed on the stock exchange. The FSA's listing rules give legal force to the Financial Reporting Council's combined code on corporate governance, which was revised last year, with the Government's full support, following reviews by Sir Derek Higgs and Sir Robert Smith.
Sir Robert Smith's report called for the strengthening of the role of the audit committee. In addition to recommending that all members of the audit committee be independent, Smith recommended that at least one member should have significant recent and relevant financial experience. Those recommendations, along with Sir Derek Higgs's proposals on the role and
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strengthened effectiveness of non-executive directors, provide a sound basis for improvements in audit and in our boardrooms.
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