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Mr. Michael Fallon (Sevenoaks) (Con): I am trying to follow my hon. Friend's argument. He said that in those circumstances the auditors would be sued, but it would be perfectly possible for them to mount a defence.

Mr. Mitchell: It would, but because of the way in which joint and several liability works—the heart of my argument—the auditors would be held responsible in the circumstances I described. A judge might conclude that the directors were 90 per cent. to blame but that the auditors were 10 per cent. to blame, as they were responsible for failing to discover what had been going on. But for the law of joint and several liability, the auditors' liability would be £100 million—a large amount, but one that the big four could probably manage, even bearing in mind that they would also have to pay legal fees, regulatory fines and so on.

Mr. Greg Knight: Could not the situation be worse than my hon. Friend describes? Under joint and several liability, the plaintiff can choose who to sue; he does not have to sue every person who may share responsibility, so it would be perfectly possible for a liquidator to mount an action against the auditors and not bother with the directors of the company.

Mr. Mitchell: My right hon. Friend, who is a distinguished lawyer, is absolutely right.

Mr. Michael Weir (Angus) (SNP): I am having some difficulty following the argument about joint and several liability. Unless the auditors and the directors were in some way involved together in the situation that the hon. Gentleman describes, I do not see where joint and several liability would come into it. If, as he suggests, the directors were involved in fraudulent activity, that would be a separate matter from the auditors. Either the auditors would have to be involved in that activity, or—if my understanding is correct—they would be extremely negligent in not discovering an obvious liability. Would not that be the case?

Mr. Mitchell: I think that the hon. Gentleman's point was answered by the intervention made by my right hon. Friend the Member for East Yorkshire (Mr. Knight). Although I am reluctant to get involved in a detailed seminar on the workings of joint and several liability, my understanding is that my right hon. Friend is correct.

The Government rightly recognise that there is a real problem relating to stability in the audit profession. More important, there is a significant threat to UK capital markets, which is, I believe, why the Government launched their consultation in December 2003. The Department of Trade and Industry seemed to be conducting that consultation sensibly until the big feet of the Treasury intervened and a compromise deal was done: the Office of Fair Trading was to produce a report, and if it said that the result of the measures that the DTI was considering would promote competition—I argue that that is the case—all would be well, but if not, the DTI proposal could not proceed.
 
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The OFT produced a report that was not one of its best, which commentators rightly branded suboptimal and which has led to an embarrassing stand-off between Treasury Ministers and DTI Ministers, who are red-faced and doubtless extremely irritated. The Opposition offered to go with the Minister for Industry and the Regions to a meeting with the Chancellor of the Exchequer during the Committee stage, to try to persuade him to listen to his DTI colleagues. The right hon. Lady has yet to take up that offer, but it remains on the table.

It is the duty of the Opposition to help out. It is bad government not to proceed; it will let down the business community, which could have serious consequences for business, savers and pensioners. We face the real prospect that the big four could become the big three and that a major company would be unable to obtain an audit. The Government are behaving like a rabbit caught in the headlights and it is time that they took action. That is why we have offered every possible way out of the problem that we can think of; we tabled amendments in Committee and have re-tabled today no fewer than eight new clauses and amendments. The Minister thus has a galaxy of choice and opportunity; she can choose which measure she wants to adopt. I hope that she will either make it clear that the Government will legislate with one of our proposals as soon as possible, or that she is moving towards a conclusion and will soon be able to announce to the House a programme for action.

New clause 1 would accommodate the Government's recent but much welcomed conversion to the concept of limiting auditors' liability on a proportionate basis by contract. Until recently, according to last December's DTI consultative document on director and auditor liability, the Government believed that the adoption of proportionate liability would need to be part of major reform of the law of negligence. As a result, the document concentrated on forms of monetary capping rather than examining proportionate liability. Although the document explicitly ruled out reform permitting proportionality, a large number of respondents volunteered the view that it was the solution that they most favoured. Indeed, it may be the widespread support for proportionality evident in the responses to the consultative document, which the Minister has most helpfully placed in the Library, that has led to the Government's new-found enthusiasm for proportionality. Whatever the reason for their conversion, it is extremely welcome.

The current system of joint and several liability, which I have set out, allows a claimant to sue any party who has contributed to their loss for the full amount of that loss, regardless of the extent to which that party was directly responsible. It is, of course, open to that party to sue all the other people who may have contributed to the loss, but if they have no money the first party has no redress.

1 pm

To illustrate that point, I shall consider another example—the case between Equitable Life and Ernst & Young. I stress that I have no direct knowledge of the case, but I understand that the board of Equitable Life is suing Ernst & Young for £2.4 billion. I do not know whether those at Ernst & Young were negligent in their
 
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work, but, even if they were, it is inconceivable that they and they alone are responsible for the total loss suffered by the poor policyholders at Equitable Life. However, quite properly under current law, the board is suing those at Ernst & Young as though they were the only people involved. The board is doing so, I imagine, because it perceives that Ernst & Young has deep pockets.

Let us consider what would happen if Ernst & Young were bankrupted. First, Equitable Life policyholders would probably end up with far less than they would if Ernst & Young continued in business, simply because there would be many other creditors and no future income from which to pay them. Secondly, the 7,000 people employed by Ernst & Young in the UK would lose their jobs, and its 400 partners would lose their jobs and their capital as well. No doubt, some of those people would obtain employment, but many others would not.

Mr. Cousins: The hon. Gentleman raises some interesting issues about one case—I certainly do not want to dwell on the case—but, surely, those are issues for the courts, not for the House of Commons. It is not for the House to ring-fence and protect some of the actors involved with special legislation.

Mr. Mitchell: The hon. Gentleman is entirely wrong on that point. The House determines the law and the courts interpret it. It is very much a matter for the House to consider whether the laws that we pass and the regulations that we make are in the best interests of the good governance of the British corporate system.

Mr. Cousins: I am grateful to the hon. Gentleman for giving way to me again, but let me make the point clear. The new clauses that he proposes would entrench protection for one of the actors in such an action. How can it be right for the House of Commons to do that?

Mr. Mitchell: The hon. Gentleman's point is a matter for debate. If he catches your eye, Mr. Speaker, he will be able to progress that argument, but I do not agree with him.

Of greater significance—in no way do I ignore the current consequences for Equitable Life policyholders or the possible consequences for employees and partners at Ernst & Young—the bankruptcy of Ernst & Young would be a disaster for UK plc. The big four would become the big three, further restricting the choice of auditor available to our largest global companies. Ernst & Young's clients would have to find a new auditor, but it cannot be assumed that the remaining big three or the next tier of audit firms would necessarily wish to take on all Ernst & Young's clients. The shock waves from the collapse of a firm of Ernst & Young's size and stature would make the remaining firms even more risk adverse. It seems almost inevitable that some companies in the riskier segments of the marketplace would end up without an auditor. That would be a crisis for UK plc, and the Government would have the task of trying to find a solution.

It would not be possible to create a new global firm either by dividing the remaining big three in half or by forcing some of the mid-tier firms to merge. Neither
 
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route would create a new global auditor firm, with the global reach, specialist skills and ability to invest in new technology necessary to audit the largest multinational companies that make up the FTSE 100. The Government would, however, have to introduce liability reform if there were to be any hope that the remaining big three and the mid-tier firms would take on those audits that they would otherwise reject. It is never easy or sensible to legislate in a hurry. Rather than introducing reform in the midst of a crisis, it would be far better to do so now, before the crisis erupts.

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