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Standing Committee Debates
Companies (Audit, Investigations and Community Enterprise) Bill [Lords]

Companies (Audit, Investigations and Community Enterprise) Bill [Lords]

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Standing Committee A

Thursday 16 September 2004

[Derek Conway in the Chair]

Companies (Audit, Investigations and Community Enterprise) Bill [Lords]

8.55 am

The Chairman: Good morning. We resume our considerations this morning on a Corridor more famous than it was on Tuesday morning.

Clause 19

Power to require documents and information

Mr. Andrew Mitchell (Sutton Coldfield) (Con): I beg to move amendment No. 17, in

    clause 19, page 23, line 41, at beginning insert

    'Where there appears to be good reason,'.

The Chairman: With this it will be convenient to discuss the following amendments:

No. 24, in

    clause 21, page 25, line 24, leave out 'thinks' and insert 'reasonably believes'.

No. 25, in

    clause 21, page 25, line 24, after 'thinks', insert 'on reasonable grounds'.

No. 28, in

    clause 21, page 25, line 28, leave out 'thinks' and insert 'reasonably believes'.

No. 29, in

    clause 21, page 25, line 28, after 'necessary', insert 'on reasonable grounds'.

No. 33, in

    clause 21, page 26, line 19, at end insert—

    '(c) the grounds for his belief that entry onto the company's premises will and that remaining thereon for a period will be necessary to materially assist him in the exercise of his functions under this Part,'.

No. 40, in

    clause 39, page 36, line 42, after 'appears' insert 'on reasonable grounds'.

No. 38, in

    schedule 7, page 70, line 14, after 'may', insert

    'if it appears reasonably necessary for the purposes of the investigation'.

No. 39, in

    schedule 7, page 70, line 19, at end insert—

    '(1A) The investigator of a community interest company must give reasons in writing for any requirement imposed under sub-paragraph (1) above, such reasons to be given to the company or other person to whom the requirement is directed.'.

Mr. Mitchell: I was about to start by gently chiding the Government Whip—I have developed a bond with him in this Committee—for the fact that we were not quorate, but, magically, and with only 30 seconds to go, enough Government Back Benchers suddenly arrived to make us quorate, so I cannot tease him. However, you will recall from our days in the

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Government's Whips Office in the Parliament of 1992 to 1997, Mr. Conway, that the great thing was to get hold of as many pliant Members as possible and ensure that they turned up on time. Given the number of pliant, docile and subservient Government Back Benchers—[Interruption.]

The Chairman: Order. Is the hon. Member for Preseli Pembrokeshire (Mrs. Lawrence) in the right Committee? This Committee is debating the Companies (Audit, Investigations and Community Enterprise) Bill, and I do not want to embarrass the hon. Lady, but she has not been appointed to it by the Committee of Selection.

Mrs. Jackie Lawrence (Preseli Pembrokeshire) (Lab): I understood that I was standing in for my hon. Friend the Member for Falkirk, West (Mr. Joyce) this morning.

The Chairman: I am sorry, but it does not work like that.

Mrs. Lawrence: I think that I am in the wrong Room. My apologies, Mr. Conway.

The Chairman: Not at all, but we have to do these things right. The Committee of Selection rules on such matters.

Mr. Mitchell: The House has had problems with people who are not supposed to come in wandering into debates, so we are grateful, Mr. Conway, for the sharp eyesight with which you are protecting the Committee.

I was making a point to the Government Whip about the importance of getting the people who actually are members of the Committee to turn up on time. I was drawing his attention to the pliant, docile and subservient nature of so many of Government Back Benchers. However, I am convinced that when hon. Members study my amendments today, they will find them so reasonable that I shall be able to secure their support. My attempts on Tuesday to seduce the Minister with my utterly reasonable, helpful, well honed and finely crafted amendments were, alas, unsuccessful; the hon. Lady remained icily resistant to what I proposed. However, I am ever optimistic, and I hope to make progress in that direction today.

Clause 19 deals with excessive investigatory powers. On Second Reading, I drew the House's attention to the fact that the Bill places only the barest limits on investigatory powers. My party's concern is that they may well give rise to abuse of power. I was particularly concerned about the powers for inspectors and investigators to enter and remain on premises, which considerably extends their existing powers; previously, they had no power of entry without a search warrant.

As I said on Second Reading, I am not against giving inspectors and investigators powers of entry, but I am firmly against allowing them entry when they only ''think'' that it would materially assist their work. I hope to persuade the Committee that all of us, on behalf of our constituents, should be wary of giving powers to investigatory officials to go on fishing trips.

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The inspectors and investigators must reasonably believe that entering and remaining on the premises will materially assist them.

I draw the Committee's attention to amendment No. 17, which would insert the words:

    ''Where there appears to be good reason''.

Clause 19 reformulates section 447 of the Companies Act 1985. The new form excludes the requirement in subsections (1) and (2) of the existing section 447 for the Secretary of State to act only if he or she thinks there is good reason to do so.

The amendment would retain an express and specific requirement for the Secretary of State to act only if there were good reason to do so. A similar amendment was proposed and defeated in the other place on 22 March. The Government's answer, as foreshadowed in the explanatory notes, was that the words were superfluous and added nothing to the requirements imposed by general administrative law—that the Secretary of State would need a good reason to act, and could not act on grounds that were trivial, irrelevant or irrational.

We maintain that it is desirable in such cases, in which the Government could visit intrusive actions on companies and individuals, that the Act should plainly state the obligation of the Secretary of State to act for ''good reason''. The companies and individuals affected by the actions of the Secretary of State should be able to see from the statute that those powers are limited. Individuals and small companies should not be expected to have a compendious knowledge of administrative law. It was not suggested that the general administrative law did not impose such obligations upon the Secretary of State at the time of the 1985 Act, yet it was thought important to include those words then. It remains desirable today.

It will help to consider the provisions of the Financial Services and Markets Act 2000, which was passed under the present Government. Section 165 of that Act, which gives the Financial Services Authority the power to require information, provides in subsection (4) that that power applies

    ''only to information . . . reasonably required in connection with the exercise by the Authority of functions conferred on it by or under this Act.''

Similarly, section 167 of the 2000 Act, which provides the FSA's power to appoint persons to carry out general investigations, provides in subsection (1) for that power to be available

    ''If it appears to the Authority or the Secretary of State . . . that there is good reason for doing so''.

Let the Government be consistent and accept the amendment. If those words were necessary in parallel provisions in the 2000 Act, why are they unnecessary now?

I now turn to amendments Nos. 25, 28, 24, 29 and 33. The latter would insert into proposed new section 453B(4) of the 1985 Act a new paragraph (c):

    ''the grounds for his belief that entry onto the company's premises will and that remaining thereon for a period will be necessary to materially assist him in the exercise of his functions under this Part''.

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That flows directly from what I said about amendment No. 17. The other amendments refer to new sections 453A and 453B, which clause 21 will insert into the 1985 Act. The first two amendments should be treated as pairs, but they are alternatives; each pair may stand alone, but it is preferable that one or other of the two pairs be adopted.

The exercise of the power of entry and the right to remain on relevant premises, which may include residential premises, depends presently only on what the inspector or investigator thinks will materially assist him. The amendments impose an express requirement that the official in question must have reasonable grounds for so thinking, or must reasonably believe something to be so. Those requirements would be given practical effect, and companies and individuals given proper notice of why their homes or premises were being intruded upon, by amendment No. 33, which would require the inspector to set out his grounds in the notice that must be given to an appropriate recipient under new subsection 453B(4) to the 1985 Act.

I have already dealt with an amendment to replace the word ''thinks'' with the words ''reasonably believes''. Such an amendment was also dealt with in the House of Lords on 7 July and rejected. I regret that, and hope that I will have more luck with the Minister this time. The Government have argued in the other place that the words ''reasonably believes'' or ''thinks on reasonable grounds'', which are hallowed through usage, are unnecessary verbiage because the general administrative law applies to officials carrying out public functions.

In Grand Committee, the Minister in the other place said:

    ''It is not necessary, however, to write in an express reasonableness requirement. Inspectors and investigators perform public functions and the ordinary principles of administrative law apply to their exercise of powers. If no reasonable person in the inspector's or investigator's position could think that to require access to the premises in question will advance the investigation, the power to require access will not be available.''—[Official Report, House of Lords, 22 March 2004; Vol. 659, c. GC258.]

The Minister went on to make a number of similar points, but that was the heart of his speech.

On Report in the House of Lords, the Minister said:

    ''In my view, the use of the word ''thinks'' is very much to be preferred to the use of ''reasonably believes''. There are a number of potential variations on the latter; for example, ''believes on reasonable grounds'', ''has reasonable grounds to believe'' or ''reasonably considers''. Effectively they all mean the same thing and ''thinks'' encapsulates them all.''

The Opposition disagree with the argument of the Minister in the other place that the word ''thinks'' necessarily means the same thing as ''reasonably believes'', ''believes'' or ''thinks on reasonable grounds''. It is one thing to be able to show, as the Minister put it, that

    ''no reasonable person could believe''—[Official Report, House of Lords, 7 July 2004; Vol. 663, c. 836-7.]

that access would advance the investigation. It is a different and a higher test to have to show positively that any reasonable person would believe access to be

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necessary. My comments apply equally to the test of the words ''thinks necessary'', which are applied in section 453A(2)(b) to the power to remain on premises.

We are discussing a serious potential intrusion by officialdom into companies' premises and even into individual private homes occupied by directors and their families. The requirement for access ought to be subject to a higher test than that encapsulated in the word ''thinks''.

It is instructive in this context to consider again the Financial Services and Markets Act 2000, to which I referred earlier. I referred then to section 165; I draw the Committee's attention now to section 167, which deals with the Financial Services Authority's powers to appoint persons to carry out general investigations. Subsection (2) provides

    ''If a person appointed under subsection (1) thinks it necessary for the purposes of his investigation, he may also investigate''

certain other parties. At first glance, that might seem to give some support to the Government's position. However, a closer inspection shows otherwise.

First, as I have already pointed out in connection with the proposed amendment to clause 19—that is, to new section 447—section 165(4) of the Financial Services and Markets Act 2000, unlike the Bill, subjects the authority's power to require information to an express test that it be ''reasonably required''. That is the answer to the Government's argument in the other place that the use of the words ''reasonably believes'' or ''on reasonable grounds'' is undesirable because it might affect other parts of the Bill that do not impose a reasonableness requirement: we should insert the reasonableness requirement in those places also, as we have proposed for clause 19. The Government should not tolerate error in one part of the Bill for fear of causing more work for themselves.

Secondly—unlike the provisions in this Bill relating to the much more intrusive powers of entry on to premises—where the investigator thinks it necessary to exercise the power to investigate under section 167 of the Financial Services and Markets Act, he is required first to give written notice to the person concerned. That is clearly set out in section 167(3).

There is a further and fundamental reason why the amendments should be accepted. Particularly where small or one-man businesses may be affected by the exercise of intrusive state powers, the enabling statute should contain the obligations and duties of the officials. It should be a complete code, which is transparent and comprehensible to the individual citizen. It is unacceptable to require the director of a small company, as the Government do, to have a detailed knowledge not only of company statutory and regulatory provisions—which the Government are, sadly, ever keen to impose on businesses—but of administrative law, in order to understand his position. He should not have to go to specialist lawyers to find out whether the Secretary of State, or his or her officers, are entitled do what they are doing.

In that connection, I refer specifically to amendment No. 33. Section 453B(4) requires an investigator to serve on the appropriate recipient as soon as possible after entry a notice setting out, as regulations may

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prescribe, matters such as a statement of the investigator's powers of entry and the occupier's rights and obligations. The amendment would require the list to include a statement of the grounds on which the investigator or inspector saw fit to exercise his powers. In practice, it would require officials to consider carefully the justification for exercising the significant powers conferred on them. It would also inform, in a transparent manner, persons affected by the exercise of those powers and give them the practical means to ascertain whether those powers were being abused.

I shall now dart towards the community interest companies regulatory amendments. I draw the Committee's attention to amendments Nos. 40, 38 and 39. Amendment No. 40 would apply an express requirement of reasonableness to a decision by the regulator of community interest companies that the conditions for exercising his wide-ranging powers had been satisfied. Amendments Nos. 38 and 39 would clarify the powers of a person appointed by the regulator to investigate a CIC and require that person to provide reasons in writing for requiring the production of documents or information. The amendments therefore marry with the protective amendments that I sought to persuade the Government to accept to the earlier part of the Bill.

As I said, amendment No. 40 would apply an express requirement of reasonableness to a decision by the regulator that the condition for exercising their wide-ranging powers had been satisfied. In effect, clause 39(3) defines when the regulator is entitled to exercise his extensive powers, including those relating to the removal of directors, the appointment of a manager and the compulsory appropriation of property belonging to a CIC—significant powers indeed. Those powers are exercisable only when the company default condition referred to in the Bill is satisfied. Clause 39(3) provides that that will be the case when

    ''it appears to the Regulator necessary''

to exercise his powers.

That provision is too broad, given the scope of the powers that the regulator can seek to exercise. It is conceivable that an innocent CIC will fall foul of the regulator without knowing that it is doing so, simply because it appears ''necessary'' to the regulator that he should exercise his powers, although no objective criteria are satisfied. The amendment would make it clear that the regulator must have reasonable grounds on which to conclude that it is necessary for him to exercise his powers. That would provide a necessary protection for the CIC concerned. I should add what I know the Minister will find to be the clinching argument: the amendment is consistent with similar amendments proposed to earlier clauses relating to auditors' rights to information.

Amendments Nos. 38 and 39 would, let me remind the Committee, clarify the powers of a person appointed by the regulator to investigate a CIC. The powers of an investigator of a CIC are set out in schedule 7. From the definition, it is clear that such a person is either the regulator, a member of his staff to whom his powers have been delegated, or some other

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person appointed by the regulator under clause 40(1)(b). The regulator does not currently have to give any reasons why he has decided to investigate a CIC under clause 40(l)(a) or why an investigator has been appointed under clause 40(l)(b). Those provisions do not appear to be covered by the obligation to give reasons in clause 59(4), as they are not provisions against which an appeal lies.

9.15 am

The powers of an investigator in schedule 7 are wide-ranging and, as presently drafted, not subject to any express limits. Paragraph 1(1) of schedule 7 simply empowers an investigator to require the production of documents or information without having to give any reason. Furthermore, the investigator can seek them not only from the CIC being investigated but from ''any other person'', including, it seems, persons not directly connected with the CIC under investigation.

It is wrong to allow both elements in the investigation process—namely the appointment and the subsequent conduct of the investigation—to proceed without any reasons being provided to the CIC being investigated or to the third party being required to comply with a direction from an investigator. At present the only right is to require the investigator to provide evidence of his authority, as set out in paragraph 1(2) of schedule 7.

The amendments therefore impose a requirement on the investigator both to have reasonable grounds for requiring the documents or information and to set those out in writing. That will not impinge upon the wide power of the investigator, but will provide proper protection to the CIC being investigated or the other person being obliged to comply with the direction, who will be entitled to know why they are being ordered to produce documents or information. Given that a failure to comply may result in contempt proceedings, as set out in paragraph 4 of schedule 7, it is only right that that information is provided. Finally, given that the regulator has to give reasons when orders other than the investigation provisions are made, it is inconsistent for the powers of investigation to be free from any such fettering.

Such matters are detailed and they dart about within the Bill, from the beginning to the provisions covering the new CIC. However, they are at the heart of what Parliament should do to protect our citizens from invasive regulatory and investigatory powers. For those reasons, I hope that the Minister will be able either to satisfy me that adequate protection is already available in the Bill—she should bear in mind that my hon. Friends and I were not satisfied with any of the assurances that were given in the other place—or to accept the amendment on the grounds that it does what Parliament is here for, which is to protect the rights and privileges of individuals in their own homes.


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