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

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The Minister for Industry and the Regions (Jacqui Smith): We now move to chapter 3, which concerns company investigations and, with the amendment, to the clauses that relate to improved powers to gain

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information and to enter and remain on premises, which are linked to the constrained powers of the community interest company regulator.

Although the vast majority of the 1.8 million companies operating in the UK are honest and do the right thing by their workers, shareholders, suppliers and creditors, a small minority do not. It is right that we have a strong and effective investigations regime, in order to maintain faith in the basis of corporate Britain. That regime has to have suitable safeguards—I hope that I will reassure the hon. Member for Sutton Coldfield (Mr. Mitchell) of that—but must nevertheless take into consideration the experience of the people involved in the investigation regime and their knowledge of what we need to do to the law to facilitate their work. I will deal with the relatively narrow definition with respect to the CIC regulator later.

The clause replaces section 447 of the Companies Act 1985, which contains the powers used to carry out most company investigations. The powers of investigators in new section 447 are wider than those currently available to investigators under the existing section 447: for example, the general power to require information from anyone is wider than the existing powers to require explanations of documents and information about the whereabouts of documents.

Amendment No. 17 seeks to impose an express restriction on the Secretary of State's ability to exercise her own powers—in other words, her power to require information from companies and her power to appoint investigators—under new section 447. She would be able to use the powers only where there appeared to be good reason. The phrase ''good reason'' is, of course, not defined—indeed, I believe that even the hon. Gentleman has not attempted to define it this morning. In our view, that phrase contributes nothing to section 447, nor will it contribute anything to new section 447. The hon. Gentleman will argue that it is better to clarify the legislation, but the problem is that where we cannot be very clear about the intention behind words in legislation, we should always be aware that if we are not careful and insert words into legislation that do not need to be there, they will be interpreted in ways that do not fulfil the intention of what we are setting out to do.

I hope that I can reassure hon. Members that whether the legislation refers to ''good reason'' or not, the Secretary of State will have to have a very sound reason for using the powers. She cannot act lawfully without such a reason. Her decision to act must be within the legal scope of the provision and must pursue the policy and objects of the Act. It must also be reasonable. Those are some of the principles of administrative law that apply. Of course, no investigation will have been started without a very thorough vetting process.

An investigation will usually result from a complaint either from a member of the public or from evidence passed on by another regulator. That information is then thoroughly vetted to establish whether an investigation is warranted. Investigations under section 447 are started when, for example, there

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are grounds for suspicion of fraud, misfeasance, misconduct, conduct that is unfairly prejudicial to shareholders, or a failure to supply shareholders with information that they may reasonably expect. That thorough approach to vetting complaints will not change as a result of omitting references to ''good reason''.

As I suggested, there is no legal definition of the phrase ''good reason'' in existing legislation. The courts have not given any special meaning to the words here. It may be a somewhat antiquated expression with no transparent, obvious and precise meaning. So there is real concern, as I suggested, that those words might be construed not simply as expressing the ordinary principles of administrative law, but as a much greater limitation on the powers, which would be very undesirable. They might also be construed as allowing the powers to be used more widely than we believe they can and should be used. That is the risk of using words that are legally unnecessary, as I believe these are.

I suggest, therefore, that it is obvious under the clause as it stands that the Secretary of State's decisions are constrained by the principles of administrative law and by the vetting process that I have outlined. A reference to ''good reason'' would not help anyone. At best the phrase would be superfluous. At worst it could, over time, produce a result that we do not want to achieve by narrowing or widening the circumstances in which the powers can be used.

Amendments Nos. 24, 25, 28, 29 focus on the word ''thinks'' in new section 453A(l) and (2), and offer, as the hon. Gentleman says, two alternatives. He is very generous with his amendments. Indeed, he offers us a cornucopia of them. Unfortunately, I do not particularly fancy any of them. I will explain why, and, I hope, reassure the hon. Gentleman. Amendments Nos. 24 and 28 would replace ''thinks'' with ''reasonably believes''. Alternatively, amendments Nos. 25 and 29 would change the formulation to ''thinks on reasonable grounds''.

Let us remind ourselves that clause 21 inserts new sections 453A and 453B to provide new powers to enable an inspector or investigator to enter and remain

on premises if he is authorised to do so by the Secretary of State—that is an important proviso—and if he ''thinks'' that to do so will materially assist him in the exercise of his investigatory functions. He may remain on premises for as long as he ''thinks'' necessary. The amendments seek to tackle those references to what the inspector or investigator ''thinks''.

We could spend time debating the relative merits of ''thinks'' in comparison with other phrases such as ''reasonably believes'' or ''thinks on reasonable grounds'', as proposed by the hon. Gentleman. In practice, however, there is no difference in legal effect between them. Whichever word or phrase is used, the inspector or investigator cannot use the powers on an unreasonable basis; they are performing public functions. They need reasonable grounds to think that it will help their investigation to gain access to the premises, and they can stay only for as long as they think, on reasonable grounds, to be necessary. More words are not needed in this case.

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The law is clear, and inspectors and investigators know what their obligations are: they must act within the law, which means that they must act reasonably. They must have reasonable grounds to think that their investigation will be helped by gaining access to the premises in question. They are working within a clear statutory framework, performing public functions—and when they come to use these powers the investigation will have already started.

I suspect that there will be more discussion later when we consider the amendments to clause 21 in detail. There seems to be a feeling in the air that the investigators will be acting on a whim, trampling into people's homes and businesses; that is why I was at pains to emphasise the vetting process that will have happened before the investigation starts. For that investigation to take place, the inspectors or investigators will have been appointed by the Secretary of State, because the Department of Trade and Industry had received a complaint or other suggestion of possible misconduct. That complaint would have gone through a two-stage vetting process, which weeds out 90 per cent. of complaints received, including those that are simply malicious.

In addition, to use the power to enter or remain on premises, the investigator or inspector will have to have been specifically authorised to use it by the Secretary of State. The power can be exercised only at reasonable times; the investigators or inspectors must produce evidence of their identity and of their appointment or authorisation; they must provide a written statement of their powers and of the rights of the company or other occupier and of persons present on the premises, and they must produce a written record of the visit.

I emphasise that the power is not about breaking down doors or getting on to premises to seize incriminating evidence. Under these provisions, investigators cannot use force and will have no power to search or seize. Instead, clause 21 gives investigators and inspectors a right of access, which will increase their ability to progress an investigation, for example when faced with obstructive or unco-operative behaviour.

Amendment No. 33 relates to the written statement, which is a description of the inspector or investigator's grounds for belief that the use of the power of entry will materially assist him. I appreciate that the hon. Gentleman believes that it would provide a measure of protection to explain in the written statement the basis for an inspector or investigator's belief that access to premises will materially assist the investigation.

However, let us think about the situation in which the written statement is administered. It will be given to what is described as an ''appropriate recipient'' at the point at which the investigator enters the premises. That ''appropriate recipient'' does not necessarily have to be an officer of the company; it could be the landlord, or another occupier, of the premises. The hon. Gentleman is suggesting that it would be appropriate for the investigator to hand over to

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someone who perhaps does not have direct knowledge of, or a stake in, the company a written explanation of what the problem might be, and of the investigation.

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It is not appropriate for people unconnected with the company to know the grounds for the investigator's decision. An investigation will be carried out in such a way that the fact that it is taking place is not brought to everybody's attention. I think that the hon. Gentleman would agree that that is right. An investigation can always conclude that the suspicions are without foundation. However, if a written statement suggesting what the basis of the investigation might be had been handed to the landlord before the investigation started on the premises, it would be difficult to put back into the box the reasons why the investigation was started, and unfounded rumours could damage a company's reputation.

It is right that there is a written statement setting out the powers and rights of the company and the power of the inspector or investigator. In fact, we recently published a consultation document seeking views from interested parties on what such a statement should include. However, it would be wrong, and potentially injurious to the company being investigated, for the statement to include all the reasons for the investigation.

Amendments Nos. 38 and 39 concern the investigation powers available to the new regulator of community interest companies. Amendment No. 38, to schedule 7, which sets out the detail of those powers, states specifically that the regulator may use the powers only if he believes that that is

    ''reasonably necessary for the purposes of the investigation''.

The amendment is unnecessary and, potentially, less restrictive than the restrictions that the Bill places on the regulator. Clause 39 already restricts the exercise of all the regulator's supervisory powers, including those of investigation, so that they may be used only if necessary to maintain confidence in CICs, and even then

    ''only to the extent necessary to maintain confidence in community interest companies.''

That means that the regulator cannot request information and documents unless he considers that such a request is necessary to maintain confidence in CICs. That imposes a stronger restriction on the use of the powers of investigation than the amendment proposes.

In addition, clause 25 requires the regulator to have regard to the impact of an investigation on those affected and to the need to use resources efficiently and economically. Schedule 7 contains additional protections—for example, an investigator may not override ''legal professional privilege''. Finally, the regulator, and anyone investigating a CIC on his behalf, will face the additional constraints of administrative law, which provides that powers must not be exercised unreasonably.

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Amendment No. 39 would insert into schedule 7 a duty for an investigator of a CIC to give reasons for any requirement made for information or documents. Again, because of the practical issues relating to investigations, the amendment would be inappropriate. It would create a significant practical risk that the giving of such reasons would interfere with the investigation by revealing information that might thwart it or alert others.

Of course, we expect investigators, when appropriate, to provide reasons for any requirement that they make for documents or information. However, they should not be required to do so in all situations, irrespective of the need for an effective investigation. Saying to the company under investigation, ''The reason why we want to look at these documents is that we think you're doing this dodgy thing,'' would enable it to hide precisely the documents and information that the investigator needs to carry out the investigation. No such requirement is imposed by legislation in respect of company investigations under the Companies Act 1985, or investigations by the Charity Commission or the Housing Corporation, and we do not believe that there is good reason to do so in this case.

Finally, amendment No. 40 would amend one of the key constraints—as I said, there are already considerable constraints—on the community interest company regulator's use of his supervisory powers. The amendment would expand clause 39(3), which currently prevents the regulator from using four of the key supervisory powers in clauses 43 to 46, unless certain conditions are satisfied. As the hon. Gentleman said, those powers are: to appoint new directors to a CIC; to remove or suspend an existing director of a CIC; to appoint a manager to a CIC; and to place certain constraints on the use of property held by a CIC.

Those are significant powers, and the Bill provides that the regulator may use them only if the company default condition is satisfied. Therefore, they can be used only if the regulator concludes that it is necessary to use them because: there has been misconduct or mismanagement in the running of the company; action is needed to secure the proper use of the company's property; the CIC is failing to satisfy the community interest test; or the CIC is not acting in pursuit of any community interest objects to which it has committed itself. Those are reasonable, but constrained, reasons allowing the CIC regulator to operate.

Amendment No. 40 would add a small hurdle to the company default condition, in that the regulator could not exercise his powers unless it appeared to him on reasonable grounds that the default condition had been reached. I do not argue with the intention of the amendment, but as was suggested in the discussions on amendments Nos. 24, 25, 28 and 29, it would add nothing to the existing requirements, which already provide that the regulator could not act on what appeared to him to be unreasonable grounds, or to the restrictions already in the Bill.

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In conclusion, I hope that I have reassured the hon. Gentleman about the specific and relatively onerous requirements necessary to begin an investigation and use the powers in clauses 19 and 21 for company investigations. Safeguards already exist for those being investigated, and we must maintain the investigators' ability to carry out the necessary investigations in practical ways. I hope that I have also made clear the constrained ability and remit of the community interest company regulator. Having heard my reassuring words this morning, I hope that the hon. Gentleman will withdraw the amendment.

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