House of Commons - Explanatory Note
Company Law Reform Bill [HL] - continued          House of Commons

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Clause 899: Liability for false or misleading statements in certain publications

1553.     Clause 899 establishes a regime for civil liability to third parties by issuers admitted to trading on a regulated market in respect of disclosures made public in response to provisions implementing obligations imposed by the Transparency directive. These will include for UK issuers provisions in transparency rules and for non-UK issuers whose securities are traded the equivalent provisions in the law of their home member state.

1554.     Although no issuer has been found liable in damages under English law in respect of statements made in narrative reports or financial statements, the law relating to financial markets and to the obligations of issuers to investors on those markets has been developing, in the light of increased regulation of both domestic and European origin. The Transparency Directive has continued that process and increased the level of uncertainty as to whether any actionable duty is owed by an issuer and its directors to investors.

1555.     The Transparency Directive sets out the periodic financial disclosures which must be made by issuers admitted to trading on a regulated market. Articles 4 and 5 of the Directive provide for annual and half-yearly reports, including management statements, to be made public, and requires statements made by persons responsible within the issuer for these disclosures (the directors in the case of a public company) that these give a true and fair view, and that the management report includes a fair review of certain matters. Article 6 requires the disclosure of interim management statements.

1556.     The Transparency Directive also sets out the minimum requirements for a liability regime which must be adopted by the UK at Article 7, and recital (17) states that "Member States should remain free to determine the extent of the liability".

1557.     These provisions give considerable flexibility to Member States in the liability regime which they choose to adopt in respect of disclosures under the Directive. The Government has decided to establish an exhaustive regime in relation to ensuring the delivery and accuracy of these reports including criminal offences, administrative penalties and actions for civil damages. The provisions in this clause relate only to the position in respect of the civil liability of issuers to investors in their securities. While it is intended that there be no additional liability under the Directive in respect of such disclosures, the regime leaves undisturbed any other liability owed by directors to the issuer and to members of the company under UK and other national law, and any liability under other FSA rules. It also leaves undisturbed any liability of the issuer in respect of any loss or damage arising otherwise than as a result of acquiring securities in reliance on the relevant statement or report.

1558.     The primary liability of directors and issuers for the accuracy of the required disclosures comprise criminal offences and administrative penalties under the provisions of Part 15 of this Bill and Part 6 of the Financial Services and Markets Act 2000. The provisions in Part 6 require compliance with FSA rules giving effect to the obligations in the Directive and provide for penalties in respect of failure to comply with the rules. In addition, restitution can potentially be ordered by the court, on application of the Authority or Secretary of State, under section 382 of FSMA or by the Authority directly under section 384 of FSMA.

1559.     The Government's intention in developing a civil liability regime has been to provide certainty in an uncertain area and to ensure that the potential scope of liability is reasonable, in relation to both expectations and the likely state of the law after the implementation of the TD. In particular, the Government has been anxious not to unnecessarily to extend the scope of any duties which might be owed to investors or wider classes of third parties, in order to protect the interests of company members, employees and creditors.

Scope of civil liability

1560.     The clause makes issuers admitted to trading on a UK regulated market (and also UK issuers admitted to trading on other regulated markets) liable in respect of the periodic information required to be disclosed under Articles 4, 5 and 6 of the Directive as given effect by FSA rules.

1561.     Depending on the final FSA rules, currently the subject of consultation, we would expect this to include annual and half yearly financial statements and management reports, the sign-off by directors or other responsible parties, as well as interim management statements. The regime is not intended to affect the regime for the enforcement of the Market Abuse Directive.

1562.     Subsection (3) provides that issuers would be liable where the disclosures contained statements or omissions that were knowingly untrue or misleading, and such statements were made in bad faith or recklessly. Issuers would only be liable to investors who had reasonably relied on the statements for investment purposes at a time when it was reasonable for them to be relied upon, and suffered loss as a result (subsection (4)). In these circumstances subsection (2) provides that the issuer of securities admitted to trading on a regulated market is liable to pay compensation to the person who has suffered a loss.

1563.     Subsection (7) clarifies that these civil liability requirements would be separate from any provisions in Part 6 FSMA, conferring liability for a civil penalty, a criminal offence or the right of the plaintiff to seek restitution.

Extent of regime

1564.     The following issuers would be subject to this liability regime:

  • issuers admitted to trading on a regulated market in the UK (whether as home or host, whether incorporated in UK, EU or third countries);

1565.     This would not preclude such issuers being sued in other EU jurisdictions by parties based in those jurisdictions under the national law implementing the Transparency Directive. However, the adoption of the above scope of regime is consistent with the Government's view that issuers should primarily be sued in the jurisdiction in which they have issued securities and sought admission to trading.

Issuers admitted to trading on exchange-regulated markets

1566.     The liability regime does not cover issuers on exchange-regulated markets such as AIM, OFEX or the PSM. Their position remains unchanged by implementation of the Transparency Directive.

Clause 900: exercise of powers where UK is host member state

1567.     Clause 900 inserts a new section into Part 6 of FSMA 2000: section 100A.

1568.     New section 100A of FSMA 2000 sets out the competent authority's ability to exercise powers in relation to infringements of prospectus rules and transparency rules or related provisions where issuers have chosen a Home state other than the UK. Subsection (2) clarifies that the enforcement powers extend only to cover infringements required by the relevant directive. Subsections (3) sets out the process by which the Authority must engage with the Home state competent authority when it finds there has been an infringement, and subsection (4) and (5) set out limitations on the Authority's ability to act in those circumstances and that, in the appropriate circumstances, it must take all appropriate measures to protect investors.

1569.     Subsection (6) imposes an obligation on the Authority to inform the Commission where it takes action to protect investors.

Clause 901: Transparency obligations and related matters: minor and consequential amendments

1570.     This clause provides for the insertion of a new Schedule 15 that makes minor and consequential amendments to other parts of FSMA 2000, related to the Authority's new rule-making powers inserted into Part 6 of that Act by clauses 894 to 900. It also makes amendments to the Companies (Audit, Investigations and Community Enterprise) Act 2004.

Schedule 15: transparency obligations and related matters: minor and consequential amendments

Part 1: Amendments of the Financial Services and Markets Act 2000

1571.     This Schedule makes minor and consequential amendments to the Financial Services and Markets Act 2000.

1572.     Paragraph 2 amends section 73 of FSMA 2000 to extend, for the purposes of the transparency rules which can apply to non-regulated UK markets, the factors to which the Authority must have regard when making rules under Part 6 of FSMA 2000, so that they need to have regard to effects on markets other than regulated markets.

1573.     Paragraph 3 amends section 73A of FSMA 2000 to provide that transparency rules and corporate governance rules are "Part 6 rules" for the purposes of Part 6 of FSMA. But paragraph 3 also makes clear that these rules are distinct and separate from other Part 6 rules, such as the listing rules, disclosure rules, and prospectus rules. These different kinds of rules impose different, and sometimes overlapping, obligations on different groups of issuers.

1574.     Paragraph 6 amends the penalty regime for breaches of Part 6 rules, in section 91 of FSMA 2000, so that it applies also to non-compliance with transparency rules, provisions made under the Transparency Directive, and corporate governance rules.

1575.     Paragraph 8 amends section 97 of FSMA 2000 to enable the Authority to appoint a person to carry out investigations into breaches of the transparency rules or related provisions or the corporate governance rules.

1576.     Paragraph 9 amends section 99 of FSMA 2000, which relates to fees, so as to enable the Authority to levy fees in the transparency rules.

1577.     Paragraphs 10 and 11 amend two definitions in Part 6 of FSMA 2000 to refer to the up to date Community legislation. They are the definitions of 'transferable securities' and 'regulated market' and the cross references are now to the definitions in the Markets in Financial Instruments Directive (2004/39/EC)

Part 2: Amendments of Companies (Audit, Investigations and Community Enterprise) Act 2004

1578.     The amendment to the Companies (Audit, Investigations and Community Enterprise) Act 2004 allows a different competent authority to have the role of examining periodic accounts and reports of issuers required under the Directive. In the UK, this role is to be carried out by the Financial Reporting and Review Panel, which is a body appointed by the Secretary of State under section 14 of the CAICE Act.

1579.     Paragraphs 13 and 14 amend Section 14 of the CAICE Act, which sets out the FRRP's supervision functions. 'Listed securities' are amended to 'transferable securities' to refer to the up to date Community legislation, and 'listing' becomes 'Part 6', so as to draw the distinction between oversight functions related to listing rules and other Part 6 rules.

Clause 902: Corporate governance regulations

1580.     This clause provides the Secretary of State with a regulation-making power similar to the Authority power in clause 898.

1581.     The Secretary of State may make regulations for the purposes of implementing, enabling the implementation of and dealing with matters arising out of Community obligations on corporate governance for UK companies whose securities are traded on a regulated market in the UK or elsewhere in the EEA.

1582.     Subsection (3) (a) allows for regulations to be made by reference to any code regulating corporate governance. This could include, for example, the Combined Code on Corporate Governance (issued by the Financial Reporting Council).

1583.     Subsection (4) specifies that any criminal offence created by the regulations may not impose a greater penalty than an unlimited fine.

1584.     Subsection (5) provides for regulations to be made by way of negative resolution. However, by virtue of clause 918 of the Bill, it will also be possible to make regulations under this power by affirmative procedure.


Regulation of actuaries etc

1585.     Clauses 903, 904 and 905 amend sections 16 and 17, and are also relevant to section 18, of the Companies (Audit, Investigations and Community Enterprise) Act 2004 (the "C(AICE) Act").

1586.     Sections 16 to 18 of the C(AICE) Act 2004 have three principal functions, namely:

    a)     to allow the Secretary of State to make a grant to any body whose activities include oversight of accountancy and the auditors' profession;

    b)     to allow the Secretary of State to impose a levy on certain other bodies and persons payable to the body undertaking the oversight role for the purpose of meeting any part of its expenses;

    c)     to provide the oversight body with a statutory immunity from liability in damages in respect of its oversight activities.

1587.     These clauses are the first step in implementing the central recommendation of the Morris Review of the Actuarial Profession, namely that the Financial Reporting Council (the "FRC") should take on a similar role in relation to the oversight of the actuarial profession to the one it currently exercises in relation to accountancy and the auditors' profession.

1588.     In welcoming the recommendations of the Morris Review, the Government announced in Budget 2005 its intention to legislate in due course to put the oversight regime onto a full statutory footing. It has not been possible to develop such a regime in time for inclusion in this Bill. It was therefore agreed with the FRC and the Institute and Faculty of Actuaries that, pending the introduction of a full statutory regime, the FRC would begin voluntary oversight of the actuarial profession at the earliest

possible opportunity. The FRC assumed this responsibility for actuarial standards and oversight of the profession in April of this year.

1589.     The aim of the proposed clauses is to provide the minimum necessary statutory underpinning to facilitate a voluntary regime. They do this by making amendments to the C(AICE) Act 2004 in two ways. First, they extend the statutory immunity conferred on the FRC and its companion bodies so that it covers acts or omissions relating to oversight of the actuarial profession. Second, they allow the Secretary of State, if necessary, to make regulations to require beneficiaries of the actuarial oversight to contribute towards the funding costs of the proposed regime. This is intended to be a reserve power. It is proposed, as is currently the case with accountancy and the auditors' professions, to fund this activity on a non-statutory basis by agreement with the insurance and pensions industries and the actuarial profession. The FRC published its final funding proposals in March of this year.

1590.     The amendments made by these provisions apply to Scotland only insofar as they relate to matters for which provision would be outside the legislative competence of the Scottish Parliament.

1591.     The amendments extend to Northern Ireland.

1592.     By virtue of clause 926, clauses 903 and 905 will obtain early commencement, taking effect immediately upon Royal Assent.

Clause 903: Grants to bodies concerned with actuarial standards etc

1593.     This clause amends section 16 of the C(AICE) Act 2004.

1594.     Subsection (2) amends section 16(2) by inserting, into the pre-existing list of matters carried on by bodies eligible for grants, a list of matters relating to the carrying on of activities concerned with the setting of actuarial standards, compliance with those standards, oversight of the actuarial profession and related matters.

1595.     Subsection (3) amends section 16(5) so that it includes definitions of "professional actuarial body" and "regulatory functions". These amendments are consequential on the amendments to section 16(2).

Clause 904: Levy to pay expenses of bodies concerned with actuarial standards etc

1596.     This clause amends section 17 of the C(AICE) Act 2004.

1597.     Subsection (2) amends section 17(3)(a) so that it includes amongst those by whom a levy may be payable under this provision certain persons (as defined in the following subsection) as well as bodies.

1598.     Subsection (3) inserts a new subsection into section 17, which defines persons for the purposes of section 17(3)(a) as the administrators of a public service pension scheme and the trustees and managers of an occupational or personal pension scheme (within the meaning of the Pension Schemes Act 1993). The amendments in subsections (2) and (3) therefore enable the Secretary of State to specify such persons as being liable to pay a levy if he considers that the activities of the FRC, or any of its subsidiary activities, are relevant to a significant extent.

1599.     Subsection (4) inserts into section 17(4) a provision enabling regulations under section 17 to make different provision for different cases so that, for example, they can provide for different rates of levy to be payable by different kinds of bodies or persons.

1600.     Subsection (5) inserts after section 17(12) a new subsection, the effect of which is to prevent the first regulations under section 17, and any other regulations under that section that would result in any change in the bodies or persons by whom the levy is payable, from being treated as hybrid instruments for the purposes of the standing orders of either House of Parliament. The effect of such regulations not being treated as hybrid instruments for these purposes is that they would not be subject to the special procedures in the House of Lords that apply to such instruments.

1601.     Subsection (6) ensures that the amendments made by the previous subsections have effect in relation to any regulations made under section 17 of the C(AICE) Act 2004 after this Bill becomes an Act, even if those regulations impose a levy to meet expenditure incurred before the Bill attains Royal Assent.

1602.     Subsection (7) amends Schedule 3 to the Pensions Act 2004 to enable the Pensions Regulator to disclose restricted information to the Secretary of State to enable or assist him in the exercise of his functions under section 17 of the C(AICE) Act 2004.

Clause 905: Application of provisions to Scotland and Northern Ireland

1603.     This clause further amends section 16 of the C(AICE) Act 2004.

1604.     Subsection (2) provides that paragraphs (a) to (t) of section 16(2), which list matters carried on by bodies eligible for grants, only apply to Scotland insofar as they relate to matters for which provision would be outside the legislative competence of the Scottish Parliament. This is necessary because, whilst section 16 of the C(AICE) Act 2004 and (by virtue of clause 925) clauses 903 and 905, extend to Scotland, some of the matters listed in paragraphs (a) to (t) are not reserved matters for the purposes of section 30 to the Scotland Act 1998 and, as such, would otherwise cover areas within the legislative competence of the Scottish Parliament.

1605.     Subsection (5) amends section 66(2) of the C(AICE) Act 2004 to the effect that sections 16 and 18, as well as section 17, extend to Northern Ireland.

Disclosure of information under the Enterprise Act 2002

Clause 906: Disclosure of information under the Enterprise Act 2002

1606.     This clause amends Part 9 of the Enterprise Act 2002 to enable public authorities, in certain circumstances, to disclose information where the information is to be used in civil proceedings or otherwise for the purpose of establishing, enforcing or defending legal rights.

1607.     Part 9 of the Enterprise Act applies to information which public authorities receive in connection with competition and consumer functions under certain Parts of the Enterprise Act 2002 and under other specified competition and consumer protection legislation. Such information relating to the affairs of an individual or business must be kept confidential unless Part 9 permits its disclosure.

1608.     This clause inserts a new section 241A into Part 9. Subsection (1) allows a public authority to disclose prescribed information to any person for the purposes of prescribed civil proceedings in the UK (including prospective proceedings, taking legal advice in respect of proceedings and alternatives ways of establishing, enforcing or defending legal rights such as Alternative Dispute Resolution schemes). Information and proceedings are "prescribed" if they are prescribed by the Secretary of State by order under this section (subsection (3)).

1609.     Subsection (2) excludes from the scope of the information that may be disclosed information which has been obtained by a public authority in connection with competition functions.

1610.     Subsection (5) allows a person to whom information is disclosed by virtue of this section to use it for all the purposes for which the section allows disclosure.

Expenses of winding up

Clause 907: Payment of expenses of winding up (England and Wales)

1611.     This clause inserts a new section 176ZA into the Insolvency Act 1986. The provision is intended to reverse the House of Lords' judgment in Buchler and another v Talbot and others in re Leyland Daf [2004] UKHL 9. The effect will be that, where necessary, property subject to a floating charge will be available to fund the general expenses of winding up in priority to the floating charge holder and any preferential creditors. It also provides a power to make secondary legislation that will prescribe circumstances in which a liquidator must seek the authorisation or approval of the floating charge holder, or preferential creditors, or the court, in order to recover certain expenses of winding up from property subject to a floating charge. Subsection (2) makes a similar change for Northern Ireland.

Commonhold associations

Clause 908: Amendment of memorandum or articles in pre-commonhold period

1612.     This clause makes an amendment to paragraph 3(1) of Schedule 3 to the Commonhold and Leasehold Reform Act 2002. It is concerned with commonhold associations. Commonhold associations are a new form of company limited by guarantee established under that Act.

1613.     Commonhold associations must register their memoranda and articles of association both with Companies House (on formation) and with HM Land Registry (on registration of the commonhold).

1614.     At present, like other companies, commonhold associations may alter some of the provisions of their articles and (in certain respects) the provisions of their memoranda, but paragraph 3 of Schedule 3 to the Commonhold and Leasehold Reform Act 2002 provides any alteration of a commonhold association's memorandum or articles which is not registered with the Land Registry is of no effect.

1615.     The purpose of that provision is to ensure that the version of those documents held by the Land Registry is up to date. An unintended consequence of this, however, is that it effectively prohibits any change of the memorandum or articles before the land which the commonhold association is established to manage is registered as commonhold land, or after it has stopped being commonhold land. This clause amends paragraph 3(1) so as to remove this difficulty.


1616.     Companies Acts since 1929 have extended to Great Britain only. But Northern Ireland companies legislation has followed changes in GB companies legislation very closely. The principal piece of current Northern Irish companies legislation, the Companies (Northern Ireland) Order 1986, is effectively a copy of the 1985 Act, with only very minor modifications to fit the Northern Irish context.

1617.     A public consultation, initiated by Northern Ireland Ministers (letter of Angela Smith MP of 7 September 2005, available through the DTI webpages at proposed that the Bill, and future legislation under it, should extend directly to Northern Ireland, along with certain other areas of law closely related to companies legislation. Company law would remain in formal terms a transferred matter, and a future Northern Ireland Assembly could for example decide to enact separate Northern Ireland companies legislation if it considered it desirable. In the meantime, the effect of the proposal would be that companies in Northern Ireland would experience the regulatory effects of new companies legislation at the same time as their GB counterparts. The Bill proceeds on this basis.

Clause 909: Extension of Companies Acts to Northern Ireland

1618.     This clause provides that the Companies Acts will extend to the whole of the UK, including Northern Ireland. The Companies Acts are defined in clause 2 of the Bill: in essence, they include the company law provisions of this Bill, the 1985 Act and Part 2 of the C(AICE) Act 2004 (which relates to community interest companies). The clause also repeals the principal pieces of separate Northern Ireland companies legislation.

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Prepared: 26 May 2006