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Clause 182

Modification of provisions in relation to charitable companies

Amendment made: No. 162, in page 83, line 11, leave out ‘Company Law Reform’ and insert ‘Companies’.— [Margaret Hodge.]

New Clause 72

Loans to directors: requirement of members’ approval

‘(1) A company may not—

(a) make a loan to a director of the company or of its holding company, or

(b) give a guarantee or provide security in connection with a loan made by any person to such a director,

unless the transaction has been approved by a resolution of the members of the company.

(2) If the director is a director of the company’s holding company, the transaction must also have been approved by a resolution of the members of the holding company.

(3) A resolution approving a transaction to which this section applies must not be passed unless a memorandum setting out the matters mentioned in subsection (4) is made available to members—

(a) in the case of a written resolution, by being sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to him;

(b) in the case of a resolution at a meeting, by being made available for inspection by members of the company both—

(i) at the company’s registered office for not less than 15 days ending with the date of the meeting, and

(ii) at the meeting itself.

(4) The matters to be disclosed are—

(a) the nature of the transaction,

(b) the amount of the loan and the purpose for which it is required, and

(c) the extent of the company’s liability under any transaction connected with the loan.

(5) No approval is required under this section on the part of the members of a body corporate that—

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(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’.— [Margaret Hodge.]

Brought up, and read the First time.

Margaret Hodge: I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker: With this it will be convenient to discuss the following:

Government new clause 73— Quasi-loans to directors: requirement of members’ approval.

Government new clause 74— Loans or quasi-loans to persons connected with directors: requirement of members’ approval.

Amendment No. 757, in page 86, line 4 [Clause 189], at end insert—

‘(2A) A company may not agree to such a provision unless it has consulted its employees.’.

Government amendment No. 591.

Amendment No. 19, in page 87, line 17 [Clause 191], at end insert

‘or must be conditional on such approval being obtained’.

Government amendments Nos. 592 and 593.

Amendment No. 405, in page 91, line 22 [Clause 200], after ‘A’, insert, ‘relevant’.

Amendment No. 406, in page 92, line 14, at end insert—

‘(6) “Relevant company” means a company which—

(a) is a public company, or

(b) is a subsidiary of a public company, or

(c) is a subsidiary of a company which has another subsidiary a public company, or

(d) has a subsidiary which is a public company.’.

Government amendments Nos. 594 to 597.

Amendment No. 20, in page 94, line 4 [Clause 204], after second ‘company’, insert ‘or of its associated company’.

Government amendment No. 598

Amendment No. 21, in page 94, line 8 [Clause 204], after ‘company’, insert

‘or where a company is permitted to give a director a qualifying third party indemnity’.

Amendment No. 354, in page 94, line 8 [Clause 204], after ‘company’, insert ‘or any associated company’.

Government amendments Nos. 613, 163, 164, 599 to 611, 644 and 612.

Margaret Hodge: Chapter 4 of part 10 is designed to deal with situations in which there is a requirement for prior shareholder authorisation, because a director has a conflict of interest. The chapter replaces provisions of part 10 of the Companies Act 1985 with ones that will be more accessible and more consistent. It also implements various recommendations of the Law Commission and the company law review.

I turn first to loans, quasi-loans and credit transactions. The Bill makes a major deregulatory change to the regime that applies to loans and other similar transactions made by a company for its directors. At the moment, such transactions are
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prohibited unless certain exceptions apply. The Bill replaces that prohibition with a requirement for member approval.

The Bill was drafted to implement the Law Commission’s recommendation that all the rules on loans, quasi-loans and credit transactions for directors should extend to all companies. That would increase regulation for most private companies, as many of the current rules apply only to relevant companies. In broad terms, relevant companies are public companies and private companies that are in the same group as a public company.

Although that recommendation was endorsed by the company law review, we have carried out further informal consultation in the light of the discussion in Committee. Stakeholders clearly supported the proposal that the requirements that currently apply only to relevant companies should not be extended to all private companies. Government new clauses 72, 73 and 74 and Government amendments Nos. 592 to 597, 599 and 601 to 612 will make the relevant changes to the Bill.

Amendments Nos. 405 and 406, tabled by the hon. Member for Huntingdon (Mr. Djanogly), relate only to the rules on credit transactions and would retain the increase in regulation for loans and quasi-loans. We believe that it would be better to remove that additional regulation. Therefore, under the Government amendments, the Bill will no longer apply the rules on credit transactions or quasi-loans to private companies, unless they are associated with a public company, or apply the rules on loans, quasi-loans and credit transactions with persons connected to a director to private companies, unless they are associated with a public company. Unlike in those Opposition amendments, we have not gone back to the concept of “Relevant company”, as that added to the complexity of the current law. Instead, Government amendments use the concept of “associated company”, which creates consistency with the rest of this part of the Bill. The rules that currently apply only to relevant companies will, under these amendments, apply only to public companies, and to any private company associated with a public company.

Jim Cousins: I am following my right hon. Friend’s arguments on these complex issues as closely as I can under the circumstances. Can she tell me whether, in light of the statement that she has just made, the new clause on quasi-loans would apply to special private-finance-initiative-vehicle companies? Also, does the watering down of the Bill that she has just outlined mean that, for example, the company taking over Thames Water Utilities, which is a foreign bank in a consortium of private equity companies, could be in a format to which the clauses under discussion would not apply? If that were the case, it would cause me considerable concern.

Margaret Hodge: I will be happy to write to my hon. Friend when I have looked at Hansard in detail. If the company to which he refers is incorporated abroad rather than in the United Kingdom, it will not be subject to UK company legislation. On the PFI issue, that depends on the kind of company to which he refers. If it is a public company, it will be covered; there
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will not be deregulation. But if it is a private company, there will be. Perhaps my hon. Friend would like to write to me, or alternatively, after I have looked at Hansard, I will write to him in greater detail, if that will be helpful to him.

I now turn to the issue of exceptions to the rules. We recognise that, in a group situation, it might be more convenient for the loan to be made by a different company in the group. Therefore, amendments Nos. 598 and 600 make it possible for a loan under the exceptions in clauses 204 and 205 to be used by a director to fund their defence in proceedings relating not just to the company, but to any associated companies. Amendments Nos. 598 and 600 achieve the same result as Opposition amendment No. 354, but create consistency by going further and widening the exception in clause 205 in the same way—for example, to actions that the Financial Services Authority might take.

We do not accept Opposition amendments Nos. 20 and 21. They would widen the exception much further. In particular, amendment No. 21 makes the exception available whenever the company would be permitted by clause 234 to give the director a qualifying third-party indemnity. Let me give an example of the sort of thing that would happen if that were the case. Without shareholder approval, a company could give a loan to a director to defend herself or himself in matters such as driving fines or offences. That would be inappropriate.

Under the Companies Act 1985, it is currently the case that the prohibition on loans to directors goes much further than the restrictions on the indemnities that may be given in respect of a director. It is possible at present to give an indemnity in circumstances where a loan would be prohibited. It is important that there is some limit on the types of proceedings for which loans may be given to a director under clauses 204 and 205. Companies should not use those exceptions to make loans without member approval for matters that, in reality, have nothing to do with the company. The sums involved under these clauses could be significant, and the exceptions do not contain any financial limits. Given that, it is right that the exceptions should be used only for matters that are properly connected to the company. It would be inappropriate for the exceptions to be available for company funds to be used without member approval to defend a director against proceedings unconnected with company business.

The Bill has already significantly relaxed the regime applying to loans by replacing the outright prohibition with a requirement for member approval. These clauses create exceptions where not even member approval is required. In order to provide worthwhile protection to members, it is important that those exceptions are sensible in their scope. We do not agree that there is any need to widen the exceptions even further, thus reducing the need for shareholder approvals.

Amendment No. 613 makes a minor drafting improvement to clause 204, following comments made to us by the Law Society. It is designed to follow more closely the wording used in section 337A of the Companies Act 1985. It is intended to make it clear that clause 204(2) does not make any substantive changes to the current law.

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I now turn to substantial property transactions. Clause 191 implements a recommendation of the Law Commissions that has been widely welcomed, by allowing companies to enter into agreements that are conditional on the approval of the members of the company being obtained. Amendment No. 591 goes one step further, allowing the agreement to be conditional on approval from the members of its holding company as well, in those cases where the approval of the members of the holding company is required. That amendment responds to concerns that companies could be inconvenienced if they had to wait for member approvals before they could agree to a substantial property transaction. Opposition amendment No. 19 would achieve the same result.

Amendment No. 644 deletes clause 223 because the provision made by that clause will now be included in clause 288, and applied not just for the purposes of part 10 of the Bill but for the entire Companies Acts. As a result of the restatement exercise, amendments Nos. 163 and 164 replace references to the Companies Act 1985 with a reference to the relevant bit of the Bill.

Amendment No. 757 on the compulsory consultation with employees on directors’ service contracts was tabled by my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins). I am sorry to tell him that, despite my best endeavours, we cannot support his approach. As he will appreciate, company law is about the relationship between the company, its members and the directors, and the directors should be accountable to the shareholders rather than to employees. However, as he knows, we do entirely agree that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors’ remuneration. Indeed, the combined code has a supporting principle that the remuneration committee should be

I hope that, with that explanation, the House can agree to these uncontentious Government new clauses and amendments.

Mr. Djanogly: We now move on to a patchwork of technical clauses, and I shall address them in the order in which they appear on the selection list.

We find Government new clauses 72, 73 and 74 to be uncontentious. Amendment No. 757, tabled by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), is an interesting proposal. I believe that he is suggesting that a company should not approve long-term service contracts by a shareholder vote unless members are previously consulted. That has to be looked at in the context of different types of company. If we are talking about a small company—a family company, for example—it is unrealistic, because the length of the service contract is, in reality, unimportant: an owner-manager effectively has a service contract for ever, simply because he does not need a service contract as he is the owner of the company, and he would therefore have one for as short or as long as he wanted, until he sold or closed his business.

The matter is more pertinent to larger companies. It was considered by the Higgs review with regard to corporate governance. The problem that we have with
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the amendment is that employees are likely to be biased just as much as other directors. Under the combined code, listed companies will have a nominations committee of independent non-executive directors, which will undertake appointments, and a remuneration committee, which will review service terms. The independence of the bodies means that they should not be on the side of the executive directors or the employees.

7.30 pm

Institutions also take a great interest in the matter. The combined code provides for a maximum recommended service term of one year, which is generally a move in the right direction. If a company puts in for a longer term of service, it will invariably be the case that the institutions will want a full explanation. There are thus controls in place to address the matters with which the hon. Gentleman’s amendment deals, but tabling it was worthwhile because it has allowed our debate to be put on record. We will not be able to support amendment No. 757.

As the Minister noted, Government amendment No. 591 is almost identical to amendment No. 19, which we tabled. Our amendment was inspired by the Law Society and would bring the provisions of clause 191(2) in line with subsection (1) of the clause. We are happy to go along with the Minister’s proposal on substantial property transactions.

Amendments Nos. 405 and 406 would amend clause 200. Although the clause replicates a provision of the Companies Act 1985, it also permits certain credit transactions that were completely prohibited by section 330 of that Act to be approved by members. Clause 200 applies to all companies, rather than public companies under the 1985 Act. Under the clause, private companies that had been able to enter into such a credit transaction will have to obtain member approval.

Although we realised that the provision was a recommendation of the company law review, it flew in the face of the deregulatory spirit of the Bill. When we asked the Minister for Industry and the Regions in Committee why private companies were being dragged into the net of requiring shareholder consent, she replied with a letter in which she pointed out that the provision followed the Law Commission’s recommendations that restrictions on a company’s power to make loans to directors and persons connected with them should apply to all companies. However, just as we were about to give up hope on this, we heard only last week that the Government had changed their mind. I thus welcome Government amendments Nos. 592 and 593. It all goes to show that the Bill continues to be something of a moving feast— [ Interruption. ] Well, a feast of some sort anyway, as my hon. Friend the Member for Reigate (Mr. Blunt) suggests.

The Minister said that the Government would reject amendment No. 20. Again, the amendment came from the Law Society. The insertion of the phrase “or any associated company” would enable a company, without the need for shareholder approval, to make a loan to a director to enable him to defend proceedings in connection with any alleged negligence or breach of duty in relation to an associated company.

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