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17 Oct 2006 : Column 802

Clause 204 substantially narrows the existing provision on the funding of a director’s expenditure on defending proceedings that is contained in section 337A of the 1985 Act. In the view of the Law Society, the clause is too restrictive, and it also points out that there has been no public consultation on the proposed change. The reference to “the company” in subsection (1)(a)(i) does not even extend to the company’s holding company, which is curious given that the clause contemplates a loan being made to a director of the company’s holding company, but only to defend proceedings in relation to the company. That is illogical.

The Law Society’s view is that subsection (1)(a)(i) should at the very least refer to the company or its holding company, and that it would be preferable if it referred to the company or any associated company. Otherwise, if a person is a director of more than one company in a group, each company will have to enter into a separate arrangement with that director, rather than one company being able to enter into an arrangement that covers all the relevant companies. That does not seem sensible. The term “associated company” is defined in clause 256. However, we note that Government amendment No. 598 addresses the problem, albeit with a different drafting approach. That amendment will be a popular move with directors who are in need of help from their companies.

The Law Society also notes that the phrase

in clause 204(2)(a) is potentially much wider than the wording in section 337A(4) of the 1985 Act, thus making the exception in the clause much narrower. The 1985 Act refers to:

In other words, under section 337A(4), the requirement to discharge the liability relates to only the thing done to provide the director with the funds to meet the relevant expenditure, or to avoid incurring it, whereas, under clause 204, the words

do not clearly relate back to the words

in subsection (1), and could thus refer to the entire circumstances of the liability or alleged liability. The Law Society thinks that the wording used in section 337A(4) is clearer and should be retained. Government amendment No. 613 effectively deals with the problem that the Law Society has identified, so I think that we have made progress.

Government amendments Nos. 163 and 164 are uncontroversial, as are Government amendments Nos. 599 to 611. However, I would be grateful if the Minister could provide further explanation of Government amendment No. 644, which will delete clause 223, which relates to resolutions.

David Howarth: I do not want to detain the House by going through the amendments one by one. I am happy to go along with the approach proposed by the Government, but I would not want to go too far down the line on which have started because of the underlying reason why the regulations were set out in
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the first place. It is difficult for directors to borrow money from their companies because it is important to maintain the separateness of the fund that a company holds from its directors. That gives rise to a protection, not so much for shareholders, but for creditors, so that they can be assured that a company’s assets are as they appear, rather than having been dissipated by being loaned out to people with a direct interest in the company. The deregulation of quasi-loans and credit transactions is not objectionable, but I would not like to give the impression that we would be happy to take a deregulatory route all the way down the line in this area.

I will be interested to hear the argument of the hon. Member for Newcastle upon Tyne, Central (Jim Cousins) for amendment No. 757. I suspect that this is not the right time to discuss the consultation of employees and the wider question of industrial democracy, but he has a good point. We are in an era in which employees face increased precariousness in their employment experience, given that more and more people are in temporary or part-time employment—employment that is not a traditional permanent job. It is thus not helpful for directors to give themselves long contracts that amount to a tenure. At the very least, companies should think about the consequences for industrial relations and human relations of doing such a thing without first talking to their employees.

Jim Cousins: I speak to amendment No. 757 tabled by myself and my hon. Friends the Members for Great Grimsby (Mr. Mitchell) and for Hayes and Harlington (John McDonnell). It does not entirely surprise me that my right hon. Friend the Minister is unable to agree to it, but there is none the less recognition by the official spokespeople for all the main parties that it relates to a serious issue; I look forward with interest to the views of Plaid Cymru.

In the past, the type of amendment that I propose would have been dismissed out of hand as something that would better belong to the North Korean “Down with Imperialism” day that has been playing on our television screens all afternoon. The matter is much more serious; we live in a society in which the divisions of wealth and power are probably greater than at any time in our history over the last 100 years. There is a proper market in the directing of companies—in corporate control—in which the company’s employees are entitled to have some involvement.

It is important to point out that my amendment does not say that directors’ contracts and remuneration would have to have the approval of employees, merely that employees should be consulted, which is just about the weakest possible formulation of the proposal. However, the point is undeniable and has indeed not been denied from the Treasury Bench or from the Front Bench of the main Opposition party.

The attempt to say that the issue can be dealt with entirely by remuneration committees is completely mistaken. Of course, my hon. Friends and I welcome the fact that there is more active consideration of such issues inside companies. We welcome the strengthening of the power of non-executive directors and the fact that remuneration committees are considering the
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issues, but the company’s employees, whose employment experience is becoming less secure in today’s flexible labour market, are entitled to have some right to the expression of an opinion about such matters and about the policies that might be involved in the appointment of directors, the extension of their contracts and their remuneration.

During our debates on the Bill we may have missed an important moment, when for the first time a representative of British workers was elected to the supervisory board of a German company with a presence in the UK. That is an important moment in the extension of European ways to our wonderfully Anglo-Celtic system—as there is a representative of Plaid Cymru in the Chamber, I shall use that Australian term rather than the words “Anglo-Saxon”. It reminds us that globalisation is a two-way traffic; there are new practices to learn about all around us.

At present, the average annual pension of a director of a quoted company is said to be about £167,000. That is a fabulous figure. In the United States, there is increasing concern about how pension rights and stock options are exercised. In the UK, there has been a dramatic fall in final salary pension schemes for employees in the private sector, but there has been no such fall in final salary pension schemes for directors. Such inequity cannot survive. It will become a matter of public debate and public controversy, and the first and right place for that is within the confines of the company itself.

7.45 pm

Of course, at present there is no set way for a company to consult its employees, and our amendment does not attempt to specify one. However, that, too, is something a sensible company ought to consider; it should not require the intervention of laws and Governments to force a company to think about how to consult its employees on this or other matters. Perhaps the amendment will serve a purpose by reminding people, in the context of how we take decisions in companies, that companies must have some regard to the issue.

Mr. Austin Mitchell: My hon. Friend is becoming excessive in his moderation. Unless the law requires companies to take account of the views of their employees, it is difficult to see how those views are to be included. Our workers have fewer rights in their companies than those of any other European country. Other systems, such as the French and German ones, were decided by their Governments and imposed on the companies sector.

Jim Cousins: That is the case, and a future Government may have to consider the issues and impose a legal framework for the requirement to consult employees. It is entirely possible that that will be a secondary consequence of legislation passed by the European Parliament and the European Commission, but it would be much better if we were willing to debate the matter now, so that we could form our views before that time comes.

The issues will not go away while the experience of workers is so drastically different and is growing increasingly different from that of the directors of the
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company, who form part of the extraordinary world in which new investment vehicles, such as private equity companies, are radically transforming even the things of which we speak. It is clearly right that employees have the right to express a view about their directors’ remuneration and length of service. It would be entirely wrong for the House to put itself in the position of saying that it will leave the matter to others, in the European Parliament or the European Commission, to impose on us at a later date. We ought to be thinking it out for ourselves.

Margaret Hodge: I shall reply briefly as I know that Members are anxious to get on with other matters.

The hon. Member for Huntingdon (Mr. Djanogly) asked why we were deleting clause 233, which is dealt with in our amendment No. 644. The provision made by the clause will be included elsewhere—in clause 288—as a result of amendment No. 643, and applies not only to part 10 but to the whole Bill.

I hear what the hon. Member for Cambridge (David Howarth) says about the balance between deregulation and the proper conduct of directors in relation to taking loans. I hope that the balance is just about right in the propositions we have put to the House tonight.

My hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) made a most eloquent contribution. I fully accept that the issue is important and that companies should be sensitive to the pay and employment conditions of their employees generally. In another place, we agreed to consult about the case for requiring quoted companies to show in the directors’ remuneration report how they have had regard to employees. To that extent, there has been a little movement on something about which my hon. Friend expressed strong feelings in his contribution. I hope he can take heart from that.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 73


Quasi-loans to directors: requirement of members’ approval

‘(1) This section applies to a company if it is—

(a) a public company, or

(b) a company associated with a public company.

(2) A company to which this section applies may not—

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

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

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

(3) 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.

(4) A resolution approving a transaction to which this section applies must not be passed unless a memorandum setting out the matters mentioned in subsection (5) 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—


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(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.

(5) The matters to be disclosed are—

(a) the nature of the transaction,

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

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

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

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

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

Brought up, read the First and Second time, and added to the Bill.

New Clause 74


Loans or quasi-loans to persons connected with directors: requirement of members’ approval

‘(1) This section applies to a company if it is—

(a) a public company, or

(b) a company associated with a public company.

(2) A company to which this section applies may not—

(a) make a loan or quasi-loan to a person connected with a director of the company or of its holding company, or

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

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

(3) If the connected person is a person connected with 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.

(4) A resolution approving a transaction to which this section applies must not be passed unless a memorandum setting out the matters mentioned in subsection (5) 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.

(5) The matters to be disclosed are—

(a) the nature of the transaction,

(b) the amount of the loan or quasi-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 or quasi-loan.

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

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

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

Brought up, read the First and Second time, and added to the Bill.


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Clause 155


Companies required to have at least one director who is a natural person

Mr. Austin Mitchell: I beg to move amendment No. 761, in page 71, line 10, at end insert ‘and domiciled in the United Kingdom’.

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

No. 762, in page 71, line 11, leave out subsection (2).

No. 385, in page 72, line 8, leave out Clause 157.

No. 386, in page 72, line 18 [Clause 157], leave out subsection (5).

No. 387, in page 72 [Clause 158], leave out lines 30 and 31.

No. 388, in page 73, line 12 [Clause 159], leave out ‘ceases’ and insert ‘shall not cease’.

Government amendments Nos. 715, 716, 770 and 717.

Mr. Mitchell: The principles of amendments Nos. 761 and 762, which are in my name and those of my hon. Friends, are fairly clear. Up until now, we have been dealing with the duties of directors and companies. The problem is how we take account of those duties and how directors and companies can be made accountable. The purpose of our amendments is to strengthen accountability. Clause 155 is an improvement in the sense that now at least one of the directors has to be a real person. We want to take that a little further. Amendment No. 761 therefore provides that that one person shall be domiciled in the UK. That is an important principle to maintain. Amendment No. 762 strikes out the ability of corporate entities to be directors—something that is wrong in principle, confuses accountability and makes enforcement of any kind difficult.

We need those two amendments because somebody needs to be accountable for what companies are doing. They need to be accountable under UK law and not living in a country that is perhaps a tax haven, or which has no extradition agreement or arrangements, and where UK law cannot be enforced. I am thinking, for instance, of countries such as that chosen by Asil Nadir—that was the nadir of enforcement—when Polly Peck collapsed. He fled to northern Cyprus and, strangely, for some reason he has refused to come back to this country and face the rigours of the law. We do not want that situation to be sustained. We need companies to be accountable. I am sure that the Opposition will support that principle in the sense that, in refusing to accept companies as directors of other companies and depriving them of that power, we are, in effect, reducing the red tape on companies.


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