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The principle is straightforward. There is a huge problem attendant on the ability of companies to escape accountability. It is because of that kind of escape from accountability that we have such problems with tax avoidance—problems involving companies and directors stationing themselves in tax havens. I am thinking of companies such as Mapley Steps, which has close relations with the Government. I am following every one of the 39 Mapley Steps adventures
in Private Eye. How do we enforce accountability on a company such as that, in a tax haven? How do we ensure that companies in tax havens fulfil their social responsibilities, pay their rent to society, and are responsible for the damage inflicted by the corporation under the law that we passed earlier? How do we ensure that they fulfil their responsibilities in relation to profits derived here? There is also the matter of criminal negligence. These two simple, straightforward amendments confront a simple issue.
The Government want companies to be accountable and they want to deal with tax avoidance, tax havens and all the other issues involved in companies escaping their obligations in this country. I note that the United States Government Accountability Office, in a report on minimal ownership information, which came out earlier this year, said that the United States Government found it almost impossible to pursue many companies for criminal activity—not just for tax avoidance—because they could not trace the individual directors, who were often living in tax havens. I want to enforce the principle in the UK and make it possible for us to deal with all kinds of infringements from money laundering, financing of terrorism and tax avoidance to criminals operating through a shelf company. How will we deal with any of that unless we agree to the amendments? Our simple provision is that a real person—the one real person—should live in this country and that only real persons can be directors of a company. I hope that my right hon. Friend the Minister, with her usual acuity, will leap to accept it and say, “Yes boys, you’re right. Right on! We’re behind you.”
Mr. Djanogly: First, I will address amendment No. 761. The suggestion is that if a company has only one director, not only should they be a natural person, but they should be domiciled in the UK. In the UK, we pride ourselves on being an international centre for conducting business. The amendment would be a backwards step and would fly in the face of London as an international community. It will not have the support of the Conservative party.
Government amendments Nos. 715, 716 and 717 deal with shadow directors. In Committee we explained the complex case law surrounding clause 168 and the difficulties in determining whether a person is a shadow director, including by making reference to the Ultraframe case of 2005. Hon. Members will be pleased, if not relieved, to hear that I do not intend to rerun that debate this evening. We recommended that the Government should recognise those complexities and remove the requirement for shadow directors’ details to be entered on the relevant registers. In the light of that, the Government have reconsidered their position and tabled amendments Nos. 715, 716 and 717. That is welcome and we commend the Government on accepting our reasoned approach to this matter.
Clause 157, which relates to the minimum age for directors, is one of the more regressive clauses in the Bill. It provides that people must be 16 to become directors. The answer to my written question of 31 January revealed that on 31 December last year there were 431 directors under the age of 16 in England and Wales and that 200 were under 10. I can envisage
circumstances in which controlling family companies or trust arrangements from wills drafted many years ago would require that a child be appointed a director and that not to do so would involve losing assets or causing problems in respect of inheritance. In Committee, I raised the question of whether the Secretary of State would make an exception under clause 157 in those circumstances, which involve an individual rather than some class basis of individuals. Unfortunately, I did not receive a full answer in Committee. Perhaps the Minister will provide one this evening.
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Over the summer, the pages of the press seem to have been filled with stories of young entrepreneurs developing thriving and often profitable businesses. They include Fraser Doherty, who makes jam using his grandma’s recipe, and who attacked the Government’s attitude to young entrepreneurs, saying that the enterprise culture should start not in the boardroom, but in the classroom. On 7 October, the Financial Times reported on a 15-year-old boy who founded a cosmetics company. I have heard of other successes, not least the teenager in my constituency who started up an online company selling shoes to people with big feet. He is doing very well, thank you very much.
In Committee, we supported the proposition that under-16s who are currently directors should be able to remain directors after the implementation of the clause, but the Government rejected that. We have proposed it again in amendment No. 388. However, we have thought further about the clause over the summer, and we now want to make a stand in support of the innovating youth of our country by tabling amendment No. 385. This is what the modern Conservative party stands for: youth, innovation and entrepreneurial spirit. What sort of example does the fuddy-duddy Labour Government set by attacking innovative youngsters?
That said, if the clause remains, my reading of subsection (5) suggests that a child who owned all the shares in a company—for example, a 14-year-old who had a bright idea and incorporated—and who appointed his parents as directors and told them what to do could, presumably, be treated as a shadow director. However, I am not sure that that follows logically. If the child is considered to be not old enough to take decisions as a director before he or she is 16, how can we say that the same child has the nous to act as a shadow director? Amendment No. 386 is designed to elicit clarification on that point. In Committee, the Minister responded to our argument by saying that really talented young entrepreneurs who direct businesses should be subject to criminal sanctions. We believe that we should support our youth and that there is merit in our amendment.
“The regulations may make different provision for different parts of the United Kingdom.”
remain in the Bill. Amendment No. 387 would delete them. We are considering UK corporate law, and the words seem inconsistent and illogical. The Minister’s response in Committee was that the provision was there
“in case”, but I am still in the dark as to the Government’s reasons. Perhaps the Minister will now enlighten me.
David Howarth: We are now faced with three different issues. The first was raised by the hon. Member for Great Grimsby (Mr. Mitchell), the second relates to the ability of under-16s to be directors, and the third is the Government amendments on shadow directors, which would make an important change to the way in which the Bill works.
I am quite sympathetic to amendment No. 761, because there is sometimes a problem, as the hon. Gentleman said, of getting jurisdiction in respect of wrongdoing directors. I fear, however, that the means that he has adopted to achieve that end would not work, as to avoid the problem a company would need only to appoint someone innocent and poor to be their real person director, and all the nefarious people to whom the hon. Gentleman referred would remain offshore.
Mr. Austin Mitchell: The hon. Gentleman will agree that our amendment becomes even more necessary, given that we are to get rid of company secretaries.
David Howarth: The hon. Gentleman should hang around for a bit, as he might find that that is no longer the case. The Government appear to have changed their mind on that matter, and very glad we are about it, too.
There is a problem with amendment No. 762. I do not think that what the hon. Gentleman said was correct. The problem relates to the concept of the corporation sole, which is not a sort of fish, but is largely a sort of bishop. Most corporations sole are traditional offices, such as the office of bishop, where the aim of the law is to separate the person who holds the office from the office itself. If one were to leave money to the Bishop of Ely, the question would be whether one left it to the bishopric—that is, the ongoing office of Bishop of Ely—or to the human being who holds that office for the time being. The two things are separate.
The hon. Gentleman commented that it was more difficult to track down individuals who are office holders. It seems to me that precisely the opposite is true in the case that I have just outlined—that of the Bishop of Ely. It is quite easy to find the present Bishop of Ely: he is usually in his palace. It would, however, be quite difficult to find the former Bishops of Ely. If a company is set up in which a directorship is held by the Bishop of Ely as an office—that is, the corporation sole—accountability is far easier under the present arrangements than it would be if amendment No. 762 were passed and it was impossible to offer the directorship to the office of Bishop of Ely, with the result that the company had to keep changing the person to the new holder of the office. I see the hon. Gentleman’s general point about office holders, but I am not entirely convinced that the amendment would work as he says it would, especially with regard to bishops.
On the under-16s debate, I shall not detain the House by reciting my own list of young entrepreneurs, but I am sympathetic to the argument advanced by the
hon. Member for Huntingdon (Mr. Djanogly). It is true that many young directors—those under 16—are directors by reason of family settlements: for example, their parents died younger than expected and the way in which the family settlement works requires them to count as a director. There is a worry that if we impose on directors, as we do in the Bill, a long series of onerous criminal law duties, it might not be sensible to expect very young children to meet those duties. On the other hand, the age of criminal responsibility is 10, not 16. I therefore wonder whether 16 is the correct age to cut off directorships and whether, in the light of the research that has been done into young people holding directorships and the evidence about young entrepreneurs, 16 might be thought to be too advanced an age for the cut-off point. Another age, less than 16, might be more appropriate.
The transitional arrangements remain bothersome. I cannot see why the Bill should take the line of insisting that all existing under-age directors be cut off before their prime. A big issue in the Committee, to which I hope Ministers will give some thought, was the question whether we should allow existing under-16 directors to continue as directors—obviously, the situation would last no more than 16 years, and in most cases considerably less than that—rather than make the arrangements necessary to change directorships almost on the fly.
Mr. Austin Mitchell: It is good to see the Liberal propensity to sit on both sides of the fence given full exhibition by the hon. Gentleman, but if he is defending the rights of under-age directors, why does he not go the whole hog and give them the right to have experience down the mines or in textile factories, or to do all sorts of other manual labour that might amplify the joys of being under 16?
David Howarth: I am grateful for the hon. Gentleman’s intervention, but he is confusing a duty with a right. We are not saying that it should be compulsory for under-16s to be directors, or that we would encourage it by legal force. Our argument is that in those cases where young people have set up their own business, it is not entirely wrong for them to have some sort of direction of the business. If they had taken a different approach—if they had set up the business and then asked someone else to run it for them, as the hon. Member for Huntingdon said—the law would treat them as directors anyway. They would end up being responsible, even though the starting point was that the law did not allow them to be directors. That is the point that the hon. Gentleman was trying to make about shadow directors. In the light of what the Government are doing about shadow directors, it seems to me that the provision in the Bill about young people being shadow directors could be justified, but only if the more general rule were changed.
Government amendments Nos. 716, 770 and 717 deal mainly with whether there is an obligation on companies to register the existence of shadow directors. There is an issue of transparency—whether people who effectively run companies without officially
running companies should in some way be registered by the company as people exercising that power. The problem is a practical one for companies—whether they can know whether particular people count as shadow directors, given the fact that the law is not very easy to apply, especially from the point of view of another company director. Courts might find it easy to apply, but companies might find it difficult.
The history of the concept of shadow director is that it has been used by the courts to put liability on someone who deserves liability for actions that they have taken with regard to a company, perhaps without realising that they were directors. It is a remedial concept, rather than a real one. It is a construct of law that is used to achieve particular results. Because the concept is so artificial, it is going too far in practical terms to require companies to register shadow directors in such circumstances. Although there are problems with transparency in this area, on the balance of practicalities the amendments are acceptable.
John McDonnell: I support amendments Nos. 761 and 762. Reading clause 155, I was almost overjoyed when I saw the concession that the Government had made by requiring at least one director to be a natural person. I then read subsection (2) and for about two hours did not understand what it meant, because it is a masterpiece of drafting skills and obfuscation, the likes of which have not been seen for some time in the House. Nevertheless, on the basis of the interpretation offered by my hon. Friend the Member for Great Grimsby (Mr. Mitchell) that subsection (2) overrides subsection (1), we are back to the situation where a director of a company does not have to be a natural person—that is, a human being.
The reason why my hon. Friend has pressed the issue for some time is that at some stage in the life of a company its responsibilities have to be borne by a human being. Last week we debated the Corporate Manslaughter and Corporate Homicide Bill. When we discussed how we held to account companies and individuals operating within those companies with regard to how they looked after the health and safety of their employees, a number of us pressed for specific reference to be made to the responsibilities of directors. We were informed that that was dealt with elsewhere as a result of various other pieces of legislation that apply to directors, and that there did not need to be a specific reference in the corporate manslaughter legislation.
We find that the provision contradicts those assurances. We could have companies where no single director was responsible of the health and safety of their employees. A company could perpetrate actions that were so negligent that they resulted in the death of an employee, and no individual would be held responsible. That is one example to demonstrate why my hon. Friends have been pressing the issue for so long.
The provision enables individuals to become involved in the establishment of companies, which then establish further companies, and they are no longer held responsible for their actions as individuals. In that way they avoid their duties and responsibilities. I urge my right hon. Friend the Minister to consider, though possibly not in the context of the Companies Bill, that we need to debate the matter further, so that companies
do not become shadow bodies and no one is held responsible in any legislation, particularly in serious circumstances such as corporate manslaughter.
Margaret Hodge: I shall begin by responding to the issues raised by my hon. Friend the Member for Great Grimsby (Mr. Mitchell). I do not know where “Great” came from in the name of his constituency.
Mr. Austin Mitchell: It reflects the representation.
Margaret Hodge: I am sure other hon. Members are envious of my hon. Friend’s title. “Great Barking” or “Great Burnley” would suit some of us very well.
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There seems to be some misunderstanding of what the amendments would do. Amendment No. 761 attempts to provide power to make regulations specifying the conditions with which a service address must comply. Our intention is to require a director of a company to have a service address in the same jurisdiction as the company’s registered office. That is a practical way of ensuring that documents can easily be served by UK residents on any director. My hon. Friend the Member for Hayes and Harlington (John McDonnell) mistakes that. With the duties that will be placed on directors when the Bill is enacted, no one would be able to evade responsibility in the way he suggested.
Mr. Mitchell: In that case, why is it not important that the service address be in the United Kingdom so that UK law can be enforced?
Margaret Hodge: The service address will be at the company’s registered office. The Bill provides elsewhere for the registered office to be in the United Kingdom, so my hon. Friend’s point is covered.
John McDonnell: Could someone—anyone—in the House explain clause 155(2) to me? It states:
“This requirement is met if the office of director is held by a natural person as a corporation sole or otherwise by virtue of an office.”
If my right hon. Friend can assure me that that results in a requirement for a director to be a human being, that would be overwhelmingly reassuring.
Margaret Hodge: I can reassure my hon. Friend on that. Amendment No. 762 attempts to address the point. The hon. Member for Cambridge (David Howarth) dealt with it in his contribution. Subsection (2) does not mean that a company can have no directors who are natural persons. That is because of what is meant by “corporation sole.” A corporation sole is a corporation that is constituted in a single person. Corporations sole are always holders of a particular office.
One example is the Official Custodian for Charities. The holders of certain offices in the Church of England—for example, vicars—are corporations sole, although, interestingly, their equivalents in the Church in Wales and the Roman Catholic and non-conformist Churches are not. Other examples include our Secretary of State and the Public Trustee. Property,
including cash and investments as well as land and buildings, that the member holds by virtue of his or her office passes on retirement, resignation or death to his or her successor. I hope my hon. Friends are content with that explanation.
Mr. Mitchell: I love the sound of this sole music. It still does not answer explain why one of the directors—a corporate sole or whatever—does not have to be resident in this country.
Margaret Hodge: The answer is that if we tried to legislate on that—I look to the Box to confirm that I am correct—we would offend EU requirements on freedom of movement. We cannot restrict directorships to UK residents. I am getting nods from those in the Box, so I am correct. We would be restricting ourselves under the EU requirements.
The Bill seeks to encourage the incorporation of companies in the UK because of the jobs and wealth that that brings. If we were to place on that the constraints that my hon. Friend the Member for Great Grimsby suggests, it would constrain our successful record of incorporations. Ensuring that directors have a service address in the UK allows anyone who so needs to communicate or pursue litigation.
Mr. Elfyn Llwyd (Meirionnydd Nant Conwy) (PC): If a company were set up with a corporation sole as the single director, and if something went awry and criminal charges were brought against the company, would criminal charges lie against the corporation sole?
Margaret Hodge: I will write to the hon. Gentleman on that.
John McDonnell: May I have a letter as well? I was brought up a Catholic, so I do not completely understand, but I hope that my right hon. Friend is speaking ex cathedra. If an action is taken, for criminal activity or whatever, would it be against the office or the individual? If it is against the office, the individual has less incentive to abide by the law because he or she can away from it scot-free or resign from it. I do not want to get into debates about the bishopric of Ely this evening, but I would welcome correspondence on the matter.
Margaret Hodge: I will write because I do not want to mislead hon. Members, but my view would be that an individual who holds an office would be liable as that office holder. I see nods, so I might have got that right too.
I come now to the amendments relating to the age of directors. I know that the Conservative party is desperate to grow its membership. It would be good if it desperately grew Back Benchers, who previously expressed such interest in the consideration of amendments to this Bill, but yet again only one has graced us with her presence.
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