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Amendment made: No. 605, in page 97, line 8, leave out ‘198’ and insert
‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval) and 199’. — [Margaret Hodge.]
Amendment made: No. 606, in page 97, line 34, leave out ‘198’ and insert
‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval) and 199’. — [Margaret Hodge.]
Amendments made: No. 607, in page 98, line 3, leave out ‘198’ and insert
‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.
No. 608, in page 98, line 24, leave out ‘198’ and insert
‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval)’.
No. 609, in page 98, line 34, leave out ‘198’ and insert
‘(Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. — [Margaret Hodge.]
Amendments made: No. 610, in page 99, line 3, leave out ‘198’ and insert
‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.
No. 611, in page 99, line 5, leave out paragraphs (a) and (b) and insert—
‘(a) in the case of a contravention of the requirement for a resolution of the members of the company, by a resolution of the members of the company, and
(b) in the case of a contravention of the requirement for a resolution of the members of the company’s holding company, by a resolution of the members of the holding company,’. — [Margaret Hodge.]
Amendment made: No. 492, in page 100, line 39 leave out subsection (4) and insert—
‘(4) 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.]
Amendment made: No. 493, in page 101, line 23, leave out subsection (4) and insert—
‘(4) 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.]
Amendments made: No. 165, in page 102, line 14, leave out ‘430E of the Companies Act 1985 (c. 6)’ and insert ‘955’.
No. 494, in page 102, line 26, leave out subsection (6) and insert—
‘(6) No approval is required under this section on the part of shareholders in a body corporate that—
(a) is not a UK-registered company, or
(b) is a wholly-owned subsidiary of another body corporate.’.
No. 644, in page 104, line 26, leave out Clause 223. — [Margaret Hodge.]
Amendments made: No. 166, in page 105, line 11, leave out ‘Company Law Reform’ and insert ‘Companies’.
No. 612, in page 105, line 22,leave out ‘198’ and insert
‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval) or (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)
No. 167, in page 105, line 34, leave out ‘Company Law Reform’ and insert ‘Companies’. — [Margaret Hodge.]
Amendment made: No. 259, in page 106, line 23 [Clause 228], leave out from end to end of line 27 and insert ‘, or
(b) a place specified in regulations under section (Regulations about where certain company records to be kept available for inspection).’. — [Margaret Hodge.]
Amendments made: No. 168, in page 109, line 28, at end insert—
‘section 674(3) or (4) (power of court to grant relief in case of acquisition of shares by innocent nominee), or’.
No. 169, in page 109, line 30, leave out from ‘conduct)’ to end of line 32. — [Margaret Hodge.]
Amendment made: No. 260, in page 111, line 11, leave out from end to end of line 15 and insert ‘, or
(b) a place specified in regulations under section (Regulations about where certain company records to be kept available for inspection).’. — [Margaret Hodge.]
Amendment made: No. 645, in page 112, leave out lines 17 to 19 and insert
‘must be made by resolution of the members of the company’. — [Margaret Hodge.]
Amendment made: No. 677, in page 114, line 11, at end insert—
‘(3A) The Secretary of State may make provision by regulations requiring the registrar, on application, to refrain from disclosing protected information relating to a director to a credit reference agency.
(3B) Regulations under subsection (3A) may make provision as to—
(a) who may make an application,
(b) the grounds on which an application may be made,
(c) the information to be included in and documents to accompany an application, and
(d) how an application is to be determined.
(3C) Provision under subsection (3B)(d) may in particular—
(a) confer a discretion on the registrar;
(b) provide for a question to be referred to a person other than the registrar for the purposes of determining the application.’. — [Margaret Hodge.]
Amendment made: No. 646, in page 116, line 27, leave out subsection (5). — [Margaret Hodge.]
Amendment made: No. 614, in page 120, line 17, leave out from ‘Part’ to end of line 19 and insert ‘—
(a) bodies corporate are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate, and
(b) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate.’ .—[Margaret Hodge.]
Clause 260
Amendment made: No. 170, in page 121, line 17, leave out ‘459 of the Companies Act 1985 (c. 6)’ and insert ‘961’.— [Margaret Hodge.]
Mr. Djanogly: I beg to move amendment No. 412, in page 121, line 21, leave out ‘or proposed’.
Madam Deputy Speaker: With this it will be convenient to discuss the following amendments:
No. 413, in page 121, line 24, leave out ‘or another person (or both)’.
No. 414, line 25, leave out subsection (4).
No. 415, line 33, at end insert—
‘(6) A derivative claim under this Chapter may only be brought if the directors have been requested by a member of the company to bring a claim in respect of an act or omission specified in subsection (3) and have not agreed to the request after the expiry of a reasonable period from service of the request.’.
No. 416, in page 123, line 8, clause 263, at end insert ‘, or
‘(d) that the directors have decided not to pursue the claim, unless the court considers that there is a substantial risk that in reaching their decision they acted in breach of their duties to the company, or
(e) that the claim is one which the company in general meeting could validly decide not to pursue, unless the court considers that there is a substantial risk that a decision not to pursue the claim would only be taken as a result of votes cast by members with a personal interest, direct or indirect, in the decision, or
(f) that pursuing the claim would not be in the interests of the company.’.
No. 417, line 8, at end insert ‘, or
‘(d) that the directors have decided not to pursue the claim, unless the court considers that there is a substantial risk that that transaction constitutes a fraud on the minority of members of the company, or
‘(e) that the claim is one which the company in general meeting could validly decide not to pursue, unless the court considers that there is a substantial risk that a decision not to pursue the claim would only be taken due to the majority of the shares being in control of those with a direct or indirect interest in the transaction.’.
Mr. Djanogly: For the first time today, we have a decent amount of time for Opposition amendments—I suppose that I should be grateful.
Despite amendments in the other place, which have improved clause 260, part 11 dealing with derivative claims is a complex area that still gives many much concern. Currently, a shareholder can bring a claim on behalf of a company against directors only in limited circumstances. Part 11 sets out a new procedure of derivative actions that enable shareholders to bring a claim on behalf of the company for directors’ breach of duty, if that breach has not been authorised or ratified by the company. Together with part 10, we believe that this has significant potential to increase liability for directors.
Before I go any further, I should like to explain the current common law position and set out what the Government aim to do in this area. Derivative claims are proceedings brought by a shareholder. Under the new Bill, they must be either
“in respect of a cause of action vested in the company and seeking relief on behalf of the company”
“brought only in respect of causes of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.”
This is significantly wider than the current common- law position.
There are two major concerns in relation to part 11. First, that it does not advance the common law and, secondly, that its effect, particularly when it is combined with part 10, will be detrimental to directors. We have tabled amendments that seek to deal with those concerns, which I shall discuss in due course. The leading common-law case on which this codification attempts to build is that of Foss v. Harbottle. If the Bill’s intention is to enshrine in statute the well-established exceptions to the rule set out in the case of Foss v. Harbottle, our view and that of the lawyers who have advised us is that that is not immediately achieved by the current drafting. The rule in Foss v. Harbottle is that a member cannot bring an action on behalf of the company for an injury done to the company; the company is the injured party and the action vests in it.
The exceptions to the rule in Foss v. Harbottle include circumstances in which the transaction constitutes a fraud on the minority. That includes fraud proper as well as breach of fiduciary duty as a director and circumstances in which the wrongdoers are in control of the shares of the company. The non-inclusion of this fraud control test in the Bill represents a radical departure from the previous thresholds to a member making a derivative claim. The result of this non-inclusion is that it will be easier for shareholders to bring claims against directors.
Although the court will now be required to consider the evidence and merits at the earlier stage, there is a danger that this part of the Bill will simply create a more complex procedure without any corresponding reduction in the potential administrative burdens for companies. It therefore makes sense that part 11 should be amended to preserve the traditional thresholds of fraud on the minority and wrongdoer control, as that would make it clear in statute that this new regime is not intended to sweep away the existing case law.
As the new legislation does not replicate existing case law, it will take some time for a body of case law to develop. We feel that this will create uncertainty for some period as to the extent of the derivative claim provisions and the burden of this will largely fall on the company. This could, in part, be remedied by the legislation mirroring more closely existing law. In practice, derivative claims have to date been relatively rare, but any potential benefit this codification will have, which will be minimal, will be far outweighed by the possible damage that will be wrought by increased shareholder litigation and reducing the number of people who are willing to take up company directorships in the UK.
A further key change in this Bill is that the persons engaging in fraudulent conduct need not have received a benefit. Members will therefore be allowed to make claims for an honest act or omission of a director where that results in a breach of duty, regardless of whether the individual has received a benefit. Under the existing common law, it is not possible to make a derivative claim as a result of negligent action unless the person in breach of duty has received a corresponding benefit. This represents a shift from the existing position and the focus is much more on allowing member control of directors’ actions.
The range of circumstances under which a derivative action may be brought will be much wider than is currently the case. This is once again an area of the law where the Government have said that the intention of putting in new clauses has been to codify the existing common law position, but this is, unfortunately, once again an area where the Government are overturning the common law position. The codification of the basis of bringing a claim and the means of bringing that claim will serve only to make it easier for claims to be brought against company directors.
Company directors also fear that increased litigation may lead to increased insurance premium costs—that is a very real fear for company directors. Should the rates that directors and officers have to pay go up, there will be a further disincentive to people becoming company directors. I am afraid that that is becoming a theme of parts 10 and 11, and it is not a happy one.
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