Company Law Reform Bill [Lords]


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David Howarth: I want to add a short point in support of what the hon. Gentleman said. Setting the number at 5 per cent. as opposed to 10 per cent. gives rise to a temptation that it might be useful for the law to discourage. If the limit is set at only 5 per cent., people faced with a blocking minority of 5 per cent. might be tempted to use section 429 of the 1985 Act, which, as I understand it, will not be changed. There is a judicial interpretation of that section. It allows, on takeover, those with a 90 per cent. hold of the shares compulsorily to purchase the remaining 10 per cent. It can be used to clear minorities of less than 10 per cent.
Case law from re Bugle Press suggests that that provision cannot be used beyond its original purpose. However, even given that case law, people faced with a blocking minority of less than 10 per cent. might be tempted to use section 429, take their chances with the case law and produce litigation that it would be helpful for the law to avoid. That litigation could be avoided by raising the relevant percentage to 10 per cent., as in section 429.
Margaret Hodge: I have been asked three questions and a supplementary question, although as I listened to the hon. Gentleman’s exposition I saw that section 429 might be consecutive rather than parallel to the issues that we are discussing. I am not sure that its existence prejudges the need for this provision. However, I shall answer the question to see whether I can satisfy him.
When a company is resolved to re-register from public to private, clause 98 enables the dissenting shareholders to apply to the court to cancel the resolution for re-registration. The application must be made within 28 days of the date on which the resolution is passed and the court will only entertain such an application when it is made by a qualifying number of shareholders and, when the company is not limited by shares, a qualifying number of members or, in either case, not fewer than 50 members.
The minimum thresholds for making such an application are set in subsections (1)(a), (b) and (c). When the company that proposes to re-register as private limited company has share capital, the application will be made by a single shareholder or by shareholders with a collective holding of at least 5 per cent. of the nominal value of the company’s issued share capital. The amendment would increase that threshold, and I appreciate that it is a probing amendment. Both amendments leave unchanged the 50 member option and the proposition in clause 98(1) that the members who voted in favour of the resolution for re-registration or consented to it do not count.
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Mr. Djanogly: Can the Minister give us any idea how often the provision has been used?
Margaret Hodge: Yes, I can. The thresholds have stood the test of time. We are not aware that they have caused companies, their shareholders and members any difficulties. In fact, we are advised by the registrar that only three such applications have been made in the previous year, two of which were rejected. In the circumstances, we are not persuaded that the amendments are either needed or helpful. The hon. Member for Cambridge (David Howarth) asked whether clause 98 was still necessary. The answer is yes, it is. As the hon. Gentleman said, there are special provisions on takeovers in section 429 of the Companies Act but the clause goes wider. Someone may have a majority shareholding by other means and the clause provides them with protection.
David Howarth: The point I was trying to make is that the question is not whether the clause is necessary—I think it is—but how it fits in with the existing law in section 429 of the Companies Act. If one sets up the two statutory provisions in different ways, the temptation will be to use one rather than the other. If they are set up with the same number, one can preserve the use of each.
Margaret Hodge: I suppose that in the interests of protecting minority shareholders, the correct way forward if we want that consistency would be an amendment to section 429. I can take that away and think about it if the hon. Gentleman so wishes. Otherwise the provisions appear to work well. I am told they work in parallel. The one follows from the other, rather than the two having to be consistent overall. There is a lower threshold in section 429 because it covers a takeover so it is a slightly different situation from the one we are discussing. I am happy to reflect further on that and if necessary come back on Report if the hon. Gentleman considers that appropriate.
I hope that I have answered the questions that the hon. Member for Huntingdon (Mr. Djanogly) raised and that he will withdraw his probing amendment.
Mr. Djanogly: As the Minister said, this was a probing amendment. The contribution from the hon. Member for Cambridge opened up the debate and was a helpful addition. I must admit that I wandered into the question by looking at the Bill rather than precedent. The existence of the case he mentioned means that we should go away and have another look at the issue. I am not entirely convinced that the answer will be to amend section 429, particularly in relation to putting in any kind of percentage, but it might be worth looking again at the 5 per cent. threshold in the clause.
I thought that the provision would be used very little in practice, so I was not surprised to hear that it was used three times in the last year, nor was I surprised to hear that the majority of cases have been thrown out. I suppose that it would typically be people having a go. I am pleased that we have had the debate. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment made: No. 102, in clause 98, page 44,line 14, leave out ‘alterations in' and insert ‘amendments to'.—[Margaret Hodge.]
Clause 98, as amended, ordered to stand part ofthe Bill.
Clauses 99 to 101 ordered to stand part of the Bill.

Clause 102

Re-registration of private limited company as unlimited
Mr. Djanogly: I beg to move amendment No. 156, in clause 102, page 45, line 21, leave out from end ofline to ‘and' in line 22.
The Chairman: With this it will be convenient to discuss amendment No. 66, in clause 102, page 45,line 27, leave out subsection (2).
Mr. Djanogly: This is a rerun of the debate in the House of Lords. I shall not read out what Lord Hodgson said, but shall instead quote what Lord McKenzie said and comment on it. Lord McKenzie said:
“The Bill reflects existing companies legislation in preventing this practice, and the Company Law Review considered carefully whether the bar should be maintained or removed. It concluded that it should be retained to prevent companies taking short-term advantage of a merely temporary change of status. The Company Law Review does not seem to have believed that this has placed any obstacle in the way of legitimate market developments; nor are the Government aware of any evidence to that effect. I therefore support the CLR’s conclusion that the bar should remain.
I should add that we are currently considering whether the condition in Clause 102(2)(b), which prevents a company beginning life as limited, re-registering as unlimited, then re-registering as limited and finally re-registering as unlimited again”—
complicated stuff, this—
“is strictly necessary given that Clause 105(2) prevents a limited company which has re-registered as unlimited reverting to limited status.”
I hope that people are with me so far. Lord McKenzie continued:
“These highly technical issues are complicated by the need to consider possible multiple re-registrations under earlier legislation. We are considering whether any change is needed.”—[Official Report, House of Lords, 1 February 2006; Vol. 678,cc. GC140-141.]
It is appropriate for me to ask whether the Minister can provide an update on the Government’s thinking on the issue.
Margaret Hodge: The hon. Gentleman said that he would quote only Lord McKenzie. I shall quote the Opposition spokesperson in the House of Lords, Lord Hodgson of Astley Abbotts, who replied, “I surrender absolutely”.
Mr. Djanogly: That may have related to the complicated nature of the answer as much as to its justification.
Margaret Hodge: The hon. Gentleman is right to suggest that in Grand Committee Lord Hodgson tabled a similar amendment. It was withdrawn, but it prompted us to look again at the conditions in subsection (2), and we put a marker down in Grand Committee that we intended to return to the issue. We subsequently amended the subsection on Report in the House of Lords to remove what amounted to a superfluous condition. If people can understand this one, they will be doing very well. The condition was that a private limited company could not re-register as unlimited if it had previously re-registered from unlimited to limited. Such a condition is unnecessary, as it is not possible for that eventuality to occur, given that clause 105(2), which is concerned with the re-registration of a company from unlimited private to limited, prevents a company that has previously re-registered as unlimited from reverting to limited status. However, we left in place the condition in the amended clause 102(2) which prevents a private limited company from re-registering as unlimited if the company has previously re-registered as limited. The amendments that we are debating would remove that subsection.
Subsection (2), as amended, carries forward the provisions of section 49(3) of the 1985 Act. Like its predecessor, it prevents companies from changing their status successively between limited and unlimited and back again. As the hon. Gentleman said, the issue was examined by the company law review, and it was concluded that it was necessary to keep the bar in place. The company law review did not accept that in practice the bar prevented legitimate market developments, nor are the Government aware of any evidence to that effect. That is why we support the review’s conclusion that the bar should remain in place.
Mr. Djanogly: On the basis of the Minister’s comprehensive response and what happened on Report in the Lords, I too surrender absolutely and beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 102 ordered to stand part of the Bill.

Clause 103

Application and accompanying documents
Question proposed, That the clause stand part ofthe Bill.
Mr. Djanogly: We are now going on to a limited company becoming unlimited. Subsections (3) and (4) insert the need for a statement of compliance to replace the statutory declaration in section 49(8)(b) of the 1985 Act. Could the Minister please provide the reasoning behind that?
Margaret Hodge: The clause prescribes the contents of the application for re-registration and the documents that must accompany it. It replaces sections 49(4) to 49(8)(a) of the 1985 Act. The current requirement for a statutory declaration made by the directors on application for re-registration as an unlimited company is replaced by a requirement for a statement of compliance. Unlike most other statements of compliance made under the Bill, the one made on application for re-registration as an unlimited company must contain a statement by the directors confirming that the persons by whom or on whose behalf the form of assent is authenticated constitute the whole membership of the company, and if any of the members have not authenticated the form themselves, that the directors have taken all reasonable steps to satisfy themselves that each person who authenticated it on behalf of a member was lawfully empowered to do so. The contents of the directors’ statement carry forward the provisions of section 49(8) of the 1985 Act, which requires a
“prescribed form of assent to company being registered as unlimited”.
On that basis, I urge Members to support clause stand part.
Mr. Djanogly: I am not entirely sure whether my question has been correctly answered. Perhaps it was, but it was not a very long response, so if the Minister would write to me on the point, I would appreciate that.
Question put and agreed to.
Clause 103 ordered to stand part of the Bill.
Clause 104 ordered to stand part of the Bill.

Clause 105

Re-registration of unlimited company as limited
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