Company Law Reform Bill [Lords]

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Mr. Djanogly: Perhaps I missed it, but will the Minister explain what evil the amendment is trying to put right?
Margaret Hodge: The evil is that someone may need to track down directors through a home address, which would not be clear under the current provisions. In the example I gave of someone starting a company from their own home and then moving elsewhere, without the amendments there will be no way of tracking that change of address.
The hon. Gentleman made a lengthy contribution. We will return to some of those issues on clause 226. He talked about issues relating to clause 225. It all comes up in chapter 8 when we talk about directors’ residential addresses.
Mr. Djanogly: If we get there.
Margaret Hodge: We will see how we do; it is up to the Opposition. I will study the hon. Gentleman’s contribution. If any issues arise on which it is necessary to write to him, I will do so.
Clause 150 was introduced on Report in the Lords as part of package of amendments to provide protection for all directors’ home addresses. Clause 223 provides that the information on those registers is protected. Clause 224 provides that, except with the consent of the director concerned, a company may use a director’s home address only in order to communicate with him or her. It also provides that it may disclose those addresses only under a court order or in compliance with a requirement to notify the registrar of companies. Clause 150 is therefore an essential part of that rather bigger package for protecting directors’ home addresses.
I am grateful to the hon. Gentleman for his acknowledgment—it was not apparent in our earlier discussion of privacy and the difficulties that individuals face—of the role played by my colleague Lord Sainsbury. He has done an enormously difficult job of taking forward many of these provisions incredibly well and bravely.
Mr. Djanogly: We have made some progress this afternoon. Amendment No. 270 is to be accepted. I think that the Minister took the point on amendment No. 459 that there should be the ability to check registers in the same place. If that is not the case, there could be the possible evil of companies splitting up their registers to make inspection difficult and an obstacle rather than helping people. I appreciate that the Minister will respond to that amendment on Report.
The Minister was not so sympathetic towards amendment No. 367. Put simply, if I am a director and I cannot make a board meeting and I want to send my alternate, I send a one-line letter to the company saying “I appoint X as my alternate.” X goes along to the board meeting as my alternate and that appointment could then be finished. I could make the appointment for a longer period.
Mr. Djanogly: Perhaps the Minister could explain in which capacity such a person would go.
Margaret Hodge: They would go as a member, presumably. I do not know whether they would be a particular office holder. People talk at directors’ meetings and participate in the deliberations without necessarily being a director. The hon. Gentleman might have done this himself. A solicitor might well take part in a directors’ meeting, giving advice to the directors.
Mr. Djanogly: The Minister is missing my point. I am not talking about a confrontational situation where solicitors are needed. I am simply saying that articles will provide for alternates. If I am a director and I cannot make a meeting, I might want to send my alternate.
Margaret Hodge: I am not talking about situations of conflict. Somebody who is not a director, viz. a solicitor, might give perfectly consensual advice on a decision discussed at a directors’ meeting.
Mr. Djanogly: I see where the Minister is coming from, but I am making a different point. I am talking not about someone being invited to a board meeting to give advice but about someone acting as a director’s alternate and therefore having that director’s vote and going to the meeting in his place.
Margaret Hodge: The point that I was making was that if a director is ill for a meeting—that was where we started this exchange—and is therefore unable to present a report, that report could be given as advice from a finance director, solicitor or whatever without that person necessarily having a vote. I am told that many companies’ articles permit their directors to appoint somebody in their stead. There may be restrictions and conditions, but they do not affect the basic position that in law anyone occupying the position of a director is a director, whatever their title, howsoever they were appointed and even if they were not. That person is a de facto director.
Mr. Djanogly: Yes, articles normally provide for a director to appoint someone in their stead—an alternate director. As the law stands, a form 228 must technically be filed if an alternate is appointed even for a single board meeting. That is hugely inconvenient and, as far as I can see, unnecessary. I still think that that is a relevant point. Is the Minister saying that under the new provisions the equivalent of a form 288 will not have to be filed in any event?
Margaret Hodge: No, I was saying that we ought to consider whether we can simplify the notification procedures in any way, taking the hon. Gentleman’s point that they are bureaucratic. I have just been told that the first company law directive requires that all directors be notified, which constrains our ability to be flexible in the way that the hon. Gentleman wishes.
Mr. Djanogly: I assume that “all directors” includes alternate directors, although the Minister did not say so. Assuming that it does, there might be a problem. I appreciate her taking the point and saying that she will look at the bureaucracy. I am making a point of bureaucracy rather than one of grand principle.
Government amendment No. 365 seems sensible and I have made the points that I wanted to make on clause 150 stand part. I hope that the Government do not see this debate as the end of the game or believe that consideration of the provisions stops here. There is more to do to build on the body of support that is being built up.
Amendment agreed to.
Clause 147, as amended, ordered to stand part of the Bill.
Clauses 148 and 149 ordered to stand part of the Bill.

Clause 150

Register of directors’ residential addresses
Amendment made: No. 365, in clause 150, page 67, line 3, leave out subsection (3) and insert—
‘(3) If a director’s usual residential address is the same as his service address (as stated in the company’s register of directors), the register of directors’ residential addresses need only contain an entry to that effect.
This does not apply if his service address is stated to be “The company’s registered office”.’.—[Margaret Hodge.]
Clause 150, as amended, ordered to stand part of the Bill.
Clause 151 ordered to stand part of the Bill.

Clause 152

Duty to notify registrar of changes
2 pm
Amendment made: No. 366, in clause 152, page 67, line 37, leave out subsection (3) and insert—
‘(3) Where—
(a) a company gives notice of a change of a director’s service address as stated in the company’s register of directors, and
(b) the notice is not accompanied by notice of any resulting change in the particulars contained in the company’s register of directors’ residential addresses,
the notice must be accompanied by a statement that no such change is required.’.—[Margaret Hodge.]
Clause 152, as amended, ordered to stand part of the Bill.

Clause 153

Application of provisions to shadow directors
Mr. Djanogly: I beg to move amendment No. 157, in clause 153, page 68, leave out line 7.
Concerns have been raised about the level of knowledge that might pertain to a shadow director. For instance, if I control 100 per cent. of a company and appoint some friends to be directors when in all but name I am calling the shots and running the company, it is clear that I am a shadow director. Clearly, it is also right that I am bound by clauses 147 to 149 and the registration provisions in clause 150.
In reality, however, whether an alleged shadow director controls the company is often confusing. For instance, it might depend on the extent of the influence exerted. A bank, through its financial covenants, might call the shots to the extent that it comes to be seen as a shadow director. In such a situation it might be that the shadow director honestly has no idea that he, she or it is a shadow director. The question then is whether such a person should have the same liability as a normal director who fails to register particulars.
In addition, recent case law seems to state that even when it is decided that someone is a shadow director, it does not necessarily follow that they should have the same duties as a normal director. That is an important new point that has come out of a recent case. I would like to go into that in a little more detail. I am afraid that it is not the most straightforward of topics.
A de facto director is a person who acts as a director without having been appointed validly, or at all. They owe director’s duties to the company in relation to which they perform those functions. That is the old common law position. A shadow director is a person in accordance with whose directions or instructions the directors of a company are accustomed to act. Professional advisers acting in that capacity are generally excluded from the definition.
The Court of Appeal made the following statements about the statutory definition of a shadow director: that the definition should not be strictly construed; that the purpose of the legislation was to identify those, other than professional advisers, with real influence in the company's corporate affairs, but this influence did not have to be over the whole field of its corporate activities; that whether a communication was to be classified as a “direction or instruction” had to be objectively ascertained by the court in the light of all the evidence; that non-professional advice might come within the statutory definition; that a person could still be a shadow director even though the board had not adopted a subservient role to him or had not surrendered its discretion; and that shadow directors are subject to specific statutory obligations and duties—including those imposed under the Companies Act 1985 and the Insolvency Act 1986.
The recent development came in the Ultraframe case of 2005. U Ltd—the claimant—and B Group, of which F was the majority shareholder, were business competitors. A dispute arose between them concerning the ownership of businesses in the field of conservatory roof design and manufacture. The dispute focused on the operations and transactions of two companies—N Ltd and S Ltd—which had been set up some years ago and were now insolvent and controlled by U Ltd. F had been appointed a director of S Ltd in October 1999, but was never appointed director of N Ltd. U Ltd contended that F was a shadow or de facto director of both S Ltd and M Ltd from about October 1998 on the basis that F, among things, attended board meetings of both companies; told the directors ofS Ltd that he wanted the location of the company’s business to be moved; was the sole signatory to S Ltd’s bank account from November 1998; stated in a letter to his solicitors dated February 1999 that he was “now running the company”; granted leases to S Ltd in March 1999 on which there were no real arm’s length negotiations over rent or other terms; made a decision to change S Ltd’s supplier of components; became company secretary of S Ltd; and took debentures over N Ltd and S Ltd in anticipation of supplies of materials and financial support.
In addition to considering F’s status within N Ltd and S Ltd, the court also considered, among many other things that hon. Members will be pleased to know I will not go into, whether as a shadow director F owed fiduciary duties to S Ltd and N Ltd. It held that F had become a de facto director of the companies from January 1999, when he had at least an equal voice to that of their de jure directors in important business decisions and was part of the corporate structure of governance. F had not become a shadow director of either company before he became a de facto director, because the board was not “accustomed to act” on his instructions or directions before that time.
The court also made the following points on shadow directors: that in most cases, it is unlikely on the facts that a person will be simultaneously a shadow director and a de facto director, although he may be both in succession; that in determining whether someone has become a shadow director it is necessary to look at all the various matters cumulatively; that a person at whose direction a governing majority of a board is accustomed to act is capable of being a shadow director; and that unless and until a board does something in conformity with a putative shadow director’s directions or instructions, the question of shadow directorship does not arise. It pointed out that the mere giving of instructions does not make someone a shadow director, and that it is only when instructions are translated into action by the board that that question can arise.
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