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Session 2005 - 06
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Standing Committee Debates

Third Standing Committee on Delegated Legislation

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Third Standing Committee on Delegated Legislation

The Committee consisted of the following Members:


†Mr. Christopher Chope

†Austin, John (Erith and Thamesmead) (Lab)
†Brown, Lyn (West Ham) (Lab)
†Coaker, Mr. Vernon (Lord Commissioner of Her Majesty’s Treasury)
†Connarty, Michael (Linlithgow and East Falkirk) (Lab)
Davies, Mr. Quentin (Grantham and Stamford) (Con)
Dodds, Mr. Nigel (Belfast, North) (DUP)
†Donohoe, Mr. Brian H. (Central Ayrshire) (Lab)
†Foster, Mr. Michael (Worcester) (Lab)
†Hopkins, Kelvin (Luton, North) (Lab)
†James, Mrs. Siân C. (Swansea, East) (Lab)
†Kawczynski, Daniel (Shrewsbury and Atcham) (Con)
Mulholland, Greg (Leeds, North-West) (LD)
Robertson, Mr. Laurence (Tewkesbury) (Con)
†Selous, Andrew (South-West Bedfordshire) (Con)
†Smith, Angela E. (Parliamentary Under-Secretary of State for Northern Ireland)
Wilson, Mr. Rob (Reading, East) (Con)
Sîan Jones, Committee Clerk

† attended the Committee

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Tuesday 5 July 2005

[Mr. Christopher Chope in the Chair]

Draft Companies (Audit, Investigations and Community Enterprise) (Northern Ireland) Order 2005

10.30 am

The Parliamentary Under-Secretary of State for Northern Ireland (Angela E. Smith): I beg to move,

    That the Committee has considered the draft Companies (Audit, Investigations and Community Enterprise) (Northern Ireland) Order 2005.

I welcome you to your first outing, Mr. Chope, as Chair of a Committee. It will be in order for us to be gentle with you today, and I am sure that you will be gentle with us, too. With your humour and your wisdom, you will be an excellent Chair and I look forward to serving in your first Committee. We shall not give you too many difficulties.

A draft of the order was laid before the House on 27 June. It brings the company law framework in Northern Ireland into line with that in Great Britain by replicating the measures under the Companies (Audit, Investigations and Community Enterprise) Act 2004. The order has two main aims, the first of which is to improve confidence in companies and financial markets, particularly in the wake of major corporate failures such as those in the United States. The provisions that support that objective are contained in part II of the order.

A modern and efficient company law framework is essential to the performance of the Northern Ireland economy because we must ensure that investors, creditors and consumers are confident in their dealings with business. We all need to know that our money is secure. The provisions in part II are designed to provide safeguards to protect investors, creditors and others who do business with companies.

Part II of the order focuses on strengthening the regulation of the audit and accountancy professions and on giving the Department greater powers to investigate companies. It also relaxes the prohibition on companies indemnifying directors against most liabilities. It is important that we encourage high-quality individuals to assume the role of company director and we believe that the provisions strike a balance between the need to deal firmly and robustly with cases of dishonesty and negligence, while at the same time encouraging those high-quality individuals needed to make companies successful to become company directors.

Part III of the order helps to promote social enterprise and develop social economy with the
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creation of a new type of company, the community interest company. The order sets out the framework for creating community interest companies and explains how they will be regulated. The community interest company offers a new additional choice for social enterprises, which make a substantial contribution to local economic development. The social enterprise sector has informed us that it is difficult and expensive to set up a company that meets its needs. We are therefore providing an off-the-shelf company form that will help to make it easier to set up social enterprises and also help to encourage an important sector in Northern Ireland.

Those who choose the community interest company form have voluntarily accepted certain constraints, such as an asset lock and a higher level of supervision from an independent regulator. That will ensure that the business is run for the benefit of the community and that its assets are protected. We have undertaken consultation on the draft proposals and I am pleased to inform the Committee that the few replies received were favourable.

Company law in the United Kingdom is rightly regarded as among the most progressive in the world. It is the policy of the Department of Enterprise, Trade and Investment in Northern Ireland to ensure that company law in Northern Ireland keeps pace with developments in Great Britain and Europe, therefore ensuring that Northern Ireland is and remains an attractive place in which to do business.

10.33 am

Andrew Selous (South-West Bedfordshire) (Con): Having been a member of Committees of which you were a member, Mr. Chope, it is a pleasure to serve under your chairmanship.

I agree with the Minister. It is vital for our economy that consumers, creditors and investors have full confidence in the business system in this country as well as in our companies and the auditors who ensure that the financial information that is given to consumers, creditors and investors is accurate and can be relied on. We have seen recently from major corporate failures in America the damage that is done when confidence is lost. We have also seen various firms of auditors that have been remiss in some regards. Indeed, if we cast back our minds a few years, we will know that Northern Ireland is no stranger to major corporate failures.

I am delighted to see the provisions under the order in respect of community interest companies. Opposition Members certainly regard the strengthening of social enterprise as important. On the companies and the audit and investigation side of the order, will the Minister say a little about the materiality and disclosure of all relevant information in respect of directors? That matter was raised on Second Reading of the Companies (Audit, Investigations and Community Enterprise) Bill. There
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is concern that if some regard for materiality is not brought into play, these provisions could be onerous for directors, or could lead to them falling foul of them if small items of expenditure or income are not disclosed to auditors. I am sure that that is not the intention of the order, but some reassurance on that from the Minister would be welcome.

Following on from that point, and closely related to it, the Minister will be aware that non-executive directors have exactly the same position in law as full-time executive directors. So far as the rest of the UK is concerned, has there been any experience since the legislation was enacted of non-executive directors being deterred from taking up similar positions because they felt that they might be caught out by these provisions? With regard to the disclosure of all relevant information, non-executive directors have to rely on their fellow full-time executive directors. I am sure that we would all agree that non-executive directors perform a useful role, and that we would want to do all that we can to encourage them.

On Second Reading, there was some discussion about whether these measures should apply to all listed companies or whether it would be sufficient for them to apply only to the FTSE 350 companies. If they were to apply to the FTSE 350 companies, that would cover 96.5 per cent. of the market capitalisation of all listed companies. Does the Minister believe that the order needs to cover all listed companies?

Concerns have been expressed about investigators and inspectors being given considerable powers under the order to enter business premises and to remain on them for long periods. We all understand why they are given those powers, and it is right and proper that they should have them in genuine cases of fraud. However, I am sure that the Minister would agree that it is important that there is some regard to the reasonable nature of those investigations, so that such powers are not abused. If the Minister were to comment briefly on any checks or constraints that there might be on those powers so that they are not abused, that would be appreciated by the business community.

On community interest companies, I reiterate that my party welcomes that new form of social enterprise company being set up. However, I ask the Minister to say whether it is envisaged that CICs will get tax breaks in time, as charities do. A major revision of charity law is due to take place under the Charities Bill, so it might be unfair or premature of me to ask such questions, and I will understand if the Minister is unable to answer them today. However, social enterprise is a crowded field—there are companies limited by shares and in other ways, industrial and provident societies, organisations that are unincorporated and others that are registered charities—and it would be useful to understand where exactly CICs fit in.

Has the Minister received any indication of how many companies are expected to register in Northern Ireland? I gather that the figure so far for the rest of the UK is 35.

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I believe that there has been some discussion about including CICs to ensure that they can be built in to procurement policies and have an equal chance of being able to take up the business. I should be grateful if the Minister would tell the Committee what progress has been made on that.

10.40 am

Angela E. Smith: I am grateful to the hon. Member for South-West Bedfordshire (Andrew Selous) for his comments on the order and his general broad welcome. It is appropriate that we ensure that Northern Ireland legislation on company law follows closely what we are doing in the rest of Great Britain.

The hon. Gentleman asked about taxation, but that is a reserved matter for which I have no authority; it has not been devolved to Northern Ireland and remains with the Treasury.

There is no evidence that the regulations have deterred non-executive directors. In fact, I fully concur with the hon. Gentleman’s comments about the valuable role that such people play, but there is no evidence that they have been put off by the measure since it has been in force in Great Britain.

The hon. Gentleman asked about safeguards against the measures. It is important to note that articles 20 to 24 say that investigators have to obtain relevant information. The word “relevant” is important. If there is no charge and basis for the investigation, it would be difficult to gain access in the way that he suggests. The relevance test is important. I understand his concerns, but this is a vital piece of the jigsaw to ensure that we restore investor confidence and the confidence of business, too, and this measure is an important part of doing that.

The proposed legislation contains the power to search, enter and seize, as the hon. Gentleman said, but there will still be a requirement for the relevant person to have a warrant to do so.

It is difficult to ascertain how many community interest companies are likely to register for the scheme, because there will be two ways of doing so: either companies can convert to CIC, or they can set up anew as a CIC. The evidence so far is that a fairly small number of companies will be involved. The social economy is developing in Northern Ireland, but it is not as advanced as it would be over here. Although the measures are in place to allow that sector to expand, there is no evidence of great numbers.

The hon. Gentleman mentioned numbers relating to procurement. Again, charities law is a devolved matter in Northern Ireland. There will be an additional legal form and new guidance published for CICs to assist with procurement, which will be helpful.

The hon. Gentleman also wanted some assurance about directors’ responsibilities. I am not sure whether he is aware of article 18, which deals with
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indemnification. A company is, at present, prevented from indemnifying a director. Under the order there will be indemnification for directors—not in cases of negligence or any criminal activity, but against third parties. It is right that directors should have to ensure that no information of which they are aware is withheld from an auditor. It is not unreasonable to ensure that that is so.

The hon. Gentleman raised a concern about materiality, but with that assurance I hope that he is content that directors have to be aware.

We need to ensure that directors have a clear understanding of what they are required to disclose. That will be clear.

Andrew Selous: I speak as a former auditor. Small amounts of income or expenditure could be relevant and could come under headings in company accounts, but if they are really so small they would not be deemed material by auditors, because they have no impact on the accounts as a whole. Some assessment is needed to say whether such items would be significant on the part of a consumer, creditor or investor looking at the company. A sum of £5 in petty cash could be relevant
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to a column of expenditure, but if we were talking about a multi-million pound business it would not be material. I was trying to tease out that difference.

Angela E. Smith: I understand the point that the hon. Gentleman is making, but the auditor would not be making such an examination unless they were concerned about a problem in the first place. A sum of the order that he is talking about would not be sufficient for an auditor to want to make an investigation of that kind. We are confident that that concern has been addressed and that it does not place an overly onerous burden on companies. That was not raised as a particular concern in our consultation, either, so we are confident that those concerns have been dealt with.

I hope that that addresses the points that the hon. Gentleman raised and I hope that the Committee agrees to the order.

Question put and agreed to.


    That the Committee has considered the draft Companies Act (Audit, Investigations and Community Enterprise) (Northern Ireland) Order 2005.

Committee rose at fifteen minutes to Eleven o’clock.


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