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Session 2006 - 07
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Public Bill Committee Debates

Draft Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007

The Committee consisted of the following Members:

Chairman: Hugh Bayley
Austin, John (Erith and Thamesmead) (Lab)
Baron, Mr. John (Billericay) (Con)
Burt, Lorely (Solihull) (LD)
Djanogly, Mr. Jonathan (Huntingdon) (Con)
Ellman, Mrs. Louise (Liverpool, Riverside) (Lab/Co-op)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Fraser, Mr. Christopher (South-West Norfolk) (Con)
Greenway, Mr. John (Ryedale) (Con)
Hall, Mr. Mike (Weaver Vale) (Lab)
Jenkins, Mr. Brian (Tamworth) (Lab)
Mactaggart, Fiona (Slough) (Lab)
Mudie, Mr. George (Leeds, East) (Lab)
Öpik, Lembit (Montgomeryshire) (LD)
Pound, Stephen (Ealing, North) (Lab)
Prosser, Gwyn (Dover) (Lab)
Seabeck, Alison (Plymouth, Devonport) (Lab)
Timms, Mr. Stephen (Minister for Competitiveness)
James Davies, Committee Clerk
† attended the Committee

Fourteenth Delegated Legislation Committee

Monday 23 July 2007

[Hugh Bayley in the Chair]

Draft Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007

4.30 pm
The Minister for Competitiveness (Mr. Stephen Timms): I beg to move,
That the Committee has considered the draft Companies Act 2006 (Commencement No. 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007.
I bid you a very warm welcome to the Chair, Mr. Bayley; I am delighted to see you. As you know, the Companies Act 2006 will bring substantial benefits to businesses by modernising and simplifying company law. The order is quite an important milestone in implementing the Act, because it will bring into force some of the key provisions, including provisions relating to the statutory statement of directors’ general duties, derivative claims and proceedings, the business review and resolutions and meetings.
I shall set out briefly how the provisions brought into force by the order will make major contributions to two of the Act’s objectives. The first is better regulation and a “think small first” approach; the second is enhancing shareholder engagement and the long-term investment culture. The provisions in part 13 on resolutions and meetings will deliver some of the most important deregulatory benefits of the Act. From the perspective of “think small first”, the whole decision-making process for private companies has been simplified, making it easier for decisions to be taken by written resolution and making annual general meetings opt-in rather than opt-out.
Other parts of the Act being commenced on 1 October this year will also deliver deregulatory benefits. Companies will be permitted to make loans to directors, subject to member authorisation. Holding companies will be able to seek authorisation for political donations and expenditure in respect of the holding company itself and one or more subsidiaries through a single approval resolution.
To enhance shareholder engagement and the long-term investment culture, there needs to be a good understanding and effective engagement between those who own companies and those who run them. The Act will provide better guidance for directors on their duties and responsibilities, making it easier for shareholders, including those who hold shares indirectly through nominees, to exercise their ownership rights. It is very important for long-term prosperity that company decisions are based on the longer-term view.
The Act was drafted, of course, as a coherent whole. Many of its provisions refer to expressions or concepts that are explained in other parts of the Act. Where those other parts have not yet been commenced, it has been necessary to adapt the drafting of the provisions being commenced to make them work in the interim. Those transitional adaptations add to the order’s complexity in the short term, but will be revoked once the whole Act has been brought into force, when they will no longer be necessary.
I apologise to hon. Members, particularly members of the Joint Committee on Statutory Instruments, that it was necessary to withdraw and re-lay the order. That was a consequence of the complexity to which I have referred. In particular, I am sorry that it was necessary to correct drafting errors at such a late stage.
Let me outline the order’s structure. Articles 2 to 5 list the provisions of the Act that come into force on different days. Schedule 1 contains the transitional adaptations of the 2006 Act provisions, to which I have referred. Schedule 2 brings some of the repeals in the Act into force. Schedule 3 makes transitional provisions and savings, and schedules 4 and 5 make consequential amendments and repeals.
It was important through the transitional arrangements to ensure that, wherever possible, existing bargains would be preserved and companies would need to do nothing, or as little as possible, to transfer to the new regime. A key area of interest in transitional arrangements has been the provisions on derivative claims and proceedings in part 11 of the 2006 Act. Those are claims and proceedings brought by shareholders of a company on behalf of the company against its directors. Under the transitional provisions, the new derivative procedures must be used for all claims started on or after 1 October 2007, but the courts must ensure that the outcome of any claim based on acts or omissions by a director before then will be as it would have been under the old, common law that applied at the time.
I hope that I have explained the key elements of the order. Its purpose is to deliver the key benefits of the 2006 Act and to bring the company law framework into the 21st century.
4.36 pm
Mr. Jonathan Djanogly (Huntingdon) (Con): We can thank the Joint Committee on Statutory Instruments for exercising its normal due diligence on the order. My humble opinion is that it is a masterpiece of drafting skills and technical expertise. It is hugely complicated and it took me no little time to get my head around it, so I congratulate those who had the nous to put it together. It is so complicated that it would make the most complicated of Voldemort’s spells look simple.
I shall run through a few points relating to the order, some more general than others. My first is on the general order of play. Looking at the order, one wonders in retrospect whether we should have gone for the big bang approach rather than the bit-by-bit approach; however, that decision was taken with our consent and we are living with the consequences of it. Having heard back from practitioners, we know that implementation is proving to be a complicated business. We need to keep that in mind, and it would be helpful if the Minister referred to that problem and said whether he has been speaking to practitioners about the implications of putting the Act into practice.
To kick off my specific questions, will the Minister explain why only some of the provisions on company directors are being brought into force on 1 October? Why are sections 327(2)(c) and 330(6)(c) of the 2006 Act, on resolutions and meetings, not being commenced at that early date? Why are the provisions on the control of political donations and expenditure being commenced only in relation to Great Britain on 1 October, whereas they will not come into force in Northern Ireland until 1 November?
We welcome the bringing into force of sections 115 to 117, which were prompted by the Conservative party’s concern to have defences against extremists using the register of members to access shareholders’ addresses and to counter the growing threat of the fraudulent use of the register through so-called boiler rooms. However, during the passage of the Bill we made the point that those provisions would be pretty ineffective if companies were still to be required to publish details of their members’ names and addresses in their annual returns. I believe that the Government are proposing changes to deal with that problem. Will the Minister advise the Committee what those changes will be and why they are not being brought in at the same time as those sections, considering how vital they are to making the provisions work?
The Government are bringing in on 1 October the new requirements on requests to inspect or obtain copies of a register of members, which are in sections 116 to 119 of the Act. However, the equivalent requirements on the register of debenture holders in sections 744 to 747, which are more or less identical, do not appear to be coming in until 6 April 2008. Will the Minister explain why?
In paragraph 13(4) of schedule 1 to the order, it would be helpful if the proposed transitional insertions into section 300 relating to the ancillary documents to be supplied to members where a written resolution is to be passed in certain circumstances—for example, a buy-back, where the buy-back contract must be sent to members—could make it clear that it is sufficient to circulate copies of the relevant documents, as the new Act does in relation to the replacement provisions.
A minor point on which clarification would be helpful relates to the transitional provisions in paragraph 32 of schedule 3 to the order. When the Government published the February consultation paper, paragraph 4(9) said:
“If a private company has express provision for holding AGMs in its articles the effect of this will be preserved. But indirect references to the AGM will be disregarded, so that where the articles provide for the directors or officers to retire by rotation at the AGM, their appointments will continue until terminated in accordance with the Act or other provisions of the articles.”
It is arguable that that is still implied, for example, where a private company has adopted table A in an unmodified form, containing the retirement by rotation provisions in regulations 73 to 80, directors’ appointments will become indefinite until otherwise terminated. That is not quite as clear as set out in the consultation paper, and it might be helpful if the Minister could at least confirm that the Government’s thinking has not changed on that point.
4.41 pm
Mr. Timms: I am grateful to the hon. Member for Huntingdon for his kind remarks about the ingenuity of those who have put the order together. He makes a perfectly fair point about the complexity. The challenge has been to ensure that, although we are implementing different parts of the Act over a period up to October 2008, by which time almost all of it will have been implemented, the overall body of company law remains coherent and complete at every stage; hence much of the complexity reflected in the order.
The hon. Gentleman makes the point, very fairly, that with the benefit of hindsight, some people might have argued for doing everything in one go in October 2008, rather than in stages. What we have done—even with the benefit of hindsight, I think that it is the right approach—is to implement as soon as possible some of the changes where the deregulatory benefits are the greatest, such as allowing electronic communications, which companies were very anxious should be implemented as soon as possible. Companies felt strongly that some of the measures that we are implementing in the order should be implemented early, but there are other measures for which companies need longer to prepare. On some measures, companies want time to go through the next AGM season to make changes, if they are required, before implementation in October 2008.
The other factor we must bear in mind is the need to comply with changing European law. We want to ensure that we implement European Union company law requirements falling due during the implementation period. That is a further complication in timing all the measures and their implementation between now and October 2008.
The hon. Gentleman asked why the provisions are being commenced separately in Northern Ireland. The provisions in part 14 of the Companies Act 2006, and therefore this order, are being separately commenced for Northern Ireland on 1 November this year to coincide with the commencement of the Political Parties, Elections and Referendums Act 2001 (Northern Ireland Political Parties) Order 2007. That order is made under the 2001 Act and the Northern Ireland (Miscellaneous Provisions) Act 2006. In other words, the aim is coincide with the implementation of other legislative provisions for Northern Ireland.
Under sections 327(2) and 330(2) of the Companies Act 2006, as originally drafted, the record date for proxy votes in polls would have been the time at which the poll was demanded. That was not what was intended. The intention was to provide for a clear 48-hour period prior to the meeting. We are therefore not commencing those two subsections—they would not have had the intended effect, and we think that the legislation works without them.
The hon. Gentleman asked about the timing in respect of some of the directors’ duties measures. We consulted extensively with business in drawing up the commencement timetable. Business leaders said that they would like the conflict of interest duties to be commenced in October 2008 so that companies would be able to review the provisions in their articles of association in that area. That reflects the point that I made about waiting for another AGM season. We can implement some provisions early, but we need to wait until October 2008 for others.
On section 116 of the 2006 Act, we will be making changes to the rules relating to annual returns so that details of members will not usually be required. However, those changes will require changes to Companies House systems that cannot be made until 1 October 2008. That is another of the constraints on us. The hon. Gentleman makes a fair point about the annual return to Companies House, which requires all members’ names and addresses to be listed. We intend that requirement on the annual return to change, but not until October 2008 because of the need for the registrar of companies to implement the associated changes to Companies House systems and processes.
The one point of comfort that I can offer is that every company may, if it wishes, take the benefit of the new provisions simply by filing an annual return soon after 30 September 2007—in other words, doing so earlier than they would otherwise have done. That will be the last occasion on which they need to provide the full list of members’ names and addresses. The next time a filing is required will be after the change has taken effect, so the full list will not be required. I do not claim that as a great gain, but it is something that a lot of companies might want to reflect on and take advantage of. They will be able to make an early filing, immediately after 30 September 2007, because they do not need to wait until their annual returns are due before they make a filing.
I hope that I have managed to answer the hon. Gentleman’s questions. I am grateful for his support for our changes. It is agreed across the House that the Companies Act 2006 offers significant deregulatory benefits, and people are looking forward to seeing the provisions of the order coming into effect.
Question put and agreed to.
Committee rose at eleven minutes to Five o’clock.

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