The
Committee consisted of the following
Members:
Chairman:
Mr.
Eric Illsley
Abbott,
Ms Diane
(Hackney, North and Stoke Newington)
(Lab)
Baron,
Mr. John
(Billericay)
(Con)
Burt,
Lorely
(Solihull)
(LD)
Crausby,
Mr. David
(Bolton, North-East)
(Lab)
Djanogly,
Mr. Jonathan
(Huntingdon)
(Con)
Dobson,
Frank
(Holborn and St. Pancras)
(Lab)
Evans,
Mr. Nigel
(Ribble Valley)
(Con)
Heald,
Mr. Oliver
(North-East Hertfordshire)
(Con)
Hill,
Keith
(Streatham)
(Lab)
Hollobone,
Mr. Philip
(Kettering)
(Con)
James,
Mrs. Siân C.
(Swansea, East)
(Lab)
Joyce,
Mr. Eric
(Falkirk)
(Lab)
Seabeck,
Alison
(Plymouth, Devonport)
(Lab)
Teather,
Sarah
(Brent, East)
(LD)
Thomas,
Mr. Gareth
(Parliamentary Under-Secretary of State for
Business, Enterprise and Regulatory
Reform)
Williams,
Mrs. Betty
(Conwy)
(Lab)
Glen McKee, Committee
Clerk
attended the
Committee
Second
Delegated Legislation Committee
Monday 14 July
2008
[Mr.
Eric Illsley in the
Chair]
Draft Companies (Reduction of Share Capital) Order 2008
4.30
pm
The
Parliamentary Under-Secretary of State for Business, Enterprise and
Regulatory Reform (Mr. Gareth Thomas): I beg to
move,
That
the Committee has considered the draft Companies (Reduction of Share
Capital) Order
2008.
The
Companies Act 2006 introduced the option for private companies wanting
to reduce their share capital not to have to go to court to do so. The
order sets out how reserves arising from a reduction of share capital
may be treated. It also sets out how a solvency statementthe
new option for achieving a reduction of share capital by private
companiesmust be produced. That avoids the need for private
companies to go to court if they want to reduce their share capital.
The order clarifies whether the reserves created by a reduction in
share capital are distributable to shareholders as dividends.
For companies
wishing to utilise the solvency statement route under the Act, the
directors must first form the opinion and then confirm that opinion in
a statement that, at the date of the statement, there are no grounds on
which the company could be found to be unable to pay its debts; that,
if it is intended to commence a winding up at any time in the 12 months
following the statement, the company will be able to pay its debts
within 12 months of the commencement of the winding up; and that, in
any other case, the company will be able to pay its debts within the
year following the date of the solvency statement.
The content
required of the solvency statement is set out in the Act. The order
relates only to the form of the statement, which the Act requires to be
prescribed in an order. In this order, we have prescribed the most
elementary requirements as to the form of a solvency statement. It
states that a solvency statement must be in writing; it must indicate
that it is a solvency statement for the purposes of section 642 of the
Companies Act 2006; and, lastly, it must be signed by each of the
company
directors.
4.32
pm
Mr.
John Baron (Billericay) (Con): On behalf of the
Opposition, I welcome the intentions behind the order. I should first
explain that in the absence of my hon. Friend the Member for Huntingdon
(Mr. Djanogly), I am speaking today. He was hoping to speak,
but he was called away to the debate on the Employment Bill in the
Chamber. The Second Reading debate was announced after the Committee of
Selection met, so it falls on me to respond.
We support
the measure, which aims to simplify the mechanisms governing business
activities. It is surely desirable to free up court time and expense
where possible. Currently, both public and private companies
have a reduction of share capital confirmed by a court order. However,
these provisions of the Companies Act 2006, when commenced,
will enable private limited companies to reduce their share capital by
means of a new solvency statement route. The order is therefore needed
to specify the form which the statement ought to
take.
The principle
behind such a change in the rules has already been decided by the
passage of the Act, so there is no point in going over that again. It
is not difficult to see why companies might broadly welcome such a
change. For one thing, the changes are optional and therefore entail no
unwanted costs. Being deregulatory in nature the order very much has
our support. However, I have a few brief questions for the
Minister.
We
would all agree that any costs and benefits of change should be
properly understood. It was therefore a little unusual to read in the
evidence
base:
There
is no data on the sums companies expend in complying with the relevant
Companies Act 1985 legislation and consequently we are unable to
calculate the financial costs or benefits that will arise from the
proposed
changes.
That
is an unusual admission. Might I therefore tempt the Minister to hazard
an educated guess about the figures at stake? I dare say the Committee
would be grateful because one could question the point of an impact
assessment when no costs and benefits can be
calculated.
The
Minister rightly mentioned creditors. Business will welcome this change
for obvious reasons. However, we must, as he implied, have due regard
to the interests of creditors. They will understandably want to know
that a company seeking to reduce its share capital is still able to pay
its debt. Whereas the court process has traditionally sought to
guarantee that, the solvency statement is clearly intended to be an
alternative route in some cases. It is a formal declaration on behalf
of the company that debts could still be paid. While that in itself is
important, in such a serious matter, it is only right that each of the
company directors must sign the solvency statement, which is a
requirement, as we know.
Even trusting
to the good nature of company directors, I cannot help feeling that if
I were a creditor, I might consider the new arrangements rather lacking
in safeguards compared with the old process of going to court, where at
least there was an element of independent scrutiny, outside the main
board of directors, as to the companys ability to repay its
debts. Can the Minister assure the Committee on that point? For one
thing, the court process not only represented an element of independent
scrutiny, but was there as a guarantor to suggest that the systems were
in place to ensure that debts were paid.
Under the new
system of statements, there is no requirement for directors to obtain
professional advice. There is no requirement for them to seek outside
professional advice as to the veracity of the statements they are
making. More importantly, there is no way that outsiders, particularly
creditors, can check the validity of the statements being made.
Obviously that is not important when it comes to the very large
companies, but it is important in the case of smaller companies,
particularly some of the shell companies. I understand that the second
part of the order is intended to govern how proceeds of any reduction
of share capital are
treated, thereby having regard to creditors interests. However,
I am specifically interested in the robustness of the solvency
statement itself.
I note that
Companies House will be expected to enforce the new policy, yet the
explanatory notes state that no significant costs are expected to arise
to Companies House from the introduction of this procedure. I have to
wonder how meaningful enforcement can take place without costs being
incurred or resources being committed. It is one thing being able to
pursue directors after a company has defaulted, but creditors also need
reassurance at all times that statements are worth more than the paper
they are written on. The accompanying notes explain that directors must
have reasonable grounds for the opinions expressed in a
statement, but what exactly is the mechanism for that to be checked? I
am sure that the Committee would be grateful if the Minister outlined
in greater detail the procedure to be followed to guarantee the
robustness of
statements.
In
the second part of the order, we have the opportunity to clarify the
treatment of reserves arising from any reduction of a companys
share capital. Previously, under the Companies Act 1985, that matter
was governed by professional guidance issued by the Institute of
Chartered Accountants. However, I understand that the ICAEW has made
representations that such matters should now be clarified in law. The
old guidance is long and complex, so the current order must surely be
welcomed for bringing treatment into line with more recent
legislationspecifically, the 2006
Act.
One
issue which was parked during the passage of the Companies Act 2006,
was the treatment of distributable reserves on capital reductions and
dividends. Will the Minister please let us know where that review is
heading?
The
Opposition welcome this order. It is an attempt at deregulation, which
has the support of business and professional bodies alike. I should be
grateful if the Minister addressed the concerns that I have raised, but
my hon. Friends and I do not intend to vote against the
motion.
4.39
pm
Lorely
Burt (Solihull) (LD): We also welcome the order. We are
glad that companies wishing to reduce their share capital will not need
expensive and time-consuming court action to do so. However, as the
hon. Member for Billericay pointed out, it would be interesting to know
how much an average court action would cost a company so that we could
get some idea of what sort of saving might be
made.
It
is important that minority shareholders and creditors are protected.
The solvency statement needs to be quite prescriptive and accurate. We
do not want to add to the prosperity of insolvency practitioners, a
business that is growing at a greater rate than any other at the
moment. Last Friday we were officially categorised as being in a bear
market, so it is important that everyone who puts their faith in a
company, either as a shareholder or a creditor, is properly
protected.
Indeed,
we see what happens when private shareholders are not protected. The
most desperate recent example of that was the Northern Rock debacle.
The Government promised in February that an auditor would be appointed
to value the shares, but to date no one has been appointed. I would be
gratefulas would many othersif the Minister commented
on that and gave us some idea of when that is likely to
happen.
The
Chairman: Order. I am quite happy to let the hon. Lady
continue, but the issues relating to Northern Rock are outside the
order. I am not sure that the Minister need respond to that
point.
Lorely
Burt: I am grateful for your wise guidance, Mr.
Illsley. The point that I was getting at was that Northern Rock is
exactly the sort of company we are talking about. It is a private
company where small shareholders have not been protected because the
description of the finances of the company was not accurately recorded.
That was the analogy that I was trying to draw.
Finally, on
the audit procedures, I echo the comments of the hon. Member for
Billericay. What audit procedures are available to creditors and
minority shareholders to ensure that solvency statements are
realistically and accurately
based?
4.42
pm
Mr.
Thomas: Let me try to do justice to the questions. The
hon. Member for Billericay asked about the impact assessment. As he
mentioned, it is usual for the Government to provide figures in an
impact assessment. I will write to him and the rest of Committee with
as much detail as I can. However, when the impact assessment was
carried out we did not have the costs incurred by the regime under the
1985 Act, so we did not have a ground-truthing opportunity for the
changes that we are
making.
Nevertheless,
this is a change which the business community has pressed for. It noted
the extensive professional guidance that is required at the moment and
wanted additional clarity in law to avoid the need for that extensive
guidance, with all the costs that accessing it brings. It is not
directly pursuant to the hon. Gentlemans question, but perhaps
to give him and the Committee further reassurance, we have consulted
extensively on the drafting of this provision with the Institute of
Chartered Accountants and the Law Society. I will check whether there
is further information that I can give him on the cost point and write
to
him.
Mr.
Baron: I look forward to receiving the Ministers
letter. As I understand it, he has said that it will give some
indication of the cost benefits of the order. The impact assessment
recommends that the costs benefits be reviewed after five years. What
mechanisms will be in place to ensure that that will
happen?
Mr.
Thomas: We have made the commitment in the impact
assessment. The hon. Gentleman has drawn
Hansards
attention to the commitment that we have given. It will be for
Ministers to follow through on that commitment. If he will forgive me
for making a political point, I believe that it will be a Labour
Minister who has to do so. Whether it will be me, who knows? If it is,
I will certainly follow through on that commitment.
The hon.
Gentleman and the hon. Member for Solihull asked a perfectly reasonable
question about the possibility of unscrupulous directors making
solvency statements that do not stack up and of creditors losing out. I
draw their attention to the existing responsibilities of company
directors. They risk prosecution with a fine, a period of imprisonment
not exceeding two years, or both if they
do not produce a solvency statement containing reasonable opinions on
the basis of what they know at the time.
There is the
additional requirement that some 75 per cent. of shareholders should
vote for the resolution that allows the solvency statement to be
produced. Therefore, there has to be a debate in the company. I
recognise the hon. Ladys point about minority shareholders, but
we believe that the existing responsibilities on company directors and
the threat of court action, fines and imprisonment if company directors
do not make reasonable statements are a sufficient
safeguard.
On
the costs to Companies House, which the hon. Member for Billericay
asked about, we have recently discussed future plans for Companies
House. It is recognised that it has responsibilities in this area as
part of the overall assessment of its income. I am not aware of any
need for any further financial allocation to Companies House as a
result of the requirements in the order. I believe that it will be able
to cope with the costs perfectly reasonably on the basis of the
calculations that have been
made.
The
hon. Gentleman raised two further issues which have been raised with
him. The first relates to reserves
arising and whether provisions should be applicable going forward. I can
confirm that, following discussions with stakeholders, we are minded to
agree that the provisions on reserves arising from reductions of share
capital will apply from 1 October this year. That matter will be
addressed in the seventh commencement order, which we intend to bring
before the House before the summer
recess.
Lastly,
the hon. Gentleman raised a series of other issues around more
fundamental reform of the capital maintenance regime, which, as he
pointed out, is outside the scope of the order. We are continuing to
consult with a variety of stakeholders on what reforms might be
appropriate, at both UK and European levels. I cannot give him a time
scale today, but as soon as I can I will want to make it available to
the House and to organisations that track our discussions in that area.
I hope that I have answered hon. Members
questions.
Question
put and agreed
to.
Resolved,
That
the Committee has considered the draft Companies (Reduction of Share
Capital) Order
2008.
Committee
rose at eleven minutes to Five
oclock.