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Public Bill Committee Debates

Draft Companies (Reduction of Share Capital) Order 2008

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 statement—the new option for achieving a reduction of share capital by private companies—must 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.
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 company’s 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 company’s 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 legislation—specifically, 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 grateful—as would many others—if 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. Gentleman’s 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 Minister’s 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 Hansard’s 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. Lady’s 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.
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.
That the Committee has considered the draft Companies (Reduction of Share Capital) Order 2008.
Committee rose at eleven minutes to Five o’clock.

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