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Public Bill Committee Debates



The Committee consisted of the following Members:

Chairman: John Cummings
Beckett, Margaret (Derby, South) (Lab)
Brennan, Kevin (Minister for Further Education, Skills, Apprenticeships and Consumer Affairs)
Burt, Lorely (Solihull) (LD)
Davidson, Mr. Ian (Glasgow, South-West) (Lab/Co-op)
Davies, Philip (Shipley) (Con)
Djanogly, Mr. Jonathan (Huntingdon) (Con)
Gray, Mr. James (North Wiltshire) (Con)
Heppell, Mr. John (Nottingham, East) (Lab)
Hutton, Mr. John (Barrow and Furness) (Lab)
Jack, Mr. Michael (Fylde) (Con)
Kilfoyle, Mr. Peter (Liverpool, Walton) (Lab)
Plaskitt, Mr. James (Warwick and Leamington) (Lab)
Purchase, Mr. Ken (Wolverhampton, North-East) (Lab/Co-op)
Thurso, John (Caithness, Sutherland and Easter Ross) (LD)
Turner, Mr. Neil (Wigan) (Lab)
Wright, Jeremy (Rugby and Kenilworth) (Con)
Chris Stanton, Committee Clerk
† attended the Committee

Fifth Delegated Legislation Committee

Tuesday 14 July 2009

[John Cummings in the Chair]

Draft Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009
4.30 pm
The Minister for Further Education, Skills, Apprenticeships and Consumer Affairs (Kevin Brennan): I beg to move,
That the Committee has considered the draft Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009.
The Chairman: With this it will be convenient to consider the draft Community Interest Company (Amendment) Regulations 2009.
Kevin Brennan: It is a pleasure to serve under your chairmanship this afternoon, Mr. Cummings.
We are debating two company law instruments. The first makes various minor changes to the law on capital and shares, and the second updates the law on community interest companies, sometimes known as CICs. Both instruments contain elements that are necessary to complete the final implementation of the provisions of the Companies Act 2006 from 1 October 2009.
The regulations amend three aspects of the 2006 Act. The first amendment reduces from 21 to 14 days the minimum period that a company can give its shareholders to accept an offer of new shares when it makes a rights issue.
Mr. Michael Jack (Fylde) (Con): I remind members of the Committee of my declaration of interest in the Register of Members’ Interests. Are those “days” working days or calendar weeks?
Kevin Brennan: Can I return to that in a moment, once I have had some in-flight refuelling? I shall double-check, so that I do not mislead the Committee.
The second modification is to change the 2006 Act so that a creditor of a company who wants to object to a reduction in capital will have to demonstrate that the reduction would create a real likelihood of his not being paid. That brings the 2006 Act into line with a corresponding change already made to the Companies Act 1985.
The third change covers the rules on the purchase by a company of its own shares. The regulations will remove the current 10 per cent. limit on a company holding its own shares. They will also extend from 18 months to five years the maximum period for which authorisation can be given for the company to purchase its own shares.
Those three minor adjustments to the rules on capital and shares will, at the margin, provide companies with some additional flexibility to manage their capital, without removing any necessary protection for creditors or shareholders.
The second statutory instrument also does three things. First, the draft regulations increase flexibility to convert a CIC into other forms and vice versa. Taking advantage of changes in other legislation, the regulations will enable CICs to convert from Scottish charities, which was not previously possible, or to community benefit societies.
Secondly, a number of changes are made in the light of experience of the regulations working in practice, including clarification of the community interest test and amendments allowing CICs to determine their approach to matters such as the appointment and removal of directors and casting votes. The third change makes minor and technical amendments consequential on the Companies Act 2006. In summary, therefore, the draft regulations aim to update the community interest regulations for the benefit of existing and prospective CICs.
I was awaiting assistance from behind me, so that I could answer the question posed by the right hon. Member for Fylde. To clarify, the “days” in question are ordinary calendar days—the period is reduced from 21 to 14 calendar days. On that basis, I commend both sets of draft regulations to the Committee.
4.34 pm
Mr. Jonathan Djanogly (Huntingdon) (Con): We accept the regulations, which are an important part of the implementation of the Companies Act 2006. The regulations are to be implemented in October 2009, amending three aspects of the 2006 Act.
The first impact of the regulations is to reduce the rights issue subscription period under section 562(5) of 2006 Act. As the Minister said, the minimum period of notice that a company can give its shareholders when making a rights issue is reduced from 21 to 14 days. We understand that the change is being introduced in response to concerns that the time taken to raise capital by selling new shares could expose companies to market abuse and volatility. According to the Department for Business, Innovation and Skills, most respondents to its consultation on the regulations were supportive of the content. One respondent suggested that the minimum period should be 10 business days, in line with the Financial Services Authority requirement for a non-statutory rights issue. However, we recognise that 14 days is the shortest minimum period permitted by the second company law directive.
We broadly accept the change to the minimum period in which a rights issue can be left open. However, given that the Government’s complaint seems to have been directed at longer rights issues, such as those of Bradford and Bingley and HBOS, which took 96 and 83 days respectively, we cannot see why they do not focus on the maximum period. Will the Minister let me know what proposals, if any, the Government have on that issue, and whether they are looking at the problem?
The second aspect of the regulations is a change in the rights of the creditors of a company when the company reduces its capital by applying to the court. Under section 646 of the 2006 Act, if and when creditors object to a reduction to the company’s capital, they will have to show that their claim is at risk and that the company has not implemented adequate safeguards. In the interests of clarity and efficiency, the regulations reduce the right of certain creditors to object to a reduction in share capital made by certain publicly listed companies. Will the Minister offer a guarantee that the rights of shareholders to make genuine objections will not be infringed?
At present, companies can, with shareholder authorisation, purchase up to 10 per cent. of their own shares to hold in treasury. Such purchases can be authorised for a period of 18 months. The ability to hold treasury shares provides companies with additional options when managing capital levels and balancing debt and equity. For example, management of treasury shares can provide an alternative to rights issues. That 10 per cent. limit has been removed by European Council directive 2006/68/EC and member states now have the option of removing that cap on holding treasury shares. We welcome the fact that the Government have decided to exercise that option and remove the 10 per cent. cap. Will the Minister tell me how many other EU member states intend to make use of that option?
The Conservative party is concerned about providing more flexibility to companies during the tough economic times that we find ourselves in. We accept the regulations, as we believe that they will provide additional flexibility for companies to manage their share capital effectively, without removing too many of the protections that are necessary for creditors.
On the second set of regulations, the community interest company was created by the Companies (Audit, Investigations and Community Enterprise) Act 2004 and the subsequent Community Interest Company Regulations 2005. That legislation came into force in July 2005 and since then, more than 3,000 social enterprises have chosen to register as community interest companies. The regulations are aimed at amending the regulatory framework for community interest companies to take into account the recent experience of companies, their advisers and the regulator.
I thank the Minister for his explanation. We do not believe that the regulations are controversial, and we welcome the greater clarification of the community interest test, so that both companies and the regulator can have more certainty about the decisions made by the regulator. We want to ensure that CICs are properly regulated, as set out in the explanatory memorandum. According to the Department:
“To minimise the impact of the requirements on firms employing up to 20 people, the approach taken is to maintain a light touch regulatory framework for CICs.”
Will the Minister explain how the regulator will achieve that, and will he advise the Committee how the regulator will interact with the Better Regulation Executive?
The Conservative party wants to ensure that businesses are equipped with the proper guidance to deal with the regulations. Will the Minister confirm what plans there are for his Department, the regulator or Companies House to issue guidance?
We support the regulations, but note that no impact assessment has been completed. Will the Minister explain why that is the case? The proposals are generally non-controversial, and we hope that they aid our community interest companies so that the regulator can work efficiently in practice.
4.40 pm
Lorely Burt (Solihull) (LD): On the whole, we welcome the two statutory instruments. It is important that business and community interest companies can work in the most efficient and simple way, without being encumbered by unnecessary regulation.
The reduction of the minimum pre-emption rights period in the first set of regulations looks fair enough. I note that the regulations reduce that to the EU minimum permissible period. Although pre-emptive rights in operating companies are valuable in terms of market exposure and abuse, we hope that the measure works and achieves the solution that we want.
On creditor protection in relation to reduction of a company’s share capital, now, creditors can object only if they can prove that share capital is at stake. That is fair enough in relation to creditors and shareholders, but following the comments from the hon. Member for Huntingdon, will the Minister say whether non-pecuniary circumstances might apply and should be considered as valid objections, as well as those outlined in the statutory instrument?
The third change of removing the 10 per cent. cap on companies holding their own shares and extending the authorisation period for the purchase of shares from 18 months to five years seems appropriate and we welcome it. It gives companies more options to manage capital, and balance debt and equity without having to issue new shares.
I have few specific comments to make about the second set of regulations. The Minister said that, in the light of experience, the second and third changes made under those regulations would remove the requirements relating to alternate directors and the casting vote and add a “reasonable person’s” test to the section of the community aspect of the community interest test. Having studied the consultation, I am a little concerned, because there were only 12 responses, as a result of which some provisions were removed to be considered later, which is welcome, and another proposed amendment was omitted.
We are already amending the regulations introduced in 2005. I am worried that, given the small number of organisations that responded, the problems will not all be ironed out and that we will be here in two, three or four years’ time—if we are, it might not be yours truly speaking for the Liberal Democrats—legislating for unintended consequences of the statutory instrument.
4.44 pm
Kevin Brennan: It has been a useful debate. Members of the Committee have asked pertinent questions that I shall attempt to answer as best I can.
The hon. Member for Huntingdon asked why not concentrate on the maximum period as well as the minimum period. At present, we do not have any plans to introduce a maximum period. It will generally be in a company’s interest to keep the period short, but we do not want to legislate to restrict companies’ freedoms too far, although I understand his point.
The hon. Gentleman also asked about guaranteeing creditor protection—that the change will not be prejudice creditors with genuine concerns. Any creditor will be heard by the court if he
“can show that there is a real likelihood that the reduction”
in capital
“would result in the company being unable to discharge his debt or claim when it fell due”.
I hope that putting that on the record provides the assurance the hon. Gentleman seeks.
The hon. Gentleman asked me how many other member states have chosen to exercise the option to make the change. I do not know the answer to that question, but I will try to find out. I am happy to write to him with some more information and to copy that letter to other members of the Committee, who I am sure will be interested in the answer.
The hon. Gentleman also asked why there is no impact assessment for the CICs regulations. An impact assessment was produced at the time of the 2004 Act that introduced the community interest company. It is generally regarded as a successful reform and has been taken up by a large number of third sector organisations, as he pointed out. The proposed regulations do not change our policy approach and are therefore not considered to impose significant costs on companies—on the contrary, we believe the changes will be generally welcomed and would not bring additional cost. For example, existing community interest companies will not be required to alter their memorandum and articles as a result of the changes.
The hon. Gentleman asked how we will ensure that the regulator operates with a light touch. The 2004 Act, to which he referred earlier, includes statutory objectives to ensure that the regulator follows better regulatory practice in the discharge of her functions. It makes it clear that the regulator must adopt an approach based on good regulatory practice by considering the likely impact on those who may be affected by the discharge of those functions, the outcome of consultations with representative and other relevant bodies, and the most efficient and economic use of the regulator’s resources.
The 2004 Act also requires the regulator to exercise her supervisory powers only to the extent necessary to maintain confidence in community interest companies. To date, the regulator has had no contact with the Better Regulation Executive, but she seeks to follow best practice and she took advice from the better regulation team of the Department on her recent consultation on dividend and performance-related interest caps. I hope that that reassures the hon. Gentleman.
The hon. Member for Solihull, speaking for the Liberal Democrats, asked about creditors with non-pecuniary interests. There has never been any protection for creditors with such interests and the amending regulations do not change that position. She also asked about changes made as a result of views expressed by the sector. I take her point about the consultation. The changes are, in practice, minor ones for CICs. The regulator undertook a further round of consultation on some of the issues about which the sector more widely might be concerned. That has now concluded and the regulator is considering the outcome, with a view to reporting further in the autumn.
We would expect to review the legislation and how it is meeting its objectives after about five years, as part of better regulation practices.
Lorely Burt: The guidance notes say that the regulator will keep an eye on how implementation is progressing. Is there any plan for a post-implementation impact assessment of either statutory instrument, so that we can check that we have done the right thing?
Kevin Brennan: I undertake to write to the hon. Lady about that. I simply emphasise, however, that the regulations make relatively minor changes. If anything, they open up opportunities for community interest companies and companies in general. However, I will write to the hon. Lady with further detail. On that basis, I commend the regulations to the Committee.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Companies (Share Capital and Acquisition by Company of its Own Shares) Regulations 2009.

Draft Community interest company (amendment) Regulations 2009

Resolved,
That the Committee has considered the draft Community Interest Company (Amendment) Regulations 2009.—(Kevin Brennan.)
4.51 pm
Committee rose.
 
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