The
Committee consisted of the following
Members:
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 daysthe
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 Governments 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 companys 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 companys
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 persons 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 timeif we are, it might not be
yours truly speaking for the Liberal Democratslegislating 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 companys
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 protectionthat
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 companieson 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 regulators
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.