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Entrenchment is an exception to that general rule: it is not something we are recommending, but it is something that companies sometimes want. Most companies will not want to make provision for entrenchment, and those that do should think carefully and take professional advice about the possible consequences before they do so. We do not think, as the Conservatives appear to do, that entrenchment of any kind is too dangerous to be allowed. We do not agree with the Liberal Democrats that the usefulness of absolute entrenchment outweighs the problems that it can cause. So we have removed what seemed to be the most dangerous element of the scheme—absolute entrenchment—and retained conditional entrenchment, but emphasised the escape routes from it. We see that as a third way on entrenchment. It is interesting that even with an obscure subject we can have a third way. We think this strikes the right balance.
Moved, That the House do agree with the Commons in their Amendments Nos. 13 and 14.—(Lord Sainsbury of Turville.)
Moved accordingly, and, on Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 15 and 16.
Moved accordingly, and, on Question, Motion agreed to.
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Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 17.
Moved, That the House do agree with the Commons in their Amendment No. 170.—(Lord Sainsbury of Turville.)
Lord Hodgson of Astley Abbotts had given notice of his intention to move, as an amendment to Amendment No. 17, Amendment No. 17A:
17A Clause 22, Line 4, leave out “all” and insert “90% of”
The noble Lord said: My Lords, my amendment concerns the reduction from unanimity to 90 per cent for the introduction of an entrenched article. Having heard what the Minister has had to say and taken further advice externally, I do not intend to move my amendment, although I realise that I run the risk of rousing the ire of the noble Lord, Lord Razzall, in so doing.
[Amendment No. 17A, as an amendment to Amendment No. 17, not moved.]
On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 18 to 59.
Moved accordingly, and, on Question, Motion agreed to.
Lord McKenzie of Luton: My Lords, I beg to move that the House do agree with the Commons in their Amendments Nos. 60 to 66.
This group of amendments improves the parts of the Bill relating to names of UK and overseas companies and names used by anyone in the course of business in the UK. The changes are small and do not involve any significant change in policy; rather, in the main, they pick up various infelicities that have been pointed out during the progress of the Bill. The only substantive change is one also sought in this House imposing a requirement that the decisions of the company names adjudicator be published. That is Amendment No. 61.
Moved, That that the House do agree with the Commons in their Amendments Nos. 60 to 66.—(Lord McKenzie of Luton.)
On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 67.
Moved, accordingly, and, on Question, Motion agreed to.
1.30 pm
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 68. I shall also speak to AmendmentsNos. 113 to 118, 120 to 155, 157, 159 to 170, 172 and 174. We now come to amendments to Part 10. This is clearly one of the most important parts of the Bill. The amendments to this part, agreed in another place, are relatively minor. I believe they also have cross-party support.
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I will look briefly at the main amendments, in amendment order. Amendments Nos. 68, 113, 115 and 118 ensure that a shadow director is treated as a director regarding potential liability for various offences, but not regarding their particulars being on the public record. Amendments Nos. 114, 116 and 117 to Clauses 150 and 152 ensure that the provisions for the protected record of directors’ residential addresses are effective. Amendment No. 172 to Clause 226 provides powers to make regulations, providing greater protection for some directors’ home addresses.
Amendment No. 120 extends the provisions of Clause 167 to Northern Ireland. The effect of Clause 167 is to reverse the various relaxations to the strict no-conflict rule made by the Bill. Charitable companies will still be able to take advantage of the various relaxations, where their constitutions allow. That is the benefit of transparency. It will be clear from the charity’s constitution whether it is able to take advantage of a relaxation to the strict no-conflict rule.
Turning to the rules on substantial property transactions, Clause 176 implements a recommendation of the Law Commissions that has been widely welcomed, by allowing companies to enter into agreements that are conditional on the approval of the members of the company being obtained. Amendment No. 122 goes one step further by allowing the agreement to be conditional on approval from the members of its holding company as well, in those cases where the approval of the members of the holding company is required. The amendment responds to concerns that companies could be inconvenienced if they had to wait for member approvals before they could agree to a substantial property transaction.
The Bill makes a major deregulatory change to the regime applying to loans and other similar transactions by a company for its directors. At the moment these are prohibited unless certain exceptions apply. The Bill replaces that with a requirement for member approval. At the same time, the Bill was drafted to implement the recommendation of the Law Commissions that all the rules on loans, quasi-loans and credit transactions for directors should extend to all companies. For most private companies that would mean an increase in regulation, because at the moment many of the rules apply only to relevant companies. In broad terms, relevant companies are public companies and private companies that are on the same group as a public company. Although this recommendation was endorsed by the Company Law Review, we have carried out further informal discussions in light of the discussion in another place. There was clear support from stakeholders for the proposal that the requirement currently applying only to relevant companies should not be extended to all private companies. Under the amendments, the Bill would therefore no longer apply the rules on credit transactions or quasi-loans to private companies, unless they were associated with a public company, or apply the rules on loans, quasi-loans and credit
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Amendments Nos. 135 and 136 make it possible for a loan under the exceptions in Clauses 189 and 190 to be used by a director to fund their defence in proceedings relating not just to the company but for negligence relating to associated companies. This recognises that in a group situation it may be more convenient for the loan to be made by a different group in the company.
Companies legislation requires prior authorisation by the members for certain transactions; for example, loans or payments for loss of office between the company and a director. Section 66 of the Charities Act 1993 renders invalid prior authorisation by the members for transactions such as payments for loss of office unless the Charity Commissioners have given their prior written consent. That reflects concerns that in some cases the members of a charitable company are not independent of the directors, and that requiring their approval would not provide sufficient protection for the charity.
Chapter 4 of Part 10 makes various changes to the provisions on the requirements for prior shareholder authorisation. Amendment No. 157 inserts two new sections into the Charities Act 1993, in place of Section 66 of that Act, to reflect the changes made by the Bill.
I turn finally to the amendments relating to the indemnification of the director of a company acting as a trustee of an occupational pension scheme. The amendments address concerns raised in this House and in another place. The point was made that such directors perform a vital role, often for very little direct financial reward, and that directors’ and officers’ liability insurance policies currently available afford limited protection. We made clear that the Government attach great importance to the work of such directors and that we are aware it can sometimes be difficult to recruit high-quality directors for companies acting as a trustee of an occupational pension scheme. In view of that, and following consultation with key stakeholders, we tabled amendments to permit companies to indemnify the directors of associated companies acting as trustees of occupational pension schemes.
Moved, That the House do agree with the Commons in their Amendment No. 68.—(Lord Sainsbury of Turville.)
Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister for that full explanation of this group of amendments. Before we wave goodbye to Part 10, we on these Benches are concerned about whether we have managed to strike the right balance between risk and reward for directors, particularly non-executive directors, and whether overall there will not be a disincentive for men and women of quality to serve on boards. The Minister will be well aware of the concerns about the new provisions, especially those in Clause 158. At this stage, however, I can do nothing better than quote the noble Baroness, Lady
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On Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 69.
Moved accordingly, and, on Question, Motion agreed to.
Lord Sainsbury of Turville: My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 70. I shall also speak to Amendments Nos. 315 to 512, 532 to 536, 560 to 612 and 646 to 671.
This group of amendments inserts a number of new clauses into the Bill. These restate various provisions, currently contained in Parts 4, 5 and 8 of the 1985 Act, which were brought into the Bill as part of the restatement exercise, and also replace and restate Clause 538 and Parts 18 and 19 in their entirety. The amendments in this group also insert new clauses into the Bill that contain powers to amend the restated provisions that are concerned with the maintenance of capital. I will come to that point shortly, but first I shall say something about the restatement exercise.
The restatement of the 1985 Act provisions was foreshadowed by various debates that we had in this House. As I said at the beginning of today’s debates, I reassure noble Lords that while the new clauses may, in some cases, look rather different in structure from those of the 1985 Act that they restate, our intention has been to make no substantive changes to the law, other than those that have been necessary in order to ensure compatibility with other provisions in the Bill and to ensure compatibility with EU law.
The Bill as introduced included various provisions on share capital, which have been subsumed into the new clauses. The restated clauses have been made consistent with them. The new clauses inserted by Amendments Nos. 432, 512 and 671 contain three new powers. Those powers would enable the Secretary of State, in regulations made under the Bill, to amend respectively the rules on share capital, on purchase by a company of its own shares and on distributions. Together, those aspects of company law are commonly referred to as the “capital maintenance rules”. There is some history to these proposals, and, as noble Lords will have seen, we now have the benefit of a report from the Select Committee on Delegated Powers and Regulatory Reform that comments on the proposals. The committee’s recommendations always command the very greatest respect in this House when we are considering important and difficult issues.
The House will recall that the Bill as it was originally introduced to the House contained a proposal for a general company law reform power.
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It is important to understand the background. The capital maintenance rules are there to ensure that the company retains its subscribed capital as a protection for present and future creditors, and in particular to control the extent to which a company can give returns to its shareholders. Of course, profitable companies must be able to pay dividends to their shareholders. Indeed, this is a significant reason why we hold shares. But there must be rules to ensure that a company cannot pay money to its shareholders in a way that may jeopardise the legitimate interests of the creditors. As the Delegated Powers and Regulatory Reform Committee said, the rules are a mix of principles and very considerable detail. Much of our companies legislation dates back to Victorian times and the provisions are set out very largely in primary legislation, unlike, for example, the related area of financial services legislation where most of it is in secondary legislation. Part of the reason for retaining this approach in the present Bill is that business said to us that it wanted all the provisions together in one place.
We have looked very carefully at the concerns of the committee and discussed these with others. We recognise that the powers would be very wide and that an exceptional case would be needed. The parts of the Bill that deal with share capital and with purchase of own shares are mostly concerned with preventing companies finding ways round the rules on dividends by passing value to their shareholders in other ways; for example, by buying back their own shares with company funds, or by unilaterally reducing their capital so that the test of whether their net assets are greater than their capital becomes easier to meet. It is very important to have these rules as otherwise companies in difficulty and in the hands of unscrupulous or imprudent directors and members could circumvent the dividends rule, enrich themselves and leave creditors worse off than they should have been. But essentially they are technical and are not of the same nature as the central rules on dividends.
Experience shows that they can give rise to serious problems for companies that want to carry out entirely innocent transactions in circumstances where creditors are not at risk. As business practice changes, so these rules need to be adapted. There is a strong case that we need secondary powers to be able to do so. It is important for business that we have the powers in Amendments Nos. 432 and 512. We may well need to be able to make changes to meet legitimate needs. There is, therefore, a strong case for the powers in Amendments Nos. 432 and 512, even though I fully recognise that they are exceptional.
Amendment No. 671 covers the area of distributions. The committee rightly cited Amendments Nos. 647 and 648 as being general rules of particular significance. The existing rules are based on the second Company Law Directive. These rules have existed in much the
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By asking the House to agree with Commons Amendments Nos. 432 and 512 but to disagree with Commons Amendment No. 671, we believe that we have found a way to meet the concerns of the Delegated Powers and Regulatory Reform Committee while enabling us to bring clarity to some important aspects of company law in a reasonable time frame.
A small number of the amendments in this group make technical changes to the Bill’s provisions on capital maintenance and share capital. I do not propose to say much about these, save to reiterate that these changes have been necessary to ensure compatibility with EU law and other provisions in the Bill. Other amendments in this group take forward commitments we gave in another place: in particular, they enable the minimum share capital requirement for public companies to be satisfied in euro as well as sterling and clarify that the prohibition on public companies and their subsidiaries providing financial assistance for a purchase of own shares does not apply to the foreign subsidiaries of such companies.
Before I sit down, I mention an issue raised by the Law Society, which may have been drawn to the attention of noble Lords. There is a concern that, following the abolition of the prohibition on private companies giving financial assistance for a purchase of own shares, a private company might not be able to enter into the range of transactions that are currently permitted—that is, if it has availed itself of the current exemption for private companies commonly known as the “whitewash” procedure. Noble Lords may wonder how the removal of the prohibition on giving financial assistance could be seen to be more restrictive than the current exemptions.
The issue is that some interested parties—the Law Society included—consider that the “whitewash” procedure provides a statutory code that supplants the common law rules on the maintenance of capital.
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Moved, That the House do agree with the Commons in their Amendment No. 70.—(Lord Sainsbury of Turville.)
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