Select Committee on Delegated Powers and Deregulation First Report



Memorandum by the Department for International Development


  1.1  The Commonwealth Development Corporation ("the Corporation") is a statutory corporation which mobilises investment in developing economies, principally by means of making loans, buying equity and managing and advising enterprises overseas.

  1.2  The main purpose of the Commonwealth Development Corporation Bill is to permit the transformation of the Corporation from a statutory corporation governed by the Commonwealth Development Corporation Act 1978 to a public company limited by shares (a "plc"). It will then be registered under, and governed primarily by, the Companies Act 1985, as are other plcs.

  1.3  The transformation will take place without creating a new legal entity. Instead, the Bill will enable the Corporation, on a designated day, to exchange its present statutory constitution under the 1978 Act for a new constitution appropriate to a plc. As part of this process, the Corporation will, by virtue of the Bill, acquire the attributes of a plc which it presently lacks, such as a share capital, directors, a company secretary etc. The purpose of this transformation is to make the Corporation a suitable vehicle for a Public/Private Partnership with private investors. The Bill also makes provision for the Government to continue to give financial assistance to the Corporation in the initial period after transformation, while it remains wholly owned by the Crown, and to enable the Corporation to undergo financial restructuring (e.g. the creation of its share capital).

2  CLAUSE 1(1) AND CLAUSES 2(4) AND 3(4)

  2.1  Clause 1(1) gives the Secretary of State power to determine a day on which the Corporation is to deliver[3] to the registrar of companies ("the registrar") the documents relating to its registration as a company that are listed in Schedule 1 to the Bill, as the first step in the transformation process. It would not be practicable to specify the filing day in the legislation itself, since it is necessary to retain flexibility in this regard to ensure that all the administrative, financial and legal preparations that will be needed are completed before the Corporation falls under a duty to file the specified documents.

  2.2  The Secretary of State will make the determination administratively, rather than by making a statutory instrument (which would then be published), because the filing of the documents is a technical step in the process of transformation, and the precise day on which it is to occur is of limited significance to anyone apart from the Secretary of State, the Corporation and the registrar. It is considered that it would not be appropriate for any Parliamentary procedure to apply, because the determination will simply initiate the transformation process, and will raise no substantive issues.

  2.3  Clauses 2(4) and 3(4) provide that the Secretary of State may determine a new filing day so as tore-start the process in the highly unlikely event that, on the day originally determined, the Corporation is unable to state that its net assets are at least equal to the sum of its share capital and undistributable reserves,[4] or fails to deliver the documents listed in Schedule 1 to the registrar, or if the registrar is not satisfied that the Corporation has satisfied its duty in that regard—for example, if any of the required documents are missing.

  2.4  The Secretary of State must consult the Corporation before determining the filing day,[5] and give the Corporation written notice of the day.[6]

3  CLAUSE 1(3) AND (5)

  3.1  Clause 1(3) requires the Secretary of State to make an order which—

    (a) specifies the "accounting reference date", according to which, under the Companies Act 1985, the Corporation (in common with other plcs) will prepare, and file with the registrar, its annual reports and accounts; and

    (b) provides for the allotment of shares on the Corporation's registration as a company.

  3.2  Clause 1(5) elaborates upon the contents of the order under clause 1(3), so far as relating to paragraph (b). This has to do with the creation of a share capital for the Corporation, which is necessary to effect the Corporation's transformation to a company. The order will state the persons to whom the first shares of the Corporation will, on registration, be allotted, the number of those shares to be allotted to each person named in the order, and the nominal value of those shares. On registration, the persons to whom the first shares are allotted will become the first members of the Corporation, by virtue of clause 6(1) of, and paragraph 7 of Schedule 2 to, the Bill. In practice, it is likely that the initial allocation will be of shares having a total nominal value of £50,000 (the minimum share capital permitted for a public limited company by the Companies Act 1985), all but one of which will be allotted to the Secretary of State. The other will go to a nominee to satisfy the Companies Act requirement that (generally speaking) a public limited company must have at least two members.

  3.3  Clause 1(4)(c) requires the Secretary of State to consult the Corporation before making an order under clause 1(3).

  3.4  It is considered that none of the matters required to be covered by an order under clause 1(3) could appropriately be included in the legislation itself because they are matters of detail where flexibility needs to be retained. It is not considered necessary that the order be made by statutory instrument because a copy of it will be delivered to the registrar of companies by the Corporation on the filing day[7] and, after registration, will be made available for public inspection by the registrar, as will other documents filed by the Corporation. No Parliamentary procedure is thought appropriate since the matters covered by the order are technical ones relating to the implementation of the policy embodied in the Bill, and will raise no substantive issues.

4  CLAUSE 3(3)

  4.1  Clause 3(3) places the Secretary of State under a duty to appoint a day for the registration of the Corporation as a company. The Secretary of State's duty arises once the registrar has notified her that he is satisfied that he has received from the Corporation documents that discharge the Corporation's duty under clause 2(1)[8]. It is intended that the day appointed as the registration day will be the day after filing day. It would be impracticable for the filing day and the registration day to fall on the same day, simply because of the time it will take for the documents to be delivered by the Corporation and inspected by the registrar, and for the registrar to give notice that he is satisfied that the Corporation has fulfilled its duties under clause 2(1) in respect of filing.[9] If, however, there were any greater interval of time, there is a risk (although, in practice, it is a slight one) that the statement the Corporation is required to make that its net assets are at least equal to its share capital and undistributable reserves might no longer be true.

  4.2  By appointing the day for registration, the order will in many respects operate like a commencement order for the principal provisions of the Bill. For example, the provisions relating to the Corporation's financial relationship with the Government[10] only operate while the Corporation is "wholly owned by the Crown", an expression which only applies to the Corporation on and after registration.[11] Also, clause 5(2) provides that most of the repeals made by the Bill in the Commonwealth Development Corporation Act 1978 take effect on registration. Thus, following the practice that is usual with ordinary commencement orders, the order is to be made by statutory instrument, and no Parliamentary procedure applies to it.

5  CLAUSE 18(5)

  5.1  Clause 18 provides measures to prevent the "Public/Private Partnership" from being substantially altered without the approval of Parliament. However, to ensure that those measures do not stultify legitimate changes in policy, subsection (5) permits them to be amended by order, subject to the "affirmative draft" procedure.

  5.2  The Government is commending the present Bill to Parliament on the basis that it will be used to create a "Public/Private Partnership", implying (amongst other things) the maintenance by the Crown of a substantial minority holding in the Corporation, and the reservation to the Secretary of State of certain rights over particular aspects of the Corporation's developmental operations and policies, by means of a special (or "Golden") share held by the Crown. Provision for such a special share is to be found principally in article 11 of the Corporation's articles of association (copies of which have been lodged in the Library of the House). Rights attaching to the special share include, for example, the fact that her approval would be needed before the Corporation's investment policy could be changed,[12] before any new issues of shares could be made (thus helping her to maintain the Crown's 25 per cent share-holding), and before any change could be made to the nature of the rights conferred by the special share.

  5.3  It is considered that, if a future Secretary of State wished to alter fundamentally the nature of what Parliament is being asked to agree to now (e.g. by the disposal, or substantial diminution, of the Crown's share holding, or the surrender or radical amendment of the special share), it would be appropriate for him or her to seek Parliament's permission to do so. Such entrenchment of the Partnership is the purpose of clause 18, and this is why it has been thought appropriate to provide in this clause that, wherever a significant change in the Partnership is proposed, the Secretary of State must seek the positive approval of Parliament, by means of an affirmative resolution. The clause will now be explained in more detail.

  5.4  Under clause 18(1), the Secretary of State is under a duty to ensure that the Crown—

    (a) holds at least 25 per cent of the Corporation's issued ordinary share capital; and

    (b) continues to hold any special share provided for under the Corporation's articles of association.

  Clause 18(3) provides that the Secretary of State may not consent to any change in the articles of association that requires her consent as holder of the special share unless a statement of her intention to approve the change has been laid before, and approved by a resolution of, each House of Parliament. The reason for this is that the condition mentioned in paragraph (b) above could otherwise easily be evaded if the Secretary of State could—without returning to Parliament—consent to amendments to the Corporation's articles that whittled away the rights attaching to it.

  5.5  Clause 18(5) gives the Secretary of State power to amend or repeal the clause by order made by statutory instrument. It is considered that, as the Partnership develops, a degree of flexibility and speed of action will be required that could not be achieved if primary legislation were needed. For example, the financial restructuring of the Corporation after transformation might lead to the creation of a holding company "above" the Corporation, which might make it appropriate to move the Golden share arrangements to the holding company. Similarly, changes might be needed if, after the Partnership had been created, the Corporation wished to take over or merge with another body with similar aims: that kind of opportunity is normally available only for a very short period. It is thought that these considerations make it appropriate for the Bill to contain a delegated power to amend or repeal clause 18 by order, given that, for the reasons given in paragraph 5.3 above, the order cannot be made unless a draft of it has been laid before and approved by resolution of each House of Parliament.


  6.1  The Bill contains provisions enabling the Secretary of State by order to designate certain companies as being "associated with" the Corporation, principally for the purposes of applying the financial assistance provisions of the Bill,[13] and also to specify certain companies that can never be so designated. These powers will now be explained in more detail.

  6.2  The present Corporation stands at the head of a "CDC Group". Its assets include a number ofwholly-owned subsidiaries, and majority or minority holdings in businesses around the world. As part of the financial restructuring that will be carried out to transform the Corporation into a plc, other subsidiaries may be established—for example, to hold assets currently owned by the Corporation. In order to ensure the success of such restructuring, many of the provisions relating to Government financial assistance apply not only to assistance to the Corporation but also to "companies associated with" it, within the meaning of the Bill.

  6.3  In addition, clause 20 of the Bill makes special provision to facilitate investment in the Corporation by trustees of trust funds, under the Trustee Investments Act 1961. In simple terms, the 1961 Act broadens the powers of trustees by allowing them to invest the funds for which they are responsible in a range of investments, including certain types of shares, but to help ensure that funds are not wasted by investment in loss-making or financially unsound businesses, the Act permits trustees to invest only in companies with a proven "track-record" of paying dividends on shares over the five years prior to the proposed investment. Since the Corporation, as a statutory corporation, has no shares, it has no such track-record, so this clause avoids the limitation imposed by the 1961 Act by deeming CDC to have paid the necessary dividends in past years. As a result of the restructuring mentioned above, it may be appropriate for this "deeming" to be extended to certain companies associated with the Corporation.

  6.4  Efforts to devise a workable definition of "associated company" in the Bill itself failed, mainly because any one of a number of corporate structures (involving, for instance, a holding company or new subsidiaries, or both) could be adopted by the Corporation when it carries out its restructuring. At this stage, it is not possible to say which of the possible structures will be the most suitable, so the Bill must cater for a range of possibilities. The choice of structures will depend on factors such as management needs and economic conditions at the time restructuring takes place.

  6.5  The only practicable solution proved to be a flexible delegated power to designate the companies which are to be regarded as "associated with the Corporation" and so brought within the scope of the Government's financial powers. That power is to be found in clause 24(4). A company can only be designated if it is "wholly owned by the Crown", as defined in clause 24(1) to (3).[14] For the purposes of the Trustee Investments Act "deeming" provision,[15] clause 20(2) provides that an order under clause 24(4) may designate an "associated company" as one to which the deeming applies.

  6.6  Subsection (5) of clause 24 provides that, if a company is designated for the purposes of that subsection, it can never thereafter be designated as an "associated company". This power is needed because potential lenders interested in lending to a company that was eligible for designation as "associated"[16] but had not been designated, might still be dissuaded from lending to it by the existence of the Secretary of State's powers under clause 16 to direct any associated company to issue securities. They could not be sure that the Secretary of State would not, for instance, after the loan was made, designate the company as "associated" and then direct it to issue securities on terms that reduced the company's value and made it less credit-worthy. Thus, without this "anti-designation" power, the deterrent effect of clause 16 in these circumstances could seriously harm the Corporation's subsidiaries' ability to do business.

  6.7  An order under clause 24(4) or (5) is to be made by statutory instrument, so that the identity of the designated and "anti-designated" companies becomes a matter of public record. Such publicity is needed because designation affects the scope of other powers under the Bill, such as the power to make loans out of the National Loans Fund under clause 9, or to give guarantees under clause 10. Publicity for both designated and "anti-designated" companies is also needed for the benefit of concerns proposing to do business with members of the Corporation's Group, and to help trustees to know where they may invest their funds by virtue of clause 20.

  6.8  It is considered, however, that it would not be appropriate to apply any Parliamentary procedure to orders under clause 24(4) or (5) because the order itself will raise no issues of substance: designation as an associated company does not in itself significantly affect a company unless the Secretary of State chooses to use other powers in the Bill in relation to that company. It is considered sufficient that those powers themselves attract duties under the Bill to inform Parliament of their exercise. For example, if the Secretary of State makes a loan under clause 9, clause 13 requires her to present certain accounts to Parliament concerning the loan, and if she gives a guarantee under clause 10, she must report it to Parliament. Thus, peers and MPs would have an opportunity to comment on the actual exercise of those powers.

1 December 1998

3  Pursuant to clause 2(1). Back
4  See paragraph 6 of Schedule 1 to the Bill. Back
5  Clause 1(4)(a). Back
6  Clause 1(2)(a). Back
7  See paragraph 7 of Schedule 1.4. Back
8  See paragraph 2.1 above. Back
9  Notice must be given to the Secretary of State and the Corporation: see clause 3(1) and (2). Back
10  Principally clauses 8 to 17. Back
11  Clause 24(1) provides that "a company is wholly owned by the Crown . . . at any time when all its shares are held by the Crown", and clause 24(3) provides that that reference to "a company" includes the Corporation on and after registration (and so, implicitly, does not include the Corporation before registration). In any event, the references to the holding of shares have no application in relation to the Corporation before registration as it cannot have shares until then. Back
12  Article 51. Back
13  See, in particular, clauses 9 (loans), 10 (guarantees), 16 (issue of securities) and 17 (Crown's acquisition of securities) "Associated companies" are also mentioned in connection with the extended powers of the Corporation under clause 23, and in paragraph 14 of Schedule 2, which prevents the Secretary of State from being regarded as a "shadow director" for the purposes of certain provisions of the Companies Act 1985. Back
14  Essentially, a company is "wholly owned by the Crown" if all its shares are held by the Crown; and shares are held by the Crown if they are held by a Minister of the Crown or by a company of which all the shares are held by the Crown. So, for example, if a minister held all the shares in company A, which held all the shares in B, and between them A and B held all the shares in company C, then A would be "wholly owned by the Crown" because all its shares were held by a minister; B would be too, because all its shares would be held by a company (A) of which all the shares were held by the Crown; and C would be wholly owned by the Crown because all its shares would be held by companies (A and B) all of whose shares were held by the Crown. If C owned all the shares in D and 75 per cent of those in E, D would be wholly owned by the Crown but E would not be. Back
15  See paragraph 6.3 above. Back
16  Such as a wholly-owned subsidiary of the Corporation. Back

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