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Lord Freeman: I very much welcome these amendments. They are in keeping with the needs of modern companies and I commend them.
On Question, amendment agreed to.
Clause 167, as amended, agreed to.
Clause 168 [General notice treated as sufficient declaration]:
Lord Freeman moved Amendment No. 186:
Page 74, line 18, at end insert ", however, an omission from, or mistake in, such a notice will not render the notice ineffective, provided such omission or mistake is not material"
The noble Lord said: In moving Amendment No. 186 I shall speak also to Amendments Nos. 188 and 191. Amendment No. 186 seeks to ensure that minor omissions or mistakes do not render a general notice invalid, giving rise to a technical breach of the disclosure obligation. It seeks guidance and an explanation of whether a minor omission could invalidate the process. The purpose of Amendment No. 188 again seeks to clarify that a minor oversight cannot be used to invalidate the members' approval of directors' long-term service contracts if the procedures for obtaining members' approval are otherwise
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adhered to. Last, Amendment No. 191 is designed to provide protection where a company falls short of strict adherence to the procedures in Clause 180 by accidental omission rather than deliberate intention. The amendments seek to ensure that draconian measures are not invoked unnecessarily. I beg to move.
Lord Goldsmith: The amendment moved and those spoken to by the noble Lord relate to immaterial omissions or accidental failures. They address two slightly different situations and I want to deal with them separately.
Amendment No. 186 seeks to ensure that immaterial omissions or mistakes in stating the nature and extent of a director's interest, as required in Clause 168(3), should not invalidate a general notice of a director's interests. I understand the concern expressed by the noble Lord that omissions or mistakes might invalidate the general notice, giving rise to a technical breach of the disclosure obligation. However, we do not think the amendment is necessary for the following reason. Clause 168(3) provides that the notice must state the extent of the director's interest in the body corporate or firm or, as the case may be, the nature of his connection with the material. So if there are only minor or immaterial—to use the word of the noble Lord—omissions, it would seem to us that the director would have succeeded in meeting the obligation to state the nature and extent of his interest in the body corporate. If it is a material mistake, he may well have failed to state the nature and extent of his interest, but the amendment is explicitly not designed to deal with that position, and I entirely understand why.
The Government do not consider it necessary to accept the amendment. Indeed, we are concerned that it could be unhelpful to insert an explicit provision because, as often happens with the insertion of explicit provisions, it then throws into doubt other occasions when such an explicit provision is not included. But, looking at the obligation, the question will always be: has the director adequately declared the nature and extent of his interest so as to satisfy Clause 168(3)? That is my answer to Amendment No. 186, which I am not inclined to accept.
3.30 pm
Amendments Nos. 188 and 191 deal with a different point. They are concerned with the accidental failure to send to any member a copy of the memorandum required under Clauses 171(5) and 180(3) setting out the details of a proposed long-term service contract or proposed loan to a director, but that would not invalidate the resolution approving that long-term service contract or loan.
It is probably right to make clear that Clauses 171 and 180 do not require the memorandum setting out details of the loan or contract to be sent to members if the resolution is to be approved at a general meeting of the company. In that case, all that is required is that the memorandum is made available for
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inspection. A copy of the memorandum needs to be sent to the members only if approval is to be given by written resolution.
We do not intend that accidental failure to send the memorandum to every member of the company should necessarily invalidate the approval. However, having heard what the noble Lord has said, we probably need to consider it to ensure that the intention I have just identified is made sufficiently clear. I undertake that we will take that back and will consider those two amendments specifically.
Lord Freeman: I am grateful for that offer, which will be much appreciated. I look forward to seeing whether there is a need for, and the draft of, any amendment to meet the concerns expressed. In the mean time, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 169 [Declaration of interest in case of company with sole director]:
On Question, Whether Clause 169 shall stand part of the Bill?
Lord Freeman: I shall speak briefly to Clause 169 stand part and Clause 209 stand part. I may be misunderstanding what is intended here, but, to those who are not lawyers coming to the text, it seems daft that there needs to be a statutory requirement for a director to have a meeting with himself. This has led to litigation and technical difficulties when the requirement has not been observed. The noble Lord, Lord Wedderburn, will probably correct me, but I think that the reference is Neptune (Vehicle Washing Equipment) Ltd v Fitzgerald 1996, Chapter 274. The purpose of the Bill is simplification, and one should be realistic about small, especially one-man, companies. I hope that the Minister will enlighten us.
Lord Goldsmith: I will speak to the stand part Motion and to Clause 209. When I have explained it, I hope that the noble Lord will see that we are applying common sense as well. The courts have said that disclosure is required under Section 370 of the Companies Act, even in the case of a sole director. The Company Law Review recommended that the requirement should be disapplied in respect of a sole director. The Bill implements that recommendation, but only where the company legitimately has just one director. I hope the noble Lord sees that that is a common-sense approach. Plainly, a requirement of a sole director to make disclosure to himself is a nonsense. But the position is different where, at that point in time, the company has only one director when it should have more than one—for example, if it were a public company.
In that circumstance, Clause 169 provides that the sole director must record in writing the nature and extent of his interest in any transaction or arrangement that has been entered into, and that the declaration has to form part of the proceedings at the next meeting of the directors after the notice has been given. The consequence is that there will be a record so that when
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another director comes along, as should be the case, the position is clear and can be seen. However, I repeat that if a sole director is entitled to be a sole director, the provision does not apply.
Clause 209 replaces Section 322B of the Companies Act 1985, which in turn implemented Article 5 of the 12th Company Law Directive. Under this clause, contracts entered into by a limited company with its only member must be recorded in writing if the sole member is also a director or shadow director of the company. That does not apply to contracts entered into in the ordinary course of the company's business. Contracts entered into not in the ordinary course of business will be of particular interest to a liquidator should the company become insolvent; hence the need for them to be adequately evidenced.
Lord Freeman: I am grateful to the noble and learned Lord for what he has said. We shall study the record.
Clause 171 [Director's long-term service contracts: requirement of members' approval]:
Lord Freeman moved Amendment No. 187:
The noble Lord said: This amendment is partly probing in nature, but also in part a statement of principle. Corporate practice has moved on in recent years, particularly in relation to the length of directors' contracts. It is now standard practice, certainly in large professional firms as opposed to companies, for contracts to be annual. My amendment leaves out five years as the maximum term and would reduce it to two years. It is a compromise.
Clause 171 provides that a director may not be guaranteed a service contract longer than five years without a resolution of the members. The Explanatory Notes say simply that long-term service contracts are contracts under which a director is guaranteed at least five years of employment with the company of which he is a director, or with any subsidiary of that company. Although substantially reworded, this clause appears to be no more than a continuation of Section 319 of the 1985 Act. We suggest that current thinking concludes that five years is too long and that our suggestion of two years is more appropriate. I am particularly grateful to the UK share association, which feels quite strongly about this for companies both large and small, and I must say that I agree. I beg to move.
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