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Lord Razzall: I understand the comments made by the Minister. However, with the benefit of experience, I do not think that the Government's answer really deals with the point. The fact is that, if you have a private company which wishes to raise money from external shareholders and you ask a law firm, a firm of accountants or a firm of merchant bankers to advise you on how many people can become shareholders without crossing the line so that the offer becomes illegal, you will get a five, six or seven-page memorandum advising you about what you can do.
Given that we are attempting to simplify company law, it seems to be a mistake by the Government not to respond, because the situation arises all the time in the arena. In effect, the Government are saying that they do not want to make any change to the current law in this area. That is fine. It will provide a lot of fees to lawyers, to bankers and to accountants, but it does not actually help to resolve the issue, because the Government are leaving us with the current relative state of uncertainty.
As the noble Lord, Lord Hodgson, says, if you are a private company and you want to raise some money, you will end up with an answer that you can probably have 49 shareholders providing the money, or maybe you can stretch it to 50. Is there actually any logic in that? The noble Lord says, "Well, the answer is that you can always become a public company". There are often reasons why people do not want their company to become a public company—cost is one of them. I am disappointed with the noble Lord's answer. I do not think that it deals with the practical issue. I will obviously consider what he has to say, but I beg leave to withdraw the amendment.
Amendment, by leave withdrawn.
[Amendments Nos. A18 to A23 not moved.]
Clause 528 [Enforcement of prohibition: order restraining proposed contravention]:
Lord Razzall moved Amendment No. A24:
The noble Lord said: In moving Amendment No. A24 I shall speak also to Amendments Nos. A25 and A27 in the group. These amendments touch on a new issue regarding the range of remedies available to a private company that has contravened the prohibition on making offers to the public. Clause 528 provides a member with the right to seek a court order either under the clause itself or under Section 459 of the 1985 Act if the company contravenes the prohibition on a private company making a public offer. Along with my noble friend and the Law Society, I think that there seems no particular purpose in prescribing the order that the court must make in proceedings under Section 459. One of the
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advantages of the section has always been the breadth and range of remedies available. We see no reason why that should not be continued in the new legislation.
The purpose of Amendments Nos. A25 and A27 is to broaden the range of remedies available to the member of a private company that has contravened the prohibition on making offers to the public. Clause 529 as drafted provides the court with the power to require a company to re-register or to order the compulsory winding up of a private company that has contravened the prohibition on offering securities to the public, but of course an order for winding up the company if re-registration is impracticable is likely to result in a forced sale of assets and may operate against the interests of the shareholders. So when shareholders have been misled into participating in an unlawful offer to the public—if the Government do not accept the previous amendment, it will, in those cases, be unclear whether the shareholders have been misled into participating in an unlawful offer to the public because of the uncertainty that arises—it seems harsh that they should bear the worst of the consequences of the company's default. The purpose of the amendments is to suggest that other remedies should be available to the court including, in appropriate circumstances, the ability to require repayment out of capital. I beg to move.
Lord Hodgson of Astley Abbotts: My name is attached to Amendment No. A26 in this group, which covers the same point as that of the last of the amendments moved by the noble Lord, Lord Razzall. It concerns the lack of breadth of opportunity for remedy, which is an issue that has been raised with us by the UK share association. Clause 529 sets out the alternative courses open to the courts if a company acts in contravention of the prohibition. However, page 147 of the Explanatory Notes states:
"This clause applies where a private company breaches the prohibition on offering securities to the public. It enables members, creditors or the Secretary of State to apply to the court for an order for the re-registration or failing that, winding up of the company. This is a new procedure which will enable members, creditors or the Secretary of State to enforce the public offer prohibition".
Something new is being introduced here, which has caught our attention. As the noble Lord, Lord Razzall, points out, it may or may not be in the best interests of the luckless members or creditors of a company if the court is given no alternative to winding up a company, which might not be able to be registered as a public company.
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There could be cases where the strict terms of Clause 526 are breached in a quite minor way. Accordingly, the court should have discretion in the course of action that it pursues, other than having to order a company to re-register or to wind up. Therefore, our amendment follows the line followed by the noble Lord, Lord Razzall. It seeks to remove the word "shall" from line 24 and insert,
That is not to say that the court cannot, but, on our reading, it does not have to, particularly since this is a new procedure, as the Explanatory Notes say.
Lord Clinton-Davis: I am wholly opposed to this idea. I do not think that the court ought to have discretion in these circumstances. The amendment is a carte blanche invitation to litigation, which ought to be discouraged. It does not happen just like that: certain steps have to be taken beforehand. In those circumstances, the amendment is misconceived.
Lord Razzall: Does the noble Lord accept that we are simply trying to reflect the current position? We are asking that the current position should be maintained. This is not a new provision on our part.
Lord Clinton-Davis: As far as I know, the department has considered this in depth with professional organisations. It finds that certain aspects of the current position are unsatisfactory. In my view, what is being proposed is perfectly okay.
Lord Razzall: So, as a current or former practising solicitor, does the noble Lord not regard the representations on this point made by the Law Society as valid?
Lord Clinton-Davis: Of course I take the Law Society's views very seriously, but it is not always right.
Lord Hodgson of Astley Abbotts: I understand the position that the noble Lord has taken. But, as we discussed yesterday, this is—dare I say—slightly on the theoretical side. We are talking about a situation where a company has a minor breach. It cannot re-register as a public company for one reason or another. If the Bill continues in its present form, the company will have to be wound up. The court has no discretion. Let us imagine that the noble Lord is a shareholder in this company when it is wound up and its assets are then put out for distress sale. The market value or the real value of those assets may not be realised because everyone knows that the company is the subject of a winding-up order. That cannot be in the best interests of any party to this sad affair, let alone to the benefit of British industry and commerce as a whole.
Lord McKenzie of Luton: Clause 528 enables members, creditors or the Secretary of State to apply to the court for an order restraining a private company from carrying out any proposed contravention of the prohibition on offering its shares or debentures to the public. It aims to prevent the company, by civil action, from carrying out proposals breaching the public offer prohibition.
However, where the private company has already contravened the prohibition, Clause 529 enables certain members and creditors or the Secretary of State to apply to the court. If it appears to the court that the company has breached the public offer prohibition, the court must make an order for the re-registration of the company as a public company, or, if it appears to the court that the company does not satisfy the requirements for re-registration, and that it is
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impractical or undesirable to require it to do so, an order for the compulsory winding up of the company. This is the new enforcement procedure for breaches and proposed breaches of the public offer prohibition. It replaces the criminal offence currently imposed in Section 81 of the Companies Act 1985.
There is another way in which the public offer prohibition can be enforced, which is the mechanism that the first two amendments in this group seek to remove. If in proceedings brought under Sections 459 or 460 of the Companies Act 1985 it appears to the court that the company is proposing to breach the public offer prohibition, or has breached the public offer prohibition, it must make the orders required under Clauses 528 or 529, as the case may be. That provides another means of enforcement that, crucially, is not dependent on an application being made specifically under Clauses 528 or 529.
Section 459 of the Companies Act 1985 allows any member of a company to petition the court on the grounds that the affairs of the company are being conducted in a way that is unfairly prejudicial to the interests of its members generally, or of some part of its members. Section 460 likewise allows the Secretary of State to petition the court on those grounds. If the court is satisfied that the petition is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of. It is possible that a Section 459 or 460 application could be brought where a private company proposes to make a public offer of securities which would be unfairly prejudicial to the interests of some members, or where the company has already made such an offer which is regarded as prejudicial to the interests of some members.
Where a private company proposes to contravene the prohibition, it should be restrained from doing so. If the company has made an offer to the public in breach of the prohibition, it should be required to re-register as a public company. The remedy should be clear and consistent. Uniform implementation would be frustrated if the court did not necessarily make a restraint order, or a re-registration order, on a petition brought under Sections 459 or 460 of the Companies Act 1985, whereas it would be required to do so following an application under Clauses 528 or 529, which is why they are aligned. This requirement will not restrict the court from making any other order on a petition brought under Sections 459 or 460 which it sees fit.
The amendment in respect of line 24 confers discretion on the court as to whether it makes any order at all following a breach of the public offer prohibition. We do not agree with that. Where the court is satisfied that there has been a breach, the company should face the consequences. The amendment at line 27 takes a slightly different approach by expanding the court's discretion as to what those consequences might be. In those cases where the court concludes that the company does not meet the requirements for re-registration as a public company, or that it is impractical or undesirable to require it to take steps to meet those requirements and
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re-register, the amendment would give the court a discretion to make such other order as it considers appropriate in place of an order for the compulsory winding up of the company.
I emphasise that subsection (3) sets an order for re-registration as the default. As the private company has done something that only a public company should do, re-registration as a public company is the appropriate remedy, along with the additional requirements that that entails—for example, increased disclosure requirements. It is only if the company does not meet the requirements for re-registration, and it is impractical or undesirable to require it to take steps to do so, that the court must order the compulsory winding up instead. We recognise that this is a significant sanction, but I emphasise that this is only where re-registration is not a realistic option. Like the criminal offence it replaces, it is intended to be a deterrent.
We are not sure why the noble Lord thinks that it is very onerous to re-register as a public company. In our view, it is entirely appropriate if a company wishes to offer its shares more widely. As we discussed yesterday, the distinction between private and public companies is important, not least for our obligations under Community law. We do not believe that it is desirable that this distinction should be eroded. We therefore believe that the remedies provided are appropriate. I hope that the noble Lord will withdraw the amendment. I recognise that this does not provide the flexibility that he requires, but for these sanctions to be effective we think that we have got the right balance.
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