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Lord Hodgson of Astley Abbotts: Yes, I shall consider carefully what the noble and learned Lord has said, and I am grateful for his explanation. As I understand it—and I am looking slightly to my left—squeeze-out works on a class-by-class basis. So in the present situation, a company with convertible preference shares, unconverted, would have to obtain 90 per cent of that class of shares to obtain the power to squeeze out. This seems to agglomerate all the securities that could be convertible, which is the point that I made in my opening remarks. In other words, you would take ordinary shares, convertible preference shares and convertible loan stock and say, "Has that all been converted and what does the pile look like?"—and 90 per cent gets you squeeze-out. That is not what you currently have; you would have to have 90 per cent of each of those classes, I think.

Unless the noble and learned Lord wants to leap to his feet and say that I have completely misunderstood what he was saying, I shall withdraw the amendment—but I may wish to come back to it, having reflected further externally.

Lord Goldsmith: On this occasion I think I shall read carefully what the noble Lord has said. Having said that, I think that there may be a point in what he has said, and I want to consider that as a result.

Lord Hodgson of Astley Abbotts: I am grateful for that and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 646, as amended, agreed to.

Clauses 647 and 648 agreed to.

Clause 649 [Matters to be dealt with in directors' report ]:

Lord Goldsmith moved Amendment No. A165:

On Question, amendment agreed to.

Clause 649, as amended, agreed to.

Clause 650 [Takeover offers]:
 
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Lord Goldsmith moved Amendment No. A166:

On Question, amendment agreed to.

Clause 650, as amended, agreed to.

Schedule 3 [Amendments to Part 13A of the Companies Act 1985]:

Lord Sharman moved Amendment No. A167:

"Section 425: Power of company to compromise with creditors and members


"(1) Section 425 of the Companies Act 1985 (c. 6) (power of company to compromise with creditors and members) is amended as follows.
(2) After subsection (1) insert—
"(1A) On an application under subsection (1), the court may, on the application of the company or other person proposing the compromise or arrangement, determine the nature of the class or classes into which the creditors or members (as the case may be) are to be divided."
(3) In subsection (2) (arrangement or compromise to be binding) leave out "majority in number" and insert "creditors or members".
(4) After subsection (2) insert—
"(2A) The court will have the power to sanction a compromise or arrangement under subsection (2) notwithstanding that any class has been wrongly constituted, subject to the court being satisfied that this has not materially affected the fairness of the compromise or arrangement.""

The noble Lord said: This amendment has been tabled on the advice of the Law Society, and its purpose is to give the courts the power to determine the constitution of any class of members or creditors and to grant the courts the discretion to sanction a scheme of arrangement even if the relevant classes have not been formally constituted, provided that the fairness of the scheme is not materially affected. Also, to dispense with the requirement, the majority in number of the creditors or members must agree to a scheme of arrangement for it to be binding.

Under common law the courts have no discretion to sanction a scheme of arrangement under Section 425, when classes of creditors or members have not been correctly constituted, even if this has no conceivable impact on the outcome. What often amounts to a technicality can create significant difficulties in practice. Chapter 4, paragraph 14 of a consultative document on company law reform, published in March 2005, proposed in line with the recommendations of the Company Law Review steering group that the Bill should grant the courts the discretion to determine what constitutes a class of creditors or members, and the jurisdiction to approve a scheme of arrangement, even when a class is wrongly constituted, when the court is satisfied that this has had no effect on the outcome. However, the Bill does not incorporate any clause with that effect and no justification for it is provided in the Explanatory Notes. The clause proposed here merely affects the proposed change, which would be of real practical benefit.
 
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Furthermore, the amendment to Section 425(2), proposed in subsection (3) above, removes the requirement for a majority of creditors or members to vote in favour of a scheme in order for it to be binding on all creditors or all members. This requirement is unnecessary, since approval of three-fourths in value of the creditors or members is required anyway. The additional limb is superfluous and in practice can result in a scheme being blocked, even when the holders of an overwhelming majority of the shares are in favour of it going ahead. This change was also recommended by the Company Law Review steering group and should now be implemented. I beg to move.

6.15 pm

Lord Goldsmith: This amendment would make three significant changes to Section 425 of the 1985 Act. The starting point is that those provisions which allow for the wide range of reorganisations, arrangements and reconstructions recognise that such things may affect the interests of minority members' and creditors' rights against their wishes. Because it may do this, we believe that those procedures should be carefully regulated. Section 425 of the 1985 Act therefore encourages companies to be cautious about including or excluding members and creditors in classes. They have to identify the correct composition for the class, and if there is any doubt, they should take all reasonable steps to notify any person who may be affected by the scheme so that that person is aware of the scheme and the class or classes identified.

The courts issued a practice statement in 2002 reminding companies of those responsibilities, and requiring them to identify any issues as to composition of classes at an early stage in the court procedure. That already removes some of the problems of wasted time and effort that the amendment aims at. The amendment would remove the requirement for a majority in number of creditors or members to vote in favour of a scheme in order for it to be binding on all creditors or members. It would mean that larger creditors and members could impose their will on smaller creditors and members. We do not think it is right to remove that important safeguard at the moment.

The amendment would give the court a broad discretion to approve a scheme, even if the class was wrongly constituted, if fairness overall was not "materially affected". Those are the words in the noble Lord's amendment. The words he used in his speech were "no effect on the outcome", which does not seem to be the same if fairness overall was not "materially affected". The amendment would weaken another safeguard for individual creditors or members contained in the current law. Under the amendment, they could be deprived of their rights without a properly constituted class meeting on the basis of what the court considered to be "fair". That could give the court an extremely wide discretion and, in some cases, allow the court to override the wishes of the minority creditors or shareholders. It could also create considerable litigation over what is or is not fair.
 
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So the changes proposed by the amendment, while I can see that they would facilitate schemes for companies and large creditors and members, would do that at the expense of the interests of small minority members and creditors. Therefore, the Government are not persuaded that the amendment strikes the right balance. For those reasons the Government resist the amendment.


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