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Company Law Reform Bill [HL]

My Lords, I start by reminding the House of my interests as declared in the register. In particular, I am a non-executive director of four listed companies. Today’s debate has shown your Lordships’ House at its very best. We have had some well-informed contributions from a number of different angles. For me, however, the high point was the maiden speech of my noble friend Lady Bottomley of Nettlestone. We all know of her outstanding track record in government, in health and, in particular, in national heritage. Today, however, we saw her reveal her in-depth knowledge of contemporary corporate issues. It was a marvellous speech and we hope that she will be joining us as we journey through the remaining stages of the Bill. My noble friend Lord Hodgson of Astley Abbots set out our general approach to the Bill in his opening speech and he welcomed the Bill in principle. He set out our three tests for the Bill. Is it really deregulatory? Does it make company law more comprehensible? Do the proposals strike the right balance? I am afraid that we cannot give the Minister 10 out of 10 on any of these tests. My noble friend referred to several areas which we will want to pursue in Committee. The Minister will have noted my noble friend’s concerns about the powers in Part 31. Those concerns were shared by a number of other noble Lords. My noble friend Lord Freeman and the noble Viscount, Lord Bledisloe, were particularly robust on this matter. I was glad to hear that the noble Lord, Lord Wedderburn, also has concerns about it. The recommendation of the Delegated Powers and Regulatory Reform Committee was strong and clear, and we cannot brush that aside. We will of course return to the matter in Committee. Part 11, which deals with derivative actions, has also raised many concerns. My noble friend Lord Trenchard supported my noble friend Lord Hodgson in raising them, and the Liberal Democrat Benches share the same concerns. I foresee another heavy Committee sitting on that, as the noble Baroness, Lady Goudie, predicted. We are delighted that my noble friend Lord Freeman will be leading for us on Part 10 of the Bill. He made some powerful points in his speech about the new formulation of the duties of directors. The Government have said that the Bill largely codifies the law as it stands, but we are simply not convinced that this is the case. In answer to the probing question of the noble Lord, Lord Lea, it probably does change the law and we are not entirely happy about it. In principle, it is good to see that Clause 156 emphasises the duty of directors to promote the success of the company for the benefit of the members. That seems to be superficially attractive, but my noble friend Lord Patten exposed the complete lack of clarity in this formulation. Part 10 will receive the most careful scrutiny. My noble friend Lord Hodgson has already said that I will be leading for these Benches on Parts 15, 16 and 33; namely, those parts which deal with accounts, audits and auditors. Part 15 starts fairly uncontroversially by stating that, in relation to accounts, its main distinctions are between small companies and other companies, and between quoted companies and unquoted companies. Would that it were so simple. There are also distinctions between public companies and private companies. Medium-sized companies have some rules too. Part 16, which deals with audited accounts, also makes special provisions for dormant companies, for charities and non-profit-making companies subject to public audit, and a miscellany of other kinds of companies. The Bill really has not made this area very much more simple or accessible. It is not a trivial issue. If I were responsible for running a small or a medium-sized company, I would have to wade through 99 sections in Part 15 and a fair part of the 72 sections in Part 16 before I was sure of my obligations. That is an unnecessary bonus for accountants and lawyers, and it certainly does not contribute to deregulation. The Chancellor of the Exchequer has, somewhat dubiously, already claimed his deregulatory credit for the amendments to Part 15, which we will be expecting in due course, in relation to the OFR. A number of noble Lords have spoken about that. My noble friend Lord Hodgson and the noble Lord, Lord Sharman, have already queried exactly what the Government intend. Will it be the business review requirement under the European directive or will it go further? Companies need some certainty on this. Having already made one abortive attempt at gearing up to meet one set of requirements, they need to know what is expected of them. We have heard a number of views today about the OFR. I confess that, somewhat unfashionably, I have never been convinced that there was sufficient evidence of benefit outweighing cost to justify a statutory requirement. Indeed, I had intended to table amendments to take the OFR out of the Bill in order to debate those issues. Whatever the precise form of the amendment when we come to consider the Bill in Committee, there will be a need for a business review—we know that much—and we know that that will require companies to make forward-looking statements. We agree with the CBI and others that a safe harbour provision is necessary to allow meaningful statements to be made by directors in this area. We particularly welcome Clause 366, which states that accounts are to give a true and fair view. This might seem a small point, but its absence as an explicit requirement was a source of potential problems when international financial reporting standards were introduced, but it is a pity that the even bigger problem that is affected by IFRS—namely, distributions, to which the noble Lord, Lord Sharman, referred—has not been dealt with in this Bill. We will want to look at that in Committee. So far as the rest of Part 15 is concerned, we will want to return to various aspects during the Bill’s passage; for example, the new duties on directors in relation to directors’ reports and the new duties on quoted companies in relation to websites. We will be looking in particular at the practical issues that arise in these areas. The Minister will not be surprised to find that the new provisions in Part 16, which restrict the liability of auditors, will be a focus of attention. There has been much rejoicing among auditors over Clause 518. While I do not believe that there is much objection to the principle, there are a number of practical issues to consider and to which I am sure we will return in Committee. In particular, we need to understand why the Government have not drafted explicitly for proportionate liability, because that is what we understood to be the agreement between all the parties who had been involved in the discussions about auditor liability during many months and years. I have one question for the Minister on this clause. When the Bill was published, his right honourable friend Mr Alun Michael was reported to have said that audit fees would be expected to fall once auditors had successfully limited their liability using this new facility. This is a matter of some concern to companies which have been faced with audit fees ratcheting upwards in recent years. I hope that the Minister will indicate what information the Government have on the cost/benefit equation as it affects audit fees. As we have already heard, auditors’ rejoicing over liability limitation has been counterbalanced by their dismay at the new criminal offence of recklessly giving an audit report, as set out in Clause 494. We are not convinced that the concept of recklessness in the absence of dishonesty has any place in the scheme of offences under the Bill. However, offences based on recklessness for directors already exist, and it would be easy to conclude that even-handedness requires that auditors should be subject to similar requirements, but I am not sure that the public interest is necessarily served by this. A number of practical issues arise; for example, the interaction between the individual auditor who signs the accounts and his firm; between the criminal law process and the independent disciplinary arrangements that already exist. These interactions may impede achieving the desired outcome, which I assume is to stop the auditor concerned carrying out any more audits. We all need to look at this matter very carefully during the passage of the Bill. The final part which I shall address is Part 33, which deals with statutory auditors. This is a part of the Bill which I believe even auditors do not find very exciting. We definitely welcome the Government’s long-overdue implementation of the report of the noble Lord, Lord Sharman, and their allowing the Comptroller and Auditor General to audit the accounts of companies. Without in any sense qualifying that welcome, I give notice that we will want to examine the detail of that when we reach the later stages of the Bill. We will want to ensure in particular that the supervisory arrangements that have been specially created for the Auditors General are completely independent of them. The Minister will be aware that the current Comptroller and Auditor General is currently the chairman of the public oversight body for auditors, which is, as I understand it, likely to carry out the supervisory tasks set out in Part 33. Lastly, I return to the Bill overall. My noble friend Lord Hodgson and other noble Lords have already referred to the way that company law will continue to be scattered over several Acts once the Bill is enacted. We simply do not buy the argument that users are content with that and are happy to carry on purchasing the Butterworths book in order to get some sense of how the legislation fits together. I simply give the Minister notice today that we will wish to return to this issue during the passage of the Bill.