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Company Law Reform Bill [HL]

The remarks of the noble Lord, Lord Razzall, give me the opportunity to say that I entirely agree with what my noble friend Lord Sainsbury said in his recent letter. That is to say, I strongly disagree with any proposition that the Bill would place massive new burdens on companies or impair business decision-making, but, given the length and complexity of the Bill, the Government will listen carefully and respond positively to any technical improvements put forward. Amendments Nos. 150, 151 and 151A touch on the very important question of the codification of the general duties that directors owe. As Members of the Committee will know, it is an area on which there has been much debate over almost one hundred years. It is set out in some detail in the Law Commission’s joint consultation paper with the Scottish Law Commission, and I note with interest that on at least two occasions the matter of codification was not completed before a general election took place, so the provisions fell. We have no intention of anything of that sort happening on this occasion and we have no doubt that we will complete this Bill. The law commissions and the Company Law Review concluded that a statutory statement of duties would be helpful. The law commissions noted that the law in this area should,"““aim to educate and inform directors, and not merely impose liabilities on them””." I entirely agree with that. It is important that the law be accessible and comprehensible to directors and their advisers. As one great judge, Lord Herschell, remarked, the benefit of codifying the duties would be that it would prevent the need to roam,"““over a vast number of authorities in order to discover what the law [is]””." It is important that, at the same time as codifying to provide those benefits, flexibility and the ability to note changing circumstances are not lost. That is why, in line with the law commissions’ recommendations, this draft puts the duties in broad and general language. Both noble Lords have suggested that there are clauses that do not represent the current law, and we will come on to those. That would probably be the right moment to debate—if debate there needs to be—the extent to which these clauses codify the current law, and the extent to which, in one or two cases, they make changes. I do not, for example, agree with the noble Lord, Lord Razzall, that Amendment No. 151 is wholly new. Clause 157(1) codifies the current law and Clause 157(2) certainly reflects the current law. However, we will come back to that, and any issues with individual cases. I need to deal with two points. One is the proposition that the result of this codification will be increased litigation. That is not how we see it. First, it is important to bear in mind whenever this point is raised that, as in existing law, the general duties are owed by the director to the company. It follows that, as now, only the company can enforce them. Directors are liable to the company for loss to the company, and not more widely. It is quite rare for companies to sue their directors for breach of duty. That may well continue to be the position. We will come to Part 11, which deals with derivative claims and action by members, describing the mechanisms under which shareholders can enforce the duties on behalf of the company. I can say now that we do not see any reason why those provisions should increase litigation. Secondly, because we do not agree that the provision of new duties, as opposed to codification of existing duties, is an issue, we do not see why that should lead to increased litigation either. For example, we will come to the need to have regard to the interests of employees as part of the main duty to promote the success of the company under Clause 156. That was part of case law before becoming incorporated in statute in 1980. It is an important principle, and plays a crucial part in business decisions. However, there have been few cases—before 1980 or since—in which the point has been pertinent. There is no evidence of which we are aware that it has led to legalistic decision-making by companies, or people turning away from bringing their talent to the world of enterprise. We have no reason to expect that there will be a greater degree of litigation on those duties than there is now, and do not, therefore, agree with the points made, particularly by the Law Society, to that effect. The second thing, therefore, that I need to do is look at subsections (3) and (4) in more detail. The noble Lord, Lord Razzall, suggested that I should set out the interrelationships for the benefit of the Committee and those who may want to look at this debate to understand the Act in future. I am not a great supporter of Pepper v Hart, and am therefore not personally inclined to set out statements in the hope that this will somehow be taken into account by the courts when they come to interpret the Act. The court should be left to interpret the words that Parliament passes. Obviously, it is our job to get that right.