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Company Law Reform Bill [HL]

If all Members of the House took the same view, perhaps. It is obviously right, however, to explain the Government’s intention, and what we believe we are achieving. First, subsection (3) explains the origins of the general duties later set out. It says that they are based on certain common law rules and equitable principles. Secondly, it says that the statutory statement replaces that common law rule or equitable principle. So the first point to note is that, once the Act is passed, one will go to the statutory statement of duties to identify the duty that the director owed. Subsection (4) deals with the interpretation of those duties. The issue here is how to balance the need for a clear statement of what the basic general duties are together with the flexibility needed to deal with a vast array of different circumstances. The decision, therefore, is to point the courts to the existing interpretation and application of the duties that are now replaced by the statutory duties in understanding what they mean. For example, when one comes to the:"““Duty to exercise reasonable care, skill and diligence””," in Clause 158, obviously there is a great deal of thought as to how one goes about assessing ““reasonable care””. To some extent, that is dealt with in the clause itself, but there are other areas where the courts would look to the existing interpretation to understand what is meant by the general statement of duties. Subsection (4) goes further still, because organic development also needs to be permitted in order to allow further development to take account of changing circumstances and new situations. Subsection (4) acknowledges that the common law rules and equitable principles applying to directors did not develop in isolation. Although we know that the duties in relation to directors sometimes depend particularly on the nature of a director’s position, a lot of the duties derive also from the fact that directors are acting in some senses as agents, so the law of agency is relevant. Other law relating to trustees is also relevant from time to time. Although the duties in relation to directors have developed in a distinctive way, they are often manifestations of more general principles. Subsection (4) is intended to enable the courts to continue to have regard to developments in the common law rules and equitable principles applying to these other types of fiduciary relationships. The advantage of that is that it will enable the statutory duties to develop in line with relevant developments in the law as it applies elsewhere. That is the explanation of subsections (3) and (4), which I hope shows the relationship between them. Amendment No. 151, moved by the noble Lord, Lord Razzall, would simply delete subsection (4). We do not think that that would be at all helpful. It is right that the general duties are based on common law rules and equitable principles as they apply now to directors, and that once the general duties come into force, those rules and principles will no longer apply to directors. The general duties will apply in their place, as is clear from subsection (3). Subsection (4) would do two things. It would point the courts towards existing case law on those common law rules and equitable principles. It will also allow the law to develop so that relevant case law after the duties come into force should also be taken into account. The removal of subsection (4) would preclude the courts from having regard to development in common law rules and equitable principles as they apply to other relationships, such as trustees and agents. That is no change from where we are at the moment in the sense that, in considering the duties of particular people, the courts already can, and do, have regard to how corresponding principles have developed. So, if they are looking at the conflict of interest obligations and fiduciary obligations of directors, the courts will look to developments in the law relating to trustees. Therefore, there is no change in continuing to allow that flexibility to apply. In short, this is a good way to balance the need for a clear statement of duties that will be accessible, in particular, to directors and others so that it is clear what the duties are, while allowing the future development of the law to the extent that it is necessary as the courts see it, but also to understand those new statutory duties by reference to how their corresponding common law duties are currently understood and applied. I hope that that will provide sufficient explanation—at least, for present purposes— for the noble Lord who moved the amendment.