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Company Law Reform Bill [HL]

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 that is 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. 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.