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Companies Bill [Lords]

We now move on to a patchwork of technical clauses, and I shall address them in the order in which they appear on the selection list. We find Government new clauses 72, 73 and 74 to be uncontentious. Amendment No. 757, tabled by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), is an interesting proposal. I believe that he is suggesting that a company should not approve long-term service contracts by a shareholder vote unless members are previously consulted. That has to be looked at in the context of different types of company. If we are talking about a small company—a family company, for example—it is unrealistic, because the length of the service contract is, in reality, unimportant: an owner-manager effectively has a service contract for ever, simply because he does not need a service contract as he is the owner of the company, and he would therefore have one for as short or as long as he wanted, until he sold or closed his business. The matter is more pertinent to larger companies. It was considered by the Higgs review with regard to corporate governance. The problem that we have with the amendment is that employees are likely to be biased just as much as other directors. Under the combined code, listed companies will have a nominations committee of independent non-executive directors, which will undertake appointments, and a remuneration committee, which will review service terms. The independence of the bodies means that they should not be on the side of the executive directors or the employees. Institutions also take a great interest in the matter. The combined code provides for a maximum recommended service term of one year, which is generally a move in the right direction. If a company puts in for a longer term of service, it will invariably be the case that the institutions will want a full explanation. There are thus controls in place to address the matters with which the hon. Gentleman’s amendment deals, but tabling it was worthwhile because it has allowed our debate to be put on record. We will not be able to support amendment No. 757. As the Minister noted, Government amendment No. 591 is almost identical to amendment No. 19, which we tabled. Our amendment was inspired by the Law Society and would bring the provisions of clause 191(2) in line with subsection (1) of the clause. We are happy to go along with the Minister’s proposal on substantial property transactions. Amendments Nos. 405 and 406 would amend clause 200. Although the clause replicates a provision of the Companies Act 1985, it also permits certain credit transactions that were completely prohibited by section 330 of that Act to be approved by members. Clause 200 applies to all companies, rather than public companies under the 1985 Act. Under the clause, private companies that had been able to enter into such a credit transaction will have to obtain member approval. Although we realised that the provision was a recommendation of the company law review, it flew in the face of the deregulatory spirit of the Bill. When we asked the Minister for Industry and the Regions in Committee why private companies were being dragged into the net of requiring shareholder consent, she replied with a letter in which she pointed out that the provision followed the Law Commission’s recommendations that restrictions on a company’s power to make loans to directors and persons connected with them should apply to all companies. However, just as we were about to give up hope on this, we heard only last week that the Government had changed their mind. I thus welcome Government amendments Nos. 592 and 593. It all goes to show that the Bill continues to be something of a moving feast—[Interruption.] Well, a feast of some sort anyway, as my hon. Friend the Member for Reigate (Mr. Blunt) suggests. The Minister said that the Government will reject amendment No. 20. Again, the amendment came from the Law Society. The insertion of the phrase ““or any associated company”” would enable a company, without the need for shareholder approval, to make a loan to a director to enable him to defend proceedings in connection with any alleged negligence or breach of duty in relation to an associated company. Clause 204 substantially narrows the existing provision on the funding of a director’s expenditure on defending proceedings that is contained in section 337A of the 1985 Act. In the view of the Law Society, the clause is too restrictive, and it also points out that there has been no public consultation on the proposed change. The reference to ““the company”” in subsection (1)(a)(i) does not even extend to the company’s holding company, which is curious given that the clause contemplates a loan being made to a director of the company’s holding company, but only to defend proceedings in relation to the company. That is illogical. The Law Society’s view is that subsection (1)(a)(i) should at the very least refer to the company or its holding company, and that it would be preferable if it referred to the company or any associated company. Otherwise, if a person is a director of more than one company in a group, each company will have to enter into a separate arrangement with that director, rather than one company being able to enter into an arrangement that covers all the relevant companies. That does not seem sensible. The term ““associated company”” is defined in clause 256. However, we note that Government amendment No. 598 addresses the problem, albeit with a different drafting approach. That amendment will be a popular move with directors who are in need of help from their companies. The Law Society also notes that the phrase"““any liability of the company incurred in connection with the matter””" in clause 204(2)(a) is potentially much wider than the wording in section 337A(4) of the 1985 Act, thus making the exception in the clause much narrower. The 1985 Act refers to:"““any liability of the company under any transaction connected with the thing in question falling to be discharged””." In other words, under section 337A(4), the requirement to discharge the liability relates to only the thing done to provide the director with the funds to meet the relevant expenditure, or to avoid incurring it, whereas, under clause 204, the words"““in connection with the matter””" do not clearly relate back to the words"““anything done by a company””" in subsection (1), and could thus refer to the entire circumstances of the liability or alleged liability. The Law Society thinks that the wording used in section 337A(4) is clearer and should be retained. Government amendment No. 613 effectively deals with the problem that the Law Society has identified, so I think that we have made progress. Government amendments Nos. 163 and 164 are uncontroversial, as are Government amendments Nos. 599 to 611. However, I would be grateful if the Minister could provide further explanation of Government amendment No. 644, which will delete clause 223, which relates to resolutions.