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Companies Bill [Lords]

Yes, but as I explained to the Solicitor-General, although the Government are maintaining that the case remains, the clause as drafted will significantly alter the application of the case. Action against a director for breach of duty could, therefore, be effectively used as a springboard for a member to bring a derivative action against others. The Institute of Chartered Accountants believes that it will encourage nuisance claims against directors. We therefore tabled amendment No. 413. In Committee, the Solicitor-General stated that clause 260 was drafted on Law Society recommendations. He gave examples of third parties who hold money, transferred in breach of trust from the company, and who should be permitted to be pursued by a member of the company. Although that may be true in limited circumstances, we remain concerned about the growing scope of the clause and support the position of the Institute of Chartered Accountants. The City law firm Allen and Overy brought the substance of amendment No. 415 to us. It aims to ensure that the company retains an opportunity to exercise its primary right to sue the directors. Although it is easy to get carried away with arguments for and against members being able to seek relief on the company’s behalf, we should not forget that the primary right is for the company to initiate the action. The amendment would embed that right in primary legislation. Amendment No. 416 is aimed at resolving some of the problems that I have highlighted. The Law Society has been a great help in drafting the amendment, which was first tabled by Lord Hodgson in the other place. It would insert in clause 263 three new provisions, which oblige the court to refuse permission to continue a claim. The first provision would apply when the directors had decided not to pursue the claim. The second would apply when the shareholders had decided not to pursue the claim. The third would apply when the court concluded that pursuing a claim was not in the company’s best interests. The first provision would apply when a company’s directors had decided not to pursue the claim, unless the court considered them to be in breach of their duties in making the decision. The purpose is to ensure that the court does not second-guess the directors’ commercial judgment unless it considers that, by deciding not to proceed, they are in breach of their duties. In Committee, the Solicitor-General maintained that that should be a relevant factor for the court in reaching its decision but not a bar. He said that the amendment would prevent meritorious claims from being granted permission for leave. However, we urge the Government to trust directors and accept the amendment. The second provision, for when shareholders had decided not to proceed, would apply when the court believed that the majority of shareholders, excluding those with a personal interest in the decision, did not wish to proceed with a claim. I hope that the third provision is self-explanatory and constitutes common sense. Although the Government gave explanations about the amendment in Committee, we do not believe that they have merit. The amendment would improve the drafting considerably. We emphasise that its purpose is to introduce a threshold test that does not involve expense. The Government have added new reasons for the court to reject a derivative claim. Are the tests strong enough? We contend that they will not be in practice. There is a concern that it will be possible for firm advice to be given on the court’s approach to the exercise of its unfettered discretion only after years of jurisprudence. Uncertainties will be damaging to business. Amendment No. 417 would reintroduce the fraud on the minority and wrongdoer control tests that existing common law contains. I have already spoken about the way in which the radical departure from common law has worried several stakeholders to whom we have spoken. From the way that the hon. Member for Cambridge (David Howarth) is shifting in his seat, I have a feeling that he, too, will cover the matter. I thank the Solicitor-General for his letter of 25 July on derivative claims, which set out the legal position about fraud on the minority following implementation. Although we acknowledge that the Government are attempting to clarify a difficult matter, we believe that the common law position should prevail and have tabled amendment No. 417 on that basis. The issue is important to us. We have been lobbied significantly by companies, accountants, solicitors, the CBI and many interest groups, including many City solicitors. The Government need to reconsider the matter because if we get it wrong, we open up the possibility of a culture of litigation, which exists in the United States, but that we do not want to experience in this country.