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Companies Bill [Lords]

I have a great deal of sympathy with what has just been said by the hon. Member for Great Grimsby (Mr. Mitchell). The audit market is a guaranteed market, guaranteed by the state, and companies covered by the obligation must have an audit. There are very few audit firms. If we put the two together—a state basis and an obligation for the market, and a very small number of firms—we have the classic conditions for a monopoly, or in this instance an oligopoly. Members on both sides of the House have commented on the position of small and, indeed, medium-sized firms trying to break into the market. They are in a very difficult position as a result of the structure created ultimately by the law. The hon. Gentleman mentioned the Law Commission’s view, and I share some of its worries. There is a serious risk that the interests of third parties will be affected. I want an assurance from the Government that they do not intend to affect those interests. What the Bill does looks entirely legitimate on the surface. The members of a company who are most directly interested in its welfare are allowed to contract with the audit firm to limit the audit firm’s liability. That appears to be a straightforward deal between two parties, and if it were there could be no objection to it: the parties would have worked out their own interests and the price would reflect the risks on both sides. The trouble with audit is that the company’s members are not the only people involved. Two other parties are obviously involved. One—this classic case takes us back to the Caparo litigation, mentioned by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins)—is a takeover bidder or buyer of the business. If the audit firm could limit its liability with the company, a takeover bidder who took over the company could not then use it to obtain recourse against an auditor who had acted badly, because the company would still have limited rights against the auditor. The only recourse would be for the takeover bidder to act in his personal capacity, or the capacity of another company. A similar case is that of creditors. Many of the examples given so far have involved insolvency. If an audit has resulted in a company’s being worth much less than people thought it was worth and creditors find that they cannot get their money back, their problem will be that the liquidator or administrator is technically acting on behalf of the company. The rights of the creditors are therefore through the company, and the company has limited its recourse to the audit firm. The creditors will suffer because of an agreement made previously by someone else, namely, the shareholders. The shareholders’ agreement has an impact beyond their own interests. There is obviously the possibility of creditors trying to obtain recourse outside the remit of the company, in their own right. That brings us to the crucial question—do the Government intend limited liability agreements to affect the rights, such as they are, of third parties? Let me put it technically: do the Government intend to change the law of tort, or just to change the law of contract? It has to be said—the hon. Member for Newcastle upon Tyne, Central mentioned this—that even in the law of negligence, or tort, the rights of outsiders are limited. The Caparo case was followed by a series of other cases that make it very difficult for people to win in those circumstances, but it is not impossible. In the Morgan Crucible case, the plaintiffs won because the court thought that, given the special circumstances and the fact that specific extra representations had been made to the auditors, the audit firm was bound by those extra representations over and above the normal audit to the person who ended up losing out—so it is possible. I want to hear from the Government that their intention is not to rule out that possibility indirectly through the ability of auditors to limit their liability in contract to the company.