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Companies Bill [Lords]

As before with the modest quip made by my hon. Friend the Member for Great Grimsby (Mr. Mitchell) about Iraq, I shall not allow his rhetorical flow, whether it be about dark-suited accountants or escaping early doors to Norway, to move me away from the focus of the amendments. I shall go through them one at a time as speedily as I realistically can. I sympathise strongly with the concerns expressed by my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) and my hon. Friend the Member for Great Grimsby, but I hope to persuade them that we have here an appropriate balance. Their amendments Nos. 751 and 752 would delete the clauses that enable the auditor and the company to agree a limitation to the auditor’s liability, so the Bill would just reflect the current position that any attempt to do that is void and unenforceable. Their alternative route is, through new clause 86 and amendment No. 802, to extend the publicity given to liability limitation agreements. New clause 86 would do so by requiring proposals to be sent to shareholders of private companies, who would resolve to waive the need for authorisation, and to debenture holders as well as shareholders of all companies. Amendment No. 802 would require agreements and associated correspondence to be filed at Companies House. Amendment No. 763 would prevent liability limitation agreements being made that specified a monetary limit—a cap, as my hon. Friend the Member for Newcastle upon Tyne, Central put it. Amendment No. 802 would modify one of the issues to which a court should have regard in considering whether a liability limitation agreement was fair and reasonable. Instead of looking at the auditor’s responsibilities under part 17, which is the audit part, it would look at the auditor’s responsibilities under the entire Bill. Let me deal with that one first. The amendment would have no effect because all of the responsibilities owed by the auditor of the company that could give rise to a claim by the company are in part 17. Government amendment No. 648 removes subsection 550(4), which specified that members were to authorise a liability limitation agreement by ordinary resolution. The hon. Member for Putney (Justine Greening) asked me to say what the point of that was. It is just that the subsection is unnecessary because that is the effect of saying in clause 550(2) that the authorisation is to be by the company passing a resolution. Let me go through how we deal with the points raised. The hon. Member for Cambridge (David Howarth) asked us to give an assurance that third parties were not affected. Yes, but as the hon. Gentleman has observed, third parties will seldom have a claim. However, if creditors can get recourse outside there is nothing in this change that ought to affect their ability to do so. It certainly is not our intention that that should be so. The agreements will limit an auditor’s liability only if the company agrees to the limitation in the contract and it is authorised by the explicit decision of the shareholders or, in the case of a private company, the shareholders resolve to waive the need for approval. The Government’s approach to the request made by my hon. Friend the Member for Newcastle upon Tyne, Central about regulation is that the safeguard is that there must be a shareholder resolution. There is, of course, much more to be said. After the event, a court can decide, whatever the agreement was, that the limited amount payable by the auditor is not fair and reasonable and, if necessary, it is open to the court to impose a much higher amount, if that is called for. Those provisions were extensively debated in the other place, where there was widespread cross-party support for the policy approach and useful clarification of the drafting took place. To put the point moderately, my hon. Friends have argued—I hope that I do justice to their arguments—that the changes will reduce the incentive on auditors to do a good quality job. Let me reiterate that under the new provisions, auditors will not be able to exclude their liability altogether and it will always be open to the court to decide that the limitation is not fair and not reasonable and to impose a higher amount as it thinks fit. Civil liability, of course, is only one of the external incentives on auditors to do a good professional job. If they fall short, a range of disciplinary procedures are available and, although we do not want to go back there, we have just introduced a new offence for anyone who knowingly or recklessly causes an audit report to be misleading, false or deceptive. Amendment No. 763, which prevents companies from agreeing a fixed sum as the limit of their auditors’ liability, amounts to the same argument. Any attempt to limit the liability to a specific financial amount will not be effective if the court decides that a larger amount is fair and reasonable and that the capped amount is not. There is also a power in clause 549(2) under which regulations could prevent limitation by fixed monetary amounts if, against our expectations, there proves to be a case for doing so in the light of experience. New clause 86 and amendment No. 802 deal with the publicity given to liability limitation agreements. As the provisions are drafted, the company will have to write to its members to receive authorisation, except where members of a private company have decided to waive the need for approval, and the company will have to disclose its agreements under clause 552. The details of disclosure are to be fixed by regulations, on which, to respond to a question posed by the hon. Member for Putney, we will consult.