---

Companies Bill [HL]

My Lords, I beg to move that the House do agree with the Commons in their Amendment No. 70. In speaking to that amendment, I shall also speak to AmendmentsNos. 315 to 512, 532 to 536, 560 to 612 and 646to 671. This group of amendments inserts a number of new clauses into the Bill. These restate various provisions, currently contained in Parts 4, 5 and 8 of the 1985 Act, which were brought into the Bill as part of the restatement exercise, and also replace and restate Clause 538 and Parts 18 and 19 in their entirety. The amendments in this group also insert new clauses into the Bill that contain powers to amend the restated provisions that are concerned with the maintenance of capital. I will come to that point shortly, but first I shall say something about the restatement exercise. The restatement of the 1985 Act provisions was foreshadowed by various debates that we had in this House. As I said at the beginning of today’s debates, I reassure noble Lords that while the new clauses may, in some cases, look rather different in structure from those of the 1985 Act that they restate, our intention has been to make no substantive changes to the law, other than those that have been necessary in order to ensure compatibility with other provisions in the Bill and to ensure compatibility with EU law. The Bill as introduced included various provisions on share capital, which have been subsumed into the new clauses. The restated clauses have been made consistent with them. The new clauses inserted by Amendments Nos. 432, 512 and 671 contain three new powers. Those powers would enable the Secretary of State, in regulations made under the Bill, to amend respectively the rules on share capital, on purchase by a company of its own shares and on distributions. Together, those aspects of company law are commonly referred to as the ““capital maintenance rules””. There is some history to these proposals, and, as noble Lords will have seen, we now have the benefit of a report from the Select Committee on Delegated Powers and Regulatory Reform that comments on the proposals. The committee’s recommendations always command the very greatest respect in this House when we are considering important and difficult issues. The House will recall that the Bill as it was originally introduced to the House contained a proposal for a general company law reform power. That proposal was dropped as a result of concern about the breadth of the power. We explained that there a small number of areas where changes were expected to be needed in the short to medium term, one of which was capital maintenance. It is important to understand the background. The capital maintenance rules are there to ensure that the company retains its subscribed capital as a protection for present and future creditors, and in particular to control the extent to which a company can give returns to its shareholders. Of course, profitable companies must be able to pay dividends to their shareholders. Indeed, this is a significant reason why we hold shares. But there must be rules to ensure that a company cannot pay money to its shareholders in a way that may jeopardise the legitimate interests of the creditors. As the Delegated Powers and Regulatory Reform Committee said, the rules are a mix of principles and very considerable detail. Much of our companies legislation dates back to Victorian times and the provisions are set out very largely in primary legislation, unlike, for example, the related area of financial services legislation where most of it is in secondary legislation. Part of the reason for retaining this approach in the present Bill is that business said to us that it wanted all the provisions together in one place. We have looked very carefully at the concerns of the committee and discussed these with others. We recognise that the powers would be very wide and that an exceptional case would be needed. The parts of the Bill that deal with share capital and with purchase of own shares are mostly concerned with preventing companies finding ways round the rules on dividends by passing value to their shareholders in other ways; for example, by buying back their own shares with company funds, or by unilaterally reducing their capital so that the test of whether their net assets are greater than their capital becomes easier to meet. It is very important to have these rules as otherwise companies in difficulty and in the hands of unscrupulous or imprudent directors and members could circumvent the dividends rule, enrich themselves and leave creditors worse off than they should have been. But essentially they are technical and are not of the same nature as the central rules on dividends. Experience shows that they can give rise to serious problems for companies that want to carry out entirely innocent transactions in circumstances where creditors are not at risk. As business practice changes, so these rules need to be adapted. There is a strong case that we need secondary powers to be able to do so. It is important for business that we have the powers in Amendments Nos. 432 and 512. We may well need to be able to make changes to meet legitimate needs. There is, therefore, a strong case for the powers in Amendments Nos. 432 and 512, even though I fully recognise that they are exceptional. Amendment No. 671 covers the area of distributions. The committee rightly cited Amendments Nos. 647 and 648 as being general rules of particular significance. The existing rules are based on the second Company Law Directive. These rules have existed in much the same form since 1981. There have been criticisms of them. Recently, with the introduction of international financial reporting standards, a number of companies have found that it was difficult for them to pay dividends under these rules, even though they were profitable under UK generally accepted accounting principles (UK GAAP). A number of people have expressed concern about these rules on dividends, but there is as yet no consensus on how these should be improved. We are following with interest companies’ experience with IFRS. One of the purposes of AmendmentNo. 671 was to enable us to amend rules if a generally acceptable improvement in the dividend rules was agreed. However, we recognise that significant aspects have not been debated. We are very mindful of the important considerations to which the Delegated Powers and Regulatory Reform Committee has drawn attention. Having considered the report of the committee, we have reached the view that it would be going too far and is not necessary to take a power to change the basic rules on dividends. We accept that if we decide to change these rules, we shall need to come back to Parliament with primary legislation unless other powers such as the European Communities Act are available. I have therefore indicated that I will recommend that we oppose Commons Amendment No. 671. By asking the House to agree with Commons Amendments Nos. 432 and 512 but to disagree with Commons Amendment No. 671, we believe that we have found a way to meet the concerns of the Delegated Powers and Regulatory Reform Committee while enabling us to bring clarity to some important aspects of company law in a reasonable time frame. A small number of the amendments in this group make technical changes to the Bill’s provisions on capital maintenance and share capital. I do not propose to say much about these, save to reiterate that these changes have been necessary to ensure compatibility with EU law and other provisions in the Bill Other amendments in this group take forward commitments we gave in another place: in particular, they enable the minimum share capital requirement for public companies to be satisfied in euro as well as sterling and clarify that the prohibition on public companies and their subsidiaries providing financial assistance for a purchase of own shares does not apply to the foreign subsidiaries of such companies. Before I sit down, I mention an issue raised by the Law Society, which may have been drawn to the attention of noble Lords. There is a concern that, following the abolition of the prohibition on private companies giving financial assistance for a purchase of own shares, a private company might not be able to enter into the range of transactions that are currently permitted—that is, if it has availed itself of the current exemption for private companies commonly known as the ““whitewash”” procedure. Noble Lords may wonder how the removal of the prohibition on giving financial assistance could be seen to be more restrictive than the current exemptions. The issue is that some interested parties—the Law Society included—consider that the ““whitewash”” procedure provides a statutory code that supplants the common law rules on the maintenance of capital. That being the case, there is a further issue as to the extent to which, if at all, the repeal of these provisions would resurrect the common law. The extent to which the current exemptions supplanted the common law is far from clear, but in any event, in our view, the repeal of the ““whitewash”” procedure does not resurrect the common law. In short, if there is a problem with the common law—we are not aware that there is—this already exists. None the less, we intend to put this matter beyond doubt by making it clear, in a saving provision made under Clause 921, that the removal of the prohibition on private companies giving financial assistance for a purchase of own shares will not prevent private companies entering into transactions which they can lawfully enter into now—that is, under the ““whitewash”” procedure. We have discussed this approach with the Law Society and trust that this addresses its concerns. Moved, That the House do agree with the Commons in their Amendment No. 70.—(Lord Sainsbury of Turville.)