Education Bill

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Mr. Timms: I am pleased to be able to trade expertise with the hon. Gentleman in the finer points of company law. Amendment No. 28 would provide that companies may be formed as a limited liability partnership rather than as a company limited by guarantee. Through regulations, we will require that companies are formed in a way that will maximise their ability to manage their own affairs. However, in order to prevent unnecessary risks to company members, we will require a company structure that limits risk. That is why we suggested companies limited by guarantee. As I said, we will consult on that before finalising our decisions.

The limited liability partnership would not be an appropriate vehicle for the companies that we envisage. Under the 2000 Act that the hon. Gentleman referred to, persons entering the partnership do so with a view to profit. He will recall that requirement under section 2(1)(a) of the 2000 Act. In reality, many persons entering the companies that we envisage will not have that aim. Groups of schools forming companies for the procurement of goods and services, so as to benefit from economies of scale and organisational support, will not be formed with profit in mind.

There are other difficulties with the rules about limited liability partnerships. That vehicle is essentially aimed at individuals grouping together to do business rather than corporate bodies. I am not saying that it cannot be used by corporate bodies, because of course it can, but the framework in the legislation has been designed for individuals coming together rather than corporate bodies. That leads to rules that make the vehicle inappropriate for the type of company that we envisage in the Bill. The rules relating to agency and the prevention of partners from leaving the partnership without reaching agreement with the other partners, which is a feature of the 2000 Act, mean that that structure would not be suitable for the companies that we envisage in this part of the Bill.

We do not want to be too prescriptive in the Bill. We want maximum flexibility. Companies formed with the aim of developing effective public private partnerships or private finance initiatives through joint venture companies would not be limited by guarantee. We would expect them to be limited by shares. As companies established with different aims-PFI or PPP as opposed to purchasing or service delivery companies-may require different structures, we have not specified details at this stage. I hope the Committee will recognise that we need to be flexible to enable the establishment of different sorts of company. We will consult fully on the options. I hope that the hon. Gentleman will therefore withdraw his amendment.

Mr. O'Brien: I am grateful to the Minister for seeking to elaborate on an apparently early joust in the consultation process. Apart from making the obvious point that, although his remarks were intended to be helpful, they demonstrate how many aspects of the Bill have been brought forward prematurely, let me say that the Government seem to know what they intend to achieve with the Bill. However, we cannot scrutinise it because the intention is not recorded in writing either in the Bill or in available regulations.

I listened to the Minister carefully when he said that members might join procurement companies without a view to making a profit. While he may be correct, the Bill does not proscribe such members coming together for profit. Schools that have demonstrated that they can be trusted with a delegated budget and are seen to be good performers may take advantage of that mechanism. The governing body or the head teacher may be particularly good at managing, motivating and bringing out the best in their staff. They are likely to be completely comfortable with the idea that, to the extent that they can lever that expertise into the economies of scale for the benefit of the children, there may well be an incentive for some form of profit.

If the Government are determined not to accept the fact that profit is a natural incentive if one is introducing corporate entities, I cannot see why they have gone to all the trouble of going down the corporate entity route. Of all parties, the Labour party must be most familiar with the co-operative movement, which would appear to be the ideal vehicle to exercise purchasing power. A number of Labour Members also stand in the name of the Co-operative party, and they have access to the co-operative movement. That is not necessarily through companies that are limited by guarantee. A number of corporate entities and structures enable the co-operative movement to be a not-for profit organisation that benefits its members. At the same time, it can have legal responsibilities that enable it to satisfy its duties.

The Minister's response was helpful, but it is still unclear why the route has been chosen in the absence of any regulations or greater consideration of the Bill before it was published. What the Government appear to be talking about is no different to what the Monopolies and Mergers Commission, as it was then, sought to do to Milk Mart, which was broken up so that farmers no longer had the opportunity to use their collective purchasing power to ensure that the farm-gate price was not squeezed. Distributors and supermarkets could therefore greatly reduce the value of farmers' produce. The co-operative movement has always been able to exercise purchasing power, but on the basis that it is for the benefit of members, which is how co-operative collectives for farmers operated.

We are looking for economies of scale that will benefit schools intending to be members and that will be sustainable, so that by accessing the competitive marketplace, money can be saved and applied to existing educational budgets. It is therefore difficult to see why a company is proposed that is limited by guarantee, when the co-operative movement would have served the purpose better and has a much better track record.

In the absence of regulations, it would be facile to press the amendment to a vote, although, as one can tell from my lengthy riposte to the Minister, I believe that the Government's thinking is muddled. I am glad to put on the record that I will not press the amendment to a vote, as the Minister rightly wants consultation on the clause, which I hope will be wide ranging. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Mr. O'Brien: I beg to move amendment No. 26, in page 8, line 5, at end insert-

    '(iii) a satisfactorily completed process of due diligence, absence of conflict of interests, due process and the taking of references.'.

The Chairman: With this it will be convenient to take the following amendments: No. 61, in page 8, line 5, at end insert-

    '(iv) maintaining an asset register,

    (v) making provision for the conversion of the company to a corporate entity under the Companies Act 1986 (c. 6) other than either a company limited by guarantee or a limited liability partnership under the Limited Liability Partnerships Act 2001,

    (vi) making provision for the flotation of any company resulting consequent to subsection (v) of this clause,

    (vii) making provisions for the limitation on the company in the event of an acquisition, merger, split and disposal of the company,

    (viii) preventing the diversion of revenues and assets of the company,

    (ix) making provisions for the distribution of profits of the company by way of dividend or otherwise,

    (x) making provisions for compliance with best practice for the nomination and remuneration of directors of the company,

    (xi) the provision of annual reports and statutory filings in accordance with the Companies Act 1985 (c. 6),

    (xii) the provision of audit reports, including interim audits, of the company, and in relation to the initial financial period of the company provision for 3-monthly interim audits of the company until the first statutory annual return is made,

    (xiii) the winding up of the company,

    (xiv) the provision of guarantees, indemnities and discharge of liabilities without prejudice to the interest of staff or pupils of the maintained school or schools to which the company is providing services, facilities, functions, arrangements or facilitation under section 10,

    (xv) notification of the local education authority and the Secretary of State of any event or circumstance which, within 3 months from the date of such event or circumstance, carries the possibility in the judgement of the directors of the company of any risk of financial or other difficulty likely to place the company in a position where it cannot meet its obligations, where such obligations may be financial or in the educational interest of the staff or pupils of the maintained school.'.

No. 62, in clause 12, page 8, line 39, at end insert-

    '(c) intervene to place upon a company a scheme of arrangement or to order divestment of assets with due fair market value compensation and release from contractual obligations where a company has notified the local education authority and Secretary of State under section 11(c)(xv) or otherwise, or on the initiative of the Secretary of State acting upon reliable information where a company is at risk of failing to meet prescribed requirements'.

Mr. O'Brien: If I am tired of my voice, everyone else must be doubly tired of it. I apologise for what appears to be a string of my amendments.

Amendment No. 26 would insert sub-paragraph (iii) at the point where the prescribed requirements are identified in clause 11(3)(c)(ii). Sub-paragraph (iii) would provide that those requirements would have to show satisfaction with

    ''a satisfactorily completed process of due diligence, absence of conflict of interests, due process and the taking of references''.

By any test, that is the obvious and common-sense nature of engaging in risk. One would expect best practice and a good track record that has generated a higher degree of commercial confidence than before, when commercial matters were not as transparent as they are today in corporate life. All too often, however, there is a justified accusation that obvious due processes are ignored by the ignorant or the greedy when engaging in corporate or commercial risk. I do not seek to over-regulate, but the amendment would make a sensible addition, as the restriction is not set out in regulations.

The Minister's response may be that what the amendments propose will be set out in the regulations. I do not want to rehearse yet again my deep frustration at the lack of regulations, but even pro forma, or privately drafted, regulations would help to give confidence and guidance as to what process we can expect by which the freedoms and controls will interplay with the incentives to set up corporate entities that will affect the ability to provide educational services. That is why it is important to debate these amendments.

We touched on the other aspect of the issue under the previous group of amendments. Without the references in amendment No. 26 to due diligence, absence of conflict of interests, due process and the taking of references, there is the presumption that it will be more difficult for someone who feels aggrieved to apply for judicial review. If the Government, public servants or local government have not followed basic processes in making decisions, people should always be allowed to challenge them. The amendment would also aid all those involved in decision making by providing a handy checklist to ensure that they could not be challenged at a later date.

12.30 pm

As we reach amendment No. 61, I see some crestfallen faces around me, as there is quite a lot of wordage. The extra sub-paragraphs (iv) to (xv) are intended to demonstrate the degree to which we, and all those who come after us, need to know the expected risks, opportunities, responsibilities, liabilities, and potential guarantees and indemnities. We also need to know about the ability to service a business that will make the procurement or service provision available in the interests of education and schools, who will carry the benefit and who is responsible for the burden of those corporate responsibilities.

I do not apologise for the fact that the amendment is something of a shopping list of things that occurred to me as I read the Bill and wondered where certain provisions were. Having some experience in the corporate world, I expected to see those provisions and duties set out clearly in the Bill.

Under the Companies Acts and memorandums and articles of companies, there are obligations such as the first one in the amendment: to maintain an asset register. That should be made explicit in the Bill because those who will operate the legislation will not have had the benefit of sitting in Committee, riveted, as we are, by the Minister's answers and knowing that the provision does not necessarily mean that schools can own land and buildings. An asset register therefore becomes all the more important. It identifies the assets that those who are contracting with companies, particularly those exercising purchasing power, can enforce against.

Under a previous clause, the hon. Member for Harrogate and Knaresborough asked about the potential for the takeover of companies, and I told him that he needed to be patient until we reached these amendments. Unless I am mistaken, which I readily admit I could be, nothing in company law forbids a company that is limited by guarantee-that which is envisaged, subject to consultation, under the Bill-from being subject to takeover or a bid. Indeed, the shareholders might be happy to be on the end of an attractive offer. What director facing heavy mortgage payments would not be glad to accept such a bid? I well understand that individuals will make their personal decisions as and when that comes about, and shareholders and directors would expect to do the same.

The point of sub-paragraph (v) is that there must be provision

    ''for the conversion of the company to a corporate entity . . . other than a company limited by guarantee or a limited liability partnership''.

I tabled this amendment because I anticipated, somewhat woefully, that the Government would readily accept my limited liability partnership amendment. That little bit is now otiose, given what has just taken place.

Sub-paragraph (vi) deals with the ''flotation of any company'', and sub-paragraph (vii) deals with

    ''provisions for the limitation on the company in the event of an acquisition, merger, split and disposal of the company''.

Purchasing power arrangements for bus services, school milk and other services, which the Minister has rightly identified as being among those that the Bill is intended to include, are inadequately expressed in the wording.

In the past, take-or-pay contracts put the gas companies under stress because of the need to extract North sea gas on a sustainable basis, and they were lumbered with liabilities. What would prevent companies from entering into a five or seven-year contract for bus services? That may be beneficial, but in the absence of such provisions there may be risks. Of course, such measures may be subject to regulations longer than the Bill, if it becomes an Act. It is important, subject to the laws that apply to such corporate activities, that long-term contracts should protect the interests of children and educational quality.

The amendment is designed to trawl around a huge field of potential corporate activity. The marketplace will rapidly consolidate; five schools in my constituency could choose to take advantage of the powers under the Bill for combined services. The Conservative party argued for that in the general election and I am glad to see it rightly adopted as Government policy. We should not waste taxpayers' money if economies of scale can be secured, especially for support that is not direct classroom provision. If five schools combine, it is easy to imagine five counties working together. Distance is not a factor, as is demonstrated by the power of the distribution companies that supply supermarkets throughout the country.

Only 20 years ago, if a brick were made in Throckley factory in Newcastle, it would not be sold in Sussex. One can now obtain bricks made in Newcastle more cheaply than those made down the road in Pevensey Bay. The economics of distribution have shifted to the point where providing services across five counties will be cheaper. Economies of scale require an understanding of takeovers, flotations, splits and disposals, and how companies can operate without prejudice in the interests of educational provision.

I am concerned that the provisions have not been thought through. Unless the Minister says that a prohibition against such corporate activity will be in the regulations-in which case it should be in the Bill-rapid consolidation will occur because the economies of scale will quickly become national.

The Minister has already indicated the restrictions. Proposed new sub-paragraph (viii) would prevent

    ''the diversion of revenues and assets of the company''

The Minister said that that should be subject to regulation and suggested that the companies he has in mind would prevent it from happening. We hope that by setting it out as part of the prescribed requirements provision, it can be addressed explicitly.

I noted that the Minister was careful to say that not all companies would be driven by profit. Some, and in time, the vast majority, will be mindful of the excess to running costs that they generate. It is a matter for them if they choose, for politically correct reasons, not to call that a profit. For the benefit of the audit trail, they will find that their accountants will refer to a profit and loss account whether they like it or not. Proposed new sub-paragraph (x) makes provisions for:

    ''best practice for the nomination and remuneration of directors of the company''.

That is a requirement under the Companies Act 1986, but given our discussions about potential company members, it is necessary to have best practice in terms of nominations for due diligence and to ensure that the right opportunities are created for those of talent, expertise and relevance to the board of the company that will deliver the services. If the Government are concerned about proper motives, they can at least ensure through the nomination procedure and the remuneration of those directors, be they non-executive or executive, that those appointed are highly motivated in terms of public service, and are not necessarily motivated by the company's profit in the hope of benefiting themselves.

Proposed new sub-paragraph (xi) is probably gilding the lily in requiring the provision of annual reports, as that is already a legal requirement. Proposed new sub-paragraph (xii) raises a concern about the initial start-up phase. A number of companies will have no track record. In previous answers, the Government made it clear that borrowing would be restricted by commission only. As the new companies will not go through the discipline of presentations to bankers when seeking to borrow money, interim audited reports should be provided in the initial financial period. That is why I seek to put that protection in place. I hope that the Government will find that an attractive way of imposing early controls on the companies.

We have touched on the winding up of companies. While the Government are learning lessons from the Railtrack administration debacle, directors risk not knowing their duties in cases where there is a potential funding shortfall and a necessity to wind up the company, but where service provision must be continued so as not to prejudice children's education. We have already dealt with the provision of guarantees for the discharge of liabilities.

The most important issue is contained in proposed new sub-paragraph (xv). I urge the Minister to look carefully at it, because it goes to the heart of the matter. Reference to Railtrack might seem provocative, but it is a live example of a company being forced into administration by an entity outside the board. What duties did Railtrack directors have to enable someone from outside the board to affect the company's activities? The amendment would show that companies operating under the Bill might well affect the continued provision of education, and the quality required and expected. If the directors do not have some form of duty in addition to that expected of them under current law, children's education could be prejudiced.

Clumsy as that provision is, it is intended to convey an important point, which I hope the Government will consider carefully. Amendment No. 61 is grouped with amendment No. 62, which seeks to require the Secretary of State to

    ''intervene to place upon a company a scheme of arrangement or to order divestment of assets with due fair market value compensation''.

I hope that the Minister recognises that there are lessons to be learned from the Railtrack experience. This is not a substitute for refusing to admit that there has been a dogmatic discussion about nationalisation or privatisation of these services. Where corporate identity exists and someone causes an event to take place which forces a company either into administration or to face potential winding-up, assets and obligations are owed to a number of what would be described in these politically correct times as stakeholders, be they customers, suppliers or shareholders.

It cannot be said that shareholders are evil, because the Government will look for shareholders to create the companies in the first place. They should not say, ''Thanks, we'll have your money now, but when things get tough and go wrong, you're the first we're going to drop''. That will be the case unless amendment No. 62 is put in place to recognise that shareholders take a risk. They do not expect to be taking such a risk if the Government are to sponsor and encourage the acceptance of a corporate feel to the marketplace, allowing them to release money for public services, as we all wish to see.

The Government must take responsibility when they choose to affect the future of corporate entities. They must not fail to pay fair compensation to the shareholders on whose money they relied to get the scheme off the ground in the first place. Amendment No. 26 makes a serious point: if the Government do not accept it, a powerful disincentive may be created and the mechanism will fail to deliver the benefits that we all want.

12.45 pm

 
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