Mr.
Djanogly: That is okay.
Margaret
Hodge: Amendment No. 182 is a probing amendment. It is
important that the resolutions and agreements that are listed in clause
29(1) are filed with Companies House, as required by clause 30, because
they can be of considerable constitutional significance. Clause 30
signals that by making it a criminal offence to fail to file those
documents. The amendment proposes that failure to file should result in
what one might call a nuclear option—namely, the amendment would
be unenforceable. That may be intellectually defensible. As I get to
know the hon. Gentleman better, I realise that that is where he is
coming from. However, we believe that, in the real world, it is a step
too far. It would mean that members of a company might unanimously
agree to something, then find out years later that their agreement is
worthless because the company failed to file a copy of it. In other
words, the members would potentially pay a heavy price for the
company’s administrative slackness. We believe that that is
going too far and that it is not entirely fair.
Let us consider a small family
company’s articles that exclude the model of articles and make
no provision about, for example, whether the chairman should have a
casting vote in directors’ meetings. If the members subsequently
reached a key clause 29-type agreement that he should, but that
agreement were not filed, the company would have no rule about the
casting vote and, in a dispute about the matter, the courts would have
nothing with which to guide their decision. Obviously it is better if
agreement is filed, hence the clause, but we think it is better,
pragmatically, to let the an agreement that is not filed stand than to
treat it as though it had not been made.
David
Howarth: I thank the Minister for that explanation. I am
glad that the Government have thought through the consequences of the
measure. The central point, though, is about shareholders’
agreements and not about changes to the articles. If one were to put
oneself in the position of an investor in a small company that is
affected by the shareholders’ agreement, if that agreement were
not registered and the people who subsequently controlled the company
did not reveal the shareholders’ agreement to the investor, what
should the effect be on the investment? In particular, would the
fairness argument work with regard to third parties and not just those
who are subject to the agreement?
Margaret
Hodge: I shall have to write to the hon. Gentleman on that
point. If he remains dissatisfied, no doubt he will raise his
dissatisfaction on Report. I hope that, given my explanation, hon.
Members will not press their amendments.
Mr.
Djanogly: The Minister said that she did not think it was
too important an issue because no companies had complained. In
practice, some companies file documents, some do not and the situation
is pretty much laissez-faire. So far as I know, no one has ever been
picked up for doing one or the other, which is why I was keen to
discuss the amendment. On that basis, I think that we have got to where
I wanted to be, but I would be grateful if, in the letter that she
promised, the Minister also elaborated on the point that she made to me
earlier and sent me the same
letter.
Margaret
Hodge: I am happy to do
so.
Mr.
Djanogly: With that, I beg to ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
29 ordered to stand part of the
Bill. Clause 30
ordered to stand part of the
Bill. Clause
31Resolutions
and agreements to be embodied in or attached to issued copies of
articles
Mr.
Djanogly: I beg to move amendment No. 15, in clause 31,
page 12, line 19, after ‘a', insert
‘public'. The
clause relates to sections 382, 383 and 386 of the 1985 Act and is a
fairly redundant carry-over provision from it. The theory is that, when
printing articles in hard copy, copies of every resolution should be
attached, but the practice is slightly different. Large public
companies with company secretarial departments will usually spend some
time updating the company’s printed memorandum and articles, for
example, after changes made at the annual general meeting. However, the
average company officer for small, mainly private, companies would
probably not have much of a clue about what we were talking about in
with this provision and would generally see it as an utter waste of
time. It could be said that that is no excuse for them being ignorant
of the law. Unusually, however, in this instance I disagree, because
every item is already part of the public record. If they have not filed
the resolution, it is important that that is corrected. However, hardly
anyone asks companies for hard copies of the memorandum and articles of
association. Practitioners will always go to the public record for such
information.
Margaret
Hodge: I know that we are about simplifying and
modernising, but the provision refers to a requirement of company law
going back to 1862, which arose at that time because there was a danger
that, without the information contained in the document, somebody
reading just the company’s articles would not get a complete
picture of its constitutional arrangements. As the hon. Member for
Huntingdon said, that provision has been incorporated into the 1985 Act
and no doubt some of its
predecessors. Under
the amendment, the clause would apply only to public companies.
Although I can see that that would reduce the paperwork that private
companies needed to produce in what the hon. Gentleman says
would be a few cases, there is a danger that it would short-change
those who are supplied with copies of a company’s
articles. I accept
that the resolutions and agreements caught by clause 31 also have to be
provided to the registrar under clause 30 and, as such, will be made
available to members of the public. I think that that was the hon.
Gentleman’s main point. However, we cannot see why private
companies should be subject to lesser standards of constitutional
transparency and accuracy or why members of private companies should be
required to go to the registrar of companies and pay for copies of
their documents to which they are currently entitled. If anything, to
the extent that internal affairs of private companies may otherwise be
less visible than those of public companies, the need for the provision
may be even greater in the case of private companies. However, although
we do not agree that it is appropriate to disapply clause 31(1) for
private companies, the thrust of the hon. Gentleman’s amendment
has caused us to look again at whether the clause could be more
deregulatory. We believe that there is room for improvement. For
instance, if a resolution or agreement merely changes the text of a
provision in the articles, it might not be necessary to provide a copy
of the resolution with those of the articles issued after the
change. It might
therefore be worth modifying the language in clause 31 so as to clarify
that point and the position of documents that record constitutional
changes made by legislation or court order. I hope that that
explanation and the possibility of a little more deregulation on Report
will be sufficient to induce the hon. Gentleman to withdraw his
amendment.
Mr.
Djanogly: I am certainly heartened by the
Minister’s response and grateful for her offer to look again at
the clause. We feel that further deregulation could apply in order to
lessen red tape for small private companies. On that basis, I beg to
ask leave to withdraw the
amendment. Amendment,
by leave,
withdrawn. Clause
31 ordered to stand part of the
Bill.
Clause
32Statement
of company’s
objects
Mr.
Djanogly: I beg to move amendment No. 16, in clause 32,
page 12, line 40, leave out subsection (1) and
insert— ‘(1) The objects of
every company shall be unrestricted'.
The clause deals with the
statement of a company’s objects. The amendment probes the new
provisions, but essentially reflects the fact that the ultra vires
principle is of declining importance to what a company can do, or how
or for what purpose it is run. Almost the only time that it arises is
when banking lawyers check that a company is not restricted from
borrowing. Frankly, in today’s corporate world, I can see little
reason why such checks should be necessary.
I appreciate, of course, that
that thinking is partly behind the merger of the memorandum and
articles of association, as proposed in the Bill. However, the slow
death of the objects, which the clause will induce, could cause
transitional confusion, particularly when objects are hidden in
articles. Is it not time therefore to bite the bullet and have the
general objects provisions, which most new companies adopt, become the
standard? Finally,
once the memorandum and articles of association are merged, can we be
sure that we will continue to know what constitutes an object? Will the
Government be issuing guidance on how those should be described in the
articles of association, in order to avoid
confusion?
David
Howarth: My view of the amendment is similar to my view on
entrenchment, which we have already discussed. Although I am
sympathetic with the direction of change throughout normal commercial
events in the world outside, I am still concerned about removing from
companies the option of restricting their objects, if they find that
commercially convenient. That situation might arise in joint ventures.
Two business partners might find it useful to restrict the purposes to
which a vehicle that they are using is
put. An argument could
be made for saying that changes in company law over a long period have
been towards general purpose companies—companies whose objects
are not restricted—but that is no reason to remove the option.
There are no effects on third parties. Because of the abolition of the
ultra vires rules in almost all circumstances, there is no need to
worry about the effects of restricting the objects on the outside
world.
Mr.
Djanogly: The hon. Gentleman makes an important point. My
understanding, however, is that where a company has general objects,
pretty much anything goes, and most new companies have general objects.
However, when a company retains specific objects, those must still be
adhered to. As we move increasingly towards general objects, those that
get left behind will increasingly lead to
confusion.
David
Howarth: The hon. Gentleman makes an interesting point.
The deep conservatism of the drafting of company objects over the
decades means that previous legal positions are left in
companies’ objects at a lower layer and new objects or ways of
thinking are layered over those, and we end up in an extraordinary
situation where we have restricted objects, with fewer and fewer
restricted objects placed above them. That is confusing.
I return to the basic principle
that members of companies are entitled to do as they wish with their
companies and with the way in which they set up their
businesses. The problem with the way in which lawyers have given advice
to companies on the subject is a separate
problem. Margaret
Hodge: The hon. Gentleman makes my points for me. We seem
to be revisiting this morning’s debate on entrenchment. In the
clause we are not trying in any way to undermine the general thrust
towards companies’ making more general provisions around their
objects but to recognise that some companies want flexibility and that
that will be reflected in their objects.
A company can choose to
restrict its objects. Its directors will then be obliged to observe
those restrictions. In clause 157 in particular, we impose a duty on
the directors to act in accordance with the company’s
constitution. No doubt we can come back to that point when we discuss
the clause. As now, any restriction that applies to a company’s
objects will have no effect on third parties dealing with companies
because of the effect of clauses 39 and 40.
The proposed amendment would
remove the flexibility allowing companies that choose to restrict their
objects to do so. Although it would limit the choice, it is available
to members of companies who might have good reason to wish to restrict
their objects. Joint ventures, charities and specialist company
vehicles, such as community interest companies, might all want to
restrict their objects. The Bill gives them the freedom so to do, and
the amendment would remove that freedom. We see no reason to remove the
flexibility of companies to restrict their objects and consequently the
powers of their directors to comply with those objects. I hope that the
hon. Gentleman will not press the amendment to a
vote.
Mr.
Djanogly: I shall not press the amendment to a vote, but
it was important to make the point. I do not believe that the issue is
the same as entrenchment: entrenchment is a new issue, whereas what we
are dealing with now has been an ongoing process over centuries. We
have reached a stage where, from a policy point of view, it would be
helpful to move on. However, the Minister has made her point and I beg
to ask leave to withdraw the amendment.
Amendment, by leave,
withdrawn. Amendments
made: No. 87, in clause 32, page 13,line 1, leave out
‘alters' and insert
‘amends'. No.
88, in clause 32, page 13, line 5, leave out ‘alteration' and
insert
‘amendment'. No.
89, in clause 32, page 13, line 6, leave out ‘alteration' and
insert ‘amendment'.—[Margaret
Hodge.] Clause
32, as amended, ordered to stand part of the
Bill.
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