Margaret
Hodge: The provision was certainly an initiation for me
into a wonderful bit of case law, the 1915 case of Hickman v.
Kent or Romney Marsh Sheep Breeders’ Association. When that was
put into a speaking note before I prepared, I tried to delve back into
what on earth that famous case was
about. The Opposition
may be pleased to know that I think that they have a point. Having
looked at the debate and having seen Lord Wedderburn’s erudite
contribution when the matter was debated in another place—I
would like to thank him for his contribution—he has informed the
view that we have taken today. The point behind the amendment is that
if the clause and case law, including the famous judgment, acknowledge
that the company’s constitution has the effect as if it were a
contract between the company and its members, the law and the clause
should say so. We are therefore happy to accept the amendment, although
we will reflect further as to whether in the light of it we should
revisit—a lawyers’ paradise—the use of the phrase
“signed and sealed”. Subject to that, we will accept the
amendment. Mr.
Djanogly: I am staggered. I hardly thought that we would
be making a bit of legal history this afternoon. Here we are—the
Wedderburn-Djanogly amendment? I can dine out on this one for years to
come. We are happy and delighted that the Minister has chosen to review
the issue. We think that the new measure will more closely reflect
practice.
Amendment agreed
to. Clause 34,
as amended, ordered to stand part of the
Bill.
Clause
35Notice
to registrar where company’s constitution altered by
enactment Question
proposed, That the clause stand part of the
Bill.
Mr.
Djanogly: I am in such a state of shock after the last
decision that I nearly missed my spot. I will speak to clause 35 stand
part briefly. We received a briefing from the Finance and Leasing
Association that is significant enough that it deserves to be read. It
says: “There is
an issue around existing safeguards provided to lenders under section
35 and 35B of the 1985 Companies Act which do not appear to have been
transposed into the new Bill. In particular the Bill does not appear to
include a provision making clear that a party dealing with a company is
not bound to enquire whether the transaction that is being entered into
is permitted by the company’s constitution, as was the case
under Section 35B of the 1985 Act. Clause 31 (1) of the Bill says that
the validity of any action taken by a company shall not be called into
question by anything in the company’s constitution, which
essentially replicates section 35 (1) of the 1985 Act. The explicit
safeguard for parties...dealing with a company provided under 35B
of the 1985 Act appears to be missing.
It does not appear to be an
intention of the drafting to reduce the safeguards provided to lenders
under the 1985 Act. The DTI Company Law Bill Team have confirmed that
the intention was to transpose existing standards
through”— the
Bill— “however we
believe that drafting has been misapplied and does not achieve
equivalence with the 1985
Act.”
Margaret
Hodge: I will consider that point.
Question put and agreed
to. Clause 35
ordered to stand part of the
Bill. Clause 36
to 38 ordered to stand part of the
Bill.
Clause
39A
company’s
capacity Question
proposed, That the clause stand part of the
Bill.
Mr.
Quentin Davies (Grantham and Stamford) (Con): I must
apologise that, because of sheer negligence, I omitted to refer to my
interests, which are declared in the Register of Members’
Interests, when I spoke on the Bill in Committee for the first time
this
morning. I spelled those interests out on Second Reading, so I hope that
I will be spared doing so now, although I am happy to do so if
required. I do not
rise to make a substantive point on the clause but because I think an
explanation is required. I may be, and probably am, missing something
obvious, but I do not believe that I am the only person likely to be
confused when reading the Bill. Earlier, we passed clause 32,
subsection (1) which says:
“Unless a
company’s articles specifically restrict the objects of the
company, its objects are
unrestricted.” The clear
implication is that, if the company’s articles do restrict the
objects of the company, the company will be so restricted by those
articles. Clause
39(1)
states: “The
validity of an act done by a company shall not be called into question
on the ground of lack of capacity by reason of anything in the
company’s
constitution.” In the
clauses that we have discussed this afternoon,
“constitution” has encompassed the articles, but
subsection (1) states that nothing in the articles can restrict the
company in any way. However, as I read it and as others will naturally
read it, clause 32 states, at least by implication, that the
company’s articles restrict the company’s activities if
the articles are defined and drafted in such a fashion as to embody
that restriction.
5.45
pm I am perplexed
by the apparent contradiction between clauses 32 and 39. If the Bill
becomes law, as I trust it will, it will be in the public interest that
anyone reading the new Act should not suffer the same confusion. We do
not want to waste the public’s timeor that of the legal
profession. If there is no contradiction, I should be grateful if the
Minister explained why. If there is a danger of there being one,
perhaps she could do something about it on
Report.
Margaret
Hodge: I shall read what I have been given on the purpose
of clause 39, which I think gives the explanation that the hon.
Gentleman seeks. If I get further information, I shall help him with
it. Clause 39 is
about protecting third parties from the internal restrictions on a
company’s capacity that may be contained in a company’s
constitution. It provides that the validity of a company’s acts
should not be questioned on the grounds of a lack of capacity because
of anything in a company’s constitution. The clause replaces
section 35(1) of the 1985 Act, which makes similar provision for
restrictions on a company’s capacity contained in the
memorandum. Under the Bill, the memorandum serves a more limited
purpose, and the provisions in section 35(1) have been updated to
reflect the fact that in future any restrictions on what a company can
do—that is, restrictions on a company’s
objects—will be set out in the articles of
association. The
clause does not contain provisions corresponding to section 35(2) and
(3) of the 1985 Act, which we are transposing, as the combination of
the fact that under the Bill a company may have unrestricted objects
and the fact that a specific duty on directors to abide by the
company’s constitution is provided for in clause 157, renders
those subsections unnecessary. Like section 35 of the 1985 Act, clause
39(2) makes it clear that special rules apply to charities.
The provision is important and protects third parties that have dealings
with companies. In that context, it should stand part of the
Bill. Mr.
Davies: I have been listening to the Minister with great
attention and interest, but I am not aware of having received any
answer, even an attempted one, to the point that I raised, which was
about the apparent incoherence between clauses 32 and
39.
Margaret
Hodge: If I understand it properly, the point is that,
under the clause, people acting in good faith will have some
relief.
Mr.
Davies: Frankly, I do not think that that is good enough.
We must produce clear legislation, not a minefield of confusion for the
future. There is nothing about good faith in modifying or in any way
qualifying clause 39(1). There is a clear contradiction
betweenthe two clauses, and I hope that the Minister
willaddress
it.
Margaret
Hodge: My understanding is that there is not. I know that
that is what is asserted but the clause specifically refers to third
parties and to people acting in good faith. It is a complete
transposition, except in the ways that I have said, of legislation in
section 35 of the 1985 Act. It might be helpful if the hon. Gentleman
turned to clause 40, which specifically discusses the powers of
directors that will bind the articles of the company. Clause 39
concerns others acting in good faith and third
parties.
David
Howarth: I think that there is a fundamental distinction
between clause 39 and clause 40. Clause 39 does not refer to good
faith, and deliberately so. The point is that we should not go back to
the bad old days of the ultra vires doctrine, under which disputes
broke out in the context of contract litigation about whether the
company had the power to make the contract in the first place and as
either side of the contract might want to try to get out of the deal on
the basis that the company lacked capacity to make it. The purpose of
clause 39, and of its predecessor, is to end all such litigation and to
ensure that nothing in the company’s constitution can be raised
in litigation to undermine such a contract. Clause 40, on the other
hand is about what
happened—
The
Chairman: Order. Interventions must be
brief.
Margaret
Hodge: I had actually completed what I was
saying.
The
Chairman: I apologise to the Minister. I had the distinct
impression that she was giving way to the hon. Member for Cambridge. If
that was not the case, I am happy to tender my apologies to the hon.
Gentleman.
David
Howarth: Thank you, Mr. Bercow. I had almost
finished.
Clause 40 deals with directors
dealing on behalf of the company and is quite separate from the
question of the company’s
constitution.
Mr.
Davies: I am grateful for the opportunity briefly to come
back to the subject.
As the hon. Member for
Cambridge rightly says, clause 40 deals with quite a different matter,
which we are coming on to and which is important. It deals with
directors and whether they can be deemed to be acting ultra vires and,
if so, what happens.
The hon. Gentleman did not
address my point about the lack of coherence—I call it
contradiction, and advisedly so—between clauses 32 and 39.
Clause 39, with which I have no problem, states that it is not possible
to set aside a decision or an obligation of a company on the grounds
that it was entered into ultra vires. That seems inconsistent with
clause 32, which
states: “Unless
a company’s articles specifically restrict the objects of the
company, its objects are
unrestricted.” That
implies that if a company’s articles do so restrict, the company
is consequently restricted by them. In other words, it upholds
restrictions in the articles.
What will happen under the
Bill, if it becomes law, if there is a contradiction between a
company’s acts and the restrictions in its articles? Would it
not be easier to have a separate clause that says that that is not a
reason to set aside a contract and that the company is still liable for
the undertakings in the contract, but nevertheless that maybe some
sanctions should be taken against the director who acted inconsistently
with the article of the company and that there would be just cause for
the shareholders to pursue them on those grounds? I am merely setting
out that example because it is important that we do not leave any
degree of confusion in our wake.
David
Howarth: The hon. Gentleman has set out an understanding
of how the two clauses will act together. Clause 32 refers only to
internal conflicts within the company, say between shareholders and
directors who have acted in a way that is not authorised by the
company’s constitution. The later clause has to do with
third-party ability. He has explained exactly how it works. He might be
right on the drafting of the clauses, but in practice I think that the
position is well
understood.
Mr.
Davies: In practice, the position might be well
understood, but the whole point of having a new company law Act is to
enshrine in statute law even what might be well understood in existing
jurisprudence. If not, is there any point in legislating? If in fact,
existing jurisprudence is sufficient and perfectly clear, why are we
wasting our time?
That exchange has been most
revealing. There might be a basis for something of an alliance, at
least on the Opposition Benches in the Committee, in order to improve
the drafting. We have no substantive difference of opinion from the
Government, but we would like some improvement in the drafting on
Report. Question
put and agreed
to. Clause 39
ordered to stand part of the Bill.
| 
