I beg to move, That the clause be read a Second time.

With this, it will be convenient to discuss the following amendments:

No. 2, in page 79, line 1, leave out clause 173.

No. 392, in page 79, line 2, clause 173, after ‘faith’, insert

‘and as appropriate for the size of the company’.

No. 393, line 4, leave out from ‘whole’ to end of line and insert

‘having regard, insofar as he considers them relevant, to the following factors (amongst others)—’.

No. 394, line 4, after ‘to’, insert

‘what he considers, in good faith, to be’.

No. 395, line 13, at end insert ‘, and

(g) all common law duties of directors.’.

No. 396, line 20, at end insert—

‘(4) None of the duties set out in or implied by this section shall take priority over any of the other duties.’.

No. 397, line 20, at end insert—

‘(4) The duty to promote the success of the company shall be paramount.’.

No. 398, line 20, at end insert—

‘(4) The Secretary of State must issue a non-statutory set of guidelines concerning the application of this section, which must be updated annually.’.

No. 788, line 20, at end insert—

‘(4) The duties implied by this section shall not apply to small and medium sized companies.’.

I am relieved that, at last, we can get on to the matters of substance in which many members of the public are interested, and I should have thought that many hon. Members are concerned about them, too. I hope that we shall do so with some of the tolerance, good humour and dignity that we experienced in Committee but which we did not experience during the debate on the programme motion.

It is a little daunting to open the batting on a 1,264 clause Bill. However, thankfully, I wish to speak only to new clause 4 and amendment No. 2—the consequential amendment tabled by my hon. Friend the Member for Portsmouth, North (Sarah McCarthy-Fry) and me.

The House will be aware that directors’ duties have attracted a great deal of attention outside Parliament and, consequently and quite rightly, were subject to detailed and lengthy scrutiny in Committee. I am given to understand that the public response to the issue has been one of the largest of all time. The office of my right hon. Friend the Minister for Industry and the Regions has been inundated by the cards generated by the Corporate Responsibility Coalition and the Trade Justice Movement. I congratulate those two umbrella organisations on their campaign, and I thank the many members of the public who have flagged up their views, both to the Department and to individual Members of Parliament around the country.

My hon. Friend raises issues that are of huge concern to many hundreds of thousands of people outside this House. Does he therefore share my concern that, following an acrimonious debate on the programme motion, only one Conservative Back Bencher has chosen to be present for this debate on one of the Bill’s key issues?

That is entirely up to the official Opposition, as my right hon. Friend knows.

I was reflecting on the fact that there is a great deal of interest in these matters outside this place. Therefore, although we should not judge the quality of an issue on the size of the postbag on it, it is right that we recognise the scale of interest and concern and reflect that on the Floor of the House on Report, as we did in Committee.

I therefore reiterate my welcome for the progress that the Government have made—which is widely supported elsewhere—in respect of this first ever statement in statute that company directors, in fulfilling their primary duty to promote the interests

“of the company for the benefit of its members”

should have regard to the six factors listed in clause 173 and new clause 4. Those factors include

“the interests of the company’s employees”

and

“the impact of the company’s operations on the community and the environment”.

That is the first ever codification, and placement in statute, of duties around the concept of corporate social responsibility. That is, indeed, progress.

It would be remiss of us, however, not to take this opportunity on Report to seek to ensure that what we end up with is the best outcome—one that is pro-business and at the same time socially and environmentally responsible. New clause 4 follows clause 173 closely, but substitutes “have regard…to” with “must endeavour to”. The reason for that is clear. An examination of the “Shorter Oxford English Dictionary” reveals that “endeavour” means

“To exert oneself…To try”

or

“make an effort for a specified object; to attempt strenuously”

to do something. On the other hand, to have regard to something is to give attention or consideration to it. Whereas “have regard…to” is a subjective test—a director can say that he or she has thought about the six secondary duties listed in clause 173 and new clause 4, and may or may not have done more about them—“must endeavour to” is an objective test, requiring some evidence of having sought to abide by those duties before deciding whether it was in the best interests of the company so to do.

I agree with the hon. Gentleman. I note that he said that the clause is pro-business. Given the changing environment and the concern about environmental issues in this country, does he agree that good businesses will look to be responsible in any event, because they must move with the times or else they will not survive in the new century?

That is an important point, and good businesses do approach such matters in that way. What we are trying to create through the Bill, perhaps as amended, is a level playing field to ensure that they are not disadvantaged for giving emphasis to these important matters.

I emphasise that what I am proposing would not change the current position that the overriding duty is to promote the success of the company, but it places the six duties that articulate the essence of enlightened shareholder value at the heart of company law, which has never been the case before. The measure would thus place those desirable objectives firmly on the agenda. I am not convinced that merely having regard to them would suffice, but we shall see.

Being positive about the duties is a pro-business position that helps to create a level playing field underpinning the good practice to which the hon. Member for Angus (Mr. Weir) referred. There is much good practice around, so why not support it in company law? Good companies already do many of the things listed in clause 173, so if those duties are set out in law, and especially if they are strengthened as proposed in new clause 4, it will encourage directors to be proactive, rather than passive, about the long-term impact of their business operations on employees, communities, suppliers and the environment. That would support directors who provide the leadership to take such a route, and why should that not be so? Who would not want it to be so? I suggest that they would be the directors who are irresponsible, short-sighted and too lacking in imagination to see the business case for a more progressive approach.

The hon. Gentleman will appreciate that businesses are worried that if they are to be able to show that they have taken notice of the items, they will have to set up processes, introduce new sorts of board minutes and effectively go through all the individual requirements, which will lead to more box ticking and administration.

Several of the objectives, such as looking after the environment and caring about one’s employees, are issues that all good companies would have no difficulty in addressing. Those that experience such difficulty should be put in a position in which it is unacceptable for them to continue in such a way. Of course, it will be argued that any demand generates time and bureaucracy, but there must be a balance. Some companies already do what is proposed, as the hon. Gentleman knows, and they do not make arguments about ticking boxes and excess bureaucracy. There will obviously be some consequences if we take that route, but there will be hidden and unrecognised costs if we do not do so.

I am keen that companies should do their bit for the environment, but can the hon. Gentleman explain what the provision about the environment adds to the big body of environmental legislation and regulation that companies rightly have to observe at present?

Indeed, British companies have to obey British law. The provision would put the obligation at the centre of company law, where it would be firmly on the agenda. It would also apply to the behaviour of British companies in their overseas operations, as British statute law does not.

I want to touch on the criticism that the new clause would lead to conflict between the different duties. That is certainly not the intention of the proposal, nor would that be its effect. The primary duty remains clear; were there any conflict the directors have the means to resolve it in the normal way, as at present. There is no change in the current situation or as it is envisaged in the Bill, so I do not agree with the criticism.

It has been suggested that the new clause represents a pluralist approach to corporate social responsibility. That is absolutely not the case. A pluralist approach would allow the interests of all the company’s stakeholders—its employees, the wider community, local residents and consumers—to be given the same priority as the interests of shareholders. It is true that such a situation is a desired long-term objective of CORE—the Corporate Responsibility Coalition—and others but I accept entirely that the framework advanced by the Government through the Bill is one of enlightened shareholder value. The Bill is not about a pluralist approach, nor is the new clause. It is firmly under the umbrella of enlightened shareholder value, which means that the primary duty of directors is to promote the success of the company. If there is to be suing for loss, only losses to the company will count.

Before I conclude, I want to make some observations about the position of the official Opposition. In the other place, in May, Conservative peers sought to remove all matters pertaining to enlightened shareholder value—an attempt to turn back the clock on the progress that is being made in company law. The word “reactionary” may be appropriate. Their position flies in the face of the new support for corporate social responsibility and compassionate Conservatism offered by the new leader of their party, the right hon. Member for Witney (Mr. Cameron), who has made some welcome and strong comments in support of the enlightened shareholder value perspective, so different positions are on display.

In Committee, we saw clear evidence of the conflict and difficulties in the Conservative party—Conservatives did not know where to stand or which way to face. Although the hon. Member for Huntingdon did not try to repeat the tactics of his friends in another place, he none the less—courteously and good-naturedly, as always—tried to weaken the Government’s approach, never mind mine. It would seem from the amendments that have been tabled today that he and his colleagues are trying to do the same again.

The hon. Gentleman has described the road to enlightened shareholder value as one of good intention but meaningless platitude, and the six secondary duties listed in what is now clause 173 and in new clause 4 as a statement of fashion. Let me explain what that statement apparently applies to. Is it fashionable to

“have regard…to

(a) the likely consequences of any decision in the long term,

(b) the interests of the company’s employees,

(c) the need to foster the company’s business relationships with suppliers, customers and others,

(d) the impact of the company’s operations on the community and the environment,

(e) the desirability of the company maintaining a reputation for high standards of business conduct, and

(f) the need to act fairly as between members of the company”?

To describe those issues as the mere trivia of fashion is wrong, although I am happy to allow the hon. Gentleman a chance to explain himself.

I thank the hon. Gentleman for giving me the opportunity to explain what he has misconstrued. I mentioned that those were objects of fashion and I repeat that statement. I say that not for the reasons that he gave, but because there are some 650 common-law duties, of which these six are part, and the Government have cherry-picked certain duties that they want to put into the Bill. All the duties are equally relevant. I am not saying that the six that the Government have chosen are not relevant; I am saying that they should not be codified.

That indicates some of the difficulties that the Conservative party has on this issue. Frankly, to regard all 650 duties—I take the hon. Gentleman’s word for the fact that there are 650—as of equal weight and value is not credible and does not stand up to scrutiny. Looking after one’s employees, and having regard to the local community and the environment are perfectly reasonable issues to give higher priority to. We know that the right hon. Member for Witney adopts a kindly, sunny and progressive stance on these matters. The Conservative party went to the polls last May on the ticket, “Go green, vote blue,” but when it comes to delivery and to contributing to company law through this important Bill, we have seen confusion, weakness and another policy vacuum.

Finally, I know that my right hon. Friend the Minister for Industry and the Regions takes a genuine, sympathetic and detailed interest in these matters. With clause 173, welcome progress is being made. In Committee, she did not accept my argument that “having regard to” is just too passive and that we should take the opportunity, as suggested by new clause 4, to protect responsible directors and to encourage a proactive, pro-business approach within the ambit of enlightened shareholder value by asking them to “endeavour” to do their best. I look forward to her response. We are not worlds apart, but what she says on the record is really important.

I declare my interests as they appear in the Register of Members’ Interests. After seven years of consultation and 10 months of Bill process, involving several thousand amendments—650 of them tabled by the Government in the past week—we near the end of the process on the largest Bill in history. One issue that is directly relevant to every group of amendments to be discussed on Report is the timing of implementation. There is much speculation and there are many rumours going round the City and the law firms on that point. It would be most helpful if the Minister could set out the position when the opportunity arises for her to do so.

I will speak to our amendments Nos. 392 to 398. As the hon. Member for Bedford (Patrick Hall) said, the issue of directors’ duties to promote the success of the company as set out in clause 173 is the area of the Bill that has probably courted the most controversy. I do not believe that the Government really wanted that when they set out with the Bill, but gradually, possibly over seven years of consultation, they have dug themselves into something of a hole on these provisions, from which they are now finding it difficult to extract themselves. We have seen that in the conflicting messages from Ministers since the Committee stage. It was interesting to hear the hon. Gentleman say that we are sending out conflicting messages. I suggest that quite the opposite is the case.

Perhaps the hon. Gentleman will tell the House how his amendment, No. 392, which would qualify the requirement so that a director would have to act in good faith according to the size of his company, makes matters sharper, clearer or more precise.

To put it briefly, we have tabled the amendment because the Conservative party believes that small companies are more susceptible to regulation and that their individual circumstances should be taken into account.

In our amendments, we are attempting to take a constructive approach to improving the provisions, as the hon. Member for Bedford acknowledged. The amendments therefore take account of the still widespread concerns throughout the legal and business communities. We do not feel that they would weaken the Government’s position; that is not our intention.

Part 10 and clause 173 are designed to codify existing, mainly common-law, principles relating to the responsibilities of directors. That has led to vociferous and growing complaints from across the legal and business communities that those provisions in particular could cause company law to be altered dramatically for the worse. Historically, judges have had the discretion to deal with complicated issues relating to directors’ duties on a case-by-case basis; that system has been adaptable and effective in dealing with cases that are often complicated and highly technical. The existing duties found in common law rules and equitable principles which have been built up over the years in the courts are now to be replaced by the statutory statement in part 10. A flexible system is to be replaced by an inflexible one.

On the one hand, the Government have said that there will be no change in the common-law position; yet on the other hand, they have introduced the concept of enlightened shareholder value, which all legal experts agree will alter the common-law position of acting in the best interests of the company. We believe that there is a fundamental gap in the Government’s train of thought: either they are introducing a new concept—enlightened shareholder value—which is an extension of the common law, or they are simply codifying the existing common law. The Minister has still not made clear which course the Government are taking. According to the many interested parties whom we have consulted on the Bill, the position seems to be clear: if the audience is business-oriented, the Government message is, “Don’t worry—nothing is going to change. This is only a restatement of the existing common-law position.”

I remind the House that I have declared my interest as a company director in the register.

Taking for an example the part of the clause on the environment, does my hon. Friend think that it means that a company director would have to do more than simply comply with all existing environmental and planning laws to show that he had satisfied that requirement?

My right hon. Friend makes an important point. It can be argued that the law would not be expanded. However, companies have told us that dealing with it on a daily basis will involve going through more red tape, setting out the steps that they take when reaching decisions in a way that has not previously been thought to be necessary. They regard that as otiose. Indeed, the Minister and I attended a conference in the City at which counsel for a very large public company made exactly that point. Companies are concerned by the proposal.

The hon. Gentleman conceded in Committee and today that successful companies do these things anyway, and do so while being successful, so how does he equate the two and why does he see it as burdensome?

I certainly agree that a successful company will have regard to many of the items set out in the list in clause 173. That is not in dispute. However, the experts are saying that for companies to be able to show that they have complied with the clause will require further red tape, which they believe is unnecessary.

rose—

I shall make progress.

The Government change their viewpoint, depending on the audience.

Will the hon. Gentleman give way?

No. I shall finish my point. If the audience is a campaigning body, the Government’s tactics seem to change. They go on to talk about the concept of enlightened shareholder value and how it will change things. For instance, I mentioned the conflicting statements made by the Minister and the Secretary of State at the Labour party conference. Perhaps the Minister will explain how those are complementary.

I thank the hon. Gentleman for giving way. I shall explain the Government’s view when I respond to the amendments. I am interested in the Conservative party’s point of view. Does the Conservative party support clause 173 with its acceptance of enlightened shareholder value—yes or no?

In the puerile terms of the Minister’s question, the answer is no. Do we have sympathy with the concept of enlightened shareholder value in its most amorphous terms? Yes, we do. Of course, we do not accept the clause as drafted, because I have just proposed half a dozen amendments to it. We think that it can be improved. Are we suggesting that the clause should be taken out of the Bill? No. The clause should stay in the Bill, but needs significant amendment.

Should not my hon. Friend bring home to the Minister the point that the measure has been got together to get off the hook that the Chancellor of the Exchequer got us on by unilaterally removing the legislation that had been promised? Is this not a fake organisation by the Government to try to get themselves off the hook with the green movement, whose members realise that the Government are all talk and no do?

My right hon. Friend puts his point strongly. As I said at the outset, the Government are trying to dig themselves out of a hole by means of the clause. There is no point in the Minister asking me “yes or no” questions because the matter is rather more complicated and sophisticated than that. I shall come to the Conservatives’ viewpoint in terms of corporate social responsibility, if she will only give me a chance.

If we look at where the pressures are coming from, we can see from its briefings that the TUC supports codification and makes an explicit link between the success of the company, the interests of employees and the other matters for consideration listed in the clause, and makes it clear that directors should have regard to these matters. The TUC sees that link as a significant step and wants clear and comprehensive guidance and reporting, which it sees as contributing to raising standards of corporate behaviour. How does a significant step not constitute a change? The Minister must come to terms with that anomaly in her position.

Our party supports many of the good intentions voiced by the Government when they talk about enlightened shareholder value. We have no problem with any of the individual items listed in clause 173, as I made clear to the hon. Member for Bedford in my intervention. For the most part, they exist as common- law responsibilities in current law. However, in the context of sound law, these intentions can easily slip into platitudes, and that view is reflected by many commentators on the Bill.

The Association of British Insurers supports the enlightened shareholder value approach, but says:

“We have nevertheless had concerns that codification might lead to a compliance driven approach to the exercise of directors’ duties rather than one based on the making of good-faith judgements. This could lead directors to take expensive and time-consuming legal advice, impair efficient decision making and add an unnecessary layer of bureaucracy to board practices. Codification of directors’ duties would not then achieve its goal of greater transparency and accountability, but instead create new uncertainties and larger administrative burden.”

The Law Society says that it

“doubts that the savings for business which the government anticipates will be achieved. On the contrary, the new provisions on directors’ duties will result in new uncertainty, increased legal costs and additional bureaucracy…In particular, the Law Society believes that the new code is inflexible—at present, the courts have considerable freedom to develop the law on directors’ duties to suit changing needs and expectations and in practice the code will not be more accessible than common law rules, as its meaning will over time become less and less clear to a reader who does not also understand how it has been interpreted and applied by the courts.”

It is very clear that while the Government protest that they are not changing the common-law position, they are doing just that—a course that will lead only to confusion where there should be clarity. But also, and in some ways even less helpfully, the clause could impede the future development of the common law, which is a very developed area in this country compared with many other jurisdictions.

The list of the six factors to which a director must have regard as set out in clause 173 seems arbitrary. It has been calculated that some 650 common law duties of directors have been laid down through the common law and various statutes over the years, and in Committee, as the hon. Member for Bedford mentioned, I set out quite a number of those. Why have the six in the Bill been deemed more important than all of the others? We recognise that putting the duties into one format would give clarity to company directors. That is why we have supported, in amendment No. 398, the Law Society’s proposal to publish a non-statutory guide to directors’ duties.

May I ask the hon. Gentleman the question that I asked the Committee, which is how can guidance in a statute be non-statutory?

I am not saying that the guidance should be statutory; I am saying that an obligation to provide guidance should be put into statute. I think that the Government have said that they intend to give non-statutory guidance to directors, but they have not yet done so, and it would be helpful if the Minister could say when that will happen.

The factors to which a director must have regard, as set out in clause 173, include many responsibilities that directors already have to have regard to as set out in statute, such as environmental concerns. In some cases the Government are weakening existing statutory duties. Although the Government have taken some of the more fashionable responsibilities already imposed on directors by statute or common law, they have curiously chosen to ignore others.

Which ones?

I think that I gave the Minister a list of about 45 in Committee and I will leave it at that.

We are not arguing here that all directors’ common- law and statutory duties should be put into statute. That would be nonsensical, particularly as the common-law duties are being advanced all the time. However, amendments Nos. 393 and 395 would oblige company directors to give consideration to all other common-law duties of directors. A non-statutory guide, as provided for in amendment No. 398, could then give directors some guidance as to what these duties are, without the guidance being enshrined in statute.

A May 2006 Financial Times lead article entitled “A missed opportunity” says:

“The stated aim was to make directors’ duties clearer and more up-to-date. The reality is a confused list that mixes platitudes with necessary duties…the Government’s approach betrays an underlying mistrust of business.”

This area has also prompted serious concerns from the legal profession. A host—I say a host—of major corporate law firms, whose job it will be to interpret the clause, have told us that the matters listed in clause 173(1)(a) to (f) make a rigid list of factors that may artificially constrain the decision-making processes and provide inappropriate challenges to the way in which directors have exercised their discretion. The list of factors set out in clause 173(1) is applicable to all types and sizes of company, but the listed matters may not be appropriate for directors to take the best decision in all circumstances. The director of a major plc and the sole director of a corner shop will not take into account the same factors when they make important decisions, and the judgment of directors is at real risk of becoming artificially fettered by their having to tick-box through a checklist of factors that may have no relevance to what their company does.

The hon. Member for Bedford (Patrick Hall) has already raised those accusations. The question is: what loss can a company suffer as a consequence of the breach of those duties which would be actionable in the circumstance described by the hon. Member for Huntingdon (Mr. Djanogly)? I remind him how the law works: it must be the company’s loss, not somebody else’s.

With respect, the hon. Member for Bedford was not supporting my point. The hon. Member for Cambridge (David Howarth) has missed the point that clause 173 must be taken with other provisions in the Bill in order for one to conclude that directors may have greater liabilities. If one puts those provisions together, one comes up with that answer, which does not allay my fears.

Amendment No. 394 would require directors to consider only those factors which they, in good faith, considered relevant to the matter in question. Provided that they acted in good faith, their decision on the relevance of a particular factor could not be called into question by the courts, except to the extent that the directors acted in breach of their duty to exercise reasonable care, skill and diligence.

Concerns have also been raised that the list does not make clear the ranking of the factors. That is why we have tabled amendment No. 396, which states that no one duty should take precedence over another.

The fundamental problem with clause 173 is that it clouds the paramount duty of directors to consider the best interest of the company; I do not think that the hon. Member for Bedford was saying that that should not be the paramount duty. This is the kernel of the issue: as I have said, the other duties are all important, but the ultimate responsibility of a director is to the best interest of their company, and from that fundamental duty all other responsibilities spring. By clouding that duty, the Government will do a great disservice to company law and company directors for a long time to come. That is why we have tabled amendment No. 397, which states that

“The duty to promote the success of the company shall be paramount.”

The hon. Member for Bedford promoted his concept of corporate social responsibility. Let me spend a little time addressing his concerns. CSR is now taken more or less seriously by all the larger companies based in this country; it is generally agreed that it is no more than good business sense to do so. My party, too, has shown how highly it values CSR. We in the Conservative party support social responsibility in companies. We believe that companies, in preference to the state, can and should be a positive driver of environmental and social change. In fact, we have placed increased corporate responsibility at the top of our agenda, even in being what my right hon. Friend the Member for Witney (Mr. Cameron) called a “critical friend” to big business when necessary. No Member, certainly no Conservative Member, would dispute that increased CSR is a good thing and a developing area.

However, we argue that this Bill is not the place in which to place unnecessary non-specific mandatory burdens on company directors of all UK companies. That will not only lead to uncertainty and the fear of litigation but set back an agenda that my party supports. The environmental agenda, which was mentioned by my right hon. Friend the Member for Suffolk, Coastal (Mr. Gummer), is of prime importance to Conservatives; that is why we say that we need a climate change Bill. However, that is different from making broad statements in a very precise Bill, which will lead to more tick-box exercises by companies with little gain to the environment. There are many campaigns to improve corporate environmental and social involvement across the world—indeed, sometimes across companies.

The problem is that very few of the companies involved will be affected by the Bill, because most such multinational companies are non-UK companies. Let me be frank: we can make our company law regime as rigid as we wish, but it will not matter a jot to most of the companies that hon. Members probably have in mind, and will therefore not go far in helping to further their individual campaigns. Most major multinational companies that are UK-listed already take CSR very seriously and spend considerable amounts of time and money on it. We can all too easily ignore the fact that many publicly listed companies sell themselves on their CSR reputation. Furthermore, increasing numbers of shareholders are realising that they can exert a positive influence on the companies that they ultimately control, and we wish to encourage that. The rise of “green” and “ethical” investment funds operated by most of the major fund managers has made them clearly aware of CSR, and it is now simply bad business for a major PLC to ignore it.

The vast majority of companies affected by the Bill—perhaps 99 per cent.—are small and medium-sized companies. Those companies, which are rarely the target of environmental or social campaigns, already have enough troubles without being asked to jump through a series of statutory hoops. Because the Bill deals with UK companies, it does not have the framework to deal with the issues on which activists have been campaigning. It treats the corner shop in the same way as the multinational. It is the wrong place to be dealing with these issues, important as they may be. That is why we tabled amendment No. 392, which proposes that duties shall be appropriate to the size of the company, and amendment No. 788, which would exclude small and medium-sized companies from the provisions.

Many organisations have taken an active interest in the Bill, and I have met several of them. In Committee, the hon. Member for Bedford stated that a voluntary approach would not work and referred to examples of corporate, social and environmental abuse. He hoped that providing legislation on that would raise the bar for CSR. However, the Bill as drafted will merely provide vague language to govern directors and serve to confuse businesses, particularly small and medium-sized companies. That is why we tabled an amendment that would limit it to larger companies.

That said, we believe that the UK should be the world leader in promoting good CSR. Where UK companies lead, Conservatives believe that other companies will follow. However, the answer to leading the way in CSR is not to impose a heavy regulatory burden on our companies but to encourage investors to take into account a company’s record on CSR and to encourage all the companies in the UK to understand that being socially responsible is in the best interests of the company. Governments certainly have a role to play in this; indeed, we often forget the need to use carrots for best practice as much as threatening the stick of regulation. I have no doubt that CSR will also be moved ahead by market forces. Informed consumers voting with their feet will always be a more effective way of getting companies to take up their CSR responsibility than regulation will ever be.

Unlike many hon. Members present, I was not fortunate enough to serve on the Standing Committee, but I should like to speak to new clause 4 and amendment No. 2, tabled by my hon. Friend the Member for Bedford (Patrick Hall) and myself.

Just over a year ago, I tabled an early-day motion, which was signed by more than 220 hon. Members, setting out why company law needed to be modernised for the 21st century. I warmly welcome the Bill, particularly the fact that it clearly states the Government’s position with regard to enlightened shareholder value. That clarity seems to be sadly missing from the Conservatives’ approach; I am sure that that will not go unnoticed.

I tabled the amendments in the hope that we could go a little further. New clause 4 proposes a positive duty for company directors to take responsibility for the impacts and interests of their companies in the round by endeavouring to minimise adverse impacts on the community and the environment, promoting the interests of employees, and maintaining high ethical and business standards. That is merely what we have a right to expect of our companies as responsible members of the global community. Modernising company directors’ duties in that way would give them a clear incentive proactively to consider the impact of their business operations on their employees and suppliers and on the companies and environment they rely on. By empowering directors to take their responsibilities seriously, we would give room for our companies’ huge energy and innovation in terms of delivering unprecedented social and environmental benefits. By making it a clear and positive duty, we would provide an incentive for those directors who do not take their responsibilities seriously to think again.

I am a Labour and Co-operative MP. For the co-operative movement, corporate social responsibility is integral to doing business, and always has been. However, it should not only be the concern of co-operatives and social enterprises. It is in the long-term interests of the economy and of society as a whole—and in the interests of the long-term success of companies themselves—that all businesses operate in a responsible and sustainable way.

I support the efforts that the Government have made to encourage responsible business practices, including through the promotion of business education and best practice in CSR. The Bill, particularly through the codification of directors’ duties, addresses a fundamental premise. Should a company operate only in the interests of its members—its shareholders—or should it have a wider remit and operate in the interests of stakeholders? If we accept that, as I do, how should we manage it—by legislation, regulation or voluntary code? That goes to the heart of the matter. In my view, as I said on Second Reading, it is no longer acceptable for financial profit to be the only motivating factor in doing business. Many businesses already acknowledge a wider responsibility to consider the interests of employees and the impacts on the local community of doing business—the essence of what we say is CSR.

Regrettably, though, despite an increasing number of commitments by companies to a more responsible way of doing business, we have evidence that there are still far too many failures to deliver. As my hon. Friend the Member for Bedford noted, the amendment is supported by members of the Trade Justice Movement and the Corporate Responsibility Coalition. Like most hon. Members here, I have received an enormous number of postcards, letters and representations on this. Many of these organisations have compiled large bodies of evidence detailing the failure of a purely voluntary approach to CSR. When I spoke back in June on Second Reading, I said that The Times had uncovered allegations that Portuguese children as young as 11 were being paid just $20 a day to make shoes for the clothing chain, Zara. It is therefore with a sense of déjà vu, as well as concern, that I note Channel 4’s recent story alleging that factories in Bangladesh that produce clothing for Tesco have employed children as young as 12. ActionAid has also exposed Tesco for paying poverty wages and failing to observe basic health and safety standards in the use of pesticides.

By contrast, will the hon. Lady take the opportunity to praise the work of Waitrose, part of the John Lewis partnership, which has an Africa foundation, which provides wages that are acceptable not only to those who receive them, but to hon. Members of all parties? It also promotes education and training in the countries from which it buys produce.

I am more than happy to praise companies that implement corporate social responsibility. I was in Ghana recently and I met representatives of an organisation called the Blue Skies company, which operates the highest standards for its employees, provides a high quality product and looks after the interests of the local community.

The highest profile companies are the most easily monitored by campaigning organisations such as the Trade Justice Movement, Christian Aid and Friends of the Earth, and the media. They, therefore, feel the pressure to improve most keenly. However, thousands of British companies have a multinational impact—far too many for the non-governmental organisations to police, as some suggest as a solution. We need a change in the law and the Bill gives us an opportunity to bring that about.

One of the points that companies make is that they want a level playing field. Those that develop good practice do not want others to undercut them and compete by driving everyone down to the lowest common denominator. The good companies want a level playing field of good practice throughout.

I could not agree more. Putting a stronger emphasis on action and encouraging a more active approach by directors is more likely to lead to genuine world improvements and create the level playing field that my hon. Friend mentions.

The hon. Lady and I agree about many things. Why does she believe that the Government turned their backs on the six years of work that companies did to report their actions on such issues? The Government told them that they had to do that but then, on the Chancellor’s whim, the policy was thrown out one night because he thought that he would buy off people who did not like corporate social responsibility.

I do not want to pre-empt tomorrow’s discussion on the business review aspect of the Bill, but I believe that the majority of companies would welcome the opportunities in the business review, which will enable them to report their activities.

There must always be a balance between incentive and regulation in the framework in which we expect companies to operate. However, a company does not exist in isolation and its value is much more than its capital and the way in which it uses that. A company must take into account its value, brand and reputation. That will apply increasingly as investors and consumers become more sophisticated about the way in which they get involved.

I have much sympathy with the hon. Lady’s aims and with the idea that good directors should do as the new clause suggests. However, let us take the example of an oil company—hon. Members will be pleased to know that I have nothing to do with oil companies. If the new clause were accepted, would an oil company have to decide that it could not promote the sale of petrol to gas guzzlers and people who use too much fuel and that, to satisfy the provision’s requirements, it would have to consider the environment in the long term and move away from a petrol-based model? Is that what the hon. Lady has in mind?

The right hon. Gentleman reads far too much into the new clause. The word “endeavour” is important. Directors would have to endeavour to consider the wider environmental impact and ensure that their actions did not have an adverse impact. However, they would have to examine the wider picture and I do not envisage what the right hon. Gentleman suggested happening.

Does my hon. Friend acknowledge that the new clause would require directors to consider “significant adverse impact” on the environment, whereas clause 173 is much weaker and the Opposition amendments are so weak and generalised that they would leave any director in a state of confusion about what he or she was supposed to do?

I thank my hon. Friend for that intervention—he raised a point that I should have made. “Significant” is a significant word. The amendments that the Opposition have tabled would significantly weaken the Government’s objective. All that I am asking is that we tweak it a little to make it more positive.

The new clause will not open the door to spurious legal challenges. Our amendments would achieve the right balance between rights and responsibilities. I hope that my right hon. Friend the Minister will consider new clause 4 and its aims seriously, and I look forward to her reply.

I begin with the point that the hon. Member for Huntingdon (Mr. Djanogly) made about whether clause 173 constitutes reform. It is a reform because it is clearly different from the previous law, and it is welcome because it supports the development of corporate social responsibility in a way that will protect directors who believe that such matters are important from litigation, which is far more likely to arise than the possibility that the hon. Gentleman raised.

I want to direct most of my comments to new clause 4 and the amendments that the hon. Member for Huntingdon tabled. As I said in Committee, I have every sympathy with the motives of those who tabled the new clause. It is important to drive forward the debate on corporate social responsibility. Unfortunately, after much thought and having considered the debate in Committee carefully, I remain of the view that clause 173 is a better way forward at this stage.

Clause 173 is better for two main reasons. First, I am still worried about the problem of contradictory duties. The hon. Member for Bedford (Patrick Hall) mentioned that and I believe that the problem remains. Secondly, the new clause raises expectations that it cannot fulfil. There is a risk that it will make matters worse for good directors who want to follow a social responsibility agenda.

Let us consider contradictory duties. The central problem is the requirement in the new clause for directors to

“minimise any… adverse impact… on the community and the environment”.

That is different from clause 173, which simply asks directors to “have regard to” the environment and the community. It is impossible to minimise two things simultaneously when there is a trade-off between them. Let us consider a company that is engaged in inherently polluting activities. The way to minimise pollution and thus the impact on the environment is plainly to close the factory. However, that cannot minimise the impact on the community because of all the jobs that would be lost. That also works the other way around. To minimise the impact on the community, the factory must be run as efficiently as possible, at least as regards cost, but that might well lead to worse environmental circumstances.

I am interested in the hon. Gentleman’s comments. Yesterday, we held a debate on a switch to green taxation, which the Liberal Democrats proposed. Surely the point of environmental and green taxation is to ensure that directors

“minimise any significant adverse impact of the company’s operations on the community and the environment”.

It is to change the way in which companies operate and realise the principle of the polluter pays. Is not the hon. Gentleman arguing against the policy that the Liberal Democrats promoted yesterday?

Not at all. The problem is in the word “minimise”, which means to make as little as possible. Green taxes both reduce anti-environmental behaviour and raise money simultaneously, but they do not reduce the activity to zero. The problem is in the trade-off, as opposed to minimising, which is the problem of the clause.

Trying to minimise significant adverse impact on the environment is overridden by the primary duty of acting in a way to promote the success of the company. How could one promote the success of the company by closing the company? If one closed such a company, one would not just be minimising but eliminating.

There are often examples, which we have discussed on the Floor of the House, of a company that thinks that the way to maximise profits is to close down one part of its operation. The hon. Gentleman’s point is not therefore an objection. I thought that he was going to say that his new clause uses the words “endeavour to minimise”. I have been thinking about that point over the past few months. Technically, it is possible, I suppose, to endeavour to minimise the adverse impact on both the environment and the community, to fail to do both, but then to argue that one has not breached the duty because one has tried to minimise both but failed. That seems a terrible way to draft a duty of directors—it is saying that if they apparently fail to fulfil that duty, they will be let off, because they only have to try to fulfil it. The better, more positive and encouraging way to do it seems to be as the Government have proposed—to say that the director must “have regard” to both the environment and the impact on the community. I am therefore still worried about the contradictory duties point.

My second objection to new clause 4, which is the reason I prefer the Government’s approach, is that it raises false expectations. We have already heard two very different points of view from the hon. Member for Bedford (Patrick Hall) and the hon. Member for Portsmouth, North (Sarah McCarthy-Fry) with regard to whether the new clause promoted a pluralist view of company law or was sticking to the Government line of enlightened shareholder value. The hon. Gentleman was correct that the new clause does not abandon the Government’s basic stance of enlightened shareholder value. The hon. Lady, perhaps talking directly to the campaign groups, was saying that it was an attempt to move the pluralist view on. It cannot do both.

An underlying problem is what company directors’ duties are under the enlightened shareholder value system. It is important to remind ourselves that as long as that system is in place—and the new clause does not challenge that system—the directors’ duties are to the company, not to anyone else. The hon. Member for Bedford used that point to reinforce his argument, which I think is correct, that there is not much risk of litigation under the new clause, or under clause 173. Who can sue as the company in such a situation? Normally, the board of directors represents the company, and decides whether to sue. If not the board, in some cases, a majority of shareholders—usually, a super majority of 75 per cent.—can order the company to sue. As he said, rare derivative actions will occasionally occur, which we shall discuss later. The scope for using such derivative actions, however, is limited. More likely, as the hon. Member for Huntingdon mentioned, is action by takeover bidders, or administrators—or liquidators—on behalf of creditors after the company has gone insolvent. Those are the only people likely to be using directors’ duties litigiously. Are those people—institutional investors, commercial creditors and boards of directors—likely to put forward, and implement through litigation, a strategy based on pluralism, which is more concerned with the environment and the community than with the company’s profits? I dare to suggest that they will not enforce those directors’ duties in that direction.

May I remind the hon. Gentleman that he made the point clearly in Committee that such actions cannot proceed unless the loss can be attributed to failing to fulfil those secondary duties? Does he now feel that that would be possible? He did not seem to be convinced in Committee.

The example that occurred in practice was precisely an attempt to sue a director for selling a business at less than maximum value. In that example, a director needs the protection of the new law and is not threatened by it at all. My point was therefore that directors are not threatened by the new law, as the hon. Member for Huntingdon was saying, because the only examples of a loss would be where a company could be said to have made a financial loss as a result of taking into account wider interests. In those circumstances, and only in that direction, directors might be vulnerable to personal actions. That is why I said in Committee that clause 173 was a deregulatory clause that protects directors from actions that might otherwise be brought against them.

A problem with the new clause is that if the hon. Member for Bedford is right that the word “endeavour” makes it harder for directors to fulfil their duty than the words “have regard”, in a way, that reduces directors’ protection, as they will be less likely to be able to argue that they have fulfilled their duties under the law and cannot therefore be sued for what they did. I fear that that is an unintended effect of the new clause as drafted. The Government’s existing proposal, because it might be slightly looser, is in practice more helpful for directors who want to do the right thing

I now turn to the amendments tabled by the hon. Member for Huntingdon. Some are slightly puzzling, and one wonders why they are needed. Amendments Nos. 393 and 394 use subjective words and phrases such as “in good faith” or “relevant”, but that subjectivity is already to be found in clause 173. In fact, the House of Lords changed the original draft to ensure that that subjectivity suffuses the clause as a whole, and one of the arguments about new clause 4 is that it renders part of clause 173 objective rather than subjective. Amendments Nos. 393 and 394 would not add anything to the Bill. They are merely confusing, as they throw into doubt how the start of clause 173 should be read.

Similarly, why is amendment No. 392 needed? It talks about requiring directors to act appropriately for the size of a company, but that is implied in the duty already set out in clause 173, where directors are required to act in the way that they think would promote a company’s success. If amendment No. 392 did serve to reduce the scope of the duty placed on directors, it would also have the unfortunate effect of reducing the scope of the protection to them offered by new clause 4, and so could be said to be objectionable on those grounds.

Amendment No. 395 deals with common-law duties. The hon. Member for Huntingdon has said in the past that there are 640 or 650 of them, but there is some confusion in his approach. I have done some digging and discovered that many are simply examples of duties that are in the Bill, such as the duties not to exceed the powers of the company, or to act in accordance with the company’s constitution, or to act with skill and care, and so on. Other examples are not, in the strict sense, directors’ duties at all, as they are not duties to the company but duties to someone else, as set out in the wider environmental, employment or other law. The company law review team and the Law Commission have put years of work into these matters, and so it would be surprising for them to get the law as badly wrong as the hon. Member for Huntingdon suggests.

Amendment No. 788 worries me a bit, as it proposes that the

“duties implied by this section shall not apply to small and medium sized companies.”

First, I do not know what the word “implied” means in that context. It would usually refer to duties not mentioned elsewhere in the clause, but in this case it must refer to duties that are not mentioned but implied by the clause. I am not at all clear what is meant: if the amendment refers to all the duties in the clause, why does not the hon. Member for Huntingdon want the fundamental duty to promote the success of the company to apply to SMEs? That would make no sense, as that duty must apply to companies of all sizes.

Perhaps the hon. Member for Huntingdon really means that the wider concerns that follow the words “have regard” in clause 173 should apply only to large companies. If so, the amendment would achieve only a reduction in the protection offered to directors of SMEs against the sort of legal action that I described earlier. I think that those directors of SMEs who follow corporate and social responsibility requirements closely are entitled to the same protection as are directors of large companies. Therefore, I do not understand what amendment No. 788 is getting at. It may be more of a symbolic gesture rather than something that the hon. Gentleman really wants to be agreed to.

Finally, amendments Nos. 396 and 397 contradict one another, and both cannot be accepted. Amendment No. 396 states that no duty takes precedence over any other, whereas amendment No. 397 states that the duty to “promote success is paramount.” Duties are either equal or unequal; they cannot be both. I hope that the hon. Member for Huntingdon is able to choose between the two alternatives that he offers.

As it stands, and as all speakers have accepted, clause 173 means that the duty to promote the company’s success is paramount, so there is no need to add what is proposed in amendment No. 397. The fact that amendment No. 396 would throw that priority into doubt is unfortunate, and I hope that the hon. Member for Huntingdon will not press it to a vote.

I shall be brief, and I shall start by speaking about the position adopted by my right hon. Friend the Minister. The right hon. Member for Suffolk, Coastal (Mr. Gummer) suggested that the architecture of clause 173 was an attempt to claw back what was lost when my right hon. Friend the Chancellor ditched the operating and financial review. If that is true, one has to say that she has not done too badly. Many who have attempted similar tasks in the past have not ended so well, as the right hon. Gentleman will admit. If, as he contends, my right hon. Friend has got the Government and the Chancellor out of a hole, she has survived to tell the tale. That puts her in a strong position.

The hon. Member for Cambridge (David Howarth) was right to say that instead of trying to codify the 650 or so common-law rights accumulated since limited liability began, my right hon. Friend the Minister has set out some general principles. That effort is not an aggressive intrusion on the rights of directors, but an attempt to protect them. There is already a problem about the rights of directors and their treatment in the law. For example, the rising liability insurance costs for directors should send a signal to the House that the circumstances that obtain at present need to be set in a proper framework of principle that will protect directors and inform the discharge of their duty.

This has been a very short debate, but is it not clear that the Minister and the hon. Members for Bedford (Patrick Hall) and for Cambridge (David Howarth) have completely different views on how the principles at issue would be construed in a court? So a person like me, who brings an open mind to the matter and wonders whether the proposals would work, is left at a loss. The whole thing is very muddled—and I am left having to say as much in an intervention, as there will not even be time for me to speak in the debate.

The right hon. Gentleman deserves credit for trying to think clearly. Shortly, he will have to work out whether he should support his party’s amendments, and I suspect that that will add to his confusion rather than diminish it.

New clause 4 takes the principles set out in clause 173 and tries to make them clearer and more specific. The hon. Member for Cambridge drew attention to that part of the new clause that deals with the impact on the environment, but I believe that it would have precisely the opposite effect from the one that he set out. The new clause is much clearer about how directors should set out to protect the environment and is much to be preferred. Clause 173 makes a rather loose and general reference to the

“impact of the company’s operations on the community and the environment”.

The form of words proposed by my hon. Friend the Member for Bedford (Patrick Hall) is more specific and provides better guidance. Moreover, his criticism of the Conservative amendments was absolutely correct.

I hope that the House will recognise that my right hon. Friend the Minister has taken on a difficult and complex matter, in circumstances that the House will agree were less than desirable from her point of view. She has made an excellent job of it. New clause 4 improves on that, and assists her in the work that she has attempted. I hope that the House will support it.

I do not think that producing a measure that is capable of so many different interpretations will solve the problem that has been caused by the Chancellor. I speak as someone who takes a strong view on this matter. I draw hon. Members’ attention to my entry in the Register of Members’ Interests. I advise a large number of companies on the subject of corporate responsibility. I prefer the term “corporate responsibility” to “corporate social responsibility” because the latter limits the coverage that companies ought to have.

I am in favour, in principle, of companies having to present to their shareholders a proper account of their activities that covers not only their financial activities, but those that relate to the wider matters of corporate responsibility. I am in favour of that happening because it means that each company can talk about itself in its own way and satisfy those who listen to it in their own way. The trouble with the Minister’s proposal is that it is so incomprehensible. Either it means a great deal, as some people say, or it means nothing at all compared with the present legal situation.

New clause 4, similarly, is being interpreted either as a mere tightening up—a bit of an extension involving better wording—or as a dramatic alteration. I find this difficult to deal with because I, too, have read what the campaigners have written about the new clause. Frankly, if what they say is true, what the proposers of new clause 4 have said is not quite as true. Alternatively, if what the proposers of new clause 4 say is true, it does not quite explain some of the real difficulties that many of us—who are on the same side in terms of what we are trying to do—perceive in new clause 4. The hon. Member for Cambridge (David Howarth) rightly made that point earlier.

Hon. Members would be wise not to go along with new clause 4, not on the basis that they take a view one way or the other on corporate responsibility or the mechanisms by which we should get companies to take these matters more seriously, but simply because if companies are being asked to do that, they must be clear about what they are expected to do. They must not be presented with wording that will have to be interpreted by the courts.

One of the problems with the bipartisan approach that we try to take on environmental matters is that we often end up doing nothing. Everyone talks about it and the rhetoric is very good, but in the end nothing is done. The worst thing to do in such circumstances is to produce a measure that the courts are going to have to interpret. That is what worries me about this wording. It has been suggested that we should not be too mean to the Minister about this because everyone else who has tried to do something about it has been sacked. That is not a very good idea, if I may say so. The Minister has moved pretty rapidly from one job to another over the past few years, but that seems to be part of this Government’s mechanism of keeping everyone in perpetual motion lest they begin to understand the issues that they are facing and start to worry about the fact that nothing is being done.

Many of us who are pushing for a climate change Bill believe that we are going to have to do a great deal more, much more precisely and with real regulation that will actually work. If we are going to do that, however, we should not at the same time load people down with vague duties and bits and pieces that the courts will interpret. I would say to the Minister that if the Government are going to introduce the kind of environmental legislation that we desperately need to cut our carbon output and change our carbon footprint, we will have to ask people to do some very tough things. So far, the Government have avoided doing any of that. Instead, they have gone in for a kind of flim-flam. The trouble with this particular flim-flam is that it will have to be interpreted by the courts, and we do not know what the outcome will be. Worse still, decent directors who try to understand this legislation will find themselves at odds with the courts. The Minister has put us in a pretty difficult position already with clause 173. I hope that she will satisfactorily defend it against new clause 4, on the basis that that is even worse, but I do wish that she would get down to some practical, direct and real environmental legislation so that we would know where we were, rather than presenting us with these measures as part of a propaganda proposition to try to get the Chancellor off the hook.

I am pleased to be able to make a short contribution to the debate. I was pleased to hear the hon. Member for Bedford (Patrick Hall) say that his new clause was pro-business. It is important for all of us that our companies should continue to be successful. However, the world is changing and—as the right hon. Member for Suffolk, Coastal (Mr. Gummer) rightly said—we are all now much more concerned about the environment and climate change. Companies are going to have to change along with that.

The hon. Member for Portsmouth, North (Sarah McCarthy-Fry) made the point that there is a philosophical argument involved. To whom does a company owe a responsibility? Is it, as the existing law states, only to its shareholders? Incidentally, those shareholders tend these days to be other big companies or institutional investors, which creates a kind of circle. That is where the idea of enlightened environmental shareholder action begins to fall down. Other big companies control each big company, so unless all of them have an interest in doing something about the environment, I do not think that we would get very far.

To whom does a company owe a duty? Traditionally, it has been purely to its shareholders—but in the changing world in which we live, where we need to tackle climate change, companies must also owe a duty to the wider society, as the right hon. Member for Suffolk, Coastal rightly said. New clause 4 would point directors along the route of thinking about their duties towards the community and the environment.

The hon. Gentleman was talking about a company’s duties. However, he then switched to talking about directors’ duties. This provision is about directors’ duties. Companies may have broad duties under environmental law, but this is about directors’ duties to the company.

I am well aware of that, but the directors are the controlling mind of the company. I think that the hon. Gentleman is being a bit nit-picking.

Companies will have to change the way in which they interact with communities and with the general environment. The point was made earlier—by a Conservative Member, I think—that there might be a need to change audit procedures if some of these proposals were to be agreed. I believe that companies will have to change anyway, and that they should be thinking now about how they will change their audit procedures in order to assess the carbon footprint of the company, and to determine how the company impacts on the environment. We had a debate in the House yesterday on the Liberal Democrats’ proposals for green taxation, and I understand that the Conservatives have also been considering proposals for environmental taxes. The logical extension of that is that if we are going down the route of taxing companies on their environmental performance rather than purely on their income, new procedures will have to be imposed on every company in order to work out its environmental impact. The audit procedures will therefore have to be looked at in any event.

The point was also made about the impact of citizens on companies in relation to green and ethical funds. However, if we are serious about introducing the substantial changes that we need to tackle global warming and environmental change, all companies will need to be green and ethical. We should not be looking at separate funds in that regard. All companies should adopt such policies. The whole point of this exercise is to achieve a level playing field, with all companies operating on the same level and considering seriously their community and environmental responsibilities. That has to be done.

The impact of the provision on smaller companies was discussed. The hon. Member for Huntingdon (Mr. Djanogly) claimed that the provisions would affect everyone from the corner shop to the corporation. It is a long time since I practised law, but in my experience most corner shops are not companies, but sole traders or partnerships. I am trying to remember the exact procedure that he used, but I believe that, in the last Budget, the Chancellor took measures to try make small partnerships and sole traders desist from incorporating to avoid taxation.

Let as look at what is already provided for in clause 173 and consider each subsection in turn. Subsection (a) deals with

“the likely consequences of any decision in the long term”.

Any company that does not consider the long-term consequences of a decision is barking mad, because it will affect the future of the company. However, some businesses might look to short-term profit rather than long-term need, so the provision will make sure that companies consider the consequences of their actions. A small company or sole trader will of course think about the long-term consequence of any action, otherwise they would not have a business.

Subsection (b) deals with

“the interests of the company’s employees”.

In a small business, the employer is likely to know all the employees, and that is more important. Subsection (c) deals with

“the need to foster the company’s business relationships with suppliers, customers and others”,

but in a small business, the chances are that the employer is the sole buyer in the company. Subsection (d) deals with

“the impact of the company’s operations on the community and the environment”.

A small company’s business operates in the community, so the employer would consider it. Subsection (e) deals with

“the desirability of the company maintaining a reputation for high standards of business conduct”.

That is more important for small businesses than it has ever been. A large, multinational oil company might get away with dubious practices, but a small business in a local community is most unlikely to do so. Subsection (f) deals with

“the need to act fairly as between members of the company.”

For a sole trader, it is hardly likely to come to that. Many of those duties are already observed by good companies, but the argument about the level playing field is important because we must move forward.

Today, we have learned in a report that we must cut our emissions by 90 per cent. if we are to stop climate change and have a planet on which to live. We cannot do that as individuals, no matter how many low-voltage light-bulbs we use, and no matter whether we have windmills on our roofs. That will not bring about changes in emissions. Companies must be part of the process, and to ensure that that is the case, we must change the culture of companies. Neither clause 173 nor new clause 4 goes far enough, but they are a step in the right direction. I must tell the Minister that although the provisions do not go far enough, they are an improvement. They will make companies start to think about what they have to do. I prefer new clause 4 because it goes slightly further, but there is more to do, and companies should take that on board.

This has been an extremely good debate. I thank Labour Members, especially my hon. Friends the Members for Bedford (Patrick Hall), for Portsmouth, North (Sarah McCarthy-Fry) and for Newcastle upon Tyne, Central (Jim Cousins), for their generous welcome of the provision, and I note their wish that it went a little further. I also appreciate the welcome that the hon. Member for Angus (Mr. Weir) gave the measures. It is a shame that I must once again draw the House’s attention to the fact that, although Opposition Members said that they wished to debate the issues in detail, for most of the debate the right hon. Member for Suffolk, Coastal (Mr. Gummer)—I welcome his contribution—has been the only Opposition Member present in the Chamber. There have been more Members from the minority parties than from the Conservative party, even though it was Conservative Members who resisted the programme motion so vigorously.

Clause 173 heralds and articulates a radical, historic and vital cultural change in the way in which companies conduct their business—a change that the Government enthusiastically promote in the Bill. In the past, business success in the interests of shareholders has been thought to be in conflict with society’s aspirations for people who work in the company or in supply chain companies, the long-term well-being of the community and the protection of the environment. The Government challenge that view. We think that the two purposes are complementary, not contradictory.

We have had an instructive debate on some important matters, and I am pleased that some finely balanced judgments have been placed on record. I listened carefully to the carefully chosen words of my right hon. Friend the Minister for Industry and the Regions. All that I want to see is that the secondary duties in clause 173 are taken seriously and cannot lightly be dismissed. I think that she has gone as far as she reasonably can today. Progress is being made, in my judgment, and I do not wish, by calling a vote on these matters now, to risk provoking the Conservatives in another place into reintroducing the damaging position that they took last May. Therefore, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Clause 171

Scope and nature of general duties

I beg to move amendment No. 389, in page 78, line 23, leave out subsection (3).

With this it will be convenient to discuss the following amendments:

No. 390, in page 78, line 24, leave out from ‘directors’ to end of line 25.

No. 391, line 26, leave out subsection (4).

No. 399, in page 79, line 36, clause 176, after ‘must’, insert ‘take all reasonable steps to’.

No. 400, line 37, leave out ‘, or possibly may conflict,’.

No. 401, line 38, at end insert

‘at the time when he seeks authorisation pursuant to subsection (5) below.’.

No. 402, in page 80, line 4, leave out paragraph (a) and insert—

‘(a) if the director reasonably and in good faith believes the situation is not likely to give rise to a conflict of interest; or’.

No. 403, line 14, at end insert—

‘(5A) The authorisation may, in either case, be given by them (unconditionally, or subject to such conditions or limitations as they may specify), either in relation to a particular matter or generally, following receipt by them of a general notice in accordance with section 183.’.

No. 404, line 22, at end insert—

‘(8) Where a conflict or potential conflict arises because of multiple directorships, the duty is not infringed if the director ensures there is no disadvantage to the interests of the company.’.

Given the lack of time, due not least to the way in which today has been arranged, I will simply say that we will seek to press amendment No. 402 to a Division and move directly to speak to it.

The amendment allows directors to exercise their subjective judgment about whether a situation is likely to give rise to a conflict. We should be showing UK company directors that we have faith in their judgment—a course that the Government do not seem keen to follow in this instance. The Government said in Committee that the amendment watered down the obligations on directors and endangered members, but it should be seen as a flexible, forward-looking approach that benefits companies.

Does the hon. Gentleman accept that one of the advantages of amendment No. 402, and one of the reasons why I support it, is that it reintroduces into the law the concept of good faith and honesty, which is surprisingly missing from the Government’s present draft?

The hon. Gentleman makes an important point, which I accept. The Law Society, among others, has pointed out that there is a significant difference between the common-law rule on conflicts of interest and the wording of the clause. Notably, the common- law rule maintains a negative position, whereas the clause imposes a positive duty. While the Government deny that that is so, it seems to be a widely held belief among stakeholders. The fact that the clause now gives rise to a positive duty is a key concern that many stakeholders have raised. The fear is that that positive duty might impact on a director’s ability to assume multiple directorships, which are a feature of the UK company system and provide a number of benefits to companies of all sizes.

We believe that it will be more difficult for directors to hold multiple directorships, which could affect the pool of non-executive directors. That is of particular concern to the private equity and venture capital industries.

The amendment does deal with directors’ conflicts of interest. Our aim is that directors should seek to avoid conflicts of interest, which do arise and need to be dealt with in a reasonable and balanced way. If they arise, the interests of the company must come first. The current law is strict. We want to put in place a statutory structure that enables the interests of the company to be closely balanced with those of the director so that people may have, in particular circumstances, multiple directorships. But it has to be clear that the interests of the various companies of which they are directors are taken into account.

Through the amendments—particularly amendment No. 402—the Conservatives are starting to water down the balanced safeguards that we have provided for shareholders.

Will the Solicitor-General give way?

I regret that I cannot give way because of the time. I apologise.

We have provided for shareholders and companies to be able to look after their interests. If directors have created a conflict—in some cases they will not be aware that the conflict is about to arise, but in the case of multiple directorships it is possible that they will be aware—they must resolve that conflict and the company’s interests must come first. It is important that, in order to give greater protection and to safeguard the interests of shareholders, investors and the companies themselves, we do not give discretion to directors to the extent that the Conservatives propose. We have to constrain it; we have to ensure a balance. We believe that we have got that balance right; we believe that we should stick to it.

The point that I wanted to make was that amendment No. 402 tightens the law by adding the requirement of honesty. That is what is missing from the present draft. However, if the Conservatives were to press their amendment on multiple directorships, I would vote with the Government and oppose it.

Amendment negatived.

It being Seven o’clock, Mr. Deputy Speaker put forthwith the Questions necessary for the disposal of the business to be concluded at that hour, pursuant to Order [this day].

Clause 176

Duty to avoid conflicts of interest

Amendment proposed: No. 402, in page 80, line 4, leave out paragraph (a) and insert—

‘(a) if the director reasonably and in good faith believes the situation is not likely to give rise to a conflict of interest; or’.—[Mr. Djanogly.]

Question put, That the amendment be made:—

I beg to move, That the clause be read a Second time.

With this it will be convenient to discuss the following:

Government new clause 73—Quasi-loans to directors: requirement of members’ approval.

Government new clause 74—Loans or quasi-loans to persons connected with directors: requirement of members’ approval.

Amendment No. 757, in page 86, line 4 [Clause 189], at end insert—

‘(2A) A company may not agree to such a provision unless it has consulted its employees.’.

Government amendment No. 591.

Amendment No. 19, in page 87, line 17 [Clause 191], at end insert

‘or must be conditional on such approval being obtained’.

Government amendments Nos. 592 and 593.

Amendment No. 405, in page 91, line 22 [Clause 200], after ‘A’, insert, ‘relevant’.

Amendment No. 406, in page 92, line 14, at end insert—

‘(6) “Relevant company” means a company which—

(a) is a public company, or

(b) is a subsidiary of a public company, or

(c) is a subsidiary of a company which has another subsidiary a public company, or

(d) has a subsidiary which is a public company.’.

Government amendments Nos. 594 to 597.

Amendment No. 20, in page 94, line 4 [Clause 204], after second ‘company’, insert ‘or of its associated company’.

Government amendment No. 598

Amendment No. 21, in page 94, line 8 [Clause 204], after ‘company’, insert

‘or where a company is permitted to give a director a qualifying third party indemnity’.

Amendment No. 354, in page 94, line 8 [Clause 204], after ‘company’, insert ‘or any associated company’.

Government amendments Nos. 613, 163, 164, 599 to 611, 644 and 612.

Chapter 4 of part 10 is designed to deal with situations in which there is a requirement for prior shareholder authorisation, because a director has a conflict of interest. The chapter replaces provisions of part 10 of the Companies Act 1985 with ones that will be more accessible and more consistent. It also implements various recommendations of the Law Commission and the company law review.

I turn first to loans, quasi-loans and credit transactions. The Bill makes a major deregulatory change to the regime that applies to loans and other similar transactions made by a company for its directors. At the moment, such transactions are prohibited unless certain exceptions apply. The Bill replaces that prohibition with a requirement for member approval.

The Bill was drafted to implement the Law Commission’s recommendation that all the rules on loans, quasi-loans and credit transactions for directors should extend to all companies. That would increase regulation for most private companies, as many of the current rules apply only to relevant companies. In broad terms, relevant companies are public companies and private companies that are in the same group as a public company.

Although that recommendation was endorsed by the company law review, we have carried out further informal consultation in the light of the discussion in Committee. Stakeholders clearly supported the proposal that the requirements that currently apply only to relevant companies should not be extended to all private companies. Government new clauses 72, 73 and 74 and Government amendments Nos. 592 to 597, 599 and 601 to 612 will make the relevant changes to the Bill.

Amendments Nos. 405 and 406, tabled by the hon. Member for Huntingdon (Mr. Djanogly), relate only to the rules on credit transactions and would retain the increase in regulation for loans and quasi-loans. We believe that it would be better to remove that additional regulation. Therefore, under the Government amendments, the Bill will no longer apply the rules on credit transactions or quasi-loans to private companies, unless they are associated with a public company, or apply the rules on loans, quasi-loans and credit transactions with persons connected to a director to private companies, unless they are associated with a public company. Unlike in those Opposition amendments, we have not gone back to the concept of “Relevant company”, as that added to the complexity of the current law. Instead, Government amendments use the concept of “associated company”, which creates consistency with the rest of this part of the Bill. The rules that currently apply only to relevant companies will, under these amendments, apply only to public companies, and to any private company associated with a public company.

I am following my right hon. Friend’s arguments on these complex issues as closely as I can under the circumstances. Can she tell me whether, in light of the statement that she has just made, the new clause on quasi-loans would apply to special private-finance-initiative-vehicle companies? Also, does the watering down of the Bill that she has just outlined mean that, for example, the company taking over Thames Water Utilities, which is a foreign bank in a consortium of private equity companies, could be in a format to which the clauses under discussion would not apply? If that were the case, it would cause me considerable concern.

I will be happy to write to my hon. Friend when I have looked at Hansard in detail. If the company to which he refers is incorporated abroad rather than in the United Kingdom, it will not be subject to UK company legislation. On the PFI issue, that depends on the kind of company to which he refers. If it is a public company, it will be covered; there will not be deregulation. But if it is a private company, there will be. Perhaps my hon. Friend would like to write to me, or alternatively, after I have looked at Hansard, I will write to him in greater detail, if that will be helpful to him.

I now turn to the issue of exceptions to the rules. We recognise that, in a group situation, it might be more convenient for the loan to be made by a different company in the group. Therefore, amendments Nos. 598 and 600 make it possible for a loan under the exceptions in clauses 204 and 205 to be used by a director to fund their defence in proceedings relating not just to the company, but to any associated companies. Amendments Nos. 598 and 600 achieve the same result as Opposition amendment No. 354, but create consistency by going further and widening the exception in clause 205 in the same way—for example, to actions that the Financial Services Authority might take.

We do not accept Opposition amendments Nos. 20 and 21. They would widen the exception much further. In particular, amendment No. 21 makes the exception available whenever the company would be permitted by clause 234 to give the director a qualifying third-party indemnity. Let me give an example of the sort of thing that would happen if that were the case. Without shareholder approval, a company could give a loan to a director to defend herself or himself in matters such as driving fines or offences. That would be inappropriate.

Under the Companies Act 1985, it is currently the case that the prohibition on loans to directors goes much further than the restrictions on the indemnities that may be given in respect of a director. It is possible at present to give an indemnity in circumstances where a loan would be prohibited. It is important that there is some limit on the types of proceedings for which loans may be given to a director under clauses 204 and 205. Companies should not use those exceptions to make loans without member approval for matters that, in reality, have nothing to do with the company. The sums involved under these clauses could be significant, and the exceptions do not contain any financial limits. Given that, it is right that the exceptions should be used only for matters that are properly connected to the company. It would be inappropriate for the exceptions to be available for company funds to be used without member approval to defend a director against proceedings unconnected with company business.

The Bill has already significantly relaxed the regime applying to loans by replacing the outright prohibition with a requirement for member approval. These clauses create exceptions where not even member approval is required. In order to provide worthwhile protection to members, it is important that those exceptions are sensible in their scope. We do not agree that there is any need to widen the exceptions even further, thus reducing the need for shareholder approvals.

Amendment No. 613 makes a minor drafting improvement to clause 204, following comments made to us by the Law Society. It is designed to follow more closely the wording used in section 337A of the Companies Act 1985. It is intended to make it clear that clause 204(2) does not make any substantive changes to the current law.

I now turn to substantial property transactions. Clause 191 implements a recommendation of the Law Commissions that has been widely welcomed, by allowing companies to enter into agreements that are conditional on the approval of the members of the company being obtained. Amendment No. 591 goes one step further, allowing the agreement to be conditional on approval from the members of its holding company as well, in those cases where the approval of the members of the holding company is required. That amendment responds to concerns that companies could be inconvenienced if they had to wait for member approvals before they could agree to a substantial property transaction. Opposition amendment No. 19 would achieve the same result.

Amendment No. 644 deletes clause 223 because the provision made by that clause will now be included in clause 288, and applied not just for the purposes of part 10 of the Bill but for the entire Companies Acts. As a result of the restatement exercise, amendments Nos. 163 and 164 replace references to the Companies Act 1985 with a reference to the relevant bit of the Bill.

Amendment No. 757 on the compulsory consultation with employees on directors’ service contracts was tabled by my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins). I am sorry to tell him that, despite my best endeavours, we cannot support his approach. As he will appreciate, company law is about the relationship between the company, its members and the directors, and the directors should be accountable to the shareholders rather than to employees. However, as he knows, we do entirely agree that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors’ remuneration. Indeed, the combined code has a supporting principle that the remuneration committee should be

“sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases”.

I hope that, with that explanation, the House can agree to these uncontentious Government new clauses and amendments.

We now move on to a patchwork of technical clauses, and I shall address them in the order in which they appear on the selection list.

We find Government new clauses 72, 73 and 74 to be uncontentious. Amendment No. 757, tabled by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins), is an interesting proposal. I believe that he is suggesting that a company should not approve long-term service contracts by a shareholder vote unless members are previously consulted. That has to be looked at in the context of different types of company. If we are talking about a small company—a family company, for example—it is unrealistic, because the length of the service contract is, in reality, unimportant: an owner-manager effectively has a service contract for ever, simply because he does not need a service contract as he is the owner of the company, and he would therefore have one for as short or as long as he wanted, until he sold or closed his business.

The matter is more pertinent to larger companies. It was considered by the Higgs review with regard to corporate governance. The problem that we have with the amendment is that employees are likely to be biased just as much as other directors. Under the combined code, listed companies will have a nominations committee of independent non-executive directors, which will undertake appointments, and a remuneration committee, which will review service terms. The independence of the bodies means that they should not be on the side of the executive directors or the employees.

I do not want to detain the House by going through the amendments one by one. I am happy to go along with the approach proposed by the Government, but I would not want to go too far down the line on which have started because of the underlying reason why the regulations were set out in the first place. It is difficult for directors to borrow money from their companies because it is important to maintain the separateness of the fund that a company holds from its directors. That gives rise to a protection, not so much for shareholders, but for creditors, so that they can be assured that a company’s assets are as they appear, rather than having been dissipated by being loaned out to people with a direct interest in the company. The deregulation of quasi-loans and credit transactions is not objectionable, but I would not like to give the impression that we would be happy to take a deregulatory route all the way down the line in this area.

I will be interested to hear the argument of the hon. Member for Newcastle upon Tyne, Central (Jim Cousins) for amendment No. 757. I suspect that this is not the right time to discuss the consultation of employees and the wider question of industrial democracy, but he has a good point. We are in an era in which employees face increased precariousness in their employment experience, given that more and more people are in temporary or part-time employment—employment that is not a traditional permanent job. It is thus not helpful for directors to give themselves long contracts that amount to a tenure. At the very least, companies should think about the consequences for industrial relations and human relations of doing such a thing without first talking to their employees.

I speak to amendment No. 757 tabled by myself and my hon. Friends the Members for Great Grimsby (Mr. Mitchell) and for Hayes and Harlington (John McDonnell). It does not entirely surprise me that my right hon. Friend the Minister is unable to agree to it, but there is none the less recognition by the official spokespeople for all the main parties that it relates to a serious issue; I look forward with interest to the views of Plaid Cymru.

In the past, the type of amendment that I propose would have been dismissed out of hand as something that would better belong to the North Korean “Down with Imperialism” day that has been playing on our television screens all afternoon. The matter is much more serious; we live in a society in which the divisions of wealth and power are probably greater than at any time in our history over the last 100 years. There is a proper market in the directing of companies—in corporate control—in which the company’s employees are entitled to have some involvement.

It is important to point out that my amendment does not say that directors’ contracts and remuneration would have to have the approval of employees, merely that employees should be consulted, which is just about the weakest possible formulation of the proposal. However, the point is undeniable and has indeed not been denied from the Treasury Bench or from the Front Bench of the main Opposition party.

The attempt to say that the issue can be dealt with entirely by remuneration committees is completely mistaken. Of course, my hon. Friends and I welcome the fact that there is more active consideration of such issues inside companies. We welcome the strengthening of the power of non-executive directors and the fact that remuneration committees are considering the issues, but the company’s employees, whose employment experience is becoming less secure in today’s flexible labour market, are entitled to have some right to the expression of an opinion about such matters and about the policies that might be involved in the appointment of directors, the extension of their contracts and their remuneration.

During our debates on the Bill we may have missed an important moment, when for the first time a representative of British workers was elected to the supervisory board of a German company with a presence in the UK. That is an important moment in the extension of European ways to our wonderfully Anglo-Celtic system—as there is a representative of Plaid Cymru in the Chamber, I shall use that Australian term rather than the words “Anglo-Saxon”. It reminds us that globalisation is a two-way traffic; there are new practices to learn about all around us.

At present, the average annual pension of a director of a quoted company is said to be about £167,000. That is a fabulous figure. In the United States, there is increasing concern about how pension rights and stock options are exercised. In the UK, there has been a dramatic fall in final salary pension schemes for employees in the private sector, but there has been no such fall in final salary pension schemes for directors. Such inequity cannot survive. It will become a matter of public debate and public controversy, and the first and right place for that is within the confines of the company itself.

My hon. Friend is becoming excessive in his moderation. Unless the law requires companies to take account of the views of their employees, it is difficult to see how those views are to be included. Our workers have fewer rights in their companies than those of any other European country. Other systems, such as the French and German ones, were decided by their Governments and imposed on the companies sector.

That is the case, and a future Government may have to consider the issues and impose a legal framework for the requirement to consult employees. It is entirely possible that that will be a secondary consequence of legislation passed by the European Parliament and the European Commission, but it would be much better if we were willing to debate the matter now, so that we could form our views before that time comes.

The issues will not go away while the experience of workers is so drastically different and is growing increasingly different from that of the directors of the company, who form part of the extraordinary world in which new investment vehicles, such as private equity companies, are radically transforming even the things of which we speak. It is clearly right that employees have the right to express a view about their directors’ remuneration and length of service. It would be entirely wrong for the House to put itself in the position of saying that it will leave the matter to others, in the European Parliament or the European Commission, to impose on us at a later date. We ought to be thinking it out for ourselves.

I shall reply briefly as I know that Members are anxious to get on with other matters.

The hon. Member for Huntingdon (Mr. Djanogly) asked why we were deleting clause 233, which is dealt with in our amendment No. 644. The provision made by the clause will be included elsewhere—in clause 288—as a result of amendment No. 643, and applies not only to part 10 but to the whole Bill.

I hear what the hon. Member for Cambridge (David Howarth) says about the balance between deregulation and the proper conduct of directors in relation to taking loans. I hope that the balance is just about right in the propositions we have put to the House tonight.

My hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) made a most eloquent contribution. I fully accept that the issue is important and that companies should be sensitive to the pay and employment conditions of their employees generally. In another place, we agreed to consult about the case for requiring quoted companies to show in the directors’ remuneration report how they have had regard to employees. To that extent, there has been a little movement on something about which my hon. Friend expressed strong feelings in his contribution. I hope he can take heart from that.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

New Clause 73

Quasi-loans to directors: requirement of members’ approval

‘(1) This section applies to a company if it is—

(a) a public company, or

(b) a company associated with a public company.

(2) A company to which this section applies may not—

(a) make a quasi-loan to a director of the company or of its holding company, or

(b) give a guarantee or provide security in connection with a quasi-loan made by any person to such a director,

unless the transaction has been approved by a resolution of the members of the company.

(3) If the director is a director of the company’s holding company, the transaction must also have been approved by a resolution of the members of the holding company.

(4) A resolution approving a transaction to which this section applies must not be passed unless a memorandum setting out the matters mentioned in subsection (5) is made available to members—

(a) in the case of a written resolution, by being sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to him;

(b) in the case of a resolution at a meeting, by being made available for inspection by members of the company both—

(i) at the company’s registered office for not less than 15 days ending with the date of the meeting, and

(ii) at the meeting itself.

(5) The matters to be disclosed are—

(a) the nature of the transaction,

(b) the amount of the quasi-loan and the purpose for which it is required, and

(c) the extent of the company’s liability under any transaction connected with the quasi-loan.

(5) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’.—[Margaret Hodge.]

Brought up, read the First and Second time, and added to the Bill.

New Clause 74

Loans or quasi-loans to persons connected with directors: requirement of members’ approval

‘(1) This section applies to a company if it is—

(a) a public company, or

(b) a company associated with a public company.

(2) A company to which this section applies may not—

(a) make a loan or quasi-loan to a person connected with a director of the company or of its holding company, or

(b) give a guarantee or provide security in connection with a loan or quasi-loan made by any person to a person connected with such a director,

unless the transaction has been approved by a resolution of the members of the company.

(3) If the connected person is a person connected with a director of the company’s holding company, the transaction must also have been approved by a resolution of the members of the holding company.

(4) A resolution approving a transaction to which this section applies must not be passed unless a memorandum setting out the matters mentioned in subsection (5) is made available to members—

(a) in the case of a written resolution, by being sent or submitted to every eligible member at or before the time at which the proposed resolution is sent or submitted to him;

(b) in the case of a resolution at a meeting, by being made available for inspection by members of the company both—

(i) at the company’s registered office for not less than 15 days ending with the date of the meeting, and

(ii) at the meeting itself.

(5) The matters to be disclosed are—

(a) the nature of the transaction,

(b) the amount of the loan or quasi-loan and the purpose for which it is required, and

(c) the extent of the company’s liability under any transaction connected with the loan or quasi-loan.

(6) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’.—[Margaret Hodge.]

Brought up, read the First and Second time, and added to the Bill.

Clause 155

Companies required to have at least one director who is a natural person

I beg to move amendment No. 761, in page 71, line 10, at end insert ‘and domiciled in the United Kingdom’.

With this it will be convenient to discuss the following amendments:

No. 762, in page 71, line 11, leave out subsection (2).

No. 385, in page 72, line 8, leave out Clause 157.

No. 386, in page 72, line 18 [Clause 157], leave out subsection (5).

No. 387, in page 72 [Clause 158], leave out lines 30 and 31.

No. 388, in page 73, line 12 [Clause 159], leave out ‘ceases’ and insert ‘shall not cease’.

Government amendments Nos. 715, 716, 770 and 717.

The principles of amendments Nos. 761 and 762, which are in my name and those of my hon. Friends, are fairly clear. Up until now, we have been dealing with the duties of directors and companies. The problem is how we take account of those duties and how directors and companies can be made accountable. The purpose of our amendments is to strengthen accountability. Clause 155 is an improvement in the sense that now at least one of the directors has to be a real person. We want to take that a little further. Amendment No. 761 therefore provides that that one person shall be domiciled in the UK. That is an important principle to maintain. Amendment No. 762 strikes out the ability of corporate entities to be directors—something that is wrong in principle, confuses accountability and makes enforcement of any kind difficult.

We need those two amendments because somebody needs to be accountable for what companies are doing. They need to be accountable under UK law and not living in a country that is perhaps a tax haven, or which has no extradition agreement or arrangements, and where UK law cannot be enforced. I am thinking, for instance, of countries such as that chosen by Asil Nadir—that was the nadir of enforcement—when Polly Peck collapsed. He fled to northern Cyprus and, strangely, for some reason he has refused to come back to this country and face the rigours of the law. We do not want that situation to be sustained. We need companies to be accountable. I am sure that the Opposition will support that principle in the sense that, in refusing to accept companies as directors of other companies and depriving them of that power, we are, in effect, reducing the red tape on companies.

The principle is straightforward. There is a huge problem attendant on the ability of companies to escape accountability. It is because of that kind of escape from accountability that we have such problems with tax avoidance—problems involving companies and directors stationing themselves in tax havens. I am thinking of companies such as Mapley Steps, which has close relations with the Government. I am following every one of the 39 Mapley Steps adventures in Private Eye. How do we enforce accountability on a company such as that, in a tax haven? How do we ensure that companies in tax havens fulfil their social responsibilities, pay their rent to society, and are responsible for the damage inflicted by the corporation under the law that we passed earlier? How do we ensure that they fulfil their responsibilities in relation to profits derived here? There is also the matter of criminal negligence. These two simple, straightforward amendments confront a simple issue.

The Government want companies to be accountable and they want to deal with tax avoidance, tax havens and all the other issues involved in companies escaping their obligations in this country. I note that the United States Government Accountability Office, in a report on minimal ownership information, which came out earlier this year, said that the United States Government found it almost impossible to pursue many companies for criminal activity—not just for tax avoidance—because they could not trace the individual directors, who were often living in tax havens. I want to enforce the principle in the UK and make it possible for us to deal with all kinds of infringements from money laundering, financing of terrorism and tax avoidance to criminals operating through a shelf company. How will we deal with any of that unless we agree to the amendments? Our simple provision is that a real person—the one real person—should live in this country and that only real persons can be directors of a company. I hope that my right hon. Friend the Minister, with her usual acuity, will leap to accept it and say, “Yes boys, you’re right. Right on! We’re behind you.”

First, I will address amendment No. 761. The suggestion is that if a company has only one director, not only should they be a natural person, but they should be domiciled in the UK. In the UK, we pride ourselves on being an international centre for conducting business. The amendment would be a backwards step and would fly in the face of London as an international community. It will not have the support of the Conservative party.

Government amendments Nos. 715, 716 and 717 deal with shadow directors. In Committee we explained the complex case law surrounding clause 168 and the difficulties in determining whether a person is a shadow director, including by making reference to the Ultraframe case of 2005. Hon. Members will be pleased, if not relieved, to hear that I do not intend to rerun that debate this evening. We recommended that the Government should recognise those complexities and remove the requirement for shadow directors’ details to be entered on the relevant registers. In the light of that, the Government have reconsidered their position and tabled amendments Nos. 715, 716 and 717. That is welcome and we commend the Government on accepting our reasoned approach to this matter.

Clause 157, which relates to the minimum age for directors, is one of the more regressive clauses in the Bill. It provides that people must be 16 to become directors. The answer to my written question of 31 January revealed that on 31 December last year there were 431 directors under the age of 16 in England and Wales and that 200 were under 10. I can envisage circumstances in which controlling family companies or trust arrangements from wills drafted many years ago would require that a child be appointed a director and that not to do so would involve losing assets or causing problems in respect of inheritance. In Committee, I raised the question of whether the Secretary of State would make an exception under clause 157 in those circumstances, which involve an individual rather than some class basis of individuals. Unfortunately, I did not receive a full answer in Committee. Perhaps the Minister will provide one this evening.

We are now faced with three different issues. The first was raised by the hon. Member for Great Grimsby (Mr. Mitchell), the second relates to the ability of under-16s to be directors, and the third is the Government amendments on shadow directors, which would make an important change to the way in which the Bill works.

I am quite sympathetic to amendment No. 761, because there is sometimes a problem, as the hon. Gentleman said, of getting jurisdiction in respect of wrongdoing directors. I fear, however, that the means that he has adopted to achieve that end would not work, as to avoid the problem a company would need only to appoint someone innocent and poor to be their real person director, and all the nefarious people to whom the hon. Gentleman referred would remain offshore.

The hon. Gentleman will agree that our amendment becomes even more necessary, given that we are to get rid of company secretaries.

The hon. Gentleman should hang around for a bit, as he might find that that is no longer the case. The Government appear to have changed their mind on that matter, and very glad we are about it, too.

There is a problem with amendment No. 762. I do not think that what the hon. Gentleman said was correct. The problem relates to the concept of the corporation sole, which is not a sort of fish, but is largely a sort of bishop. Most corporations sole are traditional offices, such as the office of bishop, where the aim of the law is to separate the person who holds the office from the office itself. If one were to leave money to the Bishop of Ely, the question would be whether one left it to the bishopric—that is, the ongoing office of Bishop of Ely—or to the human being who holds that office for the time being. The two things are separate.

The hon. Gentleman commented that it was more difficult to track down individuals who are office holders. It seems to me that precisely the opposite is true in the case that I have just outlined—that of the Bishop of Ely. It is quite easy to find the present Bishop of Ely: he is usually in his palace. It would, however, be quite difficult to find the former Bishops of Ely. If a company is set up in which a directorship is held by the Bishop of Ely as an office—that is, the corporation sole—accountability is far easier under the present arrangements than it would be if amendment No. 762 were passed and it was impossible to offer the directorship to the office of Bishop of Ely, with the result that the company had to keep changing the person to the new holder of the office. I see the hon. Gentleman’s general point about office holders, but I am not entirely convinced that the amendment would work as he says it would, especially with regard to bishops.

On the under-16s debate, I shall not detain the House by reciting my own list of young entrepreneurs, but I am sympathetic to the argument advanced by the hon. Member for Huntingdon (Mr. Djanogly). It is true that many young directors—those under 16—are directors by reason of family settlements: for example, their parents died younger than expected and the way in which the family settlement works requires them to count as a director. There is a worry that if we impose on directors, as we do in the Bill, a long series of onerous criminal law duties, it might not be sensible to expect very young children to meet those duties. On the other hand, the age of criminal responsibility is 10, not 16. I therefore wonder whether 16 is the correct age to cut off directorships and whether, in the light of the research that has been done into young people holding directorships and the evidence about young entrepreneurs, 16 might be thought to be too advanced an age for the cut-off point. Another age, less than 16, might be more appropriate.

The transitional arrangements remain bothersome. I cannot see why the Bill should take the line of insisting that all existing under-age directors be cut off before their prime. A big issue in the Committee, to which I hope Ministers will give some thought, was the question whether we should allow existing under-16 directors to continue as directors—obviously, the situation would last no more than 16 years, and in most cases considerably less than that—rather than make the arrangements necessary to change directorships almost on the fly.

It is good to see the Liberal propensity to sit on both sides of the fence given full exhibition by the hon. Gentleman, but if he is defending the rights of under-age directors, why does he not go the whole hog and give them the right to have experience down the mines or in textile factories, or to do all sorts of other manual labour that might amplify the joys of being under 16?

I am grateful for the hon. Gentleman’s intervention, but he is confusing a duty with a right. We are not saying that it should be compulsory for under-16s to be directors, or that we would encourage it by legal force. Our argument is that in those cases where young people have set up their own business, it is not entirely wrong for them to have some sort of direction of the business. If they had taken a different approach—if they had set up the business and then asked someone else to run it for them, as the hon. Member for Huntingdon said—the law would treat them as directors anyway. They would end up being responsible, even though the starting point was that the law did not allow them to be directors. That is the point that the hon. Gentleman was trying to make about shadow directors. In the light of what the Government are doing about shadow directors, it seems to me that the provision in the Bill about young people being shadow directors could be justified, but only if the more general rule were changed.

Government amendments Nos. 716, 770 and 717 deal mainly with whether there is an obligation on companies to register the existence of shadow directors. There is an issue of transparency—whether people who effectively run companies without officially running companies should in some way be registered by the company as people exercising that power. The problem is a practical one for companies—whether they can know whether particular people count as shadow directors, given the fact that the law is not very easy to apply, especially from the point of view of another company director. Courts might find it easy to apply, but companies might find it difficult.

The history of the concept of shadow director is that it has been used by the courts to put liability on someone who deserves liability for actions that they have taken with regard to a company, perhaps without realising that they were directors. It is a remedial concept, rather than a real one. It is a construct of law that is used to achieve particular results. Because the concept is so artificial, it is going too far in practical terms to require companies to register shadow directors in such circumstances. Although there are problems with transparency in this area, on the balance of practicalities the amendments are acceptable.

I support amendments Nos. 761 and 762. Reading clause 155, I was almost overjoyed when I saw the concession that the Government had made by requiring at least one director to be a natural person. I then read subsection (2) and for about two hours did not understand what it meant, because it is a masterpiece of drafting skills and obfuscation, the likes of which have not been seen for some time in the House. Nevertheless, on the basis of the interpretation offered by my hon. Friend the Member for Great Grimsby (Mr. Mitchell) that subsection (2) overrides subsection (1), we are back to the situation where a director of a company does not have to be a natural person—that is, a human being.

The reason why my hon. Friend has pressed the issue for some time is that at some stage in the life of a company its responsibilities have to be borne by a human being. Last week we debated the Corporate Manslaughter and Corporate Homicide Bill. When we discussed how we held to account companies and individuals operating within those companies with regard to how they looked after the health and safety of their employees, a number of us pressed for specific reference to be made to the responsibilities of directors. We were informed that that was dealt with elsewhere as a result of various other pieces of legislation that apply to directors, and that there did not need to be a specific reference in the corporate manslaughter legislation.

We find that the provision contradicts those assurances. We could have companies where no single director was responsible of the health and safety of their employees. A company could perpetrate actions that were so negligent that they resulted in the death of an employee, and no individual would be held responsible. That is one example to demonstrate why my hon. Friends have been pressing the issue for so long.

The provision enables individuals to become involved in the establishment of companies, which then establish further companies, and they are no longer held responsible for their actions as individuals. In that way they avoid their duties and responsibilities. I urge my right hon. Friend the Minister to consider, though possibly not in the context of the Companies Bill, that we need to debate the matter further, so that companies do not become shadow bodies and no one is held responsible in any legislation, particularly in serious circumstances such as corporate manslaughter.

I shall begin by responding to the issues raised by my hon. Friend the Member for Great Grimsby (Mr. Mitchell). I do not know where “Great” came from in the name of his constituency.

It reflects the representation.

I am sure other hon. Members are envious of my hon. Friend’s title. “Great Barking” or “Great Burnley” would suit some of us very well.

In that case, why is it not important that the service address be in the United Kingdom so that UK law can be enforced?

The service address will be at the company’s registered office. The Bill provides elsewhere for the registered office to be in the United Kingdom, so my hon. Friend’s point is covered.

Could someone—anyone—in the House explain clause 155(2) to me? It states:

“This requirement is met if the office of director is held by a natural person as a corporation sole or otherwise by virtue of an office.”

If my right hon. Friend can assure me that that results in a requirement for a director to be a human being, that would be overwhelmingly reassuring.

I can reassure my hon. Friend on that. Amendment No. 762 attempts to address the point. The hon. Member for Cambridge (David Howarth) dealt with it in his contribution. Subsection (2) does not mean that a company can have no directors who are natural persons. That is because of what is meant by “corporation sole.” A corporation sole is a corporation that is constituted in a single person. Corporations sole are always holders of a particular office.

One example is the Official Custodian for Charities. The holders of certain offices in the Church of England—for example, vicars—are corporations sole, although, interestingly, their equivalents in the Church in Wales and the Roman Catholic and non-conformist Churches are not. Other examples include our Secretary of State and the Public Trustee. Property, including cash and investments as well as land and buildings, that the member holds by virtue of his or her office passes on retirement, resignation or death to his or her successor. I hope my hon. Friends are content with that explanation.

I love the sound of this sole music. It still does not answer explain why one of the directors—a corporate sole or whatever—does not have to be resident in this country.

The answer is that if we tried to legislate on that—I look to the Box to confirm that I am correct—we would offend EU requirements on freedom of movement. We cannot restrict directorships to UK residents. I am getting nods from those in the Box, so I am correct. We would be restricting ourselves under the EU requirements.

The Bill seeks to encourage the incorporation of companies in the UK because of the jobs and wealth that that brings. If we were to place on that the constraints that my hon. Friend the Member for Great Grimsby suggests, it would constrain our successful record of incorporations. Ensuring that directors have a service address in the UK allows anyone who so needs to communicate or pursue litigation.

If a company were set up with a corporation sole as the single director, and if something went awry and criminal charges were brought against the company, would criminal charges lie against the corporation sole?

I will write to the hon. Gentleman on that.

May I have a letter as well? I was brought up a Catholic, so I do not completely understand, but I hope that my right hon. Friend is speaking ex cathedra. If an action is taken, for criminal activity or whatever, would it be against the office or the individual? If it is against the office, the individual has less incentive to abide by the law because he or she can away from it scot-free or resign from it. I do not want to get into debates about the bishopric of Ely this evening, but I would welcome correspondence on the matter.

I will write because I do not want to mislead hon. Members, but my view would be that an individual who holds an office would be liable as that office holder. I see nods, so I might have got that right too.

I come now to the amendments relating to the age of directors. I know that the Conservative party is desperate to grow its membership. It would be good if it desperately grew Back Benchers, who previously expressed such interest in the consideration of amendments to this Bill, but yet again only one has graced us with her presence.

In Committee, the hon. Member for Huntingdon (Mr. Djanogly) seemed to think that it was generally a good idea to prohibit the appointment of young persons as directors, although I accept that he had concerns about transitional arrangements. He appears now to have slightly moved from that position. I still take the view—it is open to hon. Members to express their view—that it is wrong to have young people as directors. In the other place, their lordships wanted to change the minimum age to 18, not 16. The idea of bringing it down to 10 is extremely dangerous and could lead to huge exploitation by others who want to shelter behind a child director, relying on enforcement authorities’ unwillingness to prosecute very young people. It is interesting that in the data to which the hon. Gentleman referred, there are 200 young directors under the age of 10.

This is a sensible measure. We will consider the transitional arrangements, and there will be consultation. If we make exceptions, they would apply to a company rather than an individual, so the young entrepreneurs whom the hon. Gentleman identified during his summer reading probably would not be covered, if I was honest with him, because they are individuals. If they have an idea, there are other ways in which they can pursue their business interest. The companies to which this might be relevant would be charities or community interest companies, which have a particular concern for young people. In such circumstances it might be appropriate to create an exception, but it would be dangerous to do that for individuals.

There is an important angle to this. If a young individual came to the Minister and said, “Look, I will have a serious tax problem or inheritance problem if I can’t hold this directorship,” would the Minister look at that on an individual basis under the provisions that exist in the legislation?

I will look at that point. My understanding is that directorships are increasingly being given as christening presents, and one wonders about the purpose and intent behind that. Again, I am not 100 per cent. sure that that is sensible. We will look at the point that the hon. Gentleman raises.

Government amendments Nos. 715 and 717 have generally been welcomed. We have undertaken them for the practical reasons to which the hon. Member for Cambridge (David Howarth) alluded. Amendment No. 770 improves the clarity of the clause. It makes it clear that the registrar of companies must be notified on the appointment of a director and if for any reason a person ceases to be a director.

The Government have moved amendments tonight in response to the consideration of the Bill in Committee. That is one reason for our having so many amendments before us. I could have taken a much harder line in Committee and resisted what on most days I thought was a sensible debate, but I think that it is good for parliamentary scrutiny that we reach the best decisions for the long-term sustainability of this Bill. I am just sorry that the Conservative Opposition do not understand the way in which we have proceeded and chose again to make cheap political points and then not to appear when they could debate the issues.

I had hoped that my right hon. Friend the Minister would make a plea to me on bended knee, but she forgot to do so. In some respects I am more confused than when I started. I doubt the point that she made on European law, but, if it is correct, it is yet another argument against the EU, so I am grateful for small mercies. In view of the problems that she has raised, I beg to seek leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 162

Register of directors

I beg to move amendment No. 255, in page 74, line 6 , leave out from ‘company’ to end of line 7 and insert—

‘(2A) The register must be kept available for inspection—

(a) at the company’s registered office, or

(b) at a place specified in regulations under section (Regulations about where certain company records to be kept available for inspection).’.

With this it will be convenient to discuss the following amendments: Government amendments Nos. 256 to 260, 254, and 261 to 264.

Government new clause 9—Inspection of records of resolutions and meetings.

Government amendment No. 269.

Government new clause 10—Instruments creating charges and register of charges to be available for inspection.

Government new clause 11—Instruments creating charges and register of charges to be available for inspection.

Government new clause 12—Regulations about where certain company records to be kept available for inspection.

Government amendments Nos. 270 to 300.

This package of Government amendments follows from the Commons Committee’s consideration of where a company must make its register of directors available for inspection. The Committee agreed both that any increased flexibility as to where the company records are to be kept for inspection should apply to other registers and records and that there need to be safeguards against abuse. The new clauses and amendments meet those concerns. They provide a power for regulations to specify alternatives to a company’s registered office as the place where a company must keep the specified registers and records available for further inspection.

The Government have complained about the lack of hon. Members in the House. Apart from the fact that the Government Benches are hardly overflowing, what would happen if many more hon. Members were here? None of them would have the opportunity to speak, because of the programme motion. We will not even be able to address this group of amendments.

Amendment agreed to.

It being half-past Eight o’clock, Madam Deputy Speaker proceeded to put the Questions necessary for the disposal of the business to be concluded at that hour, pursuant to Order [this day].

Clause 162

Register of directors

Amendments made: No. 256, in page 74, line 7, at end insert—

‘(2B) The company must give notice to the registrar—

(a) of the place at which the register is kept available for inspection, and

(b) of any change in that place,

unless it has at all times been kept at the company’s registered office.’.

No. 257, in page 74, line 11, leave out ‘or (2)’ and insert

‘, (2) or (2A) or if default is made for 14 days in complying with subsection (2B)’.

No. 258, in page 74, line 12, leave out ‘this section’ and insert ‘subsection (3)’.

No. 715, in page 74, line 14, at end insert—

‘For this purpose a shadow director is treated as an officer of the company.’ . —[Margaret Hodge.]

Clause 165

Register of directors’ residential addresses

Amendment made: No. 716, in page 75, line 38, at end insert—

‘For this purpose a shadow director is treated as an officer of the company.’ . —[Margaret Hodge.]

Clause 167

Duty to notify registrar of changes

Amendment made: No. 770, in page 76, line 15, leave out from ‘from’ to ‘any’ in line 17 and insert—

‘(a) a person becoming or ceasing to be a director, or

(b) the occurrence of’. . —[Margaret Hodge.]

Clause 168

Application of provisions to shadow directors

Amendment made: No. 717, in page 76, line 41, leave out Clause 168. . —[Margaret Hodge.]

Clause 189

Directors’ long-term service contracts: requirement of members’ approval

Amendment made: No. 488, in page 86, line 33, leave out subsection (6) and insert—

‘(6) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’. —[Margaret Hodge.]

Clause 191

Substantial property transactions: requirement of members’ approval

Amendment made: No. 591, in page 87, line 17, after ‘company’ insert

‘or be conditional on such approval being obtained’. —[Margaret Hodge.]

Clause 198

Loans or quasi-loans: requirments of members’ approval

Amendment made: No. 592, in page 90, line 14, leave out Clause 198. —[Margaret Hodge.]

Clause 200

Credit transactions: requirement of members’ approval

Amendments made: No. 593, in page 91, line 22, leave out ‘A company’ and insert—

‘(1) This section applies to a company if it is—

(a) a public company, or

(b) a company associated with a public company.

(2) A company to which this section applies’.

No. 490, in page 92, line 7, leave out subsection (5) and insert—

‘(5) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’. —[Margaret Hodge.]

Clause 202

Related arrangements: requirement of members’ approval

Amendments made: No. 594, in page 92, line 35, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.

No. 491, in page 93, line 20, leave out subsection (5) and insert—

‘(5) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’.

No. 595, in page 93, line 29, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 203

Exception for expenditure on company business

Amendment made: No. 596, in page 93, line 33, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 204

Exception on defending proceedings etc

Amendments made: No. 597, in page 94, line 2, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.

No. 598, in page 94, line 8, after ‘company’ insert ‘or an associated company’.

No. 613, in page 94, line 15, leave out ‘in connection with the matter’ and insert

‘under any transaction connected with the thing done’.

No. 163, in page 94, line 33, at end insert—

‘section 674(3) or (4) (power of court to grant relief in case of acquisition of shares by innocent nominee), or’.

No. 164, in page 94, line 35, leave out from ‘conduct)’ to end of line 37. —[Margaret Hodge.]

Clause 205

Exception for expenditure in connection with regulatory action or investigation

Amendments made: No. 599, in page 94, line 40, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.

No. 600, in page 95, line 2, after ‘company’ insert ‘or an associated company’. —[Margaret Hodge.]

Clause 206

Exceptions for minor and business transactions

Amendment made: No. 601, in page 95, line 5, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval) or (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 207

Exceptions for intra-group transactions

Amendment made: No. 602, in page 95, line 28, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval) or (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 208

Exceptions for money-lending companies

Amendment made: No. 603, in page 95, line 39, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval) or (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 209

Other relevant transactions or arrangements

Amendment made: No. 604, in page 96, line 26, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 210

The value of transactions and arrangements

Amendment made: No. 605, in page 97, line 8, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval) and 199’. —[Margaret Hodge.]

Clause 211

The person for whom a transaction or arrangement is entered into

Amendment made: No. 606, in page 97, line 34, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval) and 199’. —[Margaret Hodge.]

Clause 212

Loans etc: civil consequences of contravention

Amendments made: No. 607, in page 98, line 3, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.

No. 608, in page 98, line 24, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval)’.

No. 609, in page 98, line 34, leave out ‘198’ and insert

‘(Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’. —[Margaret Hodge.]

Clause 213

Loans etc: effect of subsequent affirmation

Amendments made: No. 610, in page 99, line 3, leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval), (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)’.

No. 611, in page 99, line 5, leave out paragraphs (a) and (b) and insert—

‘(a) in the case of a contravention of the requirement for a resolution of the members of the company, by a resolution of the members of the company, and

(b) in the case of a contravention of the requirement for a resolution of the members of the company’s holding company, by a resolution of the members of the holding company,’. —[Margaret Hodge.]

Clause 216

Payment by company: requirement of members’ approval

Amendment made: No. 492, in page 100,  line 39  leave out subsection (4) and insert—

‘(4) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’. —[Margaret Hodge.]

Clause 217

Payment in connection with transfer of undertaking etc: requirement of members’ approval

Amendment made: No. 493, in page 101, line 23, leave out subsection (4) and insert—

‘(4) No approval is required under this section on the part of the members of a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’. —[Margaret Hodge.]

Clause 218

Payment in connection with share transfer: requirement of members’ approval

Amendments made: No. 165, in page 102, line 14, leave out ‘430E of the Companies Act 1985 (c. 6)’ and insert ‘955’.

No. 494, in page 102, line 26, leave out subsection (6) and insert—

‘(6) No approval is required under this section on the part of shareholders in a body corporate that—

(a) is not a UK-registered company, or

(b) is a wholly-owned subsidiary of another body corporate.’.

No. 644, in page 104, line 26, leave out Clause 223. —[Margaret Hodge.]

Clause 226

Requirement of consent of charity commission: companies that are c harities

Amendments made: No. 166, in page 105, line 11, leave out ‘Company Law Reform’ and insert ‘Companies’.

No. 612, in page 105, line 22,leave out ‘198’ and insert

‘(Loans to directors: requirement of members’ approval), (Quasi-loans to directors: requirement of members’ approval) or (Loans or quasi-loans to persons connected with directors: requirement of members’ approval)

No. 167, in page 105, line 34, leave out ‘Company Law Reform’ and insert ‘Companies’. —[Margaret Hodge.]

Clause 228

Copy of contract or memorandum of terms to be available for inspection

Amendment made: No. 259, in page  106,  line 23  [Clause 228],  leave out from end to end of line 27 and insert ‘, or

(b) a place specified in regulations under section (Regulations about where certain company records to be kept available for inspection).’. —[Margaret Hodge.]

Clause 234

Qualifying third party indemnity provision

Amendments made: No. 168, in page 109, line 28, at end insert—

‘section 674(3) or (4) (power of court to grant relief in case of acquisition of shares by innocent nominee), or’.

No. 169, in page 109, line 30, leave out from ‘conduct)’ to end of line 32. —[Margaret Hodge.]

Clause 237

Copy of qualifying indemnity provision to be available for inspection

Amendment made: No. 260, in page 111, line 11, leave out from end to end of line 15 and insert ‘, or

(b) a place specified in regulations under section (Regulations about where certain company records to be kept available for inspection).’. —[Margaret Hodge.]

Clause 239

Ratification of acts of directors

Amendment made: No. 645, in page 112, leave out lines 17 to 19 and insert

‘must be made by resolution of the members of the company’. —[Margaret Hodge.]

Clause 243

Permitted use or disclosure by the registrar

Amendment made: No. 677, in page 114, line 11, at end insert—

‘(3A) The Secretary of State may make provision by regulations requiring the registrar, on application, to refrain from disclosing protected information relating to a director to a credit reference agency.

(3B) Regulations under subsection (3A) may make provision as to—

(a) who may make an application,

(b) the grounds on which an application may be made,

(c) the information to be included in and documents to accompany an application, and

(d) how an application is to be determined.

(3C) Provision under subsection (3B)(d) may in particular—

(a) confer a discretion on the registrar;

(b) provide for a question to be referred to a person other than the registrar for the purposes of determining the application.’. —[Margaret Hodge.]

Clause 247

Power to make provision for employees on cessation or transfer of business

Amendment made: No. 646, in page 116, line 27, leave out subsection (5). —[Margaret Hodge.]

Clause 256

Associated bodies corporate

Amendment made: No. 614, in page 120,  line 17,  leave out from ‘Part’ to end of line 19 and insert ‘—

(a) bodies corporate are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate, and

(b) companies are associated if one is a subsidiary of the other or both are subsidiaries of the same body corporate.’.—[Margaret Hodge.]

Clause 260

Derivative claims

Amendment made: No. 170, in page 121, line 17, leave out ‘459 of the Companies Act 1985 (c. 6)’ and insert ‘961’.—[Margaret Hodge.]

I beg to move amendment No. 412, in page 121, line 21,  leave out ‘or proposed’.

With this it will be convenient to discuss the following amendments:

No. 413, in page 121, line 24, leave out ‘or another person (or both)’.

No. 414, line 25, leave out subsection (4).

No. 415, line 33, at end insert—

‘(6) A derivative claim under this Chapter may only be brought if the directors have been requested by a member of the company to bring a claim in respect of an act or omission specified in subsection (3) and have not agreed to the request after the expiry of a reasonable period from service of the request.’.

No. 416, in page 123, line 8, clause 263,  at end insert ‘, or

‘(d) that the directors have decided not to pursue the claim, unless the court considers that there is a substantial risk that in reaching their decision they acted in breach of their duties to the company, or

(e) that the claim is one which the company in general meeting could validly decide not to pursue, unless the court considers that there is a substantial risk that a decision not to pursue the claim would only be taken as a result of votes cast by members with a personal interest, direct or indirect, in the decision, or

(f) that pursuing the claim would not be in the interests of the company.’.

No. 417, line 8,  at end insert ‘, or

‘(d) that the directors have decided not to pursue the claim, unless the court considers that there is a substantial risk that that transaction constitutes a fraud on the minority of members of the company, or

‘(e) that the claim is one which the company in general meeting could validly decide not to pursue, unless the court considers that there is a substantial risk that a decision not to pursue the claim would only be taken due to the majority of the shares being in control of those with a direct or indirect interest in the transaction.’.

For the first time today, we have a decent amount of time for Opposition amendments—I suppose that I should be grateful.

Despite amendments in the other place, which have improved clause 260, part 11 dealing with derivative claims is a complex area that still gives many much concern. Currently, a shareholder can bring a claim on behalf of a company against directors only in limited circumstances. Part 11 sets out a new procedure of derivative actions that enable shareholders to bring a claim on behalf of the company for directors’ breach of duty, if that breach has not been authorised or ratified by the company. Together with part 10, we believe that this has significant potential to increase liability for directors.

Before I go any further, I should like to explain the current common law position and set out what the Government aim to do in this area. Derivative claims are proceedings brought by a shareholder. Under the new Bill, they must be either

“in respect of a cause of action vested in the company and seeking relief on behalf of the company”

and

“brought only in respect of causes of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.”

This is significantly wider than the current common- law position.

There are two major concerns in relation to part 11. First, that it does not advance the common law and, secondly, that its effect, particularly when it is combined with part 10, will be detrimental to directors. We have tabled amendments that seek to deal with those concerns, which I shall discuss in due course. The leading common-law case on which this codification attempts to build is that of Foss v. Harbottle. If the Bill’s intention is to enshrine in statute the well-established exceptions to the rule set out in the case of Foss v. Harbottle, our view and that of the lawyers who have advised us is that that is not immediately achieved by the current drafting. The rule in Foss v. Harbottle is that a member cannot bring an action on behalf of the company for an injury done to the company; the company is the injured party and the action vests in it.

The exceptions to the rule in Foss v. Harbottle include circumstances in which the transaction constitutes a fraud on the minority. That includes fraud proper as well as breach of fiduciary duty as a director and circumstances in which the wrongdoers are in control of the shares of the company. The non-inclusion of this fraud control test in the Bill represents a radical departure from the previous thresholds to a member making a derivative claim. The result of this non-inclusion is that it will be easier for shareholders to bring claims against directors.

Although the court will now be required to consider the evidence and merits at the earlier stage, there is a danger that this part of the Bill will simply create a more complex procedure without any corresponding reduction in the potential administrative burdens for companies. It therefore makes sense that part 11 should be amended to preserve the traditional thresholds of fraud on the minority and wrongdoer control, as that would make it clear in statute that this new regime is not intended to sweep away the existing case law.

As the new legislation does not replicate existing case law, it will take some time for a body of case law to develop. We feel that this will create uncertainty for some period as to the extent of the derivative claim provisions and the burden of this will largely fall on the company. This could, in part, be remedied by the legislation mirroring more closely existing law. In practice, derivative claims have to date been relatively rare, but any potential benefit this codification will have, which will be minimal, will be far outweighed by the possible damage that will be wrought by increased shareholder litigation and reducing the number of people who are willing to take up company directorships in the UK.

A further key change in this Bill is that the persons engaging in fraudulent conduct need not have received a benefit. Members will therefore be allowed to make claims for an honest act or omission of a director where that results in a breach of duty, regardless of whether the individual has received a benefit. Under the existing common law, it is not possible to make a derivative claim as a result of negligent action unless the person in breach of duty has received a corresponding benefit. This represents a shift from the existing position and the focus is much more on allowing member control of directors’ actions.

The range of circumstances under which a derivative action may be brought will be much wider than is currently the case. This is once again an area of the law where the Government have said that the intention of putting in new clauses has been to codify the existing common law position, but this is, unfortunately, once again an area where the Government are overturning the common law position. The codification of the basis of bringing a claim and the means of bringing that claim will serve only to make it easier for claims to be brought against company directors.

Company directors also fear that increased litigation may lead to increased insurance premium costs—that is a very real fear for company directors. Should the rates that directors and officers have to pay go up, there will be a further disincentive to people becoming company directors. I am afraid that that is becoming a theme of parts 10 and 11, and it is not a happy one.

The concern that part 11 will increase potential liabilities for directors and the chance of tactical and vexatious litigation by activist shareholders has been raised by many others. The City law firm, Lovells, says:

“The Explanatory Notes to the Bill explain that ‘the’”

derivative action

“‘clauses do not formulate a substantive rule to replace the rule in Foss v Harbottle, but rather a new procedure for bringing such an action which set down criteria for the Court distilled from the Foss v Harbottle jurisprudence’. It is hard to see how this can be correct. As the Explanatory Notes themselves make clear, the rule in Foss v Harbottle is that is for the company to bring proceedings where a ‘wrong has been done to the company’, and that an exception can be made where there is conduct amounting to a fraud on the minority. The case of Estmanco (Kilner House) Ltd v Greater London Council made clear that ‘fraud’ in this context extends beyond fraud at common law to include ‘the equitable concept of fraud on a power’, including an abuse or misuse of power. It is generally considered that fraud, in this sense, does not include negligence. Other grounds include where the director’s act is illegal, ultra vires and not ratifiable, or where the shareholder has acquired a personal right against a relevant director.

Whilst the Explanatory Notes say that Part 11 does not seek to overturn these previous ‘well established principles’, it is hard to see how this can be. If Part 11 comes into law, individual shareholders will be able to bring proceedings against directors, including in respect of negligence, which cannot be summarily struck out for want of locus standii, but only under a brand new test, which is unconnected to these common law factors. As a result, there is a clear risk that multiple stakeholders might make good use of Part 11 to further their own various platforms, at the expense of companies’ time and money, and their directors time and money, personal stress, and claims upon their D&O insurance. It may even be possible for such a shareholder to use the provisions of this Part to apply for an order that the company pay his costs of bringing the proceedings, along the lines of the application upheld in Wallersteiner…If so, this could produce the very odd result that a number of activists could each buy a single share in the company, and each bring separate proceedings against directors, in respect of conduct predating their shareholding, at the company’s expense. Such claims may well, however, be struck out by the Court under the first stage of section 242 referred to above.”

We hope that that would be the case, but clearly the risks are there.

Let me turn to our amendments, which seek to rectify the problems that I have highlighted. Clause 260(3) states:

“A derivative claim…may be brought only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company.”

That wording is not sufficiently precise and is too wide. In particular, the use of the words, “or proposed”, go too far. A member should not have the statutory right to make a derivative claim to restrain some proposed act or omission. The intention should be to provide a remedy for a member where there has been an actual act or omission. To include the words, “or proposed”, may be a charter for members at any time to take action to restrain what they thought was a potential future breach of the relevant duties. We therefore propose to amend the wording of the clause as set out in amendment No. 412. In Committee, the Solicitor-General said that this approach is too restrictive, but we are yet to be convinced by his arguments.

Amendments Nos. 413 and 414 were brought to us by the Institute of Chartered Accountants, which sets out its position in its brief of 10 October:

“We are concerned that the draft clauses do not reflect the Government’s intention, as stated in its explanatory material and agreed to in the House of Lords Committee stage debate, of codifying existing common law principles on derivative actions. These clauses create new rights for members to bring a derivative action against persons other than directors. An actual or alleged breach of duty by a director”—

I am interested that the briefing from the outside body suggests that we are codifying. The aim is to deal with some of the exceptions in part 11, not to replace the whole rule in Foss v. Harbottle. The case remains as part of common law.

Yes, but as I explained to the Solicitor-General, although the Government are maintaining that the case remains, the clause as drafted will significantly alter the application of the case.

Action against a director for breach of duty could, therefore, be effectively used as a springboard for a member to bring a derivative action against others. The Institute of Chartered Accountants believes that it will encourage nuisance claims against directors. We therefore tabled amendment No. 413. In Committee, the Solicitor-General stated that clause 260 was drafted on Law Society recommendations. He gave examples of third parties who hold money, transferred in breach of trust from the company, and who should be permitted to be pursued by a member of the company. Although that may be true in limited circumstances, we remain concerned about the growing scope of the clause and support the position of the Institute of Chartered Accountants.

I am surprised that so many Members are present now that we have got on to Foss v. Harbottle, the heart of lawyer’s company law. To re-emphasise the point made by the hon. Member for Huntingdon (Mr. Djanogly), the whole point of the rule in Foss v. Harbottle is to save time. It is to prevent shareholders—particularly minority shareholders—trying to sue in the company’s name to enforce the company’s rights against somebody else in circumstances where the company could easily get rid of the wrong itself, does not want to sue or can validly prevent the action from going forward.

As I understand it, the Government have said that they are trying to clarify the law without codifying it. As the hon. Member for Huntingdon has said, the trouble with that is that it will tend to cause some confusion in areas where the statute does not mention the previous law. Would the courts reconstitute the previous law? It might be argued that it will be several years before we end up back where we started.

As the hon. Member for Huntingdon said, the law on this matter is not entirely clear. I have a problem with his amendment No. 417, simply on the ground that the concept of fraud on the minority is so difficult and so contested in the courts and academic journals that it is not really worth putting into a statute. Most academic writers think that it is too confusing to use, and many point out that what it really means is fraud against the company. Perhaps we should not put into statute a phrase of such contested meaning.

Other amendments that have been tabled have varied merit. The idea of amendment No. 412, which would leave out the word “proposed”, is, as the hon. Member for Huntingdon said, to prevent derivative actions in advance of the harm being done. That seems to me a useful aspect of the current draft, as it is frequently cheaper for all concerned to prevent harm from being done than to try to cure it later. Obviously, the word “proposed” does invite possible extra legal actions. The question, however, is whether the safeguards in the rest of the clauses with which we are dealing prevent abuse. To a large extent, I think that they do. I would not therefore support amendment No. 412.

Amendment No. 413 would take away the ability of a derivative action to cover rights that the company has against third parties. In the past, that has always been thought to be possible, and the amendment would impose a restriction on such action. This area of law is always about the company’s rights, not the personal rights of the individual shareholders or directors. The question is whether derivative action should be used to allow shareholders to enforce the company’s rights, and it seems to me perfectly sensible to propose that it should, given the other restrictions on the possible use of such action.

Amendment No. 415, however, seems to be a more sensible proposal. As has been said, the whole point of Foss v. Harbottle is to prevent shareholders in a minority action from wasting everyone’s time by bringing a derivative action that is unnecessary or has no chance of succeeding. The amendment allows the company—in particular, the board of directors, the organ of the company that normally has such a right—to decide first whether it wants to proceed with the action. It seems to me to be straightforwardly correct, and in the spirit of the existing law that goes back to the original 19th-century cases, to allow the company in the form of the board of directors to have a pre-emptive right of first refusal on whether an action should be brought.

Amendment No. 416 would reconstitute the details of the rule itself. Its ambition is admirable, and proposed subsections (d) and (e) are clearly linked to legal developments in the 19th century—the former to the Atwool case of 1867, and the latter to the Menier v. Hooper’s Telegraph case of 1874. The intention behind the amendment is good, but it is difficult to encapsulate very complex cases in statute. In a way, the amendment is vulnerable to the objection expressed by the hon. Member for Huntingdon against the whole thrust of the Bill—that it tries to put into statutory form a very complex area of case law. One could argue that he has not got it quite right.

The hon. Gentleman is right that I do not want to create new case law, and that the amendment’s attempt to incorporate in the Bill the existing common-law position runs the risk of falling into that trap. However, he will appreciate that the amendment is an attempt to ensure that that the existing provisions should not be widened.

I appreciate the attempt, but the question is whether it is entirely successful.

Amendment No. 416 paragraph (f) is a new departure, in that it would insert in the Bill the sort of catch-all provision to which one would normally object on the grounds that it is vague and unclear. The amendment has its merits, therefore, but needs more work.

I have already dealt with amendment No. 417, which I said was not a good idea because it would bring back the notion of fraud on the minority.

Finally, the Bill is an important attempt at reform, as the hon. Member for Huntingdon has noted. He seems to think that that reform is not desirable, but many people would differ with him about that. The particular question that I am dealing with here is whether it is necessary to prove that the directors made a gain from their wrongdoing before a derivative suit can be brought. The present law states that such an action cannot be brought against directors who have committed negligence, except where that negligence has resulted in a gain for the wrongdoer.

It is not entirely clear why that rule is in place. I agree with the many people who think that it is simply an historical accident, the result of taking too seriously the notion of “fiduciary”—that a gain has to be identified before legal action can be taken. Another possibility is that the relevant case law was not consistent, so that judges went one way, regretted it, and then decided to go the other way.

The underlying question is whether a derivative suit should be possible when directors have lost the company money through their negligence. That would give rise to a claim that belongs to the company, and the next question is whether the proposed reform in the Bill would give directors an incentive to do their job better. I think that it would and therefore am in favour of it.

I recognise that there could be a problem if people on the outside think that what is being done is a codification rather than a reform. That would not be correct: the Bill proposes not a codification but a reformed system that has some merits.

I thank the hon. Members for Huntingdon (Mr. Djanogly) and for Cambridge (David Howarth) for their comments on this part of the Bill. I particularly thank the hon. Member for Cambridge, whose erudite and helpful contribution has helped to clarify many of the issues. I should like to make a couple of points for the sake of clarification before I set out a brief outline of the Government’s position.

The hon. Member for Cambridge is quite right to say that our aim is not to codify the whole of Foss v. Harbottle. That case states that only a company can sue for a breach of duty, and the courts have allowed shareholders certain exceptions to sue by various derivative claims. We are replacing the exceptions—rather than codifying—by means of part 11 of the Bill. As I have said, Foss v. Harbottle will survive.

The hon. Member for Huntingdon is right to say that we need to ensure that we do not create a culture of litigation in this country. We believe that our provisions will strike a balance that will avoid the development of that kind of culture. Our aim is similar to his in that regard, but we disagree over the way in which the provisions will apply.

Both hon. Members made the point that, in order to develop this area of law further, there would need to be more case law. They are quite right, and the new statute will bring new case law with it. The common law has developed through case law in any event. Even if we did not introduce these reforms or bring into operation the clauses in part 11, there would still be some case law. There will therefore be a degree of further development of the law, and the statute will help that development. That is our intention.

I also agree with the hon. Member for Huntingdon that this is an important part of the Bill. Let me therefore outline the Government’s approach in this area. Our starting point has been the need to balance the ability of directors to manage the affairs of companies in good faith and the right of the members to bring an action on behalf of a company in circumstances in which a director has acted in breach of his duty to the company and in which an action would not otherwise be brought. I believe that part 11 achieves that balance very well.

A derivative claim is not a shareholder action in the sense of an American class action. It is an action brought by a shareholder on behalf of a company. It follows from this that any damages arising from a successful claim would be paid to the company, not to the shareholders who have brought the action. Since shareholders who bring an action may also face heavy costs, a derivative claim is very much an action of last resort. It is not something that any shareholder is likely to embark on lightly, as they could put themselves in a very difficult position if they did so.

Our fear in relation to this provision concerns costs. If an action group persuaded 300 of its members to buy one share each in a company, then funded the action of those shareholders, that could give rise to problems. People might bring court cases without caring about the costs, because they were being funded by a third party.

It is always possible that there will be exceptional circumstances. In effect, however, those people would be seeking to mount a claim, any costs from which would go back to the company. The beneficiary would therefore be the company.

My point is that the Minister is speaking about individuals winning or losing—as in America—or about the company winning or losing. However, individuals who own only one share making a claim might not have any desire to win individually. They might be taking the company to court to make a point, and if they are funded by a third party, they will be able to do that much more easily under these provisions than under the present legislation.

I do not necessarily accept that it would be that easy. The hon. Gentleman should look at the details of the derivative claims provisions. I think that they provide sufficient safeguards against the development of a litigation culture, as our aim is to prevent a pressure-group level of litigation against particular companies. When I have developed my argument, perhaps he will see how we intend to do that.

A breach of a director’s general duties to the company is a serious matter. Indeed, it may be extremely serious for the company, whose very existence may be put in jeopardy by the breach or threatened breach of duty. The general duties set out in chapter 2 of part 10 do not constitute guidance or a wish list. They are statutory duties, and every director must comply with them. It is therefore important that there be a clear and accessible mechanism by which shareholders can, if necessary, bring an action in the name of the company against a director for breach of one of those duties. For shareholders, there are two main problems in current law. First, as the hon. Member for Cambridge knows, the law is to be found in case law that stretches back more than 150 years and is anything but clear and transparent. That is why the Law Commission recommended that the right to bring a derivative action at common law should be replaced by a

“new derivative procedure with more modern, flexible and accessible criteria for determining whether a shareholder should be able to pursue the action”.

It is essential that the procedural requirements for bringing a derivative action are accessible and clearly set out, so that they can be understood by both directors and shareholders.

Secondly, the law is built on somewhat arcane legal principles relating to the concept of fraud on the minority. Those principles are difficult and obscure, even to lawyers, but they restrict the ability of shareholders to bring meritorious claims. That is why the new statutory procedure differs from the common law in two key respects. We do not want the claimant to have to show “wrongdoer control”—that is, to show that the company is controlled by the directors whom the claimant believes to have acted in breach of their duties—as that might make it impossible for a derivative claim to be brought successfully by a member of a widely held company, including almost all major quoted companies.

We also want it to be possible to bring a claim in cases of negligence, even if it cannot be shown that the directors have profited from the negligence. As the hon. Member for Huntingdon says, it is important that the Bill should not permit shareholders to bring a derivative claim that is motivated by reasons other than the commercial success of the company. We have made it clear from the beginning that we want such claims to be dismissed by the courts at the earliest possible opportunity, without the companies being involved. However, the general reforms to civil procedure introduced by Lord Woolf may mean that unmeritorious cases proceed further before being thrown out. Under those reforms, there is no requirement to obtain leave before a claim is issued. Instead, the claimant must apply to the court for “permission to continue” the claim. For that reason, in the other place, we tabled a package of reforms that ensure that the courts can dismiss unmeritorious claims at an early stage.

The amendments in the other place introduced a two-stage procedure for permission to continue a derivative claim. At the first stage, the applicant would be required to make a prima facie case. The court would be required to consider the issue on the basis of the evidence filed by the claimant alone, without requiring any evidence from the defendant. The courts must dismiss applications at that stage if what is filed does not show that there is a good case. At the second stage, but before the substantive action begins, the court considers whether the decision of the directors was one that the company could reasonably and independently have taken. In addition, the Government amendments that were tabled to part 11 in another place made it clear that the court may

“make any consequential order it considers appropriate.”

Examples include a cost order or a restraint order against the applicant. That would give the court explicit power to adjourn the permission application, either for a specific event, such as a general meeting of the company and other soundings, or more generally, so that it can revisit the question of permission at a later stage.

Thirdly, it provides that, in deciding whether to permit a claim to continue, the court should have particular regard to any evidence as to the views of members of the company who have no personal interest, direct or indirect, in that particular matter. That will help to address concerns that it is not practical or desirable for major quoted companies to ask shareholders formally to approve directors’ commercial decisions.

I believe that these clauses, as amended in another place, strike the right balance between the ability of directors to take business decisions in good faith and shareholder rights, and they make this important area of law clearer and more accessible. I emphasise that they do not oblige the courts to involve themselves in business judgments or to reverse the burden of proof in any way.

The Minister says that the procedure will be clearer and more accessible. One of our concerns is that the fact that the procedure is clearer and more accessible will mean that more people will want to use it and therefore there will be more litigation.

It will be clearer and more accessible in the sense that the constraints on someone using it in a way that we would not regard as justified—I am not sure that there is much difference in our view on that—are quite strong. Yes, the procedures that I have set out and the amendments that were tabled in another place make the procedure more accessible. If the hon. Gentleman’s argument is—I trust that it is not—that we ought to make the law inaccessible to ordinary shareholders in case they exercise their rights, it is a bad argument. Our aim should be to try to create clear law so that the directors know where they are, the shareholders know what action they can take and the general public can understand it.

We are seeking to set out our view that the shareholders should, in restricted circumstances, be able to take a derivative action, but that the courts should have the ability to intervene to prevent frivolous actions or actions that are not aimed at ensuring the commercial success of the company. In other words, they are aimed at a pressure group pursuing a viewpoint that is not about the commercial success of the company.

I think that we have struck a proper balance. The amendments that we have tabled and have had accepted in another place are able to deal with the main concerns that the hon. Member for Huntingdon raised. As I say, I do not think that there is any great difference of view of what we want. The hon. Gentleman fears that things will happen which we say we have provided protections against. Our view is that those protections will ensure that we are able to achieve the benefits of more accessible and clearer legislation without the problems caused by unnecessary litigation.

I shall now look at the amendments to clause 260, beginning with amendment No. 412, which attempts to delete “or proposed”. Amendment No. 412 is based on a misunderstanding of the current law and the position under the statutory statement of directors’ general duties. Clause 179 provides that the consequences of breach or threatened breach of the statutory duties are the same as would apply if the corresponding common law or equitable principle applied. The reference to threatened breaches is important. Under the present law, companies may be able to take pre-emptive action to stop a breach of duty from taking place before it actually happens and the damage is done. There could, for example, be a threatened breach of duty if a director was refused permission to exploit a corporate opportunity but then announced that he was going to go ahead and do it anyway. The remedies in such cases, which include an injunction or a declaration, provide an important safeguard of a company’s interest against wrongdoing by a director. A derivative action is an action brought by the company, and there is no sensible basis on which the remedies available to the court should be limited in the way proposed in the case of a derivative claim.

Amendment No. 413 would remove the right to bring a claim against a third party. That provision in clause 263 flows from a clear Law Commission recommendation, which is explained in detail in part 6 of the Law Commission’s report on shareholder remedies. The principles are important. The claim should be allowed only if there has been a breach of a duty by a director, but the relief sought may be against a third party as well as against the director personally.

9.15 pm

It might be helpful if I set out a couple of examples that have been cited by the Law Commission in its report on shareholder remedies. In the first example, a relief is sought from a third party for knowingly being in receipt of money or property or for property transferred in breach of trust or for knowing assistance in a breach of trust. It seems to us correct that the member should be entitled to pursue a remedy against the third party in circumstances where he is holding assets belonging to the company, which he has obtained in those particular circumstances.

In the second example, a profitable company is a victim of a tort by a third party—perhaps another company. The directors, while otherwise committed to the well-being of the company, have ulterior motives of their own for not wishing to enforce a remedy for the tort. Although the directors would in those circumstances be in breach of duty, that breach would not have given rise to the claim, so it would not be open to a member to bring derivative proceedings against a third party. Again, we believe that that is an appropriate outcome.

I hope that those examples show that it is possible to uphold important principles while placing reasonable constraints on the application of the provision and that this would not result in members seeking to bring derivative claims against third parties simply where they disagree with a decision of the board not to sue a third party. I believe that clause 263 achieves that.

I now wish to deal with the provisions in clause 264, which respond to the requests from some respondents to the company law reform White Paper, including the Law Society, that part 11 should state clearly that it is immaterial whether the cause of action arose before or after the person seeking to bring or continue a derivative claim became a member of the company. That reflects the position in the common-law derivative action, and the provision also makes it clear that current members, even if not members at the time that the corporate cause of action arose, are the only plaintiffs entitled to bring proceedings. In doing so, it accurately reflects the nature of the derivative action that is the company’s cause of action. As such, the point in time at which the member became a member is immaterial. I cannot therefore support the amendment proposed by the hon. Member for Huntingdon.

Amendment No. 415 provides that a derivative claim may be brought only if the directors have refused a request by a member to bring a claim. The amendment goes to the heart of what we are seeking to achieve in our reform of the law in this area. At present, a derivative claim will not be available to the minority shareholder unless he can show that, to put it briefly, the wrongdoers are in control. The onus is thus on the claimant minority shareholder who seeks to bring a derivative claim to allege in his statement of case, and then to demonstrate, that those whose actions he complains of are in control of the company and will not permit its name to be used as claimant in the action.

If the minority shareholder cannot demonstrate control, the action will be dismissed. However, the minority shareholder does not need to be able to demonstrate that the company has rejected a formal application to instigate proceedings, nor show that he has procured the summoning of a general meeting to consider the question, which has then rejected his request.

As the Law Commission observed, the meaning of “wrongdoer control” is not clear, and as long ago as 1962, believe it or not—it sometimes takes us a long time to achieve things in this place—the Jenkins committee said that it would be

“extremely difficult to devise a satisfactory general provision”

expressing this concept and the remainder of the exception to the rule in Foss v. Harbottle in wider terms. That is why the Law Commission has proposed a new statutory remedy.

Under the proposed statutory procedure, a member need not demonstrate wrongdoer control, but one of the factors that the court must take into account in considering whether to give permission to continue the claim is whether the company has decided not to pursue the claim. It may therefore be advisable for a member seeking to bring an action to ascertain the company’s intentions with regard to pursuing its cause of action before bringing a derivative claim, but we do not believe that that need be a mandatory precondition.

The hon. Member for Huntingdon proposes that we enshrine in law such a mandatory condition. He takes the view that permission should be sought, at least. I have some sympathy with the proposal, but we do not believe that such a mandatory precondition would be helpful or necessary to bring a claim. We fear that going down that route would bring us right back to a number of the unsatisfactory and undefinable concepts that I have just mentioned. Although I have every sympathy with the aim in amendment No. 415, I cannot accept its mandatory nature, so I hope that it will not be pressed to a vote.

I am grateful to the Minister for giving way, but I know that he wants to read the note that his colleagues have passed to him. Does he agree that the net upshot of the clause is that more people can be sued under it than previously?

If the hon. Gentleman had been here earlier in the debate, he would realise that I do not agree with that point at all. If the director has behaved inappropriately, we want the shareholder to be able to take a course of derivative action that will enable them to enforce the company’s rights. The shareholder is seeking to enforce the company’s rights—that is the key thing, and it is where I began. We need to ensure that we have the proper balance in place, and I fear that the provisions that the Opposition seek to insert in the clause would create a lack of balance, so the shareholder could not take action when they needed to do so if there were impropriety by a director. This is about balance and the need for care. We have got the balance right, and although the Opposition are taking points from outside organisations, they might not have got that balance right.

Clause 263 sets out the criteria that must be taken into account by the court in considering whether to give permission to continue a derivative claim. Subsection (2) provides that the court must—I emphasise the word “must”—refuse leave to continue a derivative claim if it is satisfied that a person acting in accordance with the duty to promote the success of the company would not seek to continue the claim; or where the cause of action arises from an act or omission that has not yet occurred, that act or omission has been authorised by the company; or where the cause of action arises from an act or omission that has already occurred, that act or omission has been either authorised or ratified by the company.

Amendments Nos. 416 and 417 seek to add to the list of factors matters that, if established to the satisfaction of the court, would constitute a bar to the continuation of a derivative claim. The Bill’s approach follows the Law Commission’s recommendation that whereas ratification of a breach should constitute a bar to the bringing of a derivative action, the fact that a breach of duty is ratifiable should not constitute a bar, but should feature as one of a list of factors to which the court should have regard in considering whether to grant permission to continue the claim.

Amendment No. 416 would add three further grounds that, if established to the court’s satisfaction, would constitute a bar to the continuation of a derivative claim. Therefore, let me consider each briefly. The first new bar to the bringing of a derivative claim would be a decision by the directors not to pursue the claim, unless the court considered that there was a substantial risk that, in reaching their decision, they had acted in breach of their duties to the company. That factor already appears on the list of matters that have been taken into account.

The second new factor under the amendment would be a claim that the company in general meeting could validly decide not to pursue, unless the court considered that there was a substantial risk that a decision not to pursue the claim would be taken only as a result of votes cast by members with a personal interest, direct or indirect. It is not clear from the drafting whether the amendment refers to a claim relating to a breach of duty that the company might ratify in general meeting, or to something short of that. In either case, we do not consider that this is a matter that should bar a derivative claim. The clause already provides that where a breach of duty has been ratified, that will constitute a bar and the claim will go no further.

The third factor that the amendment would insert into clause 263 is that pursuing the claim would not be in the interests of the company. That overlaps in an unhelpful way with the existing factor in subsection (2)(a), namely,

“that a person acting in accordance with section 173…would not seek to continue the claim”.

It is important that clause 173 and part 11 use consistent wording.

Amendment No. 417 would add two further grounds that are variants of those proposed by amendment No. 416, and once again we are not persuaded, for substantially the same reasons as before, of the arguments of the hon. Member for Huntingdon. I therefore ask him to consider withdrawing the amendment. If he does not do so, we will feel it necessary to oppose it.

Under these provisions, there will be a wider variety of people who can be sued, it will be possible to sue people for a greater variety of offences, and there will be a more straightforward procedure by which to sue people, which I think the Minister called a clearer and more accessible procedure. I foresee that the net result will be that more people will, indeed, be sued, as my hon. Friend the Member for North Wiltshire (Mr. Gray) suggested.

The Government have introduced certain amendments to tighten this part of the Bill, introducing the two-stage process, which in itself could be contentious—I have doubts that it will, in the event, save costs. While we note the requirement for the claimant to establish a prima facie case in order to obtain permission to continue a derivative claim, the introduction of the threshold does not entirely address the concerns about frivolous litigation. For certain categories of claim, it will be easy to establish a prima facie case, and the threshold might not act as a deterrent. The best example that I can give is where directors or the company have been fined for regulatory breaches. Evidence of the conviction will itself amount to a prima facie case of breach of duty under clause 243(3). The threshold is also no answer to the concerns that arise from allowing shareholders to bypass the board when commencing a derivative claim.

We remain concerned that part 11 empowers shareholders to commence litigation against the directors without consulting or informing the board. That increases the chances of tactical litigation, as I have made clear. Secondly, it will create the capacity for disruption. Thirdly, it will give the shareholder a primary, rather than a derived, right to bring a claim in the company’s name. On that point, we have common ground with the Liberal Democrats; it comes to the fore in relation to amendment No. 415.

9.30 pm

It is a fundamental principle of company law that directors owe their duties to the company, and the company thus has the primary right to sue them in respect of wrongdoing. At present, a shareholder derives a right to sue in a company’s name in particular circumstances, including because the wrongdoers who control the company will not exercise the company’s primary right to sue. By failing to include a requirement that the board be consulted on, or informed about, a shareholder’s intention to sue the directors in the company’s name, the company will be deprived of an opportunity to exercise its primary right to sue in any circumstances in which the shareholder chooses not to consult the board. We were not convinced by the Minister’s response to that point, so although I will not press amendments Nos. 412 to 414 to a Division, I will press amendment No. 415. I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment proposed: No. 415, in page 121, line 33, at end insert—

‘(6) A derivative claim under this Chapter may only be brought if the directors have been requested by a member of the company to bring a claim in respect of an act or omission specified in subsection (3) and have not agreed to the request after the expiry of a reasonable period from service of the request.’.—[Mr. Djanogly.]

Question put, That the amendment be made:—

I am grateful for the chance to discuss this important matter, which might not have arisen had the previous business run to the moment of interruption.

An important question must be asked of Ministers on the Treasury Bench, who do not include a Health Minister—[Interruption]. I see the Minister of State, Department of Health, the hon. Member for Don Valley (Caroline Flint), running to take her place. I welcome her to the debate. I hope that she is considerably more briefed on the statutory instrument than I have had the opportunity to be.

The statutory instrument was laid before the House on 2 June this year, when Parliament was sitting and capable of dealing with it. The arrangements that the order implements were put into practical effect—came into force—on 1 July, when the House was still sitting. The question is, why are we faced this evening with a statutory instrument that was laid before the House on 2 June? I am sure that the Minister will be able to explain the reason.

My hon. Friend will have read in the explanatory note on the order that

“A full regulatory impact assessment has not been prepared for this instrument as it has no impact on the costs of business, charities or voluntary bodies.”—

Order. I must give a ruling here. We should not debate the order. We are considering whether the order should be referred to a Committee, not the merits of the order itself.

On a point of order, Mr. Speaker. This is in no sense a challenge, but my hon. Friend the Member for Westbury (Dr. Murrison) has read out part of the explanatory note on the order. Under that heading—in brackets and italics, so it may not count—appear the words:

“This note is not part of the Order”.

Presumably, therefore, debating that is not debating the order.

This is getting too technical even for the Speaker. What we are going to do is talk about whether the order is to go into Committee, where such tricky little things can be discussed.

I am grateful for your ruling, Mr. Speaker. It had struck me that to debate the point that my hon. Friend the Member for Westbury made, very perceptively, would have been to discuss the substance of the order. I recognised that that would not be relevant this evening, as your ruling on the point of order confirms.

What matters is the fact that the order came into effect on 1 July, it having being laid before Parliament on 2 June—six or seven weeks before the House rose for the long summer recess. Why was not the order laid before the House and time found for a debate, so that we might understand the serious consequences that flow from it?

I fully accept Mr. Speaker’s ruling that we must not debate the substance of the order. Schedule 2 abolishes all the strategic health authorities with which we were so familiar and which existed in our various constituencies across England, albeit not in Scotland. Schedule 1 replaces them with a lesser number of strategic health authorities but, interestingly, there were issues about the transfer of staff, so there will be no difference. Will the Minister explain why the House was not given the opportunity to debate the order and possibly to vote to refer it to Committee? That would have allowed us to discuss the substance.

My hon. Friend has ensured that a Health Minister is present on the Front Bench to discuss whether one of the orders covered by the motion should be referred to Standing Committee. The other order mentioned in the motion relates to changes in immigration rules. I hope the Government can provide a Home Office Minister to discuss the second and equally important part of the motion.

Too long. Mr. O’Brien, have you any more to add?

The point raised by my hon. Friend the Member for Ashford (Damian Green) was a point of order, so I do not need to refer to it.

The Minister must deal with the extra cost has been placed on the processes of the House and therefore on the taxpayer, now that we are challenged to consider the order after it has been put in place. I ask you, Mr. Speaker, to consider, and I hope the Minister will also think about, the feelings of members of strategic health authorities who have recently been appointed. What must they think of a Government who suddenly put before Parliament a measure that may or may not be referred to Committee to confirm the job that they have just secured?

Order. The hon. Gentleman is getting so desperate that he is drawing the Chair into his argument. Let us hear what the Minister has to say.

I hope the Minister will rise to the challenge of explaining why the order has appeared now and give the House a response.

I shall give more than a response—I hope I shall give the House a very satisfactory response. It is clear from the motion, that the position has been set out. The Opposition have had June, July, August, September and now October to consider it. I note that neither my right hon. Friend the Leader of the House nor I received any intimation that this was an unsatisfactory way of proceeding on the matter. Perhaps the Opposition spent rather too long earlier not listening to the previous debate but formulating a way of raising the matter on the Floor of the House.

Let me explain in clear terms. In the 19 years that I have been in the House, I have heard some spurious points of order. I congratulate the hon. Member for Eddisbury (Mr. O'Brien) on the creative way in which he raised the point of order. He has done very well. Far be it from me to criticise the Speaker—

The Minister has twice referred to my hon. Friend the Member for Eddisbury (Mr. O'Brien) raising a point of order. I thought the motion was debatable and I thought my hon. Friend debated it.

I will let the Minister know when he is out of order. I can assure the hon. Gentleman that the Minister is in order.

Thank you, Mr. Speaker.

The motion states clearly that the order for the establishment or abolition of SHAs should be referred to Standing Committees on Delegated Legislation. As all hon. Members will know, those Standing Committees are made up of Members from all parties in the House. If they have points to raise about the propriety of the terms of the order, that is the place to do it. As the hon. Member for Eddisbury (Mr. O'Brien) would know if he had ever been a Minister—several hon. Members on the Conservative Benches have been Ministers and, indeed, members of the Cabinet—it is not uncommon for such orders to be presented to the House of Commons with a deadline that, if it has expired by the time the Standing Committee considers them, does not negate the very valuable contribution that Standing Committees make.

Will the Minister give way?

I will be very happy to give way to the right hon. and learned Gentleman, and, after him, as he is a right hon. and learned Member, to the hon. Member for Eddisbury(Mr. O’Brien), because he will tell us from his own experience in Cabinet that the way in which this matter has been handled was inherited from the previous Government.

If the Standing Committee does not approve the order, there will be redundancy costs. What are the redundancy costs?

Order. That is a matter for the Standing Committee. That is where the right hon. and learned Gentleman will get those answers, not here on the Floor of the House at this stage.

Your very succinct answer, Mr. Speaker, shows why you are Mr. Speaker and I am a humble Minister. I give way to the hon. Member for Eddisbury.

I would very much like quickly to ask this humble Minister—given that I have never been a Minister I cannot possibly know the answer, but he will—what, if the order were to be defeated, would be the consequences?

The consequences would be dire. I have every confidence that Members considering this matter in the Delegated Legislation Committee will reach a proper conclusion—that the Government were right to table the order on 2 June, that it was the right procedure to take, and that it was the best decision for the health service and for health authorities—and will approve it.

rose—

I know that the Opposition Front-Bench spokesman is desperate for help. He could not have a better champion than the Conservative health spokesperson.

Given that the Government’s decision enshrined in the order is so perfect, that it was perfect in 2002 when there was a similar order, that it was perfect in 2004, as the revocation has made clear, and that it is presumably perfect in 2006, the Government’s intention is to revoke all of this in 2008 and change it all again.

That is a rather clever point, but I note that the hon. Gentleman was not a member of the Standing Committees that considered such delegated legislation as he is now criticising. The House came to a view that those were the right measures in 2002, 2003, and in the other years that he mentioned. We are coming close to 10 o’clock and I do not wish to enjoy an Alan Clark moment at the Dispatch Box. I have given away enough. This is an order that is worth supporting and I commend it to the House.

On a point of order, Mr. Speaker.

Order. I am putting the question.

This is a debatable motion, Mr. Speaker.

Order. The Minister has replied to the debate.

On a point of order, Mr. Speaker.

Order. I will take the point of order after I have put the question.

Question put and agreed to.

On a point of order, Mr. Speaker. Is that the shortest debate that has been terminated?

I do not understand the point of order. Perhaps the Library will provide that information.