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

With this it will be convenient to discuss the following amendments: No. 434, in page 603, line 22, leave out clauses 1241 to 1244.

No. 435, in clause 1241, page 604, line 4 at end insert—

‘(7) Regulations under this section shall be subject to public consultation prior to publication, and shall be the subject of a cost benefit analysis.’.

As we begin the third and final day of Report on the longest Bill ever produced, I want to make a few brief remarks. Unfortunately, an urgent engagement requires me to leave the debate shortly before Third Reading, but my hon. Friend the Member for Rutland and Melton (Alan Duncan), the shadow Secretary of State, will step in. I should therefore now like to thank my advisers and researchers, who have been magnificent, and the Committee team, especially my hon. Friends the Members for Putney (Justine Greening) and for Hornchurch (James Brokenshire)—he joins me today—who made their impressive debuts at the Dispatch Box yesterday.

We have experienced problems with programming and some points of principle. However, progress has been made in a generally good spirit of co-operation with Ministers and we are pleased that many of our points have been fully addressed. All in all, we believe that company law will take a step forward through the Bill.

The new clause and amendments deal with information on the exercise of voting rights by institutional investors. The Bill compels institutional investors to provide information about the exercise of voting rights. On Third Reading in the House of Lords, my noble Friends and Liberal Democrat Members excluded clause 1241 on a vote. However, the Government reintroduced clauses 1241 to 1244, albeit in slightly amended form. Unfortunately, they did not allow proper debate of clause 1241 in Committee and we are therefore left to discuss it on the last day.

The amended clauses deal with some of the technical difficulties that have been brought to our attention. For example, they tackle aggregate voting provisions and allowing only the top fund to make the disclosure if an institution holds shares in a company through more than one fund. The provisions have polarised opinion. On one side stand the CBI and many institutional investors who resent being forced to disclose how they vote, and on the other stand the Government, who frequently appear to be taking orders on clause 1241 from the trade unions.

I am interested to hear where the hon. Gentleman and the Opposition stand on this matter.

If the Minister will give me half a chance, I will certainly come to that.

The Government have not listened to the overwhelming consensus in the business and financial communities. They have reintroduced the clause, yet they have not taken the time to carry people with them by considering a suitable compromise between the two sides that would suit all parties. I am at a loss to understand why the Government have been so last minute with these provisions. It is therefore essential that important stakeholders’ views be heard on the general principles behind the clauses. We have received comments from organisations such as the Association of Investment Trust Companies and the Investment Management Association.

A number of other stakeholders are also against the introduction of the clauses, including the CBI, whose October briefing states:

“At House of Commons Committee stage, we opposed the re-introduction into the Bill of provisions or powers to require mandatory disclosure by institutional investors as to how they have exercised their voting rights. CBI members accept that there can be practical problems involved in exercising voting rights by some investors but consider that much has been achieved in recent years by market participants working to resolve the problems. Disclosure of voting is an area where several institutional investors are already disclosing their actions and so we do not see the regulatory need for these Bill provisions. In the absence of deletion of these provisions”—

as is proposed by amendment No. 434—

“there should be full public consultation on any proposal to implement any proposals under the powers taken”

in the Bill. That is what we are proposing in amendment No. 435.

This request has also been made by the Investment Management Association, which states that the reintroduction of the clause as drafted would run counter to the Government’s aim of reducing Government red tape. The IMA, while supporting transparency, believes that it would be counter-productive to make this the subject of statutory regulation. The IMA’s briefing sets out the reasons why the new clause should be opposed:

“The voluntary system is working and increasing numbers of managers are making certain of their voting records public.”

The briefing provides a lot of statistics to back that up, stating that many more managers than in the past are making their voting records public by putting details of how they have voted on their websites, and that mangers such as Fidelity Investments and, recently, Hermes have also stated their intention to do this. It goes on:

“All this clearly shows that the ‘culture of secrecy’ in the asset management industry that some have claimed exists, does not.”

The IMA is also concerned that

“a ‘one-size-fits-all’ requirement would undermine progress. As well as looking at the number of managers that disclose, the survey analysed voting details published on web-sites. This showed a wide variation in the matters reported, indicating the complexity of this matter and the difficulty of introducing regulations that would require uniform disclosure. In effect, imposing a ‘one-size-fits-all’ legislative requirement would undermine the progress made to date.”

The IMA also believes that the

“introduction of an enabling power could bring this voluntary progress to a halt. Managers considering public disclosure would face the dilemma that if they went ahead in advance of regulation they could face the expense of completely changing their systems, and incurring costs all over again, when regulations are introduced. A number have already told us that they have shelved disclosure plans for this reason.”

The IMA states that

“Government-mandated disclosure would be costly. The Regulatory Impact Assessment published with the draft clauses…addressed the ongoing costs of disclosure. It did not address the costs of: setting up systems; determining whether voting rights have actually been exercised; vetting the information; and monitoring compliance with legal requirements. These costs are likely to be significant.”

As we can see, the IMA has made some serious points.

The Association of British Insurers believes

“that the principle of transparency is right. Market forces are, unsurprisingly, supporting the development of voluntary transparency in this area and reflecting this, major institutional investors including ABI members…are all making their voting information public.”

However, the ABI also believes that

“the costs of legislating in this area have been underestimated and since statutory rules would impose a very significant regulatory and compliance burden that would dwarf any benefits. Indeed, it would be likely to lead to less considered voting, as resources are devoted to legal compliance or to the outsourcing of both decision-making and disclosure functions. The possibility of introducing future requirements under the reserve powers of the Bill could deter those companies seeking to voluntarily disclose voting information.”

There is a growing movement among many in the investment management community voluntarily to disclose how they vote. Hermes, one of the country’s largest and most successful fund managers, has now taken this step. It is the 12th UK fund manager to decide to publish its entire voting record at annual shareholder meetings, and many others have also done so.

The Conservatives welcome this voluntary disclosure. We are in favour of business moving towards greater transparency of its own accord, rather than of the Government issuing edicts from on high as to how investment managers should act. Self-regulation from the bottom up will always be more effective than forced regulation from the top down in this complicated area. The Conservatives fully support transparency from institutions, towards their own investors and towards third-party stakeholders. We welcome the sector’s move towards voluntary disclosure and encourage it to go further. An open and transparent institution is likely to be a successful one, but if an institution wishes to maintain secrecy with its investors, that should be its choice, and we should respect that. People do not have to invest with it.

A good middle view on this matter was put forward by the ABI, which has stated:

“The proposed clauses provide sweeping and ill-defined reserve powers which provide little, if any, intimation of their purpose or of their justification of being in the public interest. They are targeted in a discriminatory way, imposing duties on certain types of shareholder whilst leaving others unaffected. This is a violation of the principle of equal treatment of all shareholders.”

The ABI goes on to state:

“For example, the clauses do not apply to important categories of investor such as hedge funds and overseas holders. Their stake is nowadays frequently as large, if not larger, than that of traditional UK institutional investors. If the latter should disclose their voting record in the public interest, then surely this should be an obligation on the former. As the requirement is constructed, it appears to be UK institutions and their clients who will have to bear the costs of disclosure…Furthermore, the clauses as drafted would require disclosure by fund managers even when they are passing on voting instructions on behalf of their clients. Where these clients have different views the fund manager’s public disclosure would show that it gave instructions to vote for, against or abstain on the same resolution. It is evident that disclosure of this nature will frustrate the presumed purpose of these provisions, to inform those with an interest in a particular fund how the shares in which they have an actual interest have in fact been voted.”

The ABI briefing goes on to state:

“Clause NC433 (4)(a) allows any person to whom disclosure should be provided to institute civil proceedings if this does not happen. If it is intended that the obligation will be to publish information, this means that any member of the public would be able to instigate legal action against a shareholder or fund manager even though that member of the public has no interest in the shares in question.”

The ABI concludes:

“The practical effect of introducing regulations is likely to be to reduce the quality of institutional shareholder engagement with companies—a process which can add real value to the beneficiaries’ holdings. Institutions will become less concerned with considered voting as their resources are switched instead to compliance with these complex disclosure requirements. There will be an increase in outsourcing of voting decisions to proxy lodgement agencies, and in some cases, a decision to refrain from voting as a conscious policy in all but exceptional circumstances.”

That is pretty forthright stuff.

It is true that a number of legitimate concerns have been raised about the practicalities of introducing institutional disclosure in the way proposed in the Bill. The Liberal Democrat team in the House of Lords thought those practical problems serious enough to raise the question of whether these powers should be supported at all.

On Second Reading, my hon. Friend the Member for Kingston and Surbiton (Mr. Davey) said that, on further reflection, our view is that there is a case for the reserve powers, but only if the Government make it clear that they will not go for a one-size-fits-all approach and that they will consult carefully with the industry before introducing any regulations under the powers that the Bill will grant.

To put it briefly, our view is that it would be highly preferable if amendment No. 435 were agreed to, because it would make it clear that there would be consultation with the industry and careful consideration of the costs and benefits before any regulations were introduced using the new powers.

In those circumstances, we believe that the fear expressed by the hon. Member for Huntingdon (Mr. Djanogly)—simply having the reserve power will result in fewer institutions moving towards voluntary disclosure—is misplaced. We believe that as long as the industry is reassured by the Government, preferably by the amendment being accepted, although the Minister could attempt it in other ways, further progress towards voluntary disclosure will continue.

The question laid down by the hon. Member for Huntingdon is, why have the reserve powers in the first place? The answer is that it is perfectly legitimate for the Government to take the view that there will be institutions and institutional investors that follow practices that are not as transparent as others, and that there might come a time when, to provide a level playing field for the whole industry, some regulation is necessary.

I hope that that time does not come and that the Government will use the powers that the Bill will grant them in a way that helps the industry to move further, although we recognise that there is a legitimate case for those powers as they stand.

I am interested in what the hon. Gentleman is saying. Does he envisage the majority of institutions following a voluntary procedure and it then becoming necessary to force a minority to come on board with disclosure, or does he think that perhaps two or three large institutions will continue to refuse to disclose when the rest are disclosing? Would that be acceptable to him?

To make things clear, I should say that I envisage there perhaps being some recalcitrant institutions, which it would then be necessary to coerce. I was about to say that the exact shape of the regulations needs to take into account industry practice, so even if it is proposed, at some stage, to coerce the final few, it will be much better if the Government draw on the experience of the industry as it has developed in the intervening period.

I hope that the Government do not evince an intention to use the regulations early. They need to consider the practice of the industry and to use that practice as a way to shape any regulations that they are thinking of introducing.

I must say first to the hon. Member for Huntingdon (Mr. Djanogly) that this is not a last-minute idea. These provisions were in the Bill when they were introduced, but were overturned in the House of Lords. We reinstated them in Committee. They have been part of the Bill from the start.

I have to say further, to all hon. Members, that a theme running through the Bill is our attempt to ensure better shareholder engagement. We think that this is part of it. The hon. Gentleman, in a very lengthy contribution, quoted every business organisation he could—the CBI, the ABI et al—and I found it extremely difficult to work out whether he was working in the spirit of what his leader said. Whether the hon. Gentleman was standing up for business or was willing to stand up to it in the interest of shareholders; I could not get it at all.

On the other hand, the contribution made by the hon. Member for Cambridge (David Howarth) was perfectly valid, and I hope to give him the undertaking that he wants. We want a practical scheme and we want to ensure that we do not have a one-size-fits-all approach. We also want a proper cost-benefit analysis and consultation, although not in the terms of the amendment. This is a good move—a reserve power that will not allow again, in the words of the hon. Member for Huntingdon, an institution that wants to maintain secrecy to do so. We do not think that is appropriate. We would rather back shareholders in this instance.

There are people who appear to oppose transparency of voting on principle. That seems to me pretty fundamental, so it was good that Lord Hodgson said in Committee in the Lords that

“shareholders whose shares are held through nominees or are managed on their behalf are entitled to know what is being done with the shares that they own.”—[Official Report, House of Lords, 25 April 2006; Vol. 681, c. GC69.]

I could not agree more. They are entitled, which means that the entitlement goes to the shareholders, not the companies. Nor is that an isolated view. The hon. Member for Huntingdon talked about a number of business interests, but John Bogle, the founder of the $500 billion Vanguard funds group, has said:

“Vanguard’s founding principles stand for the simple proposition that it is the duty of an agent to faithfully serve his principal…Viewed in this light, it would seem self evident that each Vanguard Fund shareholder has the right to know how the shares of the corporations in his or her portfolio are voted”.

The two examples given by the Minister relate to the relationship between the institution and the people investing in it, but the concerns relate more to the third parties who want to see the institution’s policies.

I do not follow that argument. Those third parties who act on behalf of shareholders in relation to institutions have such a right. Is the hon. Gentleman willing to rephrase his point?

My point is that there is a difference between information that an institution gives to people who invest in it, and information that an institution puts on its website for third parties.

I do not follow that that has an impact.

To elaborate further for the Minister’s benefit, the problem that many institutions have is not with disclosing information to people who invest in it but with having to disclose information to third parties.

I find that rather a tenuous point—[Laughter.] The hon. Gentleman laughs, but if institutions have chosen to vote in a particular way on a particular issue, I can see nothing wrong with that being open. I will deal with some of the concerns that he expressed about how openness on voting intentions or voting record, which are among the practical issues that we need to address, might lead institutions to choosing not to vote or making secret deals, which appears to be his line of argument.

Is not another argument that many institutions, such as pension funds, are very big, and it would be much cheaper for them to put the information on their website for those who are interested, rather than having to go back to all the investors in that institution?

Indeed. In discussions that we had about information being given by companies to indirect shareholders, the companies made it clear that they preferred to use e-information channels. I suppose that the hon. Member for Huntingdon would make a distinction between reports and accounts and, for instance, information on voting on particular resolutions. I cannot, however, follow the qualitative difference between the two that would lead to secrecy on one and openness on the other. I therefore agree completely with the intervention of the hon. Member for Angus (Mr. Weir).

The important principle of openness must be underpinned by clear benefits. What are the benefits? First, it can only increase the confidence of savers in the governance being exercised on their behalf by institutional investors, that they are engaging with companies and that they are doing that well.

Secondly, greater transparency makes institutional investors more accountable for the governance decisions that they make on behalf of savers, providing stronger incentives to cast votes and to do so thoughtfully. It will put more pressure on institutional investors to explain their decisions. That cannot be a bad thing. The hon. Member for Huntingdon used the argument—I cannot remember whether it was from the ABI—that this would encourage uninformed voting decisions. How can that be right? An institution that chose to vote unthinkingly would be exposed to ridicule. Why would it choose to do that, when delegating decisions to a fund manager or using a voting advisory service are simple options to ensure considered voting?

The Minister’s final comments suggested that she accepts the principle behind new clause 15 as long as there can be consultation beforehand. Perhaps she will come up with some suggestions to be dealt with in the other place.

Of course we in the Conservative party wish to encourage transparency. I said that quite clearly, and I think the Minister acknowledged it. I also think we have both acknowledged that the industry is moving in the right direction without the need for a Bill. Although I disagree with none of the Minister’s reasons for saying that institutions should be open, we do not feel that they should be forced to accept the provisions of clause 1241. The Minister mentioned shareholder engagement, and I tried to explain earlier why we think the clause could damage that. Institutions that must say how they voted and do not wish to do so will simply not vote. The impact of the clause could be purely counter-productive.

We note that the Liberal Democrats have become a little less forthright in their opposition to the clause than they were in the other place or in Committee. Having said that, I note their support for amendment No. 435, which I wish to press to a Division.

I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

Clause 1241

Power to require information about exercise of voting rights

Amendment proposed: No. 435, page 604, line 4, at end insert—

‘(7) Regulations under this section shall be subject to public consultation prior to publication, and shall be the subject of a cost benefit analysis.’.—[Mr. Djanogly.]

Question put, That the amendment be made:—

I beg to move amendment No. 740, in page 606, line 10, after ‘Kingdom’ insert ‘or elsewhere’.

With this it will be convenient to discuss the following amendments: No. 436, in page 606, line 10, after ‘Kingdom’, insert

‘or, if such proceedings relate only to intellectual property rights, in any jurisdiction’.

No. 437, in page 606, line 35, leave out

‘annulment in pursuance of a resolution of either’

and insert ‘affirmative resolution of each’.

No. 438, in page 606, line 36, at end insert

‘and after prior public consultation on the terms of a draft statutory instrument’.

The amendment will permit disclosure to be made for civil proceedings overseas. In Committee, I agreed to consider a useful proposal made by the Opposition to allow disclosure for overseas proceedings by intellectual property rights holders. I agreed to consider this, as I recognised that brand owners and those with an interest in intellectual property rights would have a particular interest in enforcing their rights overseas. However, the disclosure provisions in clause 1245 have been drawn up on the basis that business and consumers are treated equally. Therefore, I asked my officials to discuss further with a range of stakeholders whether we should amend the clause to enable disclosure for overseas civil proceedings with respect to business and consumers and not just limit it to IP rights holders.

In general, the feedback from our consultation with stakeholders was positive in supporting disclosure provisions for overseas civil proceedings for business and consumers, and we agree with that view. Consumers are increasingly likely to purchase goods and services from overseas, so it makes sense to allow them the information that they need if they choose to seek cross-border redress. I recognise that businesses have some concerns about widening the gateway, but I simply point out that, as with the existing gateway for overseas disclosure, we have excluded from what may be disclosed sensitive information provided in connection with competition inquiries.

On the basis of that explanation, I hope that amendment No. 740 will be accepted, so we will not need to consider amendments Nos. 436, 437 and 438.

Moving on to the disclosure of information under the Enterprise Act 2002, I shall speak specifically to amendments Nos. 436, 437 and 438. The amendments come from the CBI and are put forward on a probing basis. The proposed new section 241A in clause 1245 provides wide powers to amend part 9 of the 2002 Act in respect of all kinds of legal proceedings. That is because, in Committee, the Government wanted to include consumer rights within the gateway. The CBI opposed that, but there was general agreement that part 9 should extend to information concerning intellectual property rights and proceedings to counter the ever-increasing problems of counterfeiting and piracy.

The CBI also told us that it strongly opposes any further reform that would weaken the part 9 safeguards and seriously undermine business confidence in the arrangements provided for in the Enterprise Act 2002. The consumer and competition enforcement regime rests on the fact that a wide range of information is provided to public authorities by business on the basis that it will not be disclosed. In general, the gateways work well and there is no justification, the CBI says, for making any wider changes than those needed in respect of infringements of intellectual property rights where genuine problems have been identified.

Proposed new section 241A(1)(b) requires amendment so that it refers to intellectual property proceedings “in any jurisdiction”—not limited to the UK. It is often the case that counterfeits found on the UK market have been imported. For brand owners to take effective action to reduce the trade in counterfeiting and piracy, they need to be able to pursue everyone in the supply chain, including the manufacturer. That may involve criminal, administrative or civil action, depending on applicable local laws. It is also essential to be able to use such information to feed the worldwide intelligence-gathering exercise that is required. However, exclusion of the limitation to the UK is needed only in respect of information relation to IPR proceedings where there are specific international problems and obstacles to pursuing counterfeiters resulting from the fact that information gained in this country cannot be disclosed overseas. That is not the case in other areas, and the CBI strongly opposes any lifting of the limitation on overseas disclosures in other circumstances.

As the Minister said, she took our comments into account in Committee and undertook to discuss the issue with stakeholders over the summer. She has just told us that that is what happened. We therefore take note of Government amendment No. 740. If an amendment is to be made, however, we point out that some organisations, such as the CBI, wish to limit the provision to intellectual property rights, as suggested in amendment No. 436.

Briefly, we take the same view as we did on the previous group of amendments. In principle, we favour the Government view on extending the permission—it is only a permission, not a duty—to disclose information in civil proceedings abroad in favour of consumers, rather than just litigants in intellectual property disputes. That strikes us as right in principle. The hon. Member for Huntingdon (Mr. Djanogly) has a point about the importance of proper consultation on the detail of any regulations, but we accept that the result of such consultation will be very similar to the consultation undertaken over the summer on these very provisions. We take the Government’s rather than the Conservatives’ view on that.

This is the second group of amendments on which I have to tell the Conservative Opposition that they are increasingly sounding as though they are standing up for business rather than standing up to it on behalf of consumers. We have proceeded as we have because the provisions are not just about how businesses can get information, but about how consumers can secure the information that they will need to seek redress. The breadth of our consultation over the summer with all stakeholders—we talked to business organisations, consumer representatives and enforcers—led us to believe that while business had its own perspective, a more balanced view should include consumers among those who have the right to information for redress. I wish that the hon. Member for Huntingdon (Mr. Djanogly) would withdraw his amendment on that.

I wish that the Minister had listened to what I said. I clearly stated that the amendments were proposed on a probing basis and I explained that they were based on representations that we had received from the CBI. I believe that the CBI has as much right to be heard on this matter as anyone else. If others had provided comments, I would have ensured that they were discussed as well. I think that the Minister should accept my comments in that light.

I hear that, but I have to tell the hon. Gentleman that it provides an interesting comment on the trust that people generally have in the Conservative party when only business interests make representations to it and other interests do not. I ask him again to reflect on whether he is standing up for business or standing up to it.

Amendment No. 438 deals with giving stakeholders the opportunity to comment on the detail in respect of secondary legislation. I give a commitment today that we intend to speak to all interested parties— representative of business, consumers and enforcers—before we draft the order. Following that, we will have a normal, short public consultation. As with the relevant amendment in the previous group, it is unnecessary to build a requirement for public consultation directly into the Bill.

Amendment No. 437 was discussed in Committee, in the other place and again in the House, but I have not changed my view. Negative resolution is consistent with the other order-making powers in part 9 of the Enterprise Act 2002 that may be used to provide for wider disclosure of information. There is no good reason to distinguish between those powers and this power. I therefore urge hon. Members to support Government amendment No. 740 and resist amendments Nos. 436, 437 and 438.

Amendment agreed to.

Clause 521

Offences in connection with auditor’s report

I beg to move amendment No. 439, in page 251, line 28, leave out ‘knowingly or recklessly’ and insert ‘dishonestly or fraudulently’.

With this it will be convenient to discuss the following: amendment No. 440, in page 251, line 32, leave out ‘knowingly or recklessly’ and insert ‘dishonestly or fraudulently’.

Government amendments Nos. 447 and 448.

Amendment No. 684, in clause 503, in page 243, line 22, at end insert—

‘(4A) With the exception of the audit fee, an auditor or auditors of a public company must not be a party to any transaction in the financial statements.’.

Amendment No. 686, in clause 505, in page 244, line 7, at end insert ‘, and

(c) they serve a maximum of five consecutive years’.

Amendment No. 759, in clause 509, in page 246, line 17, at end insert—

‘(2A) The auditor’s report must be accompanied by a statement stating the regulatory action, if any, taken against the firm or any member of the audit team during the preceding five years, together with the outcomes.’.

Government amendments Nos. 213, 225, 449 and 519.

In speaking to amendments Nos. 439 and 440, I return to the subject of the auditor offence proposed in the Bill. At this point, I declare an interest: I am a chartered accountant, as I pointed out yesterday, and I spent my formative years as an accountant auditing a wide variety of companies, many in Britain and some in other European countries.

Clause 521 will enable an auditor to be prosecuted if he or she has acted knowingly or recklessly to cause

“a report under section 509…to include any matter that is misleading, false or deceptive in a material particular”.

In Britain, about 700,000 audits are carried out annually. To my knowledge, they are carried out professionally, and largely show no indication of behaviour by auditors that would need to be tackled by the proposed new criminal auditor offence. As my hon. Friend the Member for Huntingdon (Mr. Djanogly) noted yesterday, we have debated the proposals not only in the House, but at a breakfast briefing in the City last week. At that event, I challenged the Minister for Industry and the Regions to tell us how many auditors she believed would be prosecuted under the new offence. I hesitate to put words in her mouth but, from memory, she suggested that there would be only one or two auditors whose behaviour would have to be dealt with via the offence. That sounds like taking a sledgehammer to crack a nut, especially given the existing law on negligence and fraud.

Can the hon. Lady tell us from her experience as a chartered accountant whether any malfeasance by an auditor, whether reckless or not, ever comes to light unless the company goes belly-up and flops? Was there reckless behaviour in Andersen’s audit of Enron in the United States?

Generally, shareholders and the company would have redress if they felt that an audit had not led to an accurate audit opinion. The Enron case was in the US jurisdiction rather than in the UK, so it is probably not appropriate for me to comment on it in the UK Parliament.

The Opposition are not convinced that a fresh offence is necessary.

Does not the hon. Lady accept that “knowingly or recklessly” is a fairly high level for an auditor to reach? We are not talking about mere carelessness or mistakes; an auditor would have to do something, or deliberately not disclose something, that was of material importance to people relying on the company’s accounts, for investment or other purposes. The barrier is high, so does she accept that for a few cases it may be necessary?

If the hon. Gentleman makes a contribution to the debate, perhaps he could mention any cases that were not prosecuted, but would have been if the new offence were in place. The proposed auditor offence actually lowers the bar for the prosecution of auditors. They can already be prosecuted under the existing negligence and fraud laws.

In addition, we have concerns about how the offence will work in practice, especially its impact on the broader audit process and, consequently, on business and the economy. The offence necessarily lowers the threshold for the prosecution of auditors and in doing so will have negative consequences for the whole of business and the audit profession.

Can we clarify the fact that no criminal offence of negligence is involved? There is civil liability for negligence in very limited circumstances. We are talking about what criminal offence should be added to a difficult aspect of civil liability.

I take the hon. Gentleman’s comments on board, but the Government clearly want to broaden the ability to prosecute auditors. My concern is that that will have negative consequences for business and audit that are disproportionate to the number of offences that will be prosecuted under the new provisions. That is important, first, because more audit opinions will be qualified. Auditors will require a significantly higher risk threshold to be passed before they can be comfortable in stating that accounts are true and fair. For some companies—in respect of going-concern issues, for example—the provision could be a self-fulfilling prophecy if auditors are forced unduly to highlight such matters by qualifying an audit report when, in reality, they might have been perfectly happy with assurances from management about the going-concern nature of the company. In fact, we are putting at risk the fine judgments made by auditors, because instead of looking at the facts in front of them, they will constantly be looking over their shoulders at the offence.

Secondly, audits will take longer because more issues will need to be followed up, and in more detail. I note that later amendments propose that filing time limits for some companies should be shorter. The offence would put considerable strain on the potential for that. At present, when auditors come across a matter that seems to be unusual or anomalous, they have to make a judgment whether, and to what extent, they should follow it up.

The hon. Lady seems to be following the line of argument that she took in Committee, but at that stage the Minister reassured us that “recklessly” meant knowingly taking an unreasonable risk, and knowing about its unreasonableness. In those circumstances, I cannot see how the concerns that the hon. Lady raises are still valid.

In Committee, we argued about the fine legalities of the meaning of the offence in relation to existing law. I am not going back down that track; I am trying to get more information from the Government about the cost of the offence to business and the audit profession.

I was talking about the decisions that auditors may need to take about following up an anomalous matter. If they believe that the matter is immaterial, they may take no further action and will continue with the remainder of the audit. However, there is no doubt that once the new offence is in place, such immaterial issues will be chased up—just in case. Audit companies will not take the risk of being accused of not following up something that may subsequently become a material issue. That will take more time, but it will also take more resources, so my final point about the effects on the audit process is that audits will be more costly because audit work will need to be broader to prove that all anomalies discovered—not just potential material anomalies—are followed up adequately.

The hon. Lady’s point about following up matters that would not previously have been pursued applies to the lower test of negligence, not to the higher test of knowingly or recklessly doing something criminal. Her point is aimed at a different civil liability.

Again, Members seem to misunderstand my argument. Even if the hon. Gentleman is right, is it therefore appropriate that we should take action that leads to incredibly increased audit costs for businesses—large, medium and small—when there is apparently nothing for auditors to worry about because, in his mind, there is only a small risk of their being prosecuted? In reality, the audit profession and business will find that they cannot accept even that small risk.

To prove that someone has behaved recklessly, it is necessary to show that the auditor was aware that an action or failure to act carried risks, that they personally knew that the risks were not reasonable ones to take, and that, despite knowing that, they went ahead. Why does the hon. Lady not want such people to be prosecuted?

People who are prosecuted are not always found guilty and the provision may well lead to spurious cases that put reputations on the line. The judgment as to whether the auditor’s judgment about whether he or she knew that a risk was unreasonable will be made by the courts, rather than by the auditor as at present. Can Ministers name one case that they believe should have been brought to court, but which was not because this offence did not exist? We would all be interested to hear which cases they feel have not been dealt with as a result of not having this law in place. I did not receive an answer to that question on Second Reading or in Committee. Perhaps I will finally get an answer today. The danger is that very few—if any—prosecutions will be brought. At the breakfast briefing last week, the Minister for Industry and the Regions seemed at pains to stress that the offence would be rarely used, and yet the ramifications for business and the audit profession could be broad.

The hon. Lady asked for an example. I wonder whether the Department of Trade and Industry report on the performance of Coopers and Lybrand as auditors in the Maxwell case might provide her with a convincing one. The evidence cited was that the senior partner at Coopers and Lybrand summed up the strategy when he told his audit staff:

“The first requirement is to continue to be at the beck and call of R.M.”—

Robert Maxwell—

“his sons and staff, appear when wanted and provide whatever is required”.

Was he therefore recklessly conceding to the wishes of Maxwell?

The hon. Gentleman raises another potential problem with the clause as it is drafted, to which I will come later. Frankly, I do not think that it is for Members to interpret what that Coopers and Lybrand partner was saying. One of the amendments that the hon. Gentleman has tabled would mean that audit companies could only carry out the audit, and not provide any other form of service. Clearly, audit companies provide a whole host of services to their clients, ranging from due diligence to tax and IT. Who knows what the Coopers and Lybrand partner was talking about?

The hon. Lady has referred twice to remarks that I made at a breakfast meeting at which she and I were both present. I just want to put the record straight in the House. I said that, of the 700,000 or so audits that take place a year, most are carried out scrupulously by auditors, with diligence and honesty. However, that does not mean that we do not need an offence to assure ourselves that all audits are carried out scrupulously, diligently and honestly. Most people do not commit murder, but that does not mean that we do not have an offence on the statute book to prosecute people who do so. Her argument is spurious.

I would counter that the Minister’s argument is far more spurious than mine. The offence of murder does not change everybody else’s behaviour towards one another, but the proposed auditor offence will change the behaviour—[Laughter.] Hon. Members are laughing, as if knowing that there is an offence of murder is what stops law-abiding people from killing one another. I fail to see how that furthers the Minister’s argument in relation to the auditor offence. I am sure that she will try to come on to that. [Interruption.] The Minister is saying that it is a poor argument. I presume that she is talking about her own comments.

My final point about how the offence will affect the audit process is that audits will be more costly. Audit work will need to be broader to prove that all anomalies discovered—not just potential anomalies—have been followed up. Everything will get followed up. Those costs will almost certainly be passed on to companies—large, medium and small—placing additional unnecessary costs on them. I have a large number of small and medium-sized companies in my constituency and I know that they will not welcome the prospect of increased audit costs, which might put some of them at risk of going out of business.

In the other place, Baroness Noakes, who has a vast amount of experience in this area, said of the Bill:

“I believe the biggest impact will be risk-averse auditing and higher audit costs.”

She goes on to say, of auditors:

“Put simply, they will do more auditing, more documentation, more double review and more double checking. They would be fools not to do so.”—[Official Report, House of Lords, 10 May 2006; Vol. 681, c. 1028.]

We ignore the views of people such as Baroness Noakes at our own risk. I agree with her comments. Is that really what we want to achieve—an across-the-board raising of audit costs and risk-averse auditing for an offence that may capture only one or two, or perhaps several, rogue auditors?

I have great respect for Baroness Noakes, but after she made those comments we explored in greater depth the extent of criminality, as the hon. Member for Cambridge (David Howarth) has made clear. It appears that I satisfied the hon. Lady’s colleagues, as none of them is here to support her today. She should look at what Baroness Noakes said in the context of the issue having been more fully explored by us in Committee. I doubt that Baroness Noakes would say what she said then if she had heard our argument in Committee.

I have, of course, spoken with Baroness Noakes and she is pretty comfortable with her initial comments. The Minister did take some time to run through the Government’s rationale for this offence, stating that, in her opinion,

“Good auditors who behave honestly have nothing to fear.

But even having said that, when I asked about the issue of auditors occasionally making mistakes—given that they are human—and following up anomalies, she said:

“If he”

—the auditor—

“was in any doubt, the safest thing would be to check things through”.—[Official Report, Standing Committee D, 13 July 2006; c. 724-5.]

Surely that is the heart of the problem. That is why audit costs will rise if this offence is passed today. The Minister said so in Committee. Will she agree to assess the impact of this aspect of the Bill once we are, perhaps, two years into its operation, and will she agree to revisit the offence if it proves to lead to unnecessary and disproportionate rises in audits costs for businesses?

Moreover, to return to the intervention that was made by the hon. Member for Great Grimsby (Mr. Mitchell), given that audits are carried out by teams of people, ranging from the audit junior to the assistant manager, the manager, the director, and the partner, in practice it could prove difficult to establish which team member committed the offence. I presume that we could have a situation in which several auditors on a team would be prosecuted simultaneously because it was not clear where exactly in the team the “knowingly and recklessly” behaviour associated with the offence took place. In Committee, I expressed my doubts and said that that might be a fatal flaw. Before that is brushed off by the Minister, I refer again to the corporate manslaughter legislation, which had a fatal flaw and ultimately proved entirely ineffective in the courts because of that flaw, to the extent that the House—I think today—has had to set up another Committee to look at a fresh version of that legislation. Perhaps the Minister can comment on how she expects that it would be assessed which audit team member should be prosecuted. Does she expect that multiple prosecutions of team members might arise?

Before the hon. Lady finishes, I invite her to explore the meaning of “dishonestly or fraudulently” in her amendment. Does she mean by dishonest or fraudulent what fraud means in the Fraud Bill, which is that there has to be an intention to cause a gain or a loss—a gain, for example, for the defendant or a loss to the victim?

The hon. Gentleman brings me neatly on to what I was about to say. Amendments Nos. 439 and 440 would substitute the words “knowingly or recklessly” with “dishonestly or fraudulently”. They would thus prevent the litigation risk from being excessively increased for auditors, in line with his comments about alignment with our understanding of the concept of fraud in current law.

Although our amendments would leave an auditor offence in place, they would take away the negative by-products to which the clause as drafted will lead, such as companies having to put up with auditors over-auditing under the new law compared with what they would have otherwise done under the current law in order to be comfortable with declaring accounts to be true and fair.

Let me turn briefly to the other amendments that hon. Members have tabled. Amendment No. 684 would be unworkable. As I have said, audit companies provide a whole host of services for their clients, such as tax advice, IT systems consultancy, internal audit, due diligence work and regulatory filing work. The restriction suggested under amendment No. 684 would harm not only the businesses that clearly value the additional services that they engage audit companies to provide, but audit businesses themselves.

Amendment No. 686 proposes to limit auditors to serving a maximum of five years. Again, I would be concerned that the amendment would lead to added costs for companies and auditors because they would spend too much time on costly tender processes. New auditors have to take time to get to know client operations and doing that regularly would perpetually add unnecessary costs, prevent auditors from carrying out efficient audits on behalf of their clients and, dare I say, lead to the risk that auditors would be less able to spot that one anomaly that represented a major problem because they had not been involved with the company for as long as they ordinarily would have been. For small, medium-sized and large companies alike, that would add not only cost, but risk.

Amendment No. 759 would be unworkable and unfair. It would devalue the accounts of companies not involved in any dispute unnecessarily. It would also have an impact on large accounting firms with offices throughout the world. The corporate structure of such a body might be that a large accounting firm in Europe was merged with another firm in Asia. In such circumstances, it might well be impossible to say whether a regulatory action taken in one continent should be included in the report for an office not merged in the other continent. It would be difficult to make the amendment stick.

We are broadly happy with the Government amendments. Although we have already heard several interventions, I look forward to hearing hon. Members’ contributions to the debate and, of course, the Minister’s response to the issues that I have raised.

The problem that we face is due simply to a slip that a Minister in the House of Lords made when attempting to be helpful by describing the meaning of “recklessly”. That Minister was not a lawyer and his words caused the auditing and legal professions some anxiety about the Government’s intention in their use of the word. Whatever the Minister meant to say, the entire problem was cleared up in Committee by the Under-Secretary of State for Constitutional Affairs, the hon. and learned Member for Redcar (Vera Baird), when she said—as she repeated today—that “recklessly” was used for a thoroughly subjective offence because a risk taken must be unreasonable in the mind of the person taking it. If so, I do not think that the bad consequences identified by the hon. Member for Putney (Justine Greening) will follow.

If we are to understand the situation as it now stands, we must go back to the legal context of actions against auditors. There are two liability pressures on auditors in civil law: the auditor’s contract with the company; and the threat of a negligence action by other possible victims. An important aspect of the introduction of the new crime with which we are faced is that the Bill will reduce the contractual pressure that might be put on auditors. The Bill will, for the first time, allow auditors to contract to limit their liability to the company itself. Indeed, we will later debate amendments that challenge that very possibility.

The Bill will not allow auditors to limit their liability unreasonably.

That is correct, but the fact that it will allow auditors to limit their liability at all is a new departure. There will thus be a reduction in the contractual pressure on auditors.

Is the hon. Gentleman saying that he thinks that it is a good idea that auditors should be exposed to unreasonable liability?

I think that the hon. Lady is confusing the liability rule and the test in the Bill—they are quite different.

It is crucial to bear it in mind that the circumstances under which auditors can be sued in tort by third-party victims of negligent auditing are extraordinarily limited. The fundamental problem is the form of loss. Pure economic loss, as it is known in law, can be sued for only when the auditor has assumed responsibility to the victim of the particular negligent act. That usually means that no liability is found because the court thinks that the primary responsibility of the auditor is to the company, not to any third-party victims. The number of cases in which auditors have been found liable of negligence to third parties is very small. There will be little pressure—or less than there is now—on auditors from civil liabilities across tort and contract after the Bill has been passed. That is the context of the introduction of the new crime to try to rebalance the situation.

As we have heard, problems can be caused by audits that go wrong—the Enron and Maxwell cases have been raised. We must thus ask what form the new crime should take. The choice is between a knowing and reckless crime, and a dishonest and fraudulent crime. The difference between the two is not that which the hon. Lady described, because she fundamentally misunderstands the notion of recklessness. In one crime, the most important thing is the consequences for other people and the defendant’s state of knowledge about those consequences, while causing gain or loss is crucial for the other crime.

Given the circumstances in which problems arise in audit cases, it is not especially relevant to worry about whether auditors are dishonest in the sense of wanting to gain for themselves from a situation. The important point is the consequences for other people and whether an auditor unreasonably—subjectively unreasonably— took an unreasonable risk. Given the balance of the measures in the Bill and the fact that pressure on auditors is being reduced in some respects—the civil liability pressure on them is quite low anyway—the form of the crime that has been chosen is acceptable, especially given what the Minister has said on many occasions about the Government’s view of the meaning of the word “recklessly”. I will resist the Conservative amendments.

It is interesting to get a clear-cut opinion from the hon. Member for Cambridge (David Howarth), who is leading for the Liberal Democrats, at least on this issue, and an opinion in favour of the Government. I welcome that.

I was amazed at the case advanced by the official Opposition for their amendment. My view is that this part of the Bill is far too sympathetic to auditors, particularly the big four. I intended to call it “The prevention of cruelty to the big four and other endangered species”, until I saw the provision, which puts teeth into the Bill and which I warmly welcome.

The hon. Member for Putney (Justine Greening) presented a picture of the big four as paragons of virtue, always doing proper, efficient and effective audits—creatures without sin. In fact, they are powerful multinationals and they have a responsibility to review their operations and, where possible, to restrain them. They are not in danger of extinction. The Government have given them special protections in the Bill, including the effective capping of liability. They are huge multinationals rolling in money. Their combined global income is $70 billion a year. They audit 99 per cent. of the FTSE 100 companies—

I note that the hon. Gentleman’s comments relate to large audit firms. Does he have a view on how the Bill will affect small audit firms, which may have to pass on higher costs to small businesses?

It is certainly true that the main problems are caused by the big four. Their failures and their practices act as a slur on the entire accountancy profession and audit. However, the Government’s aim, and ours, is to achieve proper, effective audit. Audit is valuable, important and required by law, and it might require some increase in the costs of audit to make it as effective as it should be. That is a price that we should be prepared to pay for good audits, but my worry is that the big four do not provide a good audit because they are involved in a collusive relationship with companies. They are selling services to them and using audit as a foot in the door for the sale of other services. That is the import of our amendments Nos. 684, 686 and 759, to which I shall speak briefly.

The sale of other services creates a collusive arrangement. The audit firms derive 75 per cent. of their profits from the sale of other services. I cite the case of the RAC audits. PriceWaterhouseCoopers undercut the incumbent auditor, Stoy Hayward, by 50 per cent. to get the RAC audit. Stoy Hayward’s senior partner accused PriceWaterhouseCoopers of undercutting it to secure an appointment that might enable it to introduce higher price consultancy services to the RAC. That is exactly what happens.

Such firms cut the price of audit, which means cutting its effectiveness and must mean increased pressure on the auditors, in order to get their foot in the door and use that as a market stall from which to sell other services. That brings them into a collusive relationship with the managing director, chief executive and senior figures in the company, because they are more lenient about the audit, about possible failures and about arrangements made in the audit that may raise eyebrows and be slightly dodgy, in order to maintain the good relationship and sell other services.

Following the failure of the Versailles Group in 2004, Nunn Hayward was fined for failures as auditors. It was making too much money from the sale of other services and the group was too important a client to be as stringent on the audit as it should have been. The big audit houses are prepared to restrict themselves in the sale of other services when they sell audit to local authorities. They agreed not to sell other consultancy services to get that market. If they can do it in the public sector market, why can they not do it in the private sector market? It will eventually bring down the price of other services because firms will get auditors bidding to provide other services, rather than entering into a collusive relationship with one auditor, which is a serious danger.

The US Government have been active in restricting the practice. The Sarbanes-Oxley Act placed restrictions on the sale of other services, which I am grateful to see we have followed in this country. Other restrictions are on their way and we should follow them as well. A collusive relationship is dangerous to the effectiveness, independence and accuracy of the audit. If the price of the audit is cut, that must cause pressure. The firm must be using untrained staff, cutting corners and not reporting things that should be reported, just to get the audit through at a certain price. We should ban the practice of selling other services.

Amendment No. 686 provides for rotation—a maximum of five years’ tenure as an auditor. The Government and the audit profession say that partners are already rotated, but that is not good enough. We must provide for auditors to be changed. It is necessary for a new pair of eyes to look at the arrangement, scan the papers of the previous auditor and take a view. Longevity of auditors means collusion. Longevity of auditors means a comfy relationship and the kind of situation that developed in the Maxwell pensions case.

I quote from the Department of Trade and Industry report on Coopers and Lybrand’s performance. The DTI report stated that the auditing firm

“consistently agreed accounting treatments of transactions that served the interest of RM”

—Robert Maxwell—

“ and not those of the trustees or the beneficiaries of the pension scheme”.

Collusion—that is what it is about. We end that with rotation of auditors.

Rotation of partners is not the same and is not good. Enhancing the independence of auditors requires a new auditor. How likely is it that partner B, on taking over from partner A, will say, “Scandalous practices! We can’t to this. We can’t do that. We must change that”? It is not going to happen, is it? If the auditors are partners in the same firm they are unlikely to abuse each other or check each other’s performance closely. Most of the audit is, in fact, done by teams lower down whose turnover is rather rapid, so even a new partner does not produce the continuity of contact and skill that is claimed. We want rotation of auditors on the grounds that longevity leads to collusion, carelessness and the kind of situation that developed in the Maxwell case. The research indicates that that is a failure.

Amendment No. 759, tabled by my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) and me, seemed to scandalise the hon. Member for Putney by calling for the auditor’s report to

“be accompanied by a statement stating the regulatory action, if any, taken against the firm or any member of the audit team during the preceding five years, together with the outcomes.”

Why not? Why should we not know the reputation of such firms and what action has been taken against them? Why should we not be able to judge the quality of their work from what they have done in previous cases where regulators have taken action against them? This should be public information and it should be available so that we can understand the judgment of the auditor in the light of the performance of that firm and the regulatory action taken against the firm.

I understand why the hon. Gentleman is setting out this argument, but does he really think that it is an appropriate one in respect of, for example, only one audit in one office in one part of the world? Does he really think that it is a proportionate response, in respect of every single company in every other part of the world that might be audited by teams and offices that have never come into contact with the team that audited that office and that might or might not have had successful regulatory action against it, for every single audit report to include that point? If that means that some businesses might have to have a fresh audit, or even go out of business because investors simply say that they are unwilling to use their accounts any longer, does he really think that that is proportionate response?

That is a fairly far-fetched picture. It is ridiculous to suggest that, because auditors report that action was taken against them in one jurisdiction, clients will flee from the firm that is being audited.

However, on the hon. Lady’s basic point, I simply answer that the international composition that she talks about applies primarily to the big four, which are multinationals. They market themselves as multinationals and as having a common reputation: “We are PriceWatersCooperhouse”—or whatever it is called. I forget whether it is PWC, which sounds fairly obscene to my ears, or PCW. I think it must be PWC. It markets itself as a multinational team, maintaining common standards and providing services on an international basis. If it does that, it is answerable in respect of its offices in other jurisdictions, and we should know what has happened to it in other jurisdictions.

An astounding number of cases are relevant to my point. For instance, in the United States of America in 1995, Ernst and Young gave undertakings to

“comply with standards and guidelines issued by the…SEC…and the accounting profession regarding the independence of public accountants”,

but when a case came up about it not having done that, the judge said that

“the evidence shows that EY has an utter disdain for the Commission’s rules and regulations on auditor independence…EY committed repeated violations of the auditor independence standards by behaviour that was reckless, highly unreasonable and negligent.”

That is what the judge said about Ernst and Young, which markets itself as a multinational providing services all over the world.

We are obliged to publish performance and league tables for every other kind of organisation—such as schools—so why should we not have similar information on the firms that are auditing the accounts of public companies and putting their reputations on the line? Those firms do 99 per cent. of the audits of the FTSE 100 companies.

All our proposals in amendments Nos. 684, 686 and 759 are important, because we do not accept that there is any threat to those big multinationals and their behaviour. Their reckless pursuit of profit endangers the reputation of sound, efficient, effective, respectable and reputable accountants and auditors, which are smaller and are not going in for the same kind of behaviour as the big four.

I did not intend to speak on this matter, but I have been moved to do so by the comments of the hon. Member for Putney (Justine Greening). She seemed very concerned about auditors, but I have a concern for those who rely on the audit report. It is not only the company that relies on that report: an audit report in a company’s accounts will be important to those who are thinking of investing in the company and those who have an interest in it—not least pensioners in the company. The hon. Member for Great Grimsby (Mr. Mitchell) highlighted the Maxwell situation, and the disasters that followed from that.

The hon. Member for Cambridge (David Howarth) talked about civil negligence against auditors. I have been racking my brains, but I cannot think of any major cases where anyone successfully sued an auditor in such circumstances, although I think that there was an attempt in the Equitable Life case that failed. If an audit goes wrong, that can lead to very serious circumstances.

What is proposed will not put an undue burden on auditors. The phrase we are talking about is “knowingly or recklessly”. I am not an auditor. I was a fairly lowly solicitor before I entered this House, and in law there is a clear and well-established difference between carelessness and recklessness. Even in areas such as road traffic, we talk about careless driving and reckless driving. Recklessness is a very high burden for the prosecution to prove. I accept what the Minister said: the vast majority of auditors are honest, hard-working and do a good job. They have little to fear. The very small minority that for whatever reason—being too close to the company or for their own reasons—do not do the job to anything like the standard of a reasonable auditor are the only people who would have anything to fear. To add “dishonestly or fraudulently” would make it almost impossible for anyone to prosecute successfully. As the hon. Member for Cambridge said, it would have to be proven that the auditor had in some way benefited from the fraudulent activity, which would be almost impossible to do.

This is a sensible move. It means that auditors will have to think about the impact of an audit report outwith the company and adhere to proper standards. If they do not adhere to those standards, to the extent that it is reckless, it is right that there should be the option of a prosecution against them.

The House has a brief opportunity this afternoon to consider how to deal with certain remarkable financial institutions that we have developed, which have huge market power and huge global reach, namely the big four accountancy firms. We have the opportunity to consider the domination they have over the auditing of all our great companies, for which they have an effective monopoly among themselves, and also the influence that they have over government.

Some estimates suggest that, since 1997, the Government have spent almost £2.5 billion on commissioning consultancy and advice from the big four accountancy firms. Many Members are concerned with issues such as the new localism. It would be a very bold councillor indeed who would gainsay it, if an officer produced some advice that had been endorsed by the local branch of one of the big four accountancy firms. The point made by the hon. Member for Putney (Justine Greening) emphasised the global reach of those companies. KPMG is said to have 140,000 partners worldwide.

The internal organisation of these companies is far from clear, as our colleagues in the United States found when they attempted to investigate BCCI. They chased one of the big four accountancy firms across the globe, only to end up at an office in Bermuda with which no one had information-sharing agreements and no more could be said or done. The hon. Member for Cambridge (David Howarth) clearly set out to the House the very limited legal remedies that apply and can be brought against such massive financial institutions, even were it not the case that some of the very biggest law firms in the City of London have already made it clear that they would not contemplate any kind of legal action against the big four accountancy firms.

To deal with that situation, the Government have proposed the very blunt instrument that is the reason for the Conservative amendments. Here, I have some words of comfort for the hon. Member for Putney. It is almost inconceivable that there are any circumstances in which the powers set out in the Bill will be used. When in government, her party introduced the crime of insider dealing, which was on our statute book for nearly 20 years. I invite the Foss and Harbottle tendency among us to tell me whether there was ever a successful criminal prosecution for insider dealing under that legislation. No, there was not.

We can effectively dismiss the possibility that the situation that the hon. Lady is inviting us to discuss would ever arise. What public prosecutor would be bold enough to bring a criminal case against a big accountancy firm, in the light of the Chancellor’s very clear statement yesterday that he will resist—I doubt whether he will be successful—the importation of Sarbanes-Oxley. Following the outcome of the so-called “Plumber” case in the Financial Services Authority, the number of such cases that any agency will bring will be very limited indeed. That is why we should not seek this blunt instrument of criminality in order to create a cultural change in behaviour. Any 18th century squire would have been able to tell this House that there is no prospect of a hanging party changing its behaviour unless it actually hangs someone. No one is going to be “hanged”, so the prospects of changing behaviour do not exist.

The hon. Member for Putney said that it would be entirely wrong to separate audit from non-audit services. In 1982, a Conservative Government introduced just such a requirement into the auditing of local government, and it has worked very successfully for 25 years. In April, the public company accountancy oversight board introduced a requirement for the complete separation of tax advice from the auditing of companies. In due course, that will be introduced into our own rules through the Auditing Practices Board. Nothing is more certain, because for the big firms, there has to be consistency between us and the United States. How much more sensible to introduce our own arrangements, rather than passively importing into this country requirements and regulations from the United States. If, by chance, one of the big firms was required to tell a company what each one of its 140,000 partners across the world might or might not have done, what a very important discipline that might be. What clarity that might bring to the internal organisation of these big firms, and how helpful it would be to the members of the company and to the wider world.

I shall begin by discussing Opposition amendments Nos. 439 and 440. I will then turn to the three amendments tabled by my hon. Friends, and to the six Government amendments that make up the balance of this group.

This new offence has been debated extensively—hyperbole is a tool that is frequently used, but “extensively” is probably an understatement—and I do not suggest for one minute that the hon. Member for Putney (Justine Greening) is trying to defend the bad auditor. Rather, she is considering the possible impact on the good and honest auditor, and I accept that it is right that she do so. But frankly, the dismal picture that she paints is based on the misunderstanding that we are criminalising negligence by auditors. I agree with her entirely that to do so would be counter-productive, but that is not what we are doing: the Bill does not criminalise negligence. Recklessness and negligence are well-established legal concepts, and they are very different. I explained this at tedious length in Committee, and most members of it seemed satisfied with my explanation. I am grateful to the hon. Member for Cambridge (David Howarth), who indicated that I satisfied him on that point. As the distinction is so central, let me explain its elements one more time.

May I just confirm that I am being assured that, in the 20 years in which insider dealing was a criminal offence, there was one conviction?

No, I am saying that the Solicitor-General, in a different guise, successfully defended some of the many prosecutions that were brought, but that he, from his own anecdotal experience, can talk about one that most definitely did succeed. However, I doubt whether it was the only one that succeeded. The provision will be used, and we legislate with the intention of using the legislation.

If we accepted the amendment tabled by the hon. Member for Putney, which would insert the phrase “dishonestly or fraudulently”, it would make the offence redundant. If an auditor behaves dishonestly or fraudulently, they are already guilty of an extant criminal offence. This is a useful new offence that will have a positive economic impact, without imposing additional burdens on those who act in good faith in carrying out their duties. We think that it is right to have that sort of legal sanction in such cases. I hope that the hon. Member for Putney will withdraw the amendment, now that we have shown yet again that her concerns are not really justified.

I turn now to the amendments from my hon. Friends the Members for Newcastle upon Tyne, Central and for Great Grimsby (Mr. Mitchell). Amendments Nos. 684 and 686 are aimed at ensuring the independence of auditors from the companies that they are auditing. Amendment No. 684 would prevent a company from employing its auditor for any work other than the audit, while amendment No. 686 would require the rotation of auditors every five years.

We entirely agree that the independence of auditors is absolutely essential, but we also have a responsibility to avoid unnecessary regulation. Tightening the regulation on auditors often ends up imposing significant costs on companies. However, over the past few years, particularly since the collapse of Enron and WorldCom, the structures in the UK within which auditors operate have been strengthened in a number of ways. We removed responsibility for auditing standards on independence from the professional bodies and passed it over to the independent Auditing Practices Board of the Financial Reporting Council. Moreover, only a couple of years ago the APB issued ethical standards on auditor independence that impose strict duties on auditors to monitor and deal with any threats to their independence. In particular, they must avoid doing other work for an audit client if that would result in their effectively having to audit their own work.

I am very glad that my hon. and learned Friend has pointed that out, as the APB’s requirements follow to the letter those introduced in the US after the Sarbanes-Oxley Act was passed and the Public Company Accountancy Oversight Board was established. She makes precisely my point—that we in this country are not setting standards for ourselves but allowing the APB to import into British jurisdiction exactly the same requirements that are introduced in the US. How feeble that is.

I follow what my hon. Friend says, and he is right, at least in part. However, I hope that he will agree that substantial steps have been taken in the past few years to guarantee the independence of auditors—an aim that he and I share. The two steps that I have described are clearly highly germane to my assertion that he and I are thinking along the same lines, even though our approach differs slightly.

There is no doubt that there is a move to restrict the sale of tax advice by auditors to their clients, just as is happening in America. My hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) is exactly right: we are being dragged behind the Americans, step by step. It is as if we are regulating audit in the same way that we are treating Iraq.

Order. Perhaps I can help the Minister. That is not a good line to pursue, I think.

Thank you, Mr. Deputy Speaker. I do not think that I could cope even if I did try to pursue it.

The Government believe that it is better for businesses and investors in the UK to use the ways set out in the Bill to guarantee or safeguard auditors’ independence, and that the approach adopted is more compatible with the culture that we are used to than would be a pursuit of the course taken by the US, with its Sarbanes-Oxley rules.

Similarly, we do not agree with the proposal that regulatory action against an audit firm or an individual auditor should be disclosed in every audit report with which they are involved. If an auditor, whether a firm or individual, is found guilty of a disciplinary offence by the professional body or by the AIDB, that is publicly available information to which audit committees and shareholders can have ready access. If auditors are investigated and cleared of a professional shortcoming, it would be unreasonable and wrong to require them to disclose that in reports.

In summary, I sympathise powerfully with the desire on the part of my hon. Friends the Members for Newcastle upon Tyne, Central and for Great Grimsby to improve the independence and accountability of auditors, but I believe that we have made real progress in these areas in the past few years and that the extra bits of regulation that they propose would be counter-productive.

Finally, the six Government amendments in this group are minor but worthwhile technical improvements. Amendment No. 213 removes a reference to a type of fine that is inappropriate in relation to conviction on indictment. Amendment No. 261 provides a definition for a “supervisory body” for the purposes of clause 539. Amendments Nos. 447 to 449 clarify that, when rights are available to a specified percentage of shareholders, someone who holds shares on behalf of more than one investor can choose to deploy the part of his overall holding appropriate to those investors who wish him to do so. Amendment No. 519 updates the definition of “bank” in clause 1174 so that it now refers to the new banking consolidation directive published in June 2006.

We have had an interesting and wide-ranging debate. The hon. Member for Cambridge (David Howarth) appears to think that he belongs to the real Opposition, but will clearly vote with the Government on the Conservative amendment before the House. I listened very carefully to the hon. Members for Newcastle upon Tyne, Central (Jim Cousins) and for Great Grimsby (Mr. Mitchell), and I understand the points that they raised. However, I have considered their amendments previously, and I cannot agree that they would have a positive effect. I therefore remain unconvinced of their merit.

Similarly, I take on board the points made by the hon. Member for Angus (Mr. Weir), but there seemed a slight prejudice in his remarks against successful multinational audit firms, some of which happen to be British. By and large, they get on with their business very well.

I appreciate the Minister’s acceptance that I am not trying to protect reckless accountants. In fact, the representatives from the accountancy and audit professions who have got in touch with me are worried about the rising costs that they may now have to pass on to customers. They do not feel that that will add anything to the audit approach, and we ignore their views at our peril.

Finally, my main concern is for the impact that increasing audit costs could have on small business. I very much hope that the Minister will keep a close eye on how the legislation is working once it is enacted, as that would go a long way towards minimising the potential risks that I have flagged up today. I am fully aware of how the offence is structured legally, and I understood the arguments that the Minister made in Standing Committee. However, the impact that the measure will unwittingly have on the audit profession broadly, and the costs to business that will result, cause me concern. As I have had no assurances that those arguments have been taken on board at all, I shall push amendment No. 439 to a vote.

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 amendments: No. 751, in page 264, line 36, clause 546, leave out from ‘proceedings)’ to end of line 37.

No. 752, in page 265, line 12, leave out clauses 548 to 552.

No. 763, in page 265, line 33, clause 549, at end insert ‘, and

(c) shall not specify a sum of money as a cap or absolute upper limit on the total liability.’.

Government amendment No. 648.

No. 803, in page 266, line 41, clause 551, leave out ‘Part’ and insert ‘Act’.

No. 802, in page 267, line 14, clause 552, at end insert—

‘(1A) The regulations must require that all such agreements must be filed at Companies House within 21 days of the date of agreement together with a copy of the correspondence relating to the agreement between the company, its advisers, auditors and their advisers.’.

In our last debate, when my hon. Friend the Member for Great Grimsby (Mr. Mitchell) and I tried to draw the House’s attention to the possibility of market regulation in dealing with our new overmighty subjects—the big four accountancy firms—it was reasonably clearly established that we can await rescue from the United States in due course. In this debate, we will consider the legal situation is as regards these matters. We are in the hands of a powerful array of impressive lawyers, although I see that we do not currently have the assistance of the Solicitor-General, who did heroic work in former times.

We are dealing with a situation in which there was already moral hazard because of the enormous power and influence of a few institutions, the domination that they had over their own markets, and the need to open up those markets to a much wider range of audit and accountancy firms that could seek to challenge them. We now have an attempt to strengthen and embed the privileges and to deepen the moral hazards that such institutions already have. The hon. Member for Cambridge (David Howarth) may put me right, but the Caparo judgment was the first step on the route towards embedding the privileges of these powerful firms.

In 1997, two further court cases—it is unnecessary to go into detail—limited the liabilities of the big firms even further and established the idea of proportionate liability, which has become part of our courts’ practice. Not content with that, in 2000, the Government introduced the concept of limited liability partnerships, which effectively further strengthen and defend the powers of a few large firms to dominate the audit and accountancy market. On that point, I had a great deal of sympathy with the hon. Member for Putney (Justine Greening) when she spoke up for the smaller firms. New entrants to the big end of accountancy will find it extraordinarily difficult, given the market power of a few large firms and their international reach and connections.

I am conscious of the time, so I shall briefly set out the Opposition’s view on the new clause and amendments. We broadly support the limited liability agreement clauses and do not therefore support amendments Nos. 751, 752, 763, 802 and 803. The limited liability agreement is not made mandatory by the Bill. It will be a matter for companies and their auditors, an agreement between the audit firm and the business. It might, however, provide a tool for more carefully limiting the risk to auditors in relation to the corporate risk that they can influence and have some responsibility for. It is right that clauses 458 to 552 do not take an over-prescriptive approach. It will clearly be a matter for companies and their auditors to work through the fine details of structuring the agreement, and that process will no doubt be adapted with experience and time.

New clause 86 provides for a limited liability agreement to be circulated to all parties entitled to receive company accounts. This would result in unnecessary bureaucracy, as any agreement would have to be approved by members through the normal company procedures anyway and at that stage the agreement would be available for scrutiny. Similarly, amendment No. 803 also seems to involve unnecessary bureaucracy.

Clause 551 provides a reasonableness test against which to judge an agreement. Clause 552 provides that the Secretary of State could introduce regulations that require disclosure of an agreement in the annual accounts or the directors’ report. Will the Minister tell the House whether the Government intend to introduce such disclosure regulations and, if so, when she expects them to come into force?

Does not any limitation of liability—whether introduced by agreement, a cap or some other means—strengthen the big four against the smaller accountancy businesses that the hon. Lady and I want to protect and encourage?

That is an interesting point. Companies can engage whichever audit firms they choose. If a company felt that its accountant was pressing for a limited liability agreement that was excessively limited, that could result in the audit business being made more competitive. There are clearly only so many firms that are in a position to audit multinational companies, but I do not think that this agreement will change that. If anything, it could open the door to some medium-sized companies, to allow them to compete in relation to the agreement that they put in place.

It would be helpful if the Minister could provide the background to Government amendment No. 648. When I read the existing clause, I felt that it was adequate as it stood. The Government are proposing a change to ordinary resolutions, and it would be helpful if she could clarify the background to this proposal.

I rise to support the speech made by my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins) and to put the case for the amendments.

We are trying to enforce liability, particularly against the big firms. The auditor has responsibilities and it is not reasonable that liability should be limited in any way. We are saying that there is a principle here that applies in no other field—that is, when a product, which is what an audit is, fails or is not fit for use, there should be no redress against the producer of that product. If that applied in relation to baked beans or Coca-Cola, consumer protection legislation would be reduced to farce.

Why should the big four—the species that we are told is in danger of extinction—have protection from their own failures, which is effectively limitation of liability? This has a long history, and I have been surprised by some of the concessions made by my Government. I was involved in a Companies Bill in the 1980s, under a Conservative Government. The audit firms came to us to say that they were threatened because they had deep pockets, poor creatures—the more money they have, the more threatened they feel.

Those companies were exposed to law suits against them, most of which came from other members of the big four. The audit arms were being pursued by the insolvency arms, so it was fairly incestuous, as my hon. Friend the Member for Newcastle upon Tyne, Central pointed out. They came quaking in fear and said, “We want our liability limited.” How did they want it limiting? They said, “We should be able to set up as limited companies, rather than as partnerships.”

So the Bill was changed as a result of representations from the chartered institute and the big audit firms. They were given the right to set up as limited companies, but they did not use it, because they had moved on to another stage—upping their demands. They produced a demand for limited liability partnerships, but the Conservative Government wisely refused to grant it.

Those firms then bought legislation in Jersey and promised the Jersey legislature, which is not a paragon of virtue, that they would provide the legislation, which they did. It cost more than a million quid and was written by the big accountancy firms here. The legislation passed through the States of Jersey, but the promised flock of dark-suited immigrants who would come to Jersey to set up accountancy businesses to benefit from limited liability partnership did not arrive. Nobody came.

Those firms then turned to our Government, who, having told us that there was no time to introduce the independent regulation of accountancy and audit as in the United States, which is the only way forward, decided that there was time to limit liability of partnerships. That came in, over our protests.

The only concession that we gained came about because the Minister was desperate to go to Norway that particular night. If we had continued to talk here, his journey would have been threatened, so he gave us the concession that the proposal would not come into force immediately and that there would be consideration of the exact effects. We achieved a minor victory, but here we are again.

The argument is specious. We are, effectively, providing limitation of liability, but the amendments would stop either any such agreement or any form of cap. Those big, secretive firms have never produced evidence that there is a huge threat against them or that huge damages would be awarded against them. Only two cases from the 1960s to the 1980s were cited earlier, as I recall, and in the 1990s the big four auditing firms were spending just 2.6 per cent. of their income to meet liability costs. What I have to spend on insurance—house, car and personal—amounts to far more than 2.6 per cent.

I am following with care my hon. Friend’s argument. In dealing with the big four, however, is it not clear that there is a lack of ability to prosecute a case against them? Whether liability is limited is not therefore the issue; the issue is whether we can get to them in the first place. Therefore the point that he makes is not really the one that he should be making.

That is correct, and the reluctance of even big City law firms to embark on a case against the big four has been pointed out. They do, however, embark on cases against each other. When there is a question of making the auditor liable, the case is usually brought by the insolvency arm of another of the big four. They are fairly adept at taking action against each other, which is what they fear. They want limitation of liability to protect them from each other.

All the precedents indicate that such limitation is dangerous. In 1986, the Law Commission said that a “cap” on auditor liability or “proportional liability” were against the public interest. The Office of Fair Trading also rejected the idea. Section 137 of the Companies Act 1989, which I mentioned earlier, allowed firms to buy insurance to cover their liability should they wish, but no major company has taken advantage of that. When such companies tell us that they would not get insurance, I wonder what kind of business they are running. One can buy insurance against Martians landing on the roof of one’s house. How come the big four are so shady that they cannot get insurance? The crisis of huge cases pending against the big four, threatening to end the existence of any one of them, is entirely spurious.

It is clear that Enron, WorldCom, Xerox, Tyco, Adelphia and all the other scandals resulted directly from the limitation of liability in the United States. Joseph Stiglitz, who was an adviser to President Clinton, has said that the US liability laws directly paved the way for auditor negligence and the mega-scandals. If we limit liability, we get scandals. If liability is limited, what will keep auditors up to the mark? What will improve their performance and make sure that they are providing good audits? It seems a crazy principle to adopt.

The president of the Institute of Chartered Accountants of Scotland, which examined failures—our chartered institute does not seem inclined to take on the big four, largely because it is permeated and dominated by them, and they provide the personnel and partners with the time to run the institute and to influence policy—said:

“All the failures we looked into would have been found if anyone other than the audit junior had looked at the bank statements”.

He added:

“Big firms are no longer carrying out audits. They audit in helicopters and circle clients from a few thousand feet and take pictures. No one gets out of the helicopter and kicks tyres. It’s no longer audit, it’s more akin to due diligence”.

We have supplied evidence to the Department that more than 60 per cent. of the staff carrying out audits admit to falsifying work under the pressure to provide the audit for the level of fees that has been cut to get the audit in the first place. We did not get much reaction from the DTI.

We are against the principle of limiting liability. It seems dangerous and not conducive to good audit. We are anxious to maintain the reputation of the profession, particularly those small and medium-sized audit firms that need to be brought into the market to make it more competitive, but which are excluded by the dominance of the self-perpetuating big four.

I have a great deal of sympathy with what has just been said by the hon. Member for Great Grimsby (Mr. Mitchell). The audit market is a guaranteed market, guaranteed by the state, and companies covered by the obligation must have an audit. There are very few audit firms. If we put the two together—a state basis and an obligation for the market, and a very small number of firms—we have the classic conditions for a monopoly, or in this instance an oligopoly. Members on both sides of the House have commented on the position of small and, indeed, medium-sized firms trying to break into the market. They are in a very difficult position as a result of the structure created ultimately by the law. The hon. Gentleman mentioned the Law Commission’s view, and I share some of its worries. There is a serious risk that the interests of third parties will be affected. I want an assurance from the Government that they do not intend to affect those interests.

What the Bill does looks entirely legitimate on the surface. The members of a company who are most directly interested in its welfare are allowed to contract with the audit firm to limit the audit firm’s liability. That appears to be a straightforward deal between two parties, and if it were there could be no objection to it: the parties would have worked out their own interests and the price would reflect the risks on both sides. The trouble with audit is that the company’s members are not the only people involved.

Two other parties are obviously involved. One—this classic case takes us back to the Caparo litigation, mentioned by the hon. Member for Newcastle upon Tyne, Central (Jim Cousins)—is a takeover bidder or buyer of the business. If the audit firm could limit its liability with the company, a takeover bidder who took over the company could not then use it to obtain recourse against an auditor who had acted badly, because the company would still have limited rights against the auditor. The only recourse would be for the takeover bidder to act in his personal capacity, or the capacity of another company.

A similar case is that of creditors. Many of the examples given so far have involved insolvency. If an audit has resulted in a company’s being worth much less than people thought it was worth and creditors find that they cannot get their money back, their problem will be that the liquidator or administrator is technically acting on behalf of the company. The rights of the creditors are therefore through the company, and the company has limited its recourse to the audit firm. The creditors will suffer because of an agreement made previously by someone else, namely, the shareholders. The shareholders’ agreement has an impact beyond their own interests.

There is obviously the possibility of creditors trying to obtain recourse outside the remit of the company, in their own right. That brings us to the crucial question—do the Government intend limited liability agreements to affect the rights, such as they are, of third parties? Let me put it technically: do the Government intend to change the law of tort, or just to change the law of contract? It has to be said—the hon. Member for Newcastle upon Tyne, Central mentioned this—that even in the law of negligence, or tort, the rights of outsiders are limited. The Caparo case was followed by a series of other cases that make it very difficult for people to win in those circumstances, but it is not impossible. In the Morgan Crucible case, the plaintiffs won because the court thought that, given the special circumstances and the fact that specific extra representations had been made to the auditors, the audit firm was bound by those extra representations over and above the normal audit to the person who ended up losing out—so it is possible. I want to hear from the Government that their intention is not to rule out that possibility indirectly through the ability of auditors to limit their liability in contract to the company.

As before with the modest quip made by my hon. Friend the Member for Great Grimsby (Mr. Mitchell) about Iraq, I shall not allow his rhetorical flow, whether it be about dark-suited accountants or escaping early doors to Norway, to move me away from the focus of the amendments. I shall go through them one at a time as speedily as I realistically can.

I sympathise strongly with the concerns expressed by my hon. Friends the Members for Newcastle upon Tyne, Central (Jim Cousins) and for Great Grimsby, but I hope to persuade them that we have here an appropriate balance. Their amendments Nos. 751 and 752 would delete the clauses that enable the auditor and the company to agree a limitation to the auditor’s liability, so the Bill would just reflect the current position that any attempt to do that is void and unenforceable. Their alternative route is, through new clause 86 and amendment No. 802, to extend the publicity given to liability limitation agreements. New clause 86 would do so by requiring proposals to be sent to shareholders of private companies, who would resolve to waive the need for authorisation, and to debenture holders as well as shareholders of all companies. Amendment No. 802 would require agreements and associated correspondence to be filed at Companies House. Amendment No. 763 would prevent liability limitation agreements being made that specified a monetary limit—a cap, as my hon. Friend the Member for Newcastle upon Tyne, Central put it.

Amendment No. 802 would modify one of the issues to which a court should have regard in considering whether a liability limitation agreement was fair and reasonable. Instead of looking at the auditor’s responsibilities under part 17, which is the audit part, it would look at the auditor’s responsibilities under the entire Bill. Let me deal with that one first. The amendment would have no effect because all of the responsibilities owed by the auditor of the company that could give rise to a claim by the company are in part 17.

Government amendment No. 648 removes subsection 550(4), which specified that members were to authorise a liability limitation agreement by ordinary resolution. The hon. Member for Putney (Justine Greening) asked me to say what the point of that was. It is just that the subsection is unnecessary because that is the effect of saying in clause 550(2) that the authorisation is to be by the company passing a resolution.

Let me go through how we deal with the points raised. The hon. Member for Cambridge (David Howarth) asked us to give an assurance that third parties were not affected. Yes, but as the hon. Gentleman has observed, third parties will seldom have a claim. However, if creditors can get recourse outside there is nothing in this change that ought to affect their ability to do so. It certainly is not our intention that that should be so.

The agreements will limit an auditor’s liability only if the company agrees to the limitation in the contract and it is authorised by the explicit decision of the shareholders or, in the case of a private company, the shareholders resolve to waive the need for approval. The Government’s approach to the request made by my hon. Friend the Member for Newcastle upon Tyne, Central about regulation is that the safeguard is that there must be a shareholder resolution.

There is, of course, much more to be said. After the event, a court can decide, whatever the agreement was, that the limited amount payable by the auditor is not fair and reasonable and, if necessary, it is open to the court to impose a much higher amount, if that is called for. Those provisions were extensively debated in the other place, where there was widespread cross-party support for the policy approach and useful clarification of the drafting took place.

To put the point moderately, my hon. Friends have argued—I hope that I do justice to their arguments—that the changes will reduce the incentive on auditors to do a good quality job. Let me reiterate that under the new provisions, auditors will not be able to exclude their liability altogether and it will always be open to the court to decide that the limitation is not fair and not reasonable and to impose a higher amount as it thinks fit. Civil liability, of course, is only one of the external incentives on auditors to do a good professional job. If they fall short, a range of disciplinary procedures are available and, although we do not want to go back there, we have just introduced a new offence for anyone who knowingly or recklessly causes an audit report to be misleading, false or deceptive.

Amendment No. 763, which prevents companies from agreeing a fixed sum as the limit of their auditors’ liability, amounts to the same argument. Any attempt to limit the liability to a specific financial amount will not be effective if the court decides that a larger amount is fair and reasonable and that the capped amount is not. There is also a power in clause 549(2) under which regulations could prevent limitation by fixed monetary amounts if, against our expectations, there proves to be a case for doing so in the light of experience.

New clause 86 and amendment No. 802 deal with the publicity given to liability limitation agreements. As the provisions are drafted, the company will have to write to its members to receive authorisation, except where members of a private company have decided to waive the need for approval, and the company will have to disclose its agreements under clause 552. The details of disclosure are to be fixed by regulations, on which, to respond to a question posed by the hon. Member for Putney, we will consult.

I am listening to the hon. and learned Lady, but can she help us with the claims of depositors with respect to banks? If a bank goes bust and the auditor should have picked up the fact that money was being filched by bank employees, but does not, what happens to the depositors? Does a liability limitation agreement pre-empt or prevent the depositor from being able to maintain a claim against the auditor?

Is not that the same question put by the hon. Member for Cambridge, which I have already answered? [Interruption.] I think that it is, but let me say it again. There are rarely claims for third parties, but if a creditor of some sort—including a depositor— can get recourse outside the contract to limit liability, there is nothing in the provisions that will prevent them from doing so. They will be in no worse or better a position than they were before the change was introduced.

The current position is that the requirements for publicity surrounding the entry into an agreement are as I have set out, but new clause 86 would force the company to send the proposal to all those—including private companies that had already decided to waive the need for approval—who receive the company’s accounts. It would also include venture holders as well as members. If the company wants to send the publicity to the venture holders, that is absolutely fine, but they are not part of the decision-making process and we see no good reason for forcing companies to send the proposals to them.

Amendment No. 802 would constrain the regulations on disclosure that include filing the full agreement and all correspondence at Companies House within 21 days. As I have already explained to the hon. Member for Putney, the Department will consult on the best form of disclosure, seeking views on the balance between the need for transparency and the avoidance of unnecessary burdens. I would not like to pre-judge that consultation, but it strikes me that the proposals of my hon. Friend the Member for Newcastle upon Tyne, Central lie towards the extreme wing of the argument. In our view, it is best left to regulation and we should not place such definitive proposals in the Bill.

My hon. and learned Friend advises the House that some of these issues will be clarified in later regulation. We understand that and I drew attention to it, but can she give us a flavour of what propositions the Government will advance in the regulatory consultation?

We will do our best to ensure that all the interests in such arrangements are consulted as thoroughly as possible about the right level at which to pitch the measure. It would be wrong for me to suggest that the Government were going in a particular direction. It is a matter of balance between the need for transparency and the avoidance of unnecessary burdens. I am sure that my hon. Friend will play a role in that consultation, representing the interests that he has rightly represented today.

The last of my hon. Friend’s amendments in this group is No. 803, which would make a small change to the list in clause 551 of items to which the court is to have regard in considering whether a limitation of liability is fair and reasonable. In practice, I do not think that it would make any difference whether the court has regard to the auditor’s responsibilities under part 17 or under the Bill as a whole, because those responsibilities are confined to part 17.

In conclusion, I support Government amendment No. 648, which is minor and technical. If anybody wants to know what it is I shall be pleased to tell them more about it, but it is merely a drafting amendment. We shall resist the new clause and the other amendments.

This has been an interesting series of exchanges. I am left to puzzle about what my hon. and learned Friend the Minister has just told us—that a court can override a limited liability agreement. A number of people will ponder carefully what circumstances might give rise to that situation. She has indicated that there will be regulations to cover consultation on the introduction of a limited liability agreement. Although, to be frank, I do not find her initial remarks on that point entirely satisfactory, there will at any rate be a consultation in which we can all take part.

At an early age I was taught to believe that confession and repentance were more important than righteousness, so I considered carefully whether I should ask the House to divide on the new clause and on amendment No. 763. However, as I believe that in due course the Government will come to repent the approach of limiting liability, and I fear that to force a Division would only slow down that process, I beg to ask leave to withdraw the motion.

Motion and clause, by leave, withdrawn.

rose—

Order. Before we deal with the next group, the House must deal with the Government amendments and new clauses that have already been debated. With the leave of the House, I shall put all amendments and new clauses together.

Question, That amendments Nos. 241, 242, 447, 243 to 245, 544, 545, 246, 546, 714, 547, 247 to 252, 548, 488, 213, 225, 449, 648, 549, 826 and 550 to 552 be made, that new clauses 8 and 10 to 12 be brought up, read the First and Second time, and added to the Bill, put and agreed to.

New Clause 18

Application of this Part

‘(1) This Part applies where—

(a) a compromise or arrangement is proposed between a public company and—

(i) its creditors or any class of them, or

(ii) its members or any class of them,

for the purposes of, or in connection with, a scheme for the reconstruction of any company or companies or the amalgamation of any two or more companies,

(b) the scheme involves—

(i) a merger (as defined in section (Mergers and merging companies)), or

(ii) a division (as defined in section (Divisions and companies involved in a division)), and

(c) the consideration for the transfer (or each of the transfers) envisaged is to be shares in the transferee company (or one or more of the transferee companies) receivable by members of the transferor company (or transferor companies), with or without any cash payment to members.

(2) In this Part—

(a) a “new company” means a company formed for the purposes of, or in connection with, the scheme, and

(b) an “existing company” means a company other than one formed for the purposes of, or in connection with, the scheme.

(3) This Part does not apply where the company in respect of which the compromise or arrangement is proposed is being wound up.’.—[Margaret Hodge.]

Brought up, and read the First time.

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 19—Relationship of this Part to Part 27.

Government new clause 20—Mergers and merging companies.

Government new clause 21—Draft terms of scheme (merger).

Government new clause 22—Publication of draft terms (merger).

Government new clause 23—Approval of members of merging companies.

Government new clause 24—Directors’ explanatory report (merger).

Government new clause 25—Expert’s report (merger).

Government new clause 26—Supplementary accounting statement (merger).

Government new clause 27—Inspection of documents (merger).

Government new clause 28—Approval of articles of new transferee company (merger).

Government new clause 29—Protection of holders of securities to which special rights attached (merger).

Government new clause 30—No allotment of shares to transferor company or its nominee (merger).

Government new clause 31—Circumstances in which certain particulars and reports not required (merger).

Government new clause 32—Circumstances in which meeting of members of transferee company not required (merger).

Government new clause 33—Circumstances in which no meetings required (merger).

Government new clause 34—Other circumstances in which meeting of members of transferee company not required (merger).

Government new clause 35—Divisions and companies involved in a division.

Government new clause 36—Draft terms of scheme (division).

Government new clause 37—Publication of draft terms (division).

Government new clause 38—Approval of members of companies involved in the division.

Government new clause 39—Directors’ explanatory report (division).

Government new clause 40—Expert’s report (division).

Government new clause 41—Supplementary accounting statement (division).

Government new clause 42—Inspection of documents (division).

Government new clause 43—Report on material changes of assets of transferor company (division).

Government new clause 44—Approval of articles of new transferee company (division).

Government new clause 45—Protection of holders of securities to which special rights attached (division).

Government new clause 46—No allotment of shares to transferor company or its nominee (division).

Government new clause 47—Circumstances in which meeting of members of transferor company not required (division).

Government new clause 48—Circumstances in which meeting of members of transferee company not required (division).

Government new clause 49—Agreement to dispense with reports etc (division).

Government new clause 50—Power of court to exclude certain requirements (division).

Government new clause 51—Expert’s report: valuation by another person.

Government new clause 52—Experts and valuers: independence requirement.

Government new clause 53—Experts and valuers: meaning of “associate”.

Government new clause 54—Power of court to summon meeting of members or creditors of existing transferee company.

Government new clause 55—Court to fix date for transfer of undertaking etc of transferor company.

Government new clause 56—Liability of transferee companies for each other’s defaults.

Government new clause 57—Meaning of “liabilities” and “property”.

I know that there are a lot of new clauses in this group, but I hope that they are pretty uncontentious. The restatement clauses in part 27 of the Bill allow for the wide range of reorganisations, arrangements and reconstructions that can arise within a company and allow some types of merger or demerger to take place. Part 27, as introduced in Committee, contained a regulatory power under clause 908 to make detailed provision for mergers and divisions of public companies in certain cases. On reflection, we have concluded that it would be preferable to replace that power by setting out the provisions in full in primary legislation, as they are in the Companies Act 1985. We all feel that that is a better way of proceeding where we can.

Accordingly, this part restates section 427A and schedule 15B to the 1985 Act. We have made only one minor change: in new clause 52(1)(c), concerning the independent requirement of experts and valuers, we have taken a power to specify a disallowed connection for the purposes of determining whether a person meets the independence requirement. That is consistent with the approach that we have taken elsewhere in the Bill, in clauses 351, 1117 and 1178. We have consulted on the new clauses and are grateful to the Law Society, in particular, for its comments.

The Government’s approach in this group is acceptable to the Opposition, but I would like to put it on the record that, with just over half an hour to go, we have finished dealing with only four of the 31 groups to be discussed today. Many of the issues in these groups are being covered for the first time on this Bill. Surely that is yet another indictment of the Government’s guillotining of the Bill.

I will respond to that point, because I am rather tired of it. [Interruption.] I am delighted to welcome the hon. Member for Rutland and Melton (Alan Duncan) to his place for the first time since we have been discussing the details of the Bill. I wonder whether he knows—

Order. May I remind Members that the Minister will just be responding to the debate on the new clause?

I am sure that the hon. Member for Rutland and Melton knows full well what is involved in this group of new clauses. I will simply say what I said at the beginning: the amendments tabled in the names of Opposition Members are all amendments that we have discussed before and the amendments tabled by the Government relate to the consolidation that was requested by the Conservatives in the House of Lords. We have taken the advice of leading people in the field—particularly the Law Society—and have made sure that what we put into the Bill can stand the test of time. That is a perfectly proper way of proceeding, which was agreed by Opposition Members. To play silly politics just wastes time.

I had not intended to speak, but I have sat through most of the debates, as I think the right hon. Lady will agree, and although there are no issues that I want to raise in detail in relation to this series of amendments and new clauses, I do not think that it is proper to let this opportunity go past without saying that there are a lot of other issues in the rest of the Bill that I would want to raise if we had time. There is no other opportunity to say that. The point about the House of Commons is that it is increasingly true that the Bills that we pass are badly thought out, badly understood and badly debated. That is the fault of this Government, who use the House of Commons disgracefully. There are whole areas of the Bill that my constituents want me to debate, but the Government and the Minister have stopped me doing so. It is a disgrace.

Question put and agreed to.

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

Question, That Government new clauses 19 to 57 be brought up, read the First and Second time, and added to the Bill, put and agreed to.

New Clause 58

Consequences of order imposing restrictions

‘(1) The effect of an order under section 803 that shares are subject to restrictions is as follows—

(a) any transfer of the shares is void;

(b) no voting rights are exercisable in respect of the shares;

(c) no further shares may be issued in right of the shares or in pursuance of an offer made to their holder;

(d) except in a liquidation, no payment may be made of sums due from the company on the shares, whether in respect of capital or otherwise.

(2) Where shares are subject to the restriction in subsection (1)(a), an agreement to transfer the shares is void.

This does not apply to an agreement to transfer the shares on the making of an order under section (Removal of restrictions) made by virtue of subsection (3)(b) (removal of restrictions in case of court-approved transfer).

(3) Where shares are subject to the restriction in subsection (1)(c) or (d), an agreement to transfer any right to be issued with other shares in right of those shares, or to receive any payment on them (otherwise than in a liquidation), is void.

This does not apply to an agreement to transfer any such right on the making of an order under section (Removal of restrictions) made by virtue of subsection (3)(b) (removal of restrictions in case of court-approved transfer).

(4) The provisions of this section are subject—

(a) to any directions under section 803(2) or section (Relaxation of restrictions) (3) (directions for protection of third parties), and

(b) in the case of an interim order under section 803(3), to the terms of the order.’.—[Margaret Hodge.]

Brought up, and read the First time.

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 59—Penalty for attempted evasion of restrictions.

Government new clause 60—Relaxation of restrictions.

Government new clause 61—Removal of restrictions.

Government new clause 62—Order for sale of shares.

Government new clause 63—Application of proceeds of sale under court order.

Government amendments Nos. 454 to 458.

The right hon. Member for Suffolk, Coastal (Mr. Gummer) has been in the Chamber for much of our proceedings and has made a welcome contribution. However, I must tell him that the new clauses in this group, those that we have just discussed and many others are simply a restatement of existing legislation. At the behest of Members of the House of Lords, we decided to incorporate the provisions in one place so that it would be easier for businesses—especially small businesses, which are enabled by much of the legislation to act more effectively and efficiently, with less regulation—to ensure that they understood and could cope with the law.

The new clauses in this group restate part 15 of the Companies Act 1985 in so far as the provisions apply in relation to part 23 of the Bill. Part 23 enables public companies and members of those companies to ascertain the underlying beneficial owners of shares. The company may apply to the court for an order under clause 803 directing that the shares in question be subject to various restrictions under part 15 of the 1985 Act, which include voiding any transfer of the shares and providing that voting rights are not exercisable in respect of the shares. Those provisions are restated without substantive change in the new clauses.

Part 15 will remain in the 1985 Act because it also applies to part 14 of that Act, which will remain in force. Nevertheless, we think that it is helpful to make a restatement through the new clauses so that the reader can find all the relevant provisions for part 23 in one place. Again, we have consulted on the new clauses and we are especially grateful to the Law Society for its useful comments.

The new clauses relate to the old section 212 notice provisions. Where a shareholder or beneficial holder fails to respond to a section 212 notice inquiry into the ownership of the shares in question, a public company generally has powers in its articles to remove rights from the shares. Those powers will now go into the Bill so that transfers can be blocked, rights to vote removed, and so forth. However, the Minister will appreciate that that is very much the nuclear option and that, in all likelihood, it will rarely, if ever, be used. I have only one question: how extensive has the Minister’s consultation been, and what further consultation and review will be undertaken on the matter?

There has been extensive consultation over the summer with stakeholders. I do not see a need for further consultation, and I accept that, as the hon. Gentleman says, the provision is unlikely to be widely used. If he puts an argument to me, I will take it on board and see whether further consultation is required.

Question put and agreed to.

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

Question, That new clauses 59 to 63 be brought up, read the First and Second time, and added to the Bill, put and agreed to.

New Clause 64

Registrar’s requirements as to certification or verification

‘(1) Where a document required or authorised to be delivered to the registrar under any enactment is required—

(a) to be certified as an accurate translation or transliteration, or

(b) to be certified as a correct copy or verified,

the registrar may impose requirements as to the person, or description of person, by whom the certificate or verification is to be given.

(2) The power conferred by section 1034 (registrar’s requirements as to form, authentication and manner of delivery) is exercisable in relation to the certificate or verification as if it were a separate document.

(3) Requirements imposed under this section must not be inconsistent with requirements imposed by any enactment with respect to the certification or verification of the document concerned.’.—[Vera Baird.]

Brought up, and read the First time.

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 84—Power to accept documents not meeting requirements for proper delivery.

Government new clause 85—Documents containing unnecessary material.

Government amendments Nos. 741, 484, 466 to 469, 742, 174, 743 to 748, 175 to 187, 749, 188, 189, 233, 750, 190, 191, 234 and 192 to 194.

The majority of the amendments in this group are drafting amendments and I do not propose to dwell on them at length. If hon. Members have questions about them, I shall do my best to reply. The amendments are all pretty self-evident. They make improvements to the Bill and should cause no contention.

I should say something about the amendments relating to the provisions on proper delivery, as these introduce changes to the Bill in the interests of clarity and consistency. It is clear from the Bill, as set out in clause 1038(1), what requirements a company must meet in order to have “properly delivered” a document. In the Bill there is some inconsistency as to the implications of failure to comply with these requirements. For example, clause 862(6) as it currently stands makes it clear that when we talk about a company failing to deliver its annual return, what is meant is failure to comply with all the requirements set out in clause 1038(1). If the company does not meet those requirements, it cannot be said to have delivered the document for the purposes of compliance with the law.

However, provisions in the Bill in relation to many other documents do not make similar reference to clause 1038, implying that there are, so to speak, two sorts of delivery, a “first class” status of “proper delivery” and a “second class” one of “mere delivery”. Such an inconsistency cannot be helpful to anyone and it leaves the status of documents that are “delivered” but not “properly delivered” somewhat uncertain.

It is important to be clear about what a company does and does not need to do in order to comply with the law when it submits documents. Clarity is provided by amendment No. 742, which makes it clear that in order for a document to be considered as delivered, it must be properly delivered in the terms of clause 1038. That clarity will be helpful to companies, so that they know what they need to do, and to Companies House, which needs to be sure when it can and cannot take action against a company. Introducing a consistent policy across the Bill has some implications for other clauses, which are dealt with by other amendments.

As the Minister said, these are largely drafting, technical and legal changes. We agree that they improve the Bill, so we have no objection to the amendments and new clauses.

Question put and agreed to.

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

New Clause 55

Court to fix date for transfer of undertaking etc of transferor company

‘(1) Where the court sanctions the compromise or arrangement, it must—

(a) in the order sanctioning the compromise or arrangement, or

(b) in a subsequent order under section 906 (powers of court to facilitate reconstruction or amalgamation),

fix a date on which the transfer (or transfers) to the transferee company (or transferee companies) of the undertaking, property and liabilities of the transferor company is (or are) to take place.

(2) Any such order that provides for the dissolution of the transferor company must fix the same date for the dissolution.

(3) If it is necessary for the transferor company to take steps to ensure that the undertaking, property and liabilities are fully transferred, the court must fix a date, not later than six months after the date fixed under subsection (1), by which such steps must be taken.

(4) In that case, the court may postpone the dissolution of the transferor company until that date.

(5) The court may postpone or further postpone the date fixed under subsection (3) if it is satisfied that the steps mentioned cannot be completed by the date (or latest date) fixed under that subsection.’.—[Margaret Hodge.]

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

New Clause 66

Application of Part 27

‘(1) The provisions of this Part apply where a compromise or arrangement is proposed between a company and—

(a) its creditors, or any class of them, or

(b) its members, or any class of them.

(2) In this Part—

“arrangement” includes a reorganisation of the company’s share capital by the consolidation of shares of different classes or by the division of shares into shares of different classes, or by both of those methods; and

“company”—

(a) in section (Powers of court to facilitate reconstruction or amalgamation) (powers of court to facilitate reconstruction or amalgamation) means a company within the meaning of this Act, and

(b) elsewhere in this Part means any company liable to be wound up under the Insolvency Act 1986 (c. 45) or the Insolvency (Northern Ireland) Order 1989 (S.I. 1989/2405 (N.I. 19)).

(3) The provisions of this Part have effect subject to Part (Mergers and divisions of public companies) (mergers and divisions of public companies) where that Part applies (see sections (Application of Part 27A) and (Relationship of this Part with Part 27)).’.—[Margaret Hodge.]

Brought up, and read the First time.

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 67—Court order for holding of meeting.

Government new clause 68—Statement to be circulated or made available.

Government new clause 69—Duty of directors and trustees to provide information.

Government new clause 70—Court sanction for compromise or arrangement.

Government new clause 71—Powers of court to facilitate reconstruction or amalgamation.

Government amendments No. 520 to 522

Amendment No. 113, in page 421, line 31, Clause 901, leave out from ‘application’ to ‘the’ in line 32 and insert

‘from the company, a member or a creditor’.

Government amendments Nos. 523 to 529

Amendment No. 117, in page 425, line 5, clause 908, leave out ‘900’ and insert ‘899(1)’.

Amendment No. 118, line 20, after ‘undertaking’, insert ‘,’.

These new clauses replace the existing part 27, making a number of minor and technical amendments. Part 27 is part of the exercise of restating the Companies Act 1985. The provisions in part 27 concern reorganisations, arrangements and reconstructions within a company, and allow some types of merger or demerger to take place. They restate what is currently part 13 of the 1985 Act, without making any change in substance. Following our consultation over the summer, and particularly in light of comments received from the Law Society, we propose to delete clauses 899 to 908 in part 27 and replace them with new clauses containing amendments of a minor and technical nature. I hope that Opposition Members agree that their drafting amendments to these provisions—amendments Nos. 113, 117 and 118—should no longer be necessary in light of the Government changes, which replace the clauses that they address.

Let me explain the minor and technical changes that we propose. New clause 67 allows the court to order a meeting without having first received an application to sanction a scheme. What was clause 900 has been placed after what was clause 903 and becomes new clause 70. Clause 908, which provided a power to make regulations on mergers and divisions, has now been deleted. That should be welcome, as we are now including those provisions in full in the Bill. References to clause 908 have also been deleted. There are a few other minor drafting changes.

We have chosen to lift and replace the existing clauses largely because the Law Society had proposed some desirable reordering of the clauses, which we have adopted. If we had tried to achieve that through amendments, we considered that it would have been hard for Members to follow the end result.

As the Minister said, these are technical changes relating to arrangements and reconstructions, and they reflect the proposals of the Law Society. The only question that I had was whether amendment No. 113, which is a consequential change suggested by the Law Society, had been dealt with as part of the proposals that the Minister has just explained. I heard what she said about being satisfied that that had been addressed, and therefore I have no further objections.

I also have no objection to these new clauses. They are entirely reasonable and sensible. However, I wish to observe that amendment No. 118 makes an extraordinary powerful change; it brings in a comma. I observe for the benefit of the hon. Member for Hornchurch (Mr. Brokenshire), who tabled the amendment, that he should perhaps bear in mind the words of one of the great observers of political life on that kind of amendment, which he refers to as comma-hunting.

F. M. Cornford said:

“Another sport which wastes unlimited time is Comma hunting. Once start a comma and the whole pack will be off, full cry, especially if they have had a literary training…But comma-hunting is so exciting as to be a little dangerous. When attention is entirely concentrated on punctuation, there is some fear that the conduct of business may suffer, and a proposal get through without being properly obstructed on its own demerits.”

Question put and agreed to.

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

Question, That new clauses 67 to 71 be brought up, read the First and Second time, and added to the Bill, put and agreed to.

New Clause 77

Documents to be incorporated in or accompany copies of articles issued by company

‘(1) Every copy of a company’s articles issued by the company must be accompanied by—

(a) a copy of any resolution or agreement relating to the company to which Chapter 3 applies (resolutions and agreements affecting a company’s constitution),

(b) where the company has been required to give notice to the registrar under section 35(2) (notice where company’s constitution altered by enactment), a statement that the enactment in question alters the effect of the company’s constitution,

(c) where the company’s constitution is altered by a special enactment (see section 35(4)), a copy of the enactment, and

(d) a copy of any order required to be sent to the registrar under section 36(2)(a) (order of court or other authority altering company’s constitution).

(2) This does not require the articles to be accompanied by a copy of a document or by a statement if—

(a) the effect of the resolution, agreement, enactment or order (as the case may be) on the company’s constitution has been incorporated into the articles by amendment, or

(b) the resolution, agreement, enactment or order (as the case may be) is not for the time being in force.

(3) If the company fails to comply with this section, an offence is committed by every officer of the company who is in default.

(4) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale for each occasion on which copies are issued, or, as the case may be, requested.

(5) For the purposes of this section, a liquidator of the company is treated as an officer of it.’.—[Margaret Hodge.]

Brought up, and read the First time.

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 78—Resolutions to be forwarded to registrar.

Government new clause 79—Obligations of company with respect to articles etc.

Government new clause 80—Supplementary provisions where company’s constitution altered.

Government new clause 99—Notice to registrar of existence of restriction on amendment of articles.

Government new clause 100—Statement of compliance where amendment of articles restricted.

New clause 89—Unamendable articles—

‘(1) Notwithstanding anything in section 22, a company’s articles may provide that specified provisions of the articles may not be amended or repealed—

(a) except with the unanimous consent of the members, or

(b) in any circumstances.

(2) Provision for unamendable articles under this section may only be made in the company’s articles on formation.

(3) Provision for unamendable articles shall count for the purposes of this Chapter as provision for entrenchment.’.

Government amendments Nos. 688 and 206.

Amendment No. 790, in page 9, line 13, leave out Clause 22.

Government amendments Nos. 837 to 841 and 791.

Amendment No. 378, in page 9, line 31, Clause 23, leave out subsection (2).

Government amendment No. 792.

Amendment No. 379, in page 10, line 7, Clause 24, at end insert ‘by unanimous consent less one vote.’.

Amendment No. 380, in page 10, line 7, at end insert

‘by a resolution of at least 90 per cent.’.

Amendment No. 381, in page 10, line 7, at end insert

‘by a scheme of arrangement approved by the court.’.

Government amendments Nos. 689 to 697.

Amendment No. 4, in page 15, line 23 , Clause 36, at end insert

‘or such longer time as the court allows’.

Amendment No. 3, in page 15, leave out lines 26 to 30 and insert—

‘(b) if the order—

(i) amends the company’s articles, or

(ii) amends a resolution or agreement to which Chapter 3 applies (resolutions and agreements affecting the company’s constitution), or

(iii) gives leave for the company to make any, or any specified, alteration in its articles,’.

Government amendments Nos. 698 to 702.

Amendment No. 93, in page 461, line 21, Clause 963, at end insert—

‘(f) make provision for entrenchment as referred to under section 22.

(3) The court’s order must be embodied in or annexed to every copy of the company’s articles issued by the company.’.

Government amendments Nos. 703 and 704.

This series of clauses and amendments relates to a company’s constitution. Government new clauses 77 to 80 and amendments Nos. 206, 688 to 695 and 699 to 705 are drafting or minor technical amendments. They also make amendment No. 67, which is grouped with other amendments to part 19, unnecessary. Many of the changes made by these amendments have been prompted by Law Society comments or by amendments tabled by Opposition Members. They tidy up the drafting of various clauses that refer to documents of constitutional significance for companies, and we hope that some potential overlaps or ambiguities have been removed. Some cross-references have been added and some points of procedure clarified. We hope that the overall result is more internally consistent and user-friendly.

Amendment No. 696 has a long history, but its purpose is simply to tidy up the drafting of clause 34, following its amending in Committee, so that it states explicitly that the provisions of a company’s constitution take effect as if it was a contract between the company and its members. We are not changing the law—we are simply making it clearer that it means what it has been recognised to mean for many years, and we have removed an outdated reference to signing and sealing. We are all grateful to Lord Wedderburn for raising this issue in another place, and to the hon. Member for Huntingdon (Mr. Djanogly) for proposing in Committee the amendments that, as evidenced today, prompted us to think again about the clause.

I will largely confine my comments to amendment No. 790 and clause 22. This must be one of the most bizarre concepts in the Bill. Historically, members have been able to change their articles of association or amend their memorandums if they get 75 per cent. of the votes in a general meeting. The Government seem fixated with the concept of shareholders being able to entrench their rights, so that future members are unable to change the company’s constitution. The foremost question is why the Government want that to happen. We have seen no representations asking for the provision, but plenty of criticism. My hon. Friend the Member for Huntingdon (Mr. Djanogly) put that point in Committee, and the Minister replied:

“Why have a concept of entrenchment? Why go beyond a special resolution?...We have to look at the Companies (Audit, Investigations and Community Enterprises) Act 2004, which introduced new provisions that make it difficult to entrench provisions in articles. There was a demand for us to do so, particularly from social enterprise and community interest companies.”—[Official Report, Standing Committee D, 20 June 2006; c. 61.]

It seems strange that the Government should base the entrenchment provisions on the requirements of the roughly 300 community interest companies in existence. There is neither interest in nor demand for entrenchment from large companies, small family companies, venture capital companies, or from any of the tens of thousands of other companies that exist.

In Committee, the Minister agreed that CICs would have separate legislation and would not be consolidated. However, if she wants to present arguments for entrenchment in relation to CICs, surely separate legislation is the best place to do that? Amendments Nos. 790, 791 and 792 together would provide for those provisions to be deleted from the Bill. If I am given leave to do so, I should like to press amendment No. 790 to a Division, in order to test the House’s opinion on the matter.

I turn now to amendments Nos. 379 and 380. If the entrenchment clauses have to remain in the Bill, better provision should be made for removing them. I recognise that the Government have gone some way to accepting that through their introduction at an earlier stage of an amendment allowing entrenchment to be reversed by a unanimous vote. That was a step in the right direction. Furthermore, they propose to extend the provision to court orders that counter the entrenchment, and that is another welcome improvement. However, the Opposition believe that there is a need to go further, so amendment No. 379 allows for the fact that public companies always have more than one shareholder and that private companies, before 1989, had to have at least two. Many private companies still do have at least two shareholders, as they never got rid of the spare shareholder after 1989.

Public holding companies got around the provision by finding an individual—normally one of the directors—who would hold the second share, subject to a declaration of trust. That declaration meant that the director promised to act in accordance with the holding company’s wishes. In practice, those declarations were not always made, depending on the efficiency of the company secretary. Sometimes they get lost in the mists of time, and sometimes old forms get thrown away when a director leaves a company. As a result, getting unanimity can often be tough, and that is why we suggest that articles should be removed by unanimous resolution, less one vote.

Additionally, amendment No. 380 brings back into play a proposal originally put forward by Lord Hodgson. It would reduce to 90 per cent. the level of agreement required for the removal of entrenched articles. That 90 per cent. level would tie in with the amount required to buy out minorities in a takeover, and I also point out that 10 per cent. is the level needed to call a general meeting.

My main concern about the Government’s position in Committee was that if two individuals owned 100 per cent. of a company that they set up, they could at the outset put in place whatever provisions they wanted. The Minister came up with a compromise, saying that 100 per cent. of shareholders can end the entrenchment. That is an improvement, but we maintain that it is hardly most people’s idea of shareholder democracy. The Government need to make clear the concept behind their approach, as they have not yet done so.

We have tabled amendment No. 381 in accordance with the brief from the Institute of Directors in respect of the modernisation of company law. It states:

“Entrenching provisions need to be approached with care. In commercial companies they could be dangerous, as a company could be held to ransom by a single shareholder holding one share (if he has a genuine grievance, his remedy will normally be to apply to the courts). We think it is essential to make it explicit in the legislation that any entrenching provision (and any entrenched provision) may be a scheme of arrangement approved by the court regardless of absence of unanimity (or other level of approval stipulated in the constitution). We consider that this would reduce the impact of companies happily introducing a requirement for unanimity then living to regret it when the business cannot move on. We also think there should be no encouragement for commercial companies to adopt entrenching provisions. For instance, any model form of constitution for such a company should not include wording for entrenching provisions (even as an optional extra).”

That is another option that the Government could use to replace their restrictive provisions to reflect the wishes of many small and large companies.

Turning to amendment No. 378, clause 23 provides for a notice of entrenchment to be filed, but if an entrenchment resolution is passed, surely the resolution filed at Companies House, together with the revised version of the articles filed, should be adequate. I cannot think of any other compliance provisions, so I question the purpose of the extra piece of paper, particularly given our desire to be deregulatory. Furthermore, the measures will increase regulation. The director must ask a lawyer to confirm that the new notice is compliant. Even if it is blatantly the case that it is compliant, doing so is a belt-and-braces safeguard. The Government measure is unnecessary and will lead to trouble, so I urge the Minister to drop it. We should consider how we can improve shareholder democracy, not restrict it with entrenched provisions.

I note the Minister’s comments on the contractual arrangement between companies and their members. I certainly welcome that clarification of the law, given the history of such measures. Unfortunately, time does not allow me to discuss the matter in greater detail, or to talk about Lord Wedderburn and various other learned, legal minds, but we certainly welcome that aspect of the Minister’s proposals.

I shall be brief, and shall refer only to amendment No. 790, which the hon. Member for Hornchurch (James Brokenshire) mentioned, and new clause 89, which I tabled with my hon. Friends and which takes exactly the opposite direction from his amendment. Our view, at least on formation, is that companies should be allowed to entrench provisions. We would allow them to set up an organisation in which people had certain rights that only the court could take away, and which could not be removed even by agreement of all the members.

There is no ideological difference between the hon. Gentleman and me. We simply have a different perspective on what the law is for. Some lawyers think that their job is to create new organisations and institutions for people, and to do so in the way that their client wants. That is largely my view—the law should allow such institutions to be created according to the wishes of the people setting them up. The hon. Gentleman and the hon. Member for Huntingdon (Mr. Djanogly) view the law from the opposite perspective, and are concerned with legal professionals who think that it is their job to sort out problems that have been set up by lawyers for other people. There is conflict in the law between those who create and those who dismantle, and I am in favour of the creation lobby, not the dismantling lobby. I urge the Government to choose our way forward rather than theirs, although I suspect that they may stick with their middle way.

I would like to speak at length on this group of amendments, as some important issues are involved. However, I cannot do so because we have only two minutes before the guillotine falls, resulting in our failure to discuss the rest of the Bill. I shall just make the major point that the Government have failed, throughout proceedings on the Bill—I have looked at the record—to find anybody of any standing whatever who wants to include such a measure. I am always suspicious of Governments who want to regulate when no one wants them to do so. I am not suspicious of this Minister in particular, but I am suspicious of all Ministers. I am more suspicious of Labour Ministers, but I am suspicious of Ministers from all parties. I believe that Ministers have been led by the nose by civil servants in this case.

Someone, somewhere has decided that the provision is a good idea, and no one has discovered any reason why we should include it. We should not regulate if we do not need to do so. The Better Regulation Commission should look at the Bill, because we do not need this piece of regulation. No one has asked for it, and the House has not had a chance to debate it properly. It is another regulation that will pass into law without having been properly debated. The Minister will not even have time to answer me properly.

I do not have time to answer the right hon. Gentleman properly, but the issue has been discussed many times—probably about five times. I simply draw his attention to the fact that the proposition before us was not invented by civil servants, but emerged from the company law review. It has been debated and discussed with all stakeholders over a very long period, and on that basis has some credibility. We debated it in Committee. We have one view from the Liberal Democrats and a completely opposite view from the Conservatives, while Labour Members stand where they always do—representing the vast majority of people in this country—

It being Four o’clock, Madam Deputy Speaker put forthwith the Questions necessary for the disposal of business to be concluded at that hour, pursuant to Order [17 October].

Question put and agreed to.

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

Question, That new clauses 78 to 80, 84, 85, 87, 88A, 92 to 96 and 98 to 100 be brought up, read the First and Second time and added to the Bill, put and agreed to.

Question, That amendments Nos. 470, 471, 823, 472, 764, 718, 765, 719, 720, 473, 721, 766, 722, 688 and 206 be made, put and agreed to.

Amendment proposed: No. 790, in page 9, line 13, leave out clause 22.—[James Brokenshire.]

Question put, That the amendment be made:—

This has been a very good learning process. I am delighted that we have now reached the Third Reading of the Bill.

I am proud to have been part of what has been the biggest reform ever, I think, of company law. The Government’s goal has been to increase competitiveness. We are committed to ensuring that the legal and regulatory framework within which business operates promotes enterprise, growth and the right conditions for investment and employment. We all recognise that we operate in an increasingly global marketplace. Our company law framework must enable business to flourish in the 21st century, where business and investment decisions are determined more and more by our global environment, and cross-border activity is commonplace.

Since this Government have been in office, we have been extremely successful in securing growth in British enterprise and growth in British jobs. New incorporations have risen by over 60 per cent. since 1997. Companies House adds 120 companies to its register every working hour. Indeed, the customer record for the fastest incorporation at Companies House is less than five minutes. The number of EU firms incorporating in the UK has more than quadrupled since 1997, and Britain is increasingly seen as the location of choice for international companies for manufacturing, research and development, marketing and European headquarters.

The Bill will make the UK an even more attractive place in which to invest and do business. It is a real step forward in the reform and modernisation of company law, so that the UK remains a leader in the world of business and finance. As I have learned, much of our company law dated back to Victorian times. Over the past 50 years, the law has undergone reform, but in a piecemeal fashion, leading to a body of law that is increasingly complex and inaccessible, especially for smaller businesses. The framework established by that law needed to be updated. It needed in-depth and considered reform. That is what we have delivered.

This Bill will bring many and important benefits to British business. Company law is a crucial part of the legal framework that promotes enterprise and growth. The Bill ensures that we can continue to grow our economy, providing the right conditions for investment, employment and modernisation. Our aim has been to maintain the UK’s position as a prime place to incorporate a business. I am confident that we have succeeded.

The Bill has also rightly attracted the attention of a much wider constituency. The Bill is significant for the culture it seeks to promote on corporate accountability. Our company law needed to reflect the new climate of corporate social responsibility. The importance of the issue to companies and citizens was reflected in the thousands of representations to MPs, and in the time that we spent on Report and before that debating the relevant clauses. In my view, we have taken some historic steps forward, which will help us to achieve long-term sustainability for businesses and for the communities and societies within which they operate.

Let me reiterate the Bill’s key themes. The first is to enhance shareholder engagement and create a long-term investment culture. The second is to ensure better regulation and a “Think small first” approach. The third is to make it easier to set up and run a company. The fourth is to provide flexibility for the future.

The Bill updates and simplifies the regulatory framework to reduce cost and increase flexibility for companies. The “Think small first” approach to regulation is at its heart, which makes it easier to set up and to run a company. It makes life easier for companies and their advisers by bringing company law together in one place, and by restating the law in clear, modern language. It is now a complete code of company legislation. It incorporates all the provisions in existing companies legislation except those on investigations, which go wider than companies, and the self-contained provisions on community enterprise companies.

I should make it clear that in introducing the restated clauses, we have not made changes to the law except to the extent necessary to ensure consistency with other parts of the Bill, and in some cases to ensure that the provisions comply with our European obligations. A complete code is what users want, and I am pleased that we have been able to deliver it.

At the heart of the Bill are the provisions on directors and shareholders. We have provided a statutory statement of directors’ general duties, which will make what is expected of directors much clearer. It recognises that to achieve sustainable success for the benefit of shareholders, directors should have regard to wider factors than short-term profit. Many businesses have long seen the link between long-term success and responsible behaviour, but we want all directors and all companies to behave in that way. Prosperity and responsibility go hand in hand.

We have carried forward the long-established principle of enabling shareholders rather than the state to be the primary regulators of corporate behaviour. Provisions to strengthen the involvement of shareholders and thus to promote a long-term investment culture are key parts of the Bill. There will be fuller reporting, and quoted companies will need to cover future challenges and opportunities as well as past performance. Investors holding shares indirectly will now be able to play a full part.

This is undeniably a long Bill, but it is also comprehensive. Now is not the time for me to go through all the ways in which it modernises and simplifies the law. Many of the changes are small, taken individually, but taken together they add up to a thorough-going reform that will help UK business to succeed in the future.

On Report, the hon. Member for Huntingdon (Mr. Djanogly) asked me for an indication of when the Bill’s provisions would commence. Because of time pressures, I did not respond then. I can say now that some of the provisions, such as those on takeovers and the transparency directive, need to be in place very soon because of our European obligations. As for the rest, there are strong interconnections. We have already received detailed views from interested parties on the factors that we should take into account in deciding on the timetable. I want to ensure that we implement the Bill in the way that will be best for business. We will announce our timetable for implementation before it completes its passage.

Let me say something about the way in which the Bill has been developed. I take particular pride in the inclusive and collaborative approach that we have adopted, and in the consistent and informed engagement of so many outside parties. I pay tribute to those who undertook the company law review, which was the inspiration for the reform process. The review brought together leading experts in the field, and many interested parties became involved in the deliberations both during the review and subsequently. I thank the many businesses and other organisations—including professional associations, trade unions and special interest groups—who worked with us so constructively in developing the legislation over time. I particularly thank the company law committee of the Law Society, which worked painstakingly to scrutinise the proposals at every stage. That includes the re-statement clauses added during the Commons passage. I believe that it is in large part thanks to that collaborative approach that the resulting legislation has generally been warmly welcomed.

I should also like to pay tribute to the parliamentary draftsman and his team. The clarity and simplicity of his drafting style has been much commented on and will, I know, be appreciated by generations to come who have to use our company law. I thank colleagues from all parties for their contributions to our interesting and constructive debates. I particularly want to thank those hon. Members who served so expertly on Standing Committee D and the Chairmen of that Committee for the thorough and detailed scrutiny of the Bill which took place there. My particular thanks go to my hon. Friends on the Labour Back Benches, who had to sit patiently through many hours and many sittings of Committee proceedings. They are not here today, but I will mention their names.

I thank my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins), who was a member of the Committee until he was taken ill, but who has helped considerably on Report. He was replaced by my hon. Friend the Member for Broxtowe (Dr. Palmer). I also thank my hon. Friends the Members for Liverpool, Riverside (Mrs. Ellman), for Barnsley, East and Mexborough (Jeff Ennis) and for Newcastle-under-Lyme (Paul Farrelly). My hon. Friend the Member for Bedford (Patrick Hall) has played a constructive and active role, and I thank my hon. Friends the Members for Falkirk (Mr. Joyce) and for Bradford, West (Mr. Singh). My hon. Friend the Member for Burnley (Kitty Ussher) has been extremely helpful to me, and I also thank my right hon. Friend the Member for Leicester, East (Keith Vaz).

I thank Opposition Members who sat through the proceedings on the Bill. I hope that they accept that we listened constructively to the propositions that they made. I always tried where I could to incorporate them in the legislation. I pay particular thanks to my ministerial colleagues—the Solicitor-General and the Under-Secretary of State for Constitutional Affairs, my hon. and learned Friend the Member for Redcar (Vera Baird)—for their help and expertise in taking the Bill through and keeping me sane by supporting me in what was a massive task.

I pay tribute to our Whip, my hon. Friend the Member for Birmingham, Hall Green (Steve McCabe), who also had challenges facing him during the proceedings on the Bill and who worked extremely hard to ensure its proper passage. Finally, I thank the officials and reporters of the House, who have earned particular gratitude for coping with the challenges of dealing with legislation of this size and complexity and the many officials in my Department and across Government, especially Philip Bovey and Anne Willcocks, for the contribution that they have made in ensuring that we got this historic legislation this far.

This is a crucial Bill for UK competitiveness. Our company law has served us well in the past. With this Bill, we modernise and strengthen it and ensure that we create a firm platform for national business success. I commend the Bill to the House.

Reaching the Third Reading of this Bill has taken a long, long time. Right back in March 1998, the Government launched the company law review, as the Minister has said. There was then a good case for updating company law in this country. It is a case that has grown in the intervening years. Since then, we have had eight years to discuss the issues and two White Papers along the way.

In another place Lord Hodgson opened the debate in Grand Committee by saying:

“A journey of a thousand miles begins with a single amendment.”—[Official Report, House of Lords, 30 January 2006; Vol. 678, GC1.]

It is a view with which I wholeheartedly agree. I should like to return to the issue of the passage of the Bill shortly, but first I thank my colleagues in this House and another place who have worked extremely hard in the past year to improve the Bill. In another place, Lord Hodgson, Baroness Noakes and Lord Freeman made substantial improvements to it. In this House, my hon. Friend the Member for Huntingdon (Mr. Djanogly), who apologises that he has not been able to stay for this Third Reading debate, has done a marvellous job in keeping on top of the Bill’s more than 1,200 clauses and an even greater number of amendments.

I should also like to thank our DTI Whip, my hon. Friend the Member for Reigate (Mr. Blunt), who has been utterly determined and masterly throughout this long process. We have also had the welcome assistance on the Front Bench of my hon. Friends the Members for Hornchurch (James Brokenshire) and for Putney (Justine Greening), who have both worked so hard in Committee and on the Floor of the House. They have proved themselves to be professional and effective Members of Parliament.

Conservative Members support most of the Bill and the loudest dissent, it has to be said, has come from Labour Back Benchers. There remain only a small number of issues on which we disagree with the Government. That is due in good part to the Government having conceded our point on a raft of concerns—a point to which I shall return later in acknowledgement of what the Minister said a few moments ago. In wrapping up this long process, I should like to spend a little time dealing with some of the most important issues.

The question of directors’ duties has proved one of the most contentious as the Bill has proceeded and I would like to make our position clear and put a few points on the record. First, Conservatives agree with the ethos behind enlightened shareholder value, even though the Government have been unable—or perhaps unwilling—to provide a simple interpretation of what it actually means. We tabled a number of amendments to what will become section 173 because we did not believe that the clause as drafted represented the best statement of the enlightened shareholder value principle.

Although the wording has, to be fair, improved, the central problem with the clause remains. It is broad, vague and unclear and is capable of being interpreted in many different ways. That may be something that Ministers have used to their advantage during the Bill’s passage. When addressing business audiences, Ministers have claimed that the clause is merely a restatement of the status quo, but when talking to campaign groups such as the Corporate Responsibility Coalition, they have emphasised how much the new approach will change things. The lack of certainty goes to the heart of the issue, as the House should aim to pass laws that are clear about what it is they are meant to do. We should reject laws that are worded in such a way as to make recourse to interpretation by the courts inevitable.

Let me make another point clear. Our amendments have not been designed to make it easier for directors to ignore concerns about employee issues, social issues or the environment. My hon. Friends will know that we are calling on the Government to introduce a climate change Bill in the next Session. Such a Bill would contain concrete provisions on companies and their environmental impact. That is the sort of regulation that we Conservatives believe would work effectively. By contrast, the Government perhaps want to fob us off with the vague provisions of clause 173.

It was Lord Eldon, then Lord Chancellor, who set down in 1817 one of the fundamental tenets of company law—that the courts should not

“be required on each Occasion to take the Management of every Playhouse and Brewhouse in the Kingdom.”

Since that time, the judiciary has been rightly reluctant to interfere with the internal management of companies. Lying behind Lord Eldon’s phrase is the principle that, so long as the directors of a company act in good faith, decisions will not be revisited by courts with the benefit of hindsight. I am afraid that the Government’s phrasing may well end up undermining that commendable principle.

The second contentious issue relates to clause 22, which deals with entrenched provisions in a company’s articles. There are potentially two logically consistent positions that one can hold on this matter. The first was put forward by the hon. Member for Cambridge (David Howarth), who said that full and irreversible entrenchment was desirable and that companies should have the right to create articles that can then never be changed. I disagree with the hon. Gentleman for reasons that I shall come on to in a few moments, but it is a logically consistent position to hold. The second possible approach is one of flexibility, reflecting the fact that businesses need to be able to respond to a changing marketplace or to changing purposes as a company’s scope and activities change.

The changed circumstances that we will see in the future will mean that companies will have to change, but the people entrenching provisions in today’s companies are not able to foresee the changes that lie ahead. We should not allow the present shareholders to impose absolutely on future shareholders. Such fossilisation may entrench principles that are inferior and unsuitable for future circumstances. That is our position and it, too, is logically consistent.

The Government’s position, on the other hand, is not logically consistent. They have argued, and continue to argue, that there may be value in allowing companies to entrench articles, but now they say that it should not be irreversible. In Committee, the Minister said that they do not want companies’ constitutions set in stone, but they have allowed the unreasonable requirement of unanimity to change provisions. What is really unacceptable is that the Government’s programming did not even give time for that issue to be debated at all on Report.

Thirdly, we are concerned about directors’ conflicts of interest and that the tightening of what constitutes a conflict and, more important, how it is dealt with by a board will lead to experienced directors being unwilling to share their experience on other boards. Our fourth area of concern relates to the new derivative claims regime, which by broadening the scope for shareholder-inspired actions against directors could lead us to the US have-a-go litigation culture, with the associated risks of higher directors and officers insurance premiums and fewer people wishing to serve as a director. We must look at the implications of Sarbanes-Oxley, which are stifling small and medium-sized listed companies in the United States, and be sure not to repeat the same mistakes in the UK.

Our fifth concern is the requirement to disclose institutional voting. That provision is one of a large number of clauses introduced by the Government at the end of Committee. No time was given to debate it in Committee, or to give it proper scrutiny. We support institutional investors voluntarily declaring how they voted with the shares they own. However, we feel that making it compulsory could be counter-productive. If such declarations mean extra costs, extra paperwork and intimidation from campaign groups, institutional shareholders are more likely not to bother voting at all with the shares they hold, which would not be good news for shareholder democracy.

Our sixth area of contention—and Members will be relieved to hear, the last—concerns the business review. Here, too, the Government and others have misrepresented our position. We believe in and support the business review, and for the avoidance of doubt I shall explain why. Clause 423 refers to businesses reporting annually on

“trends and factors likely to affect the future development, performance and position of the company’s business”.

That is eminently sensible. Investors will be pleased to see the provision enacted and will be able to make better investment decisions as a result of the extra information made available to them. The next paragraph in the clause requires reporting on environmental and social matters, along with issues relating to the company’s employees, and is also covered by the phrase:

“to the extent necessary for an understanding of the development, performance or position of the company’s business”.

Again, that seems perfectly sensible from the point of view of investors and not over-burdensome from the point of view of quoted companies. Indeed, according to the Association of British Insurers all FTSE 100 companies were reporting at some level on social, ethical and environmental issues as long ago as 2003. British companies are leading the way.

What is happening with voluntary reporting is good news. The business review will improve things by making companies that currently report nothing report something. Even greater levels of corporate disclosure will be commonplace in the next few years, through the voluntary actions of companies that increasingly recognise—as the Minister said earlier—the business benefits of openness and transparency.

Companies I talk to broadly welcome the business review, as it gives them flexibility to refer to their social and environmental actions in their own way and in a way that is relevant to their business. However, there is just one small spanner in the works of the business review: the Government’s decision to table last Monday a new amendment on the subject. It is not as though they have not already tinkered enough with corporate reporting provisions. First, they consulted on an operating and financial review and then regulated for it. Then, last November, the Chancellor scrapped it without telling the Department of Trade and Industry. Nine weeks later, he U-turned again and agreed to consult on it again. Finally, in March, the Government formally scrapped it.

Let us be clear: indecision on that issue helps no one and achieves nothing. Many British companies already lead the world in corporate social responsibility. They want to act decently and to be seen to be doing the right thing; yet, without consultation and without so much as a courtesy phone call, the Government slipped in amendment No. 821 at the last possible moment. The effect of the amendment will be significant and wide-ranging. Again, the proposed wording is broad, vague and unclear. Of course, the Government’s programme motion for Report ensured that Members did not even get a chance to debate it.

I wonder whether my hon. Friend would note that it is not only indecision on the part of the Government that has caused the problem. The Government got almost every major company in Britain all teed up for the OFR. Then, once they had spent the money and got themselves prepared, it was thrown over by the whim of the Chancellor. Now, at the last moment, we have something else. Even those of us who are enthusiastic about greater reporting and transparency and an emphasis on corporate social responsibility have to say that to include a provision such as this, which is quite unknown in its effect, makes the whole thing worse. That is particularly true given that it has been included only to get the Chancellor off a hook—a hook that he put himself on and ought to stay on.

My right hon. Friend is absolutely right. The Government’s conduct made the grand old Duke of York look like a hero. It is unacceptable for the Government to make such a change at this stage and without consultation. As he suggested, the provision is clearly designed by Ministers to keep a few of their own Back Benchers quiet. That is not the right way to make good law. Ministers should know that without successful and thriving businesses in this country, there would be no jobs, no tax receipts and therefore no money for the critical public services that we all want to see. They should know that creating vague, vexatious and burdensome regulation for political reasons is bad for the country and the reputation of politicians.

I said on Second Reading that we broadly support the Bill and that it is pleasing that we have to disagree with only a handful of its many clauses. Despite the areas that I have just laid out, where I believe that the Government have got things wrong, I still believe what I said earlier. In fact, I think that we now agree on more areas of the Bill, because the Government, to be fair, have listened to the reasoned arguments of Conservative Members on a number of key issues. I welcome the fact—and express appropriate gratitude—that Ministers have recognised that in a Bill this large, it was not possible to get everything right the first time. By the process of listening to suggestions and arguments from both sides of the House, the Bill has been much improved. I am grateful to the Government for accepting some of our arguments and not being obdurate on everything just because we are the Opposition. We are, after all, here to make good law for the one country that we all represent.

I am not claiming that Conservatives have a monopoly on wisdom in the House, but on this matter, just as on synthetic phonics, tax in relation to soldiers in combat, integration in faith schools and many other issues, the Government have come round to our way of thinking. They accepted our arguments on the value of company secretaries. They listened to our calls for consolidation of the Bill with the Companies Act 1985. The Conservatives even changed the name of the Bill. The Solicitor-General was good enough to vote with us on that and I am grateful for that support.

The Government saw the error of their ways on what was the original part 31, which created a monstrous new kind of super statutory instrument. They have come to agree in part with my hon. Friend the Member for Huntingdon on the issue of the home addresses of directors and, in part, with our position on access to the register of members. Following arguments from my colleagues in another place, nominee shareholders will have a greater opportunity to participate actively in the companies that they own. Our arguments to reduce the numbers of forms have been accepted, as well as our arguments on a host of technical issues, for which practitioners have been grateful. Small and charitable companies will benefit from our work on audit rules for such companies.

I express our profound gratitude to Ministers for the positive way in which they have dealt with those improvements to the Bill. I add my special gratitude—echoing the Minister—to Department of Trade and Industry officials, the Clerks of the House and all the Officers of the House for the mammoth undertaking that has probably dominated their lives for the past six months or so. I hope that they have managed to get some sleep in the course of their hard work.

I will conclude with a few remarks about the progress of the Bill. I understand—no one has questioned this—that this is the biggest Bill in parliamentary history. It had more than 1,260 clauses when it left Committee and more clauses have been added since. We have considered many hundreds of amendments. The Government have tabled more than 600 in the past fortnight. Some of them are what the Minister would have described, if she had just found the word, as consequential amendments—amendments that follow naturally, out of logic, from amendments that have been made earlier. Inasmuch as many of the amendments are consequential, we accept that they do not necessarily need debate—if they are genuinely consequential. However, this has not been a satisfactory way for the House to make law. Hundreds of new clauses—ones that do matter and are not merely consequential—have never been debated at all; some because they were uncontentious, many because of the iniquity of the programme motion, and yet more because they were tabled only at the end of the Committee stage and time was not given on Report to correct that misdemeanour.

Yesterday, my hon. Friend the Member for Reigate raised a point of order because for reasons that I have outlined we wished to vote against Government amendment No. 821. Madam Deputy Speaker ruled, quite rightly and understandably, that if we were to vote against those two lines of text, we would be obliged to vote against several pages of perfectly sensible amendments as well. It is a pity that our processes do not allow us to press distinctive amendments to a Division.

We have kept a tally of what has not been debated. In Committee, 419 Government new clauses were not debated. On Report, 33 out of 52 subject areas that were selected by Mr. Speaker were not debated, along with 177 Government amendments, seven Government new clauses and one Government new schedule. I have been given a useful crib sheet saying that I can add to that 123 Government amendments, two new clauses and two new schedules—and, no doubt, a partridge in a pear tree.

I hope that the Government will learn from the experience of this Bill. By bringing forward more clearly directed legislation that is better consulted on in advance, and without tabling surprise amendments at the last possible minute, the Government can help to ensure that the House delivers better legislation, and they will thus trouble our courts less with questions of interpretation.

By and large, the Bill is welcome and good. However, I am certain that we will have to revisit elements of it in the not-too-distant future. Sooner than we would wish, it will be tested in the courts, and subsequent legislation will be required to tidy it up.

Company law is part of the hidden wiring of the economy. Immense problems are caused if it goes wrong, but no one notices if it goes right. The limited liability company was one of the great inventions of the 19th century. In many ways, it was more important than the technological inventions of that century. However, like all inventions and advances, it brings its own problems. The corporate form helps to channel investment into specific areas, but it also brings its inherent problems, which are classically problems for creditors. The corporate form helps new enterprises to get off the ground by separating an enterprise’s assets from the personal assets of the entrepreneur, but it also provides a vehicle for the concentration of economic power and a type of organisation in which responsibility is diffuse. The fundamental principle of company law for the past 150 years—I hope that it is maintained in the Bill—has been that people should be allowed to use the tool of the corporate form as they wish, unless there is a public interest that overrides that power.

We welcome the underlying themes of the Bill, especially the deregulatory and “Think small first” themes. However, we remain convinced of the need for regulation in specific areas not only to restrain harmful behaviour, but—this was the theme of our contribution to the debate on the OFR and the business review—to help the creation of new markets and forms of market. However, we fully accept that the Bill is an attempt to strike the same balance that has faced Parliament for 150 years in new economic and social circumstances.

I shall not go through all the areas of the Bill that the hon. Member for Rutland and Melton (Alan Duncan) mentioned. The Bill is far too long and complex for me even to attempt a summary of pros and cons at this stage, but I shall mention one aspect that he covered: directors’ duties. Our view is that the reform contained in clause 173 is a useful development. The Minister called it historic. I am not sure that it is historic, but it is an important advance. It has the effect of protecting directors who wish to follow corporate social and environmental responsibility to a greater degree than fund managers might like. It encourages a responsible attitude towards the environment and social matters, and taking a long-term view.

There are worries that the clause mandates that approach in a way that would be restrictive for directors and difficult for them to deal with. We do not believe that that is the case. We believe that the reform is well balanced, but there are problems with the directors’ duties area of the Bill. The hon. Gentleman mentioned that there was insufficient time to debate certain parts of the Bill. I draw the Government’s attention to one aspect of the directors’ duties, a chapter which I fear may produce difficulties in the future. I hope that they pay some attention to it.

I refer to clause 171, which we were due to debate yesterday, but it was in one of the groups that fell. The problem in the clause is that the Government have not fully made up their mind what the relationship is between the duties as they stand in the Bill and the law as it was before the Bill. It should have been possible to be clearer about which aspects of the Bill are reforms and are new, and therefore take precedence, and which areas are consolidations and codifications of existing law, in which case the previous law is highly relevant.

There might be a political problem for the Government in doing that. The hon. Gentleman mentioned the difficulty of having to say slightly different things to different audiences. The cost of not being entirely clear about what is reform and what is codification will be litigation. I hope that the Government will bear that in mind in future consideration of these issues.

The other matter to which I draw the attention of the House has been mentioned several times—the business review. As the right hon. Member for Suffolk, Coastal (Mr. Gummer) said, the history of this part of company law is somewhat chequered and includes an extraordinary double reversal in the past couple of years, with the Chancellor of the Exchequer looking for a symbolic gesture to show his commitment to deregulation and big business, then a subtle reversal, with the position in the Bill being halfway back to where we started, but not quite, in our view, far enough.

The problems in the Bill are, first, that the coverage of the review is not broad enough. The question is, not broad enough for what? Our view all along has been that one of the purposes of the review is to help ethical investors and ethical consumers, rather than just to help members of the company—shareholders for the time being—hold directors to account for what the company is doing at present. For us, the fact that only listed companies are covered is a problem. We think that ethical investors, and especially ethical consumers, have an interest in more companies than those that are listed.

Perhaps a bigger problem—it is the biggest problem with the state of the business review as it leaves the House—is to do with auditing. That is, I think, the single issue that motivated the Chancellor to remove the original operating and financial review. Ministers frequently refer to the cost of auditing the business review—previously the OFR—but the auditing requirement is central to the utility of the review, for creating and helping to develop markets for ethical consumption and investment. Only reliable information will help to create those new markets. We accept that that process will bring a cost to business, but we believe that the offsetting benefit of developing ethical investment and consumption far outweighs that cost.

The Bill will leave the House in a somewhat rough state—especially for a Bill that will have gone through its Third Reading in its second Chamber. Consideration has sometimes been very rushed—at times it has been close to shambolic. However, we all must accept responsibility for that, because I fear that the origin of the problems to do with the consideration of the Bill lies in the decision to use it as a consolidation measure, and not just as a reform measure. There is evidence in all parts of the House—there are fingerprints and traces everywhere—of all parties having been involved in that decision.

If it had been recognised all along that the intention was to go for consolidation, we might have started our consideration of the Bill at a different time of year and have thought about having a carry-over provision for it. We did not do that. Consolidation and codification is, indeed, a good thing, as the Minister said: having a Bill that covers as much of company law as possible in one place is a good thing. However, if we had thought about this matter better in advance, we might either have started earlier, or have done the reform first and the consolidation second at greater leisure. Nevertheless, speaking as someone who attended almost every Committee sitting and almost every debate on Report, I certainly do not want to start again at this stage, so I have no intention of opposing the Bill on Third Reading.

I thank all those involved in discussions on the Bill, especially my hon. Friend the Member for Solihull (Lorely Burt), who supported me throughout in Committee and on Report, and my hon. Friend the Member for Cheadle (Mark Hunter), who also attended the Committee. I also thank the Liberal Democrat team in the House of Lords, who brought to discussions an extraordinary depth of experience of business. I pay tribute to the hon. Member for Huntingdon (Mr. Djanogly)—unfortunately, he is not present—who displayed an extraordinary degree of persistence and accuracy in his attempt to get to the technical heart of a great number of questions. I also thank the other members of the official Opposition Front-Bench team for their courtesy and good humour throughout the Bill’s extraordinary progress.

However, I thank most of all the ministerial team, and especially the Minister for Industry and the Regions, who has had to pick up, and learn to master, an extraordinarily complex and difficult brief in a very short period. Those of us who have dealt for a long time with company law—in my case, a quarter of my life, and I spent 10 years teaching the subject at university—have been very impressed by what a quick and accurate learner of this area of law she has shown herself to be. The rest of the ministerial team are more legally experienced, but they have shown themselves to be able to adapt quickly and well to a new area of law.

I should also like to thank the Bill team and the civil service for the very helpful way in which they dealt with Opposition Members. It is perhaps unusual at a national level—it is rather less unusual in local politics—for there to be a good relationship between the civil service and Opposition politicians. That has been genuinely helpful in our effort to make genuine progress in getting legislation through this House.

At one stage in the past couple of days, the hon. Member for Huntingdon said to me that he wanted to be involved in this Bill because, for a lawyer, it is a once-in-a-generation opportunity. That is true. Company law reform of this sort comes through Parliament very rarely, but I have to say that I expect we now both hope that it is a once-in-a-lifetime experience.

It is with some trepidation that I contribute to the debate, after all the hard work that so many people have clearly done over so many months on such technical legislation. However, there is one issue about which I remain concerned: information about shareholders and directors. I tried to discuss it on Tuesday evening, but—as with many of the amendments that were tabled, and as my hon. Friend the Member for Rutland and Melton (Alan Duncan) explained—that subject was not reached.

My principal concern, which stems from my involvement in this area for more than 25 years, is people and companies that undertake scientific research that involves the use of animals. I know that the Government have considered, and will be consulting on, ways of making it more difficult for information on such people and companies to be accessible to those of malign intent. I hope that the consultation will proceed apace and that innocent people whose lives are made a misery, who suffer mental breakdowns, whose marriages break down, whose children are terrorised, whose property is vandalised and whose companies are brought to the brink of bankruptcy through the malign efforts of animal rights terrorists can be afforded some protection from their names and addresses being known.

I have constituents who have been targeted in that way, and many of my friends have been broken by the attentions of animal rights terrorists. I hope that the Government will proceed with great speed and firmness to ensure that while information on a company and its members and shareholders can be made available, it is not available to those who wish to do them harm. As I said, I hope that the consultation will proceed apace and that the Government will quickly come up with serious measures to deal with this issue.

This is a new development, and it is particularly important to me because I understand that the name of the company that is allegedly building the primate laboratory in Oxford is well known to animal rights terrorists. That company—if it is that company—is also likely to be involved in building Olympic provision. If the animal rights terrorists, having obtained such information, behave in the same way toward the Olympics and everybody involved in it—that includes all the athletes, trainers and suppliers worldwide—we can only tremble at the prospect of what could happen to our Olympic games. That is the seriousness of the situation, and it is the reason why I have risen, with trepidation, to intervene at this very late stage to implore Ministers to ensure that there is no way that those people can ever gain access to any of that information.

I want to make a few brief points at the end of the debate. The length of the Bill has been commented on, and it is the biggest ever to go through the House. When I was a student—more years ago than I care to remember—I used to carry many legal volumes. I think that modern law students and lawyers must be thankful for the invention of the CD-ROM.

We have heard a lot about enlightened shareholder value being the cornerstone of the Government’s policy for company law in the 21st century. I believe that our system limits enlightened shareholder value, as the bulk of most large companies’ shares are controlled by institutions or other large companies. The hon. Member for Rutland and Melton (Alan Duncan) dismissed problems to do with disclosure about how institutions vote, but it is a vital matter. Many of us do not hold shares as individuals, but the institutions to which I referred control our pension funds or other investments. If we are serious about ethical investment, we need to know how they deal with those matters on our behalf. One of the most important facets of the Bill is that it will give many small shareholders the information that they need to understand what is happening to their investments.

A couple of days ago, I spoke to clause 173, which was presented as a way of improving directors’ responsibilities in respect of the environment and other matters. As I said, the clause is a step forward, although it does not go far enough. We will have to revisit the matter, as the world is changing. I heard this morning that the Conservative party, like the Liberal Democrats, is discussing green taxes. I am sure that other parties will follow suit, which means that all companies will have to change. That will have a knock-on effect on how directors react and companies work.

Another strand to the argument has to do with the proposed climate change Bill. If such a Bill comes before the House, that too will have an impact on companies. It does not contradict what has been achieved with this Bill to say that the climate change legislation must place a responsibility on directors to react to environmental issues.

Finally, it has been noted that many clauses have not been discussed, although the huge number of clauses means that we would still be talking next Christmas if we had debated all of them as much as some would have preferred. However, we did not discuss the important new clause 3, which was due to be debated today. It deals with the liability of UK companies for the actions of their overseas subsidiaries.

I raised the matter on Second Reading, when I said that the legal system in many developing countries is not sufficient to allow people to gain redress for the actions of companies. The Secretary of State said that he would be very reluctant to encourage widespread litigation in UK courts simply because remedies might not be easily available in some countries. However, if we as a developed nation are not prepared to give people the opportunity to take matters to court—and only a small number of UK companies would be involved—we are failing our responsibilities to the developing world.

The Government argue that the Bill is not the place to deal with such matters, but it codifies the law affecting UK companies so, if it is not appropriate for the purpose that I have set out, what would be? We have been told that the Bill sets out company law in the 21st century but it has been noted often enough over the past few days that the world is changing. Companies have to change with it: issues to do with the environment and trade justice are much more to the fore, and companies need to reflect our changing times. This was the time and the place to tackle the issue, and to ensure that UK companies were at the forefront in accepting responsibility for their actions, and those of their subsidiarie overseas. The best of our companies already do that; I stress that we are not talking about the majority of companies, which act responsibly in most areas. One of the problems is that people in many developing countries cannot easily get access to the courts. We have a well developed legal system, and a massive Bill on what our companies can do. We should have taken that extra step and allowed justice to prevail for those affected by the actions of some in the third world, and it is a shame that we did not.

I thank all Members for their contributions, particularly those who were on the Standing Committee. Britain is part of a global economy. Nobody owes us a living in that economy, so we must ensure that we modernise our industry and our tax laws. As the hon. Member for Cambridge (David Howarth) said, we must modernise the hard-wiring of the economy—the company law—and we must get it right. That is what we have done during our consideration of the Bill.

The Bill had a very long gestation—it was eight years in consideration, and the company law review looked into all aspects of company law. Initially, the legislation was the Company Law Reform Bill, and it then became a consolidation Bill. We have struck the right balance between ensuring that we build on the need for an enterprise economy and introducing the right element of regulation. We thus create fairness for shareholders and allow them better control over the companies in which they invest. Rightly, in addition to considering those issues, we looked into the subjects of animal rights and terrorism, and some of the other problems that the hon. Member for Beckenham (Mrs. Lait) identified in her contribution.

I thank all those who have contributed, particularly my noble Friend Lord Sainsbury and my right hon. and learned Friend the Attorney-General, who spoke in another place. I thank my right hon. Friend the Minister for Industry and the Regions for the way in which she piloted the Bill through its stages. It is a major reform that modernises Britain’s company law, and it will make our economy stronger. In no small part, that is thanks to her dedication and effort in ensuring that the Bill becomes law.

Question put and agreed to.

Bill accordingly read the Third time, and passed, with amendments.