Company Law Reform Bill [Lords]

Public Bill Committee, 11 July 2006.

Standing Committee D

Clause 158

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 40, in clause 158, page 70, line 7, after ‘faith’, insert

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

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss the following: Amendment No. 39, in clause 158, page 70, line 9, leave out from ‘whole,’ to end of line and insert

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

Amendment No. 300, in clause 158, page 70, line 9, leave out from ‘so’ to end of line 18 and insert ‘must endeavour to—

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

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

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

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

(e) maintain a reputation for high standards of business conduct, and

(f) act fairly as between members of the company.’.

Amendment No. 166, in clause 158, page 70, line 9, after ‘to’, insert

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

Amendment No. 297, in clause 158, page 70, line 14, leave out ‘and the environment’.

Amendment No. 41, in clause 158, page 70, line 18, at end insert ‘, and

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

Amendment No. 42, in clause 158, page 70, line 25, at end insert—

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

Amendment No. 43, in clause 158, page 70, line 25, at end insert—

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

Amendment No. 165, in clause 158, page 70, line 25, at end insert—

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

Amendment No. 417, in clause 158, page 70, line 25, at end add—

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

Clause stand part.

New clause 1—Directors to have regard to interests of employees—

‘(1) The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.

(2) Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

(3) This section applies to shadow directors as it does to directors.’.

New clause 27—Guidance on interpretation of directors’ duties—

‘(1) The Secretary of State shall from time to time publish binding statutory guidance as to the interpretation of the duties imposed on directors by section 158.

(2) Before publishing the guidance referred to in subsection (1), the Secretary of State shall consult such persons or bodies as he considers relevant.’.

Jonathan Djanogly (Conservative, Huntingdon)

I shall speak to amendments Nos. 40, 39, 166, 41, 42, 43, 165, 417 and new clause 1. The issue of directors’ duties is the area of the Bill that has courted the most controversy. It is also the issue that, rightly or wrongly, has political as much as financial or administrative implications. I do not believe that the Government really wanted that, but gradually over the last few years, they have dug themselves into a hole on these provisions and they are now finding it difficult to extricate themselves.

In another place during the later stages of consideration of the Bill, Lords Hodgson and Freeman introduced amendments that would have removed the six considerations to which a director must have regard under the clause and returned the position towards the existing common law. The Government rejected that outright, so we have had to make a basic choice here. Do I just stand here today and say the same things as we said in the Lords and get another negative answer, or do I attempt a more constructive approach as to how the provisions could be improved? I shall take the latter route, although the issues are not straightforward and we reserve our position on this, depending on the Government’s approach.

These mainly probing amendments therefore initiate debate on how to improve the drafting to take account of the still widespread concerns throughout the legal and business communities, which can be seen on the pages of most of the financial press, including The Economist andthe Financial Times, which have both attacked the clause.

We have six primary concerns with this part of the Bill. The first involves the technical problems arising from the codification of the existing common law duties in statute. The second is over the seemingly random choice of factors and duties that a director must consider; these new duties could cloud the directors’ paramount duty to look after the best interests of the company. The third is over the confusing new language that the Government have introduced and how it will be interpreted.

Our fourth concern is that the clause has been inserted as an offering to various, albeit often worthy, different agendas when those issues could be more effectively advanced by means other than distorting what is essentially a legislative framework built for companies. There is also the fear that over-regulation will make this country less able to compete in the global marketplace. Finally, we think it would be a great pity if this country went down the route of over-regulation that has been taken in recent times in the United States with Sarbanes-Oxley, which results in companies being driven overseas. That is a real fear.

I shall deal first with codification of the common law. Part 10 of the Bill aims to codify existing common law principles relating to the responsibilities of directors. That has led to vociferous and growing complaints from across the legal and business communities that this could cause company law to be dramatically altered for the worst. Historically, judges have had the discretion to deal with complicated issues relating to directors’ duties case by case. That system has been adaptable and effective in dealing with cases that are often complicated and highly technical.

The existing duties found in common law rules and equitable principles, which have been built up in the courts over the years, are to be replaced by the statutory statement in part 10. A flexible system is to be replaced with an inflexible one.

As my noble Friend Lord Freeman pointed out in the Lords, there is an inherent danger in cross-referring to case law but not defining it—a situation he aptly described as a minefield. On the one hand, the Government have said that there will be no change in the common law position, but, on the other, they have introduced the concept of enlightened shareholder value, which all experts seem to agree will alter the common law position on directors acting in the best interests of their company. That is no better illustrated than by a letter sent to me by the Minister herself on 9 June, in which she wrote:

“We had two main intentions in introducing a statutory statement of directors’ duties.

First, it will provide much greater clarity on what is expected of directors and make the law more accessible. The duties are at the moment found in case law—that is, decisions in individual court cases over the years—rather than in the Companies Act. Many directors are understandably unaware of, or unclear about, what their duties are, and we want to address this both through the Bill and through non-statutory guidance.

Secondly, it enshrines in statute a concept called ‘Enlightened Shareholder Value’. This recognises that directors will be more likely to achieve long-term sustainable success for the benefit of their shareholders if their companies behave responsibly. Directors will therefore be required to promote the success of the company in the collective best interests of shareholders, but must in doing so have regard to wider factors such as the interests of employees and the environment.”

There is a fundamental gap in the Government’s train of thought: either they are introducing a new concept called enlightened shareholder value, an extension of the common law, or they are simply codifying existing common law. I hope that the Minister makes clear which course they are taking.

From our consultations on the Bill with many interested parties, the position seems clear. If the audience is business oriented, the Government’s message is, “Don’t worry, nothing is going to change. This is only a restatement of the common law position.” If the audience is a campaigning body, the tactics change and the emphasis is on explaining how the concept of enlightened shareholder value will change things.

John Bercow (Conservative, Buckingham)

Order. The hon. Member for Montgomeryshire (Lembit Öpik) cannot come within the curtilage of the Committee. Would he care to leave? [Interruption.] I am sorry, but he really cannot come into the curtilage of the Committee during its consideration of the Bill.

Jonathan Djanogly (Conservative, Huntingdon)

We may examine what the Government’s supporters believe they are doing. I refer to the TUC briefing of 6 June, which says:

“The TUC supports codification of directors’ duties, and considers that putting them into statute is the best way of ensuring clarity on what is expected of directors and giving the duties prominence in the eyes of directors and stakeholders.”

It goes on to say:

“Making an explicit link between the success of the company and the interests of employees and the other matters for consideration listed in clause 158, and making it clear that directors should have regard to these matters, is a significant step that the TUC welcomes. Backed up by clear and comprehensive guidance and reporting requirements, the TUC hopes that clause 158 will contribute to raising standards of corporate behaviour.”

The Opposition have no problem with, and indeed support, many of the good intentions voiced by the Government whenever they talk about enlightened shareholder value. However, in the context of sound law, such intentions can easily slip into meaningless platitudes. That is reflected in the Association of British Insurers paper of 14 June 2006, which states:

“These clauses propose that the general duties owed by directors to their company will be set out in statute reflecting the ‘enlightened shareholder value’ approach, which recognises that boards need to take account of the impact on the company of non-financial social, environmental and ethical issues.

The ABI supports the ‘enlightened shareholder value’ approach. We have nevertheless had concerns that codification might lead to a compliance-driven approach to the exercise of directors’ duties rather than one based on the making of good-faith judgments. This could lead directors to take expensive and time-consuming legal advice, impair efficient decision-making and add an unnecessary layer of bureaucracy to board practices. Codification of directors’ duties would not then achieve its goal of greater transparency and accountability, but instead create new uncertainties and larger administrative burden. The ABI welcomes the efforts made by the Government at the time of the House of Lords deliberations to amend the Bill to lessen these risks. However, we consider this remains an area where further Parliamentary scrutiny is necessary.”

The Law Society’s June briefing says:

“The Law Society doubts that the savings for business which the Government anticipates will be achieved. On the contrary, the new provisions on directors’ duties will result in new uncertainty, increased legal costs and additional bureaucracy.

In particular, the Law Society believes that the new code is inflexible—at present, the courts have considerable freedom to develop the law on directors’ duties to suit changing needs and expectations and in practice the code will not be more accessible than common law rules, as its meaning will over time become less and less clear to a reader who does not also understand how it has been interpreted and applied by the courts.”

Clearly, although the Government protest that they are not changing the common law position, they are in fact doing just that. That will lead only to confusion where there should be clarity. Also, and in some ways even less helpfully, the clause could impede the development of common law.

The six factors in clause 158(1)(a) to (f), to which the director must have regard, seem arbitrary. It has been calculated that directors have had some 650 duties laid down through the common law and various statutes over the years. Why have those six been deemed more important than the other 640-odd? We recognise that putting those duties in one format will give clarity to company directors. That is why we supported the Law Society proposal to publish a non-statutory guide to directors’ duties. The Government have said that they intend also to give non-statutory guidance to directors, but have not yet done so.

We support fully an official guide to the roles and responsibilities of directors, and have tabled amendment No. 417 to have that requirement set out in the Bill. The duties, roles and responsibilities that directors of UK companies face are great and myriad. The Institute of Directors published a helpful guide to directors’ duties, responsibilities and liabilities called “The Director’s Handbook”. It was endorsed warmly by none other than the ex-Secretary of State, who now has responsibility for the Department for Education and Skills and who called it a

“valuable and reliable source of information and guidance.”

Do the Government consider it adequate for an area of business law that can fill an entire book to be set out in six lines of statute?

The Bill contains heavily edited common law duties. I believe that we should give some consideration to those roles, duties, responsibilities and liabilities that the Government do not consider important enough to be enshrined in statute. Why have they not been included in the clause? For example, here are a small number of common law directors’ duties that the Government have not included in that list—the Minister might like to explain why she does not consider each duty worthy of codification in statute: duty to act for proper purposes; duty to prepare true and fair accounts; duty not to make secret profits; duty not to act ultra vires; duty to supervise the discharge of delegated functions; duty to pass on relevant information; duty of mutual trust and confidence; duty to ensure that undertakings are complied with; and duty not to profit from their position without approval.

David Howarth (Liberal Democrat, Cambridge)

I am not sure about all the duties to which the hon. Gentleman has referred—he might be right about some of them—but surely they are covered by the duties to

“act in accordance with the company’s constitution”

and to

“only exercise powers for the purposes for which they are conferred”,

as set out in clause 157, which we have just passed.

Jonathan Djanogly (Conservative, Huntingdon)

They are but, as the hon. Gentleman will remember, we had problems with how those were set down. Furthermore, the statute differs from the common law position. By the way, that is relevant to a further clause that we will come on to in part 10.

To continue the list, duty to declare an interest in contracts; duty to account to company for property under control; duty to attend board meetings—directors have a general duty to attend board meetings, but do not need to attend every one; duty to account for profits while taking advantage of his position as director; duty to exercise reasonable care and skill while carrying out his duties; duty not to oppress minority shareholders; and duty not to abuse powers, including powers to issue shares for not the right purpose.

I have set out a few of the extra duties, but there are hundreds more. For example, there are a number of insolvency-related duties that the Government have chosen to exclude from the provisions, as well as the duty to consider the interests of creditors above those of members, to take steps to avoid loss to creditors, and not to enter into transactions at an undervalue or make preferences.

The factors to which directors must have regard relate to many responsibilities to which directors must already have regard, such as environmental concerns, as set out in statute. In some cases, the Government are weakening directors’ existing statutory duties. That is particularly the case with the introduction of clause 158(1)(b), which states that they should have regard to

“the interests of the company’s employees”,

and the removal of the section 309 in the Companies Act 1985. That waters down the provisions in the 1985 Act which deal with employees and it could be detrimental to the interests of employees. That is why the first amendment we tabled was new clause 1, which aimed to reintroduce the existing employee protection language. Although the Government have taken some of the more fashionable responsibilities already imposed on directors by statute or common law, they have curiously chosen to ignore others.

Why, for example, have the Government chosen to ignore the health and safety duties to which a director must have regard? Why are they not included? I am not saying that they or any others should be, but I am asking why, using the Government’s rationale, they are not listed in the clause. The possibility of corporate manslaughter is a hugely serious and important issue of which all directors should be aware.

Patrick Hall (Labour, Bedford)

Is the hon. Gentleman suggesting that the clause as drafted abolishes other statutes and wipes out centuries of common law?

Jonathan Djanogly (Conservative, Huntingdon)

I am saying that clause 158 abolishes some statutes that place duties on directors—for instance, employees’ rights—and, in other cases, wipes out or amends the common law position. However, more importantly, it raises certain common law rights above others by placing them in the Bill. If the Government are saying that one common law right is not more important than another common law right, why are they only choosing six? That is the core of my argument.

If the Government consider health and safety to be important, will the Minister explain how a director new to his job is meant to know from the Bill as drafted that he should be aware of the importance of health and safety while making a decision? He could reasonably presume that as environmental issues have been included, the Government have incorporated all the statutory duties necessary. That is more confusing than enlightening.

Competition law is another thing that the Government have chosen to ignore. Directors can be held personally liable for breaches of EC and UK competition law. A director who is found guilty of participating in a so-called cartel offence can be disqualified from acting as a director for up to 15 years. A director who is found guilty of dishonestly agreeing to take part in hardcore anti-competitive activities in the UK can face imprisonment, but the Government have come to the conclusion that a breach of competition law is not worth mentioning above the impact of the company’s operations on the community.

The Government will no doubt say that those glaring gaps in the Bill as drafted are covered by the law as it exists and, possibly, that the duties could be addressed by non-statutory guidance.

Margaret Hodge (Labour, Barking)

I have listened to the hon. Gentleman for some time as he takes us on a complete journey through various duties which, as my hon. Friend said, are perfectly adequately expressed either in the Bill or in other legislation. Will the hon. Gentleman come to the point? Do the Conservatives support a concept of enlightened shareholder value? If so, what is wrong with having the need to have regard to those factors—whether it is the community, employees or environment—set out in clause 158(1)(a) to (f), in pursuit of the interests of the business?

Will the hon. Gentleman get to the kernel of the argument? Does his party support us having a wider view of business interests, or does that apply only to his leader? Does the hon. Gentleman have the narrow, traditional view of business interests which was articulated before the clause appeared in any legislation?

Jonathan Djanogly (Conservative, Huntingdon)

The Minister goes into my party’s wider beliefs on corporate social responsibility. I shall come on to that. The kernel of my point is that the six common law responsibilities set out in the Bill are a statement of fashion rather than law.

Margaret Hodge (Labour, Barking)

Will the hon. Gentleman give way?

Jonathan Djanogly (Conservative, Huntingdon)

No, if I can just finish my point. I am making the case that out of the hundreds of items that the Government could have chosen, they have decided to include only six items to which directors must have regard. They maintain that that somehow clarifies the position, but I maintain that they are doing the exact opposite.

Margaret Hodge (Labour, Barking)

I shall allow the hon. Gentleman to continue after this comment.

James Brokenshire (Conservative, Hornchurch)

Very decent of the Minister.

Margaret Hodge (Labour, Barking)

I am trying to get the hon. Member for Huntingdon (Mr. Djanogly) to the point rather than wasting our time. He is saying that it is a matter of fashion and nothing else that we should ask companies to have regard to the interests of the community and the environment as they promote the success of their company in good faith.

Jonathan Djanogly (Conservative, Huntingdon)

What I am saying to the right hon. Lady is that she must justify the clause to the Committee, businesses and the mainstream media, which described the clause as containing “platitudes”. She must explain why she has chosen those six duties as opposed to some of the hundreds of others. We think that it will lead to even more confusion.

Are the duties and responsibilities outlined in the non-statutory guide less important than those in statute? If they are equally important, as the examples that I quoted show, why have they not been included? We are not arguing that all directors’ common law duties should be put into statute. That would be nonsensical, particularly as common law duties are being advanced all the time. However, our probing amendments Nos. 39 and 41 would oblige company directors to consider all other common law directors’ duties. A non-statutory guide, as provided for in amendment No. 417, could then give directors guidance on those duties without it being enshrined in statute. Clearly, the Government have considered that, as they chopped up and inserted bits into the clause at earlier stages.

The Minister might believe that the words “amongst other matters” in subsection (1) cover that concern. However, we do not accept that that is adequate, which is why we wish to assert our point in greater detail. At the moment, however, the Government’s choice of listed duties in the clause puts fashion over the need for good law. That is a poor basis on which to make law. For instance, what happens when fashion changes?

David Howarth (Liberal Democrat, Cambridge)

The hon. Gentleman’s point about the clause is that it is a change, and I think that we should debate it on the basis that it is a new law. However, I do not think that his other point about the other clause is well made. In the case of Benfield Greig, the judges described the Law Commission’s draft of the duties as amply supported by authority. His other point seems to be based on breaking down the duties into more and more sub-duties, but it seems to me that they are all at least plausibly covered by the Bill, apart from in clause 158.

Jonathan Djanogly (Conservative, Huntingdon)

There is an argument about whether the clauses are adequate. However, I am making the wider point that the clause does not adequately cover the existing legal position.

In May 2006, a Financial Times lead article entitled “A Missed Opportunity” said:

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

That problem has prompted serious concerns from the legal profession. A host of major corporate law firms that will have the job of interpreting the clause told us that the rigid list in clause 158(1)(a) to (f) might artificially constrain the decision-making process and provide inappropriate challenges to the way in which directors exercise their discretion.

Again, on 9 May, an article in the Financial Times stated:

“The Company Law Reform Bill...requires boards to consider the effects of their decisions on employees, customers, the environment and local communities, as well as document the process.

The in-house counsel and independent legal experts say such requirements are impractical and will make decision-making more cumbersome and fraught.

Peter Kennerley, a member of the GC 100 group, which represents in-house corporate lawyers, said the bill’s provisions could encourage lawsuits from pressure groups, investors and industrial rivals.

Board deliberations on anything from approving budgets to locating new production facilities would be affected, said Mr. Kennerley, company secretary as Scottish & Newcastle, the brewer.

‘The area that worries me is making decisions from which someone else loses out,’ he added. ‘Short-term investors could seek to improve their positions by challenging a board decision, for example, on accepting a (takeover) offer.’

Under the proposals, lawyers say directors could be left in breach of their duties if they cannot demonstrate that they have considered every interest group.

Most companies accept the need to consider a range of stakeholders, where relevant, in the decision-making process, but they are opposed to the rigid codification of those duties.

James Palmer, chairman of a company law committee at the City of London Law Society and author of a letter in today’s Financial Times, said: ‘We are very frustrated over this element and think the government doesn’t get how this would work for companies in practice.’”

The list of factors set out in the clause will apply to all types and sizes of companies, but the listed matters might not be appropriate for directors to consider in taking the best decisions in all circumstances. A director of a major plc and the sole director of a corner shop will not take into account the same factors when they make important decisions. The judgment of directors is at risk of becoming artificially fettered by their having to go through a checklist of factors that may have absolutely no relevance to what their company does. Again, the Government are taking a one-size-fits-all approach to company law. The change will lead to a new area of law, in which the courts will have to interpret circumstances and facts based on the precise and unbending words of the clause.

The argument is not new. Our continental neighbours have been working on codified law since Napoleon transported the idea with his armies. However, let us not forget that the common law system has always been at the forefront of developing company law in this country, and the question is whether that will now be under threat. By enshrining in statute the list in the clause, many believe that the Government are really saying that they do not trust UK directors to make their own decisions about what is best for their companies. By and large, directors are directors because they have shown themselves to have good judgment and we should keep trusting them to discharge their duties. Yes, we should punish wrongdoing, but we should otherwise regulate lightly and let directors get on with running their businesses.

The Law Society has pointed out that the list of factors in subsection (1) that a director must consider raises the possibility that the courts will be given the power to review business decisions made by directors, thereby undermining the well established business judgment rule. That could adversely affect the management of companies and be a significant burden to businesses in both time and cost, as they would have to examine the factors set out before taking any decision. The way in which directors make decisions would therefore be significantly altered.

The change will impact most harshly on smaller firms, which will have to expend much more of their resources in ensuring that they comply with the requirements. That is why we have tabled amendment No. 39 on the recommendation of the Law Society. It would require directors to take into account the listed factors only if they were relevant to the matter under consideration and it was reasonably practicable to do so. That would qualify the requirement to take all the factors into account. The Law Society’s June briefing on the amendment stated:

“Clause 158(1), as amended at the Report stage of the Bill in the House of Lords, creates an obligation to consider the listed factors which goes beyond the subjective duty to act in the way the director considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. To say, as the Government does, that there is only a single duty rather than two separate duties does not assist because two duties have been replaced by a single complex duty which has two facets to it. In other words, a director cannot discharge the duty imposed by clause 158(1) without having regard to the factors listed in that Clause.”

The Law Society continues to have serious concerns about the clause, even as amended, and believes that it will make a material change to existing law. It states:

“In our view, the introduction of a list of factors which the directors are obliged to consider makes it significantly more likely that the courts will intervene in matters previously left to the directors’ judgement. We believe that this is likely to lead to wasted management time, and unnecessary expense, on the company’s part.”

It also says that it is concerned about the extent of the burden that the subsection is likely to impose on directors. It states:

“In particular, it is unclear how extensive are the enquiries which the directors are required to make in order to obtain information which may be relevant to the matters listed. Furthermore, it is unclear what weight the directors are expected to attribute to competing factors when reaching their decision.

As currently drafted, Clause 158(1) obliges the directors to have regard to a list of matters in deciding whether a particular course of action is likely to promote the success of the company for the benefit of its members. Although the basic duty (in Clause 158(1)) is qualified by reference to the directors’ good faith judgement, the obligation to have regard to the factors now listed in Clause 158(1) is absolute. This is a significant change from the current law.”

The Law Society is concerned that this change may make it much more difficult for directors to manage the affairs of their company. It also says:

“the introduction of factors which directors are required to have regard to in discharging their duty under Clause 158 may also create new uncertainties for third parties. This is because a transaction entered into with a third party who has notice of a breach of a fiduciary duty by one or more of the directors relating to the transaction is voidable at the option of the company. This may result in third parties seeking an assurance that the directors have complied with this duty and have had regard to the factors listed in Clause 158(1).”

The Law Society then says that

“directors will be more exposed to actions for breach of duty, in particular following a takeover or in the event of the company becoming insolvent. An increase in the risk of personal liability is likely to discourage many individuals from taking up directorships of UK incorporated companies and is also likely to discourage those who do take up directorships from taking decisions which might give rise to personal liability in the future if they ultimately turn out to be detrimental to the company.”

It states that amendment No. 166

“would require the directors to consider only those factors which they, in good faith, considered relevant to the matter in question. Provided they acted in good faith, their decision on the relevance of a particular factor could not be called into question by the courts except to the extent that the directors acted in breach of their duty to exercise reasonable care, skill and diligence. This would meet what the Company Law Review described as its main concern in Paragraph 3.19 of Completing the Structure published in November 2000. In the absence of an amendment to this effect we believe that there is a significant risk that those incorporating companies to carry on business in the UK may choose to incorporate them in a jurisdiction with a less onerous regime.”

James Brokenshire (Conservative, Hornchurch)

My hon. Friend makes a persuasive case about the uncertainty that would be caused by the changes proposed in the clause. Would he care to comment on the direct cost that may be attributed to companies, particularly in seeking to obtain insurance for directors and officers in relation to such provisions? Will the uncertainty have any impact on the premiums that may be charged to such companies in those circumstances?

Jonathan Djanogly (Conservative, Huntingdon)

As always, my hon. Friend makes a pertinent point. Yes, areas of additional cost will certainly arise. Costs will arise, first, in relation to additional advice that boards will need to take about whether they have covered the points in the list. There will be costs in relation, secondly, to documenting the steps that they have taken and, thirdly, to the additional claims that may arise and resulting litigation. Finally, there will be additional costs for insurance. I will speak more about that when we debate clause 161, which many companies and advisers have been saying will affect the costs of directors’ and officers’ liability insurance.

David Howarth (Liberal Democrat, Cambridge)

To stick to the provision before us and the possibility of increased insurance costs, can the hon. Gentleman tell me the likely loss to the company in the case of a takeover where the incoming directors try to proceed against the previous directors under the clause? I am struggling to see how any of the duties might be breached in a way that gives rise to a loss to the company, in which case there is nothing to insure against.

Jonathan Djanogly (Conservative, Huntingdon)

I gave two examples: a takeover and insolvency. In themselves the costs will not attach to the clause; they will attach to the clause in conjunction with other provisions, particularly under clause 161 and probably in relation to other sections in the Insolvency Act. Following a hostile takeover during which there was an uncomfortable situation between competing boards, the winning party might in the course of selling off the target’s headquarters and going through papers consider how they could recoup the costs of the takeover, and it would be attractive to the incoming board to have a go at the sacked directors of the target company.

David Howarth (Liberal Democrat, Cambridge)

The hon. Gentleman is correct that in such a situation there is an opportunity for the new board to look for possible legal remedies against the previous directors, and the risk under clause 161 seems exactly the same as it is now, in that that practice already happens. The question is what loss there might be to a company under clause 158 were such a directive to proceed. There cannot be a legal action in those circumstances unless there is a loss to the company. Can he specify what that loss would be?

Jonathan Djanogly (Conservative, Huntingdon)

I can think of 101 different ways in the takeover scenario that I mentioned in which there could be financial loss to the company where the incoming board maintains that it wants to recoup that loss from the outgoing directors. It will be looking for areas of alleged mismanagement.

Shailesh Vara (Conservative, North West Cambridgeshire)

My hon. Friend may agree that an example might arise during a property recession. It is foreseeable that following a takeover the new board might accuse the former board of not having paid due diligence to a property recession, and if the company dealt in property, the new board could seek to recuperate. That would lead to a financial loss—

Margaret Hodge (Labour, Barking)

That has nothing to do with it.

Shailesh Vara (Conservative, North West Cambridgeshire)

The Minister should appreciate that the hon. Member for Cambridge (David Howarth) asked for an example and I have given a business example.

Margaret Hodge (Labour, Barking)

It is nothing to do with clause 158.

Shailesh Vara (Conservative, North West Cambridgeshire)

It is; that is an example. If the board has not taken that into account, the new board can say that there has been a financial loss to the company and it can seek to claim for it. That loss can be infinite.

Jonathan Djanogly (Conservative, Huntingdon)

My hon. Friend makes a fair point. [Interruption.] His point is that history has shown that in an economic downturn people are more likely to become litigious and therefore in a takeover there could be more temptation to look to recoup. However, the point has been well covered.

David Howarth (Liberal Democrat, Cambridge)

The point made by the hon. Member for North-West Cambridgeshire (Mr. Vara) concerns clause 160: directors could sue because of a loss due to a breach of clause 160—the duty to exercise reasonable care, skill and diligence. The question is what losses could there be under clause 158?

Jonathan Djanogly (Conservative, Huntingdon)

Clause 158 would have to be looked at in the context of other provisions.

Margaret Hodge (Labour, Barking)

Ah.

Jonathan Djanogly (Conservative, Huntingdon)

Yes, but that does not make clause 158 any less of a worry.

Let us move on to concerns that have been raised that the list as currently drafted does not make clear the ranking of the factors to take into consideration. That is the reason for our amendment No. 43, which states that no one duty should take precedence over another. Is the first duty more important than the last? Are they subordinate to a director’s primary duty to promote the company’s success? If so, we believe that that should be made clear. As presently drafted it is not clear and will undoubtedly provide much grist for a number of court cases.

Many commentators have been asking whether we necessarily want to invite judges into the boardroom. The business community does not, as The Economist clearly sets out in its article of 21 April:

“Behind Lord Eldon's words is a neat principle, usually known in America as the business-judgment rule. This holds that so long as the directors of a company act in good faith then their decisions (even the bad ones) will not be revisited by courts with the benefit of hindsight. Directors who are dishonest get judged in court and those that are just bad are judged in the market place. Now a proposed revision of England's company law threatens to change this arrangement.

The Company Law Reform bill, which has its last hearing in the House of Lords on April 25th, proposes to charge directors with more than safeguarding the financial interests of the companies they serve. They will also have to keep in mind their employees, customers and suppliers, as well as nurture communities and the environment. And the bill makes it easier for shareholders to sue wayward directors.

Critics, generally from business, warn that together these revisions threaten to release a torrent of litigation as suppliers, customers, environmentalists and others ask the courts to reverse company decisions. The mere threat of such suits may gum up board meetings as directors pay more attention to protecting themselves from legal action and less to doing what they get paid to do—taking risky decisions that may sometimes prove wrong.”

The article concludes:

“The proposed duties are based on the notion that successful companies are also good corporate citizens, managed on behalf of ‘enlightened shareholders’. Under this doctrine there is a neat intersection between the desire of shareholders for a better world and their interest in corporate success, and reward flows to those companies that are most successful at balancing the needs of different stakeholders. But the approach bears little relation to reality.

Take tobacco and liquor companies. They supply products that, while giving pleasure, may harm their customers and others. Airlines provide convenient transport but also release greenhouse gases. Under the new law shareholders could potentially sue directors of these companies for disregarding their duty to protect the environment and the community. ‘You'll have the teetotallers taking over the brewery,’ warns Dan Prentice, a law professor at Oxford's Pembroke College.

The greater worry is that, in trying to legislate good behaviour, the bill may make business decisions subject to subsequent review in court, says Adrian Levy, a partner at Clifford Chance, a law firm. Directors will be less happy to sanction a takeover or restructuring knowing that they could suffer personal liability for honest business decisions. In effect directors may end up being held liable for decisions simply because they are wrong, rather than because they acted in bad faith.

If the bill passes, many think judges will continue to leave business decisions to businessmen. Judges ‘are no good at it and don’t want to take it on,’ says Paul Davies, of the London School of Economics. Perhaps. But mounting red tape is already deterring qualified people from accepting board appointments. If they now face the risk of being taken to the cleaners for business decisions made in good faith, even fewer are likely to step forward.”

There is a likely conflict between the factors listed in subsection (1). For instance, the long-term interests of a company may be best served by closing a factory, but this is unlikely to be in the interests of the company’s employees or the wider community.

Keith Vaz (Labour, Leicester East)

I am following the hon. Gentleman’s argument very carefully. Is he saying that he does not believe that the average company director in the United Kingdom would be competent enough to make such judgments?

Jonathan Djanogly (Conservative, Huntingdon)

No. A director under the existing common law must make many judgments. Commentators argue that the formulation of some of the judgments that they have to make under the clause could confuse rather than clarify the picture.

Margaret Hodge (Labour, Barking)

Does the hon. Gentleman agree with the commentators’ view?

Jonathan Djanogly (Conservative, Huntingdon)

Yes, I do agree with it. It is a great concern, which is why we propose the amendments. The Minister may not have been listening.

Keith Vaz (Labour, Leicester East)

If the hon. Gentleman were to put his arguments to the average company director in the United Kingdom they would be insulted by the view of these commentators. If directors take on the responsibilities, they will want to discharge them to the best of their ability. If they are given judgments to make, they will make them. May I suggest that the hon. Gentleman talk to some company directors, rather than academics, and put their views before us?

Jonathan Djanogly (Conservative, Huntingdon)

May I suggest that the hon. Gentleman should have listened to what I have said, which is exactly what he has just said?

According to Herbert Smith, a director

“will be required to give regard to all of these factors in every decision, even if a factor is plainly irrelevant and even if it would be outweighed by other considerations.

The new formulation poses a number of questions. What does it mean to ‘have regard’ to a particular factor? Can a director properly ‘have regard’ to a factor without full and proper investigation? What if the director decides not to investigate? Would the reasons matter?

What if a factor had been outweighed in the context of an almost identical recent decision? An example might be a proposal to vary a decision reached on a previous occasion, when the ultimate choice had come down to the balance between two considerations. On the second occasion, would the failure to have regard to all six factors amount to a breach?

What if the director is wrong about one of the factors? Have they nevertheless ‘had regard’ to the impact, rather than simply their erroneous perception of the impact? What if the director’s mistake is itself a breach of the separate duty to exercise reasonable care, skill and diligence?

There is no clear answer to many of those questions. Assuming the bill is passed, they will require detailed consideration by the courts over forthcoming years. It will be some time before any certainty is achieved.”

The communication from Herbert Smith goes on to talk about derivative actions. Although that is in part 11, it establishes an important connection with clause 158. The communication states:

“Any uncertainty will be exacerbated by reforms expanding the scope of the derivative action. The Bill replaces the restrictive ‘wrongdoer control’ and ‘fraud on the minority’ preconditions with a general discretion for the courts to allow such claims to proceed. There is a list of considerations that must be taken into account by the court in exercising this discretion. Even so, the discretion is very broad.

The new provisions may mean that derivative actions become a more common feature of the corporate landscape. They will almost certainly provide a means for a disaffected shareholder to seek further public debate about the merits of a challenged decision. As the court has a general discretion, companies may well feel compelled to justify the substance of their decisions to the court, rather than simply focusing on why this applicant should not be permitted to bring the claim.

In the short term, the likely consequence of all these reforms will be an increase in the procedural requirements of decision-making as directors strive to ensure that they have records reflecting proper consideration of each factor so as to minimise any prospect for challenge by means of the derivative action or otherwise.

Even so, the result is likely to be more breaches by directors, many of which will be largely technical. This may have consequences in terms of reporting and insurance. It may also trigger contractual provisions, perhaps in joint ventures or financing arrangements.”

Louise Ellman (Labour, Liverpool, Riverside)

The hon. Gentleman’s comments seem to disregard the fact that the clause deals with judgment exercised in good faith having regard to the factors to which he appears to take objection.

Jonathan Djanogly (Conservative, Huntingdon)

The fundamental problem with the Bill is that it clouds the directors paramount duty to consider the best interests of the company. That is the kernel of the issue.

The other duties are all important, as I made clear, but the fundamental responsibility of a director is to the best interests of their company. All other responsibilities spring from that fundamental duty. By clouding that duty, the Government will do a great disservice to company law and directors for decades to come. That is why we have tabled amendment No. 165, which states:

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

There are a number of concerns about the interpretation of the new language that the Government have chosen to introduce to the Bill. For example, what does “independent judgment” mean for a director? That was taken up by Patrick Mitchell and Carl Powlson of the City law firm Herbert Smith:

“There is an unfortunate mixture of subjective and objective standards in this section. The first part of section 158(1) “A director of a company must act in the way he considers, in good faith...” is a subjective test as is the case under the current common law, whereas the test set out in the remainder of section 158(1) “...and in doing so have regard (amongst other matters) to...” is an objective test, which would allow a court to find that a director had breached his duty even if acting in good faith. By introducing this objective requirement into directors’ decision making processes, courts may increasingly be asked to intervene on issues currently treated as matters for directors’ judgement.”

I think that they make an important point.

The law firm, Linklaters, has raised concerns also about the use of the word “success” in the clause. Does it differ from the term “best interests of the company”? There is no case law on the matter. The report that Linklaters has provided covers all the duties of directors, and I feel that hon. Members need to listen to what the legal professionals have to say. The Linklaters report of February this year states:

“Almost since the beginning of the law of companies, it has been clear that directors had a duty to act in the best interests of their company as a whole. Over time, this duty has been developed and expanded, but always in court, never in a way accessible to the thousands of directors who run small private companies.

Following one of the key recommendations of the Company Law Review, the Bill seeks to take the current state of the common law on directors’ duties and put it in statutory form, with the intention of making these duties clearer and more accessible... However, effective codification of such a complex area of law is not easily achieved. In particular... it risks creating a more rigid and restrictive regime, compared with the ability of case law to apply and develop established principles in a way that distinguishes between different situations and circumstances... the Bill uses new wording to describe the existing duties, and it is not clear whether the courts will be able to interpret the new wording in the same way as the old principles that it replaces. Thus codification creates areas of uncertainty... the statement of duties does not cover all of the duties a director may owe to a company, for example the duty to consider the interests of creditors in times of threatened insolvency. To that extent, the objective of making the law more accessible to directors is not achieved, since it will still be necessary to refer to other statutory or common law duties apart from those set out in the Bill.”

The report goes on:

“The statutory statement of directors’ duties is intended in general to be based on, and not to alter but to replace, common law... Yet, somewhat paradoxically, the Bill provides that ‘regard shall be had to the corresponding common law rules and equitable principles in interpreting and applying the general duties.’... Thus, it will be necessary to refer to the existing historic body of case law to understand the new provisions. Quite how this is supposed to work where the statutory codification and common law/equitable rules and principles do not ‘correspond’ is inevitably a matter of uncertainty.”

It continues, but the point has been made.

There are concerns about the pluralist agenda, an issue that is important to many hon. Members. We are concerned that as drafted, and certainly as proposed in amendment No. 300, the clause would allow company law to become the arena for a number of interest groups to further their causes at the expense of the best interests of a company.

Corporate social responsibility is now taken more or less seriously by all the larger companies based in this country, and it is generally agreed that it is only good business sense for them to do so. The Conservative party has shown how highly it values corporate responsibility. We support social responsibility in companies and believe that companies, in preference to the state, can be a positive driver of environmental and social change. In fact, we in the Conservative party have placed increased corporate responsibility at the top of our agenda.

Margaret Hodge (Labour, Barking)

If the hon. Gentleman is sincere in what he has just said, which I do not doubt, why does he oppose any mention of it in the clause?

Jonathan Djanogly (Conservative, Huntingdon)

I hate to bring this to the Minister’s attention, but there is no mention of corporate social responsibility in the clause. I am addressing the implication of the clause for that matter.

Margaret Hodge (Labour, Barking)

That is not a fair response, because the elements that the hon. Gentleman has just criticised—[Interruption.] I do not know how he defines corporate responsibility; perhaps he will tell me. The elements that he has just criticised—subsection (1)(a) to (f)—are crucial to any understanding of a corporate responsibility agenda. The long-term consequences of decisions; the need to foster relationships with suppliers, customers and others; the impact of a company’s operations on the community and the environment; and the desirability of maintaining high standards of business conduct are elements of a corporate responsibility agenda. If he has a different understanding, I do not think that anybody, except perhaps members of his party, shares it.

Jonathan Djanogly (Conservative, Huntingdon)

In themselves, those are elements of corporate responsibility, but I have just spent some time explaining their legal context. The Minister is asking me to develop my point and I hope that she will allow me to do so.

Margaret Hodge (Labour, Barking)

In the interests of having a fair debate, I say that the hon. Gentleman has now conceded that the elements listed in the clause are those that he understands make up our common understanding of corporate social responsibility.

Jonathan Djanogly (Conservative, Huntingdon)

No, I did not say that.

Margaret Hodge (Labour, Barking)

That was what the hon. Gentleman said when I read out the list. I shall read it out again if he so wishes. He said that those were the elements that he understood. I then asked him a question: if those are the elements that help to constitute an understanding of corporate social responsibility, which he claims he and his party support, why does he oppose their inclusion in the clause?

Jonathan Djanogly (Conservative, Huntingdon)

The Minister must not have been listening to what I have been saying for the past hour. In themselves, those are elements of corporate social responsibility.

Margaret Hodge (Labour, Barking)

But we must not have them in the Bill.

Jonathan Djanogly (Conservative, Huntingdon)

There are many other elements of corporate social responsibility that are not mentioned in these measures. I have explained how that in itself will induce confusion. If the Minister will allow me, I shall develop this point because it will be of interest to her, and I shall be interested to hear how she can reply to me in the round.

The Conservative party aims to be what my right hon. Friend the Member for Witney (Mr. Cameron) called “a critical friend” to big business. In a strong speech to Business in the Community on 9 May, the leader of the Conservative party set out our attitude to business and corporate social responsibility. However, we are also arguing that the Bill is not the place in which to legislate, placing unnecessary general mandatory burdens on the directors of all UK companies. Such measures will not just lead to uncertainty and the fear of litigation; they will set back the agenda that this party supports.

Corporate social responsibility is very important, but there are a number of reasons to be wary of non-specific mandatory obligations.

Louise Ellman (Labour, Liverpool, Riverside)

If the hon. Gentleman is as concerned about business social responsibility as he claims, and he does not wish it to be included or defined in the Bill, where would he like it to be defined?

Jonathan Djanogly (Conservative, Huntingdon)

The hon. Lady pre-empts what I am about to say. What are we talking about? What is of concern to most campaigners? We are talking about the type of campaigner who has written cards asking for a more pluralist approach to the Bill. I want to spend a little time identifying some of the larger campaigns, many of which are undertaken by pressure groups that have been lobbying the Government and the Opposition for some time to include mandatory and sometimes almost punitive obligations in the directors’ duties in the Bill.

I shall give a few examples of those campaigns: the campaign against NestlÃ(c); the Greenpeace campaigns against Cargill, Kentucky Fried Chicken, and McDonald’s; the campaigns against Asia Pulp and Paper, Asia Pacific Resources International Holdings Ltd, ExxonMobil, Bayer and Lafarge, which wanted to turn the mountains of South Harris into aggregates for road building; and the campaigns against Alstom. I think that hon. Members get the picture. Those are some of the largest campaigns that have been doing the rounds in recent times.

As hon. Members are aware, there are many campaigns to improve environmental and social conditions around the world—the list that I have given only scratches the surface. From the pluralist viewpoint, there is a problem with all this: not one of the companies that I mentioned will be affected by the Bill. Why? Because every single one is not a UK company, and only UK companies are affected by the Bill.

I shall be frank. We can make our company law regime as rigid as we want, but it will not matter a jot to those foreign companies and will therefore not go an inch in helping to further any of those campaigns. Most major multinational companies that are UK listed, such as BP, already take CSR very seriously and spend considerable time and money on it.

The clause ignores the fact that many publicly listed companies sell themselves on their CSR reputation, BP being a prime example. More and more shareholders are realising that they can exert a positive influence on the companies that they ultimately control. The rise in green and ethical investment funds operated by most of the major fund managers has made them clearly aware of that. It is now simply bad business for a major plc to ignore CSR, as the following statement from an article in the Financial Times of 21 April makes clear:

“Corporate governance is becoming increasingly important to European investors, according to a new survey.

Jean-Nicolas Caprasse, managing director of Institutional Shareholder Services Europe, the proxy voting service, said: ‘Although to date, continental European investors have lagged behind their counterparts in North America and the UK in terms of the priority they place on corporate governance, this study shows that attitudes are clearly changing.’”

The article goes on to show how things are changing in Europe, as well as in the United Kingdom.

Of the rest of the companies that will be affected by the Bill, the vast majority—probably more than 90 per cent.—are small and medium sized. Such companies, which are rarely the target of environmental or social campaigning, have enough troubles as it is, without being asked to jump through a series of new statutory hoops.

The problem is that the Bill deals with UK companies and does not provide the framework to deal with the issues on which most people have campaigned. It treats the English corner shop in the same way as the British multinational, and it is the wrong place to deal with the issues before us, important as they may be. We have therefore tabled amendment No. 40, which notes that the duties should be

“appropriate for the size of the company”,

and amendment No. 40, which would exclude small and medium-sized companies from the provisions.

It is worth considering that if CSR is made statutory, as some hon. Members wish, UK companies would be less able to compete in the global marketplace. Increasingly, we are seeing the emergence of powerful multinational companies, which are becoming direct competitors to UK companies. India’s Tata bought Tetley, Hong Kong’s Cheung Kong Infrastructure Holdings Ltd. is a potential bidder for Thames Water, and the only potential saviour following the Government’s fiasco over Rover was a Chinese company.

The Corporate Responsibility Coalition has taken an active interest in the Bill, because it regards company law as the correct vehicle to deal with the wide range of issues that its umbrella group encompasses. Those groups are important stakeholders, and I was pleased to meet them to discuss the Bill. It is right that I should put forward their views. They say:

“CORE and the Trade Justice Movement recognise that many UK companies take their environmental and social responsibilities seriously and play an important role both here and abroad though job creation, innovation and technological development. However, as the above examples demonstrate”—

CORE had given a lot of examples—

“left to their own devices some companies seek to minimise their costs and maximise their profits by taking shortcuts on health and safety and environmental protection and failing to respect the basic rights of their workers and the local communities affected by their operations.

UK company law is the only framework that sets the overarching terms of reference for UK companies, including the role and priorities of company directors. Following the longstanding campaigning of our members to expose and rectify examples of corporate abuse, we no longer believe that the current legal framework is adequate to prevent irresponsible behaviour by UK companies. Legal measures are needed to set basic minimum obligations for directors and their companies in relation to their environmental and social impacts so as to ensure that UK business makes a positive contribution to the major global challenges we face this century, including global poverty and social injustice, unsustainable development, and climate change.”

The examples of India and China show that as we move into an increasingly international marketplace, we will have to compete with companies that come from an economic climate in which CSR is not often taken into account, let alone put on the statute books. The Government’s attempts to burden every UK company with a series of extra boxes to tick show that they have no concept of the true nature of the global marketplace. As Indian and Chinese companies reach around the world and the economies of those countries grow, should we really be tilting the playing field in their favour by making our company directors adhere to these extra regulations? If we are not careful, even more of our entrepreneurs will pick up sticks and reopen in China. That is happening now—it is not me speculating.

The UK should be the world leader in promoting good corporate responsibility in companies. Where we lead, other companies will follow. However, the answer to the question of how to lead the way on CSR is not to impose a heavy regulatory burden on our companies, but to encourage investors to take into account a company’s record on CSR and to encourage all the companies in the UK to understand that being socially responsible is in their best interests. I have no doubt that CSR will be moved ahead by market forces. Consumers voting with their feet will always be a more effective way than regulation of getting companies to take up their CSR responsibilities.

It is also important to consider just how damaging an over-regulated company environment can be. The strict regulatory environment that now prevails in the United States has led the US Chamber of Commerce to warn that the US could lose its leading position in global capital markets. Our companies are steadily falling from their position as the most competitive in the world and to rest on our past laurels would be fatal. At a time when our competitors, including those in Europe, are waking up to the dangers of over-regulation, we should not go down the regulation route ourselves. Over recent years there has been a plethora of often individually small changes that have heightened the regulatory environment for directors in the UK.

One impact has been the switch of companies from the London stock exchange to the alternative investment market exchange. There has also been a significant increase in moves to company de-listings and venture capital and management buy-outs. As company directors and investors have become increasingly wary of the additional regulations and structures imposed on listed companies, to impose even more costs and burdens on UK company directors would do nothing to further the course of UK plc. In fact, by imposing further burdens on UK company directors there are fears that the right people will be discouraged from becoming company directors in the UK.

Particular concerns have also been expressed about directors of smaller companies who will bear the brunt of further regulation. The Government have said that one of the Bill’s aims is to help smaller companies. This is one example of that aim being completely off target. I shall read from a letter to the editor of the Financial Times, dated 6 January. It says:

“The impact will fall unduly on the smaller sector. Also the likely consequence of 158...is that there will be an increase in the length of minutes and to a large extent those minutes will develop a standard format. The effect will be a waste of resources, including cost for no real benefit to UK plc. Even if the government does not accept it is wrong for company law to be used to regulate the environment—that should be left to environmental legislation—it ought to accept that the wording of the code needs to make it clear that the factors in 158...are subservient to the prime duty of a director to promote the success (or interests) of the company”.

There is no doubt in my mind that increased corporate regulation will do nothing but hinder our economy. When all is said and done I tend to agree with James Palmer, a partner at Herbert Smith, who chairs the City of London Law Society’s law sub-committee, and who is reported as saying on 30 March that this is one area of company law where,

“we actually we didn’t need much change”.

Patrick Hall (Labour, Bedford)

I shall speak to amendment No. 300 and new clause 27 in the name of my hon. Friend the Member for Newcastle upon Tyne, Central (Jim Cousins), who for health reasons is no longer a member of the Committee. I have also signed the two submissions.

I would like to make it clear that I welcome the recognition in this first ever statutory statement of directors’ duties that, in fulfilling their primary duty to promote the success of the company for the benefit of its members, directors must have regard to a number of factors, including the interests of the company’s employees and the impact of the company’s operations on the community and the environment. Having said that, I share the concerns expressed by some commentators, such as the Corporate Responsibility Coalition—CORE—and the Trade Justice Movement that, contrary to what we have heard from the hon. Member for Huntingdon, the Bill does not go far enough in addressing the issue of corporate accountability.

As currently drafted, clause 158, welcome though it is, is unlikely to lead to a sufficient improvement in the social and environmental performances of UK companies as a whole. It may be worth mentioning that the two coalitions to which I have referred include all the major UK environmental development and human rights organisations as well as a number of trade unions, businesses and faith-based groups. In total they represent more than 100 organisations and approximately 9 million members.

The key argument is that all UK businesses should become more accountable for their wider impacts on communities and the environment, and the Bill represents a real opportunity to advance the same through the provisions on social and environmental reporting and on directors duties. I am not asking for something new; the best companies do that already. It is an important part of how business operates throughout the world and in this country.

Businesses take their social and environmental responsibilities seriously. British business is more often than not a force for good, as the hon. Gentleman said. It creates jobs here and overseas, and it is responsible for innovation and technological advance. My argument is pro-business. It looks for a high-standard level playing field where the good are not undermined by the bad. There are many examples of bad practice at home and overseas, although I shall not go into detail as they were mentioned on Second Reading in the House and in the other place.

Part of today’s debate involves the consideration of directors duties that took place in the company law review, which reported to the Government exactly five years ago. It considered a number of approaches, including the so-called pluralist approach to directors duties. Such an approach would require directors to balance shareholder interests with those of a company’s other stakeholders, such as employees, consumers and the wider community in which the company operated, including overseas.

The Government have rejected that pluralist approach in favour of an alternative, which has already been mentioned, known as enlightened shareholder value. Many see it as integral to the idea of corporate social responsibility, so I was confused when the hon. Member for Huntingdon seemingly rejected it while espousing corporate social responsibility. The clause articulates enlightened shareholder value. It clearly means that the promotion of shareholder interest remains the central priority for company directors, and it relegates other considerations, valuable though they are, to secondary status.

I acknowledge that the introduction of a pluralist approach to directors duties would be radical and one which, in light of the Government’s position on the company law review, we could not reasonably have supported or achieved in the Bill. However, I also share concerns that enlightened shareholder value relies excessively on the voluntary approach—voluntary action by companies to improve their impact on wider stakeholders and the environment. Many volunteer, and they do that well while being profitable. Some argue that if a company embraces a wider set of interests, it is more likely to succeed. Others do not.

The voluntary approach is considered inefficient in dealing with some of the worst examples of corporate social and environmental abuse throughout the world, and its weaknesses have been highlighted in several reports from leading international organisations, including the Organisation for Economic Co-operation and Development and the World Bank. Amendment No. 300 would respond to those concerns by strengthening the clause so that directors, in fulfilling their primary duty to promote the success of the company for the benefit of its members, were required not to have regard to the interests of and impacts on the company’s wider stakeholders and the environment, but to have a positive duty in relation to them. In short, directors would be required not to have regard to the factors in subsection (1)(a) to (f), but to endeavour to act on each of them.

David Howarth (Liberal Democrat, Cambridge)

To whom would the duties be owed?

Patrick Hall (Labour, Bedford)

The duties would be owed primarily to the shareholders and members of the company who would be able to raise the issues. The company would be asked to look beyond the sole prime duty of maximising profit, which good companies do, and would send a message to the wider public and society in which it operates.

Amendment No. 300 seeks to ask shareholders, in fulfilling the company’s primary duty to maximise profit, to require directors actively to take steps to minimise any adverse impact on communities and the environment. Similarly, directors would be required actively to promote the interests of their employees rather than simply having to have regard to them.

A similar amendment was tabled by a cross-party group of Lords in the other place and the Attorney-General, Lord Goldsmith, expressed concern that that would point directors in two directions at once. That is certainly not the intention of amendment No. 300. The duty that the amendment would introduce would sit within the framework of enlightened shareholder value and the primary duty of directors would still be to promote the success of the company for the benefit of its members. The proposed positive duty would be secondary to that. It is important to stress that, because there seems to be a great deal of confusion and fog around these matters, which are important to us and people throughout the world.

If there were conflict between the primary duty to promote the success of the company and the positive duty to the company’s wider stakeholders, the duty to shareholders would take precedence. The difference between the requirement to have regard to the interests of and the impact on the company’s wider stakeholders—that is what the clause requires—and the requirement in amendment No. 300 for directors to endeavour to act positively in relation to those factors is important, but it is one of emphasis, with the latter requirement being more likely to lead to real improvements in corporate, social and environmental performance. I do not believe that that would be a burden—some companies are already doing that or considering moving more in that direction—and I do not believe that directors would find that too much of a difficulty to take on board and to seek to put into practice.

A requirement that directors have regard to a range of other factors while fulfilling their primary duty provides no obligation for directors to act on the information, but the proposed positive duty “to endeavour” to do so would encourage them to be proactive in their consideration of the environmental and social impact of their business.

James Brokenshire (Conservative, Hornchurch)

The hon. Gentleman is making an interesting point about the need to ensure that we protect the environment, although I believe that it could be addressed in a different way. His amendment states that a company should

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

Would he concede that in certain circumstances that might mean that a company would have to stop trading, full stop? For example, a company involved in waste management and landfill may be carrying out a valuable service, but it could not say 100 per cent. that it minimised the effect on the environment, so to comply with the amendment it might have to stop trading.

Patrick Hall (Labour, Bedford)

No, I do not see that, because a company trading in that sphere would have to comply with other law and would do so without difficulty. If the directors wanted to raise the game above the minimum standards set by the law in terms of the issues that the hon. Gentleman used as an example, obviously they would do so provided that it did not lead to a loss by the company. The fact that there would be extra pressure on them to raise their game and improve their performance is surely good rather than bad.

James Brokenshire (Conservative, Hornchurch)

The hon. Gentleman makes a valid point about standards coming from other legislation. Does he agree that, practically, that is the most effective way to deal with the issue, rather than relying on the more general and vague language of his amendment? Obviously, the minimising provision in paragraph (d) has to be read separately. Minimising any adverse impact overrides and overarches statutory provisions elsewhere, and it might have the effects that I have already highlighted.

Patrick Hall (Labour, Bedford)

I do not think that it would have that impact. It would focus the board on the need to address those issues, not necessarily only because there is another statute. Of course any responsible company must comply with the law. My proposal would bring the issues more into the ethos of the company and put them firmly on the agenda. Indeed, in order to continue being successful and to become even more successful, it would encourage a company to address such issues better if it could do so.

That is an important signal to give to all companies, not just the sort of company to which the hon. Gentleman referred. I do not think that there is a size issue. Conservative Members have tabled a number of amendments that seek to limit the application of these matters to large companies. Small and medium-sized enterprises can have as many as 250 employees as I understand it. That is a vast percentage of business in this country. Saying that they should be exempt is the wrong signal to send. I am talking about encouraging directors to be proactive.

Louise Ellman (Labour, Liverpool, Riverside)

Does my hon. Friend accept that his proposals would give a stronger focus to issues of corporate social responsibility which would be entirely compatible with the more general measures recommended by the hon. Members for Hornchurch (James Brokenshire) and for Huntingdon? If their measures went forward on their own without any focus in company legislation, the impact of corporate responsibility would be diminished.

Patrick Hall (Labour, Bedford)

There is a contradiction in the position that has been taken by the Conservative party on this issue. It is important to recall that at the recent local elections your party, Mr. Bercow, went to the country on the ticket, “Go Green, Vote Blue”. Some of the confusions about the green element of that have been revealed in Committee today. We are all talking much the same language—we are using phrases such as “corporate social responsibility” and I am pleased that there is all-party consensus about that, but we must not leave it entirely to chance and allow individuals to say, “OK, we’ll do a little bit more about this, that and the other.” There is nothing wrong with trying to set a fair, achievable, level playing field, which is pro-business, rather than rewarding those who cannot be bothered to raise their game and leaving it just to the market for those who are more responsible in that regard.

Shailesh Vara (Conservative, North West Cambridgeshire)

I understand where the hon. Gentleman is coming from but does he not feel that there needs to be some specific guidelines as to what is meant by, for example,

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

in subsection (1)(d)? They are such broad terms and so general that there will be the potential for litigation. The perception of what is in the best interests of the community and the environment can differ from one individual to another.

Patrick Hall (Labour, Bedford)

I will come to new clause 27 shortly. It addresses the guidance and its status in terms of interpreting such words. As far as litigation is concerned, nothing in the Bill or in any of the amendments with which I am associated makes any difference to the current situation. We are trying to encourage the raising of standards and a voluntary focused requirement to examine issues in the operation of companies other than just maximising profit. We want directors to be proactive and to seek to mitigate or remove adverse social and environment effects.

The term “having regard to” will create a subjective test, based on the personal judgment of a director. The proposed wording in amendment No. 300, “must endeavour to”, would lead to an objective test. There would need to be evidence of directors seeking to carry out the additional duties, even if they were unable to. Such duties are now on the agenda, either on a voluntary basis under the clause as drafted or in a slightly stronger way as proposed in amendment No. 300.

The amendment would make no difference to the way in which a director’s duties are enforced and, as I have said, it would not lead to an increased risk of litigation. It is intended to provide a stronger signpost for directors on the type of behaviour that is likely to lead to success for their companies in the long term, and to provide protection for directors who act responsibly and seek to raise the standard of their companies’ performance by broadening what they do. That would protect them from shareholders who say, “Well, the only thing you’re here for is to maximise profit.” That is another matter of long-term interests and responsible behaviour.

The stronger emphasis on action that amendment No. 300 would deliver would encourage a more active approach by directors to the social and environmental impact of their businesses. It would therefore be more likely to lead to real improvements in the social and environmental performance of poorly performing companies and create a more level playing field so that the many UK companies that take seriously their social and environmental duties are less likely to be undercut by less scrupulous competitors.

To ensure that there is no confusion on what the clause requires of directors, new clause 27 would introduce a requirement of the Secretary of State for Trade and Industry to publish statutory mandatory guidance on how the duties in clause 158 should be interpreted. That guidance would help directors to understand in practical terms what the enhanced duties will mean for them, and it could be updated freely and easily.

A similar proposal was tabled in the other place, in response to which the Attorney-General committed the Government to publishing non-statutory guidance on the statutory statement of directors’ general duties in clause 158 and to consulting relevant parties. I look forward to confirmation from my right hon. Friend the Minister that that is still the position. I welcome that commitment, but the benefits of amendment No. 300 in corporate social and environmental performance would be likely to be maximised if there were a stronger incentive for directors to comply with guidance; that is, if it were statutory, mandatory guidance. In the face of statutory guidance, compliance indicates compliance with the law, but if the guidance is voluntary and non-statutory, directors will be able to pick and choose whether to comply. Mandatory guidance is therefore more likely to lead to the responsible corporate behaviour and long-term business success that we all hope for.

Finally, I know that my right hon. Friend the Minister takes a close personal interest in the matter and that she has had a lot of discussions with a number of people including, briefly, myself. I also know from our discussion last week when she, I and a small band of others voted on the title of the Bill in clause 923, that she is one of a small number of true reformers in the Committee. That being so, although we lost the vote on that occasion, we can put it right today with her assistance. I look forward to the comfort that she will give to a fellow reformer when she comes to make helpful remarks in response to the debate.

David Howarth (Liberal Democrat, Cambridge)

The proposals are of great importance, but I fear that I will deliver a somewhat hard-nosed legal speech. A lawyer once told me that the main thing that someone has to remember if they are told that there is a risk of litigation is to ask two questions. The first is: who is the plaintiff? The second is: what is the loss? If there is no plausible plaintiff and there is no loss, there is no risk of litigation, so do not worry.

We need to be clear about who will be suing for what. We must go back to clause 156 to see the fundamental liability regime that we are dealing with. It has established that the duties concerned are duties “to the company”. The duties are not to the shareholders. It is a common misapprehension that shareholders are the same as the company. They are not. The company is a structure of rules that allows certain people in certain circumstances to make decisions about the assets that the company holds. The company is, in effect, a bank account and a set of rules that establish who can take money out of that bank account in what circumstances.

A key point to remember about companies is that usually the directors are in control of the company, and they represent the company for the most part in company law. Article 70 of table A in the Companies (Tables A to F) Regulations 1985 states:

“the business of the company shall be managed by the directors who may exercise all the powers of the company”.

The belief that the company is somehow the shareholders goes back to the 19th century, but it has not been true in practice for a long time.

However, sometimes the shareholders are in charge. Article 70 allows a supermajority of shareholders—75 per cent., by special resolution—to give directions to the board. We are not talking about a mere majority, although an ordinary majority can remove a director at any time, and we just reaffirmed that principle in clause 154. Some other actions require votes by the shareholders as opposed to votes by the board of directors, and when we reach chapter 4 of this part we will see a few examples of those.

Majority shareholders are therefore in a powerful position, but they are not the same as the company itself. When the company becomes insolvent, for example, the creditors take control through the administrator or liquidator. What matters for the purposes of the discussion we are having on clause 158 is who can speak on behalf of the company in the relevant circumstances and who can sue on its behalf. That is what determines what counts as “the company” for the purposes of the clause, and that is who is the plaintiff.

There are basically four possibilities. The first is the board. For the most part, however, directors owe their duties to the board, because it decides when the company will take legal action against anybody. The second possibility is that in some unusual circumstances shareholders can begin legal actions. Almost always a special resolution involving a 75 per cent. supermajority of shareholders can do that, and there are some circumstances in which the majority of shareholders can take legal action on behalf of the company. The second possibility therefore involves the directors and the majority of shareholders, although that will more often be a supermajority than an ordinary majority.

The third possibility is of minority shareholder legal actions. Under existing law, that happens under the very rare exceptions to the rule in Foss v. Harbottle. That is being replaced by statutory derivative action in clause 243 and subsequent clauses, which is fortunate because we will not all have to know the exceptions to the rule in Foss v. Harbottle. If we read those clauses, however, we see that it is not at all easy to get a derivative claim going against the wishes of the majority of shareholders. Clauses 243 and 246 in particular make it clear that the likelihood of ratification by the shareholders, particularly independent shareholders who are not involved in the dispute, is a key factor in determining whether a derivative action should continue. If we want to know what ratification is, we go to clause 222, which tell us that it can be done by a majority of shareholders. It turns out, therefore, that minority shareholder action will be very rare. In a sense, it is just a minor variation on the second option, which is action by the majority of shareholders. It will come into use when the majority is a majority only because of the votes of a particular shareholder, who will be the person whose actions are in dispute. In those rather rare circumstances, the derivative action might come into use in court.

The fourth option, which will be by far the most important in practice, involves the liquidators who act on behalf of an insolvent company. When a company goes broke, as the hon. Member for Huntingdon said, the creditors take over, and their representative collects all the money that is owing to the company, which might include suing past directors for breaches of their duty.

How likely are such legal actions to take place in reality? As the hon. Gentleman mentioned, it is only during a takeover that there is any prospect at all of the board of directors or the majority shareholders using the clauses to bring legal action against a director. That is because, in the ordinary course of business, they have far better remedies than suing under those clauses. They can remove the director at any time under clause 154, for example, and the threat of dismissal is far more effective than the threat of legal action. Aside from takeover cases, therefore, we are really only talking about the threat of legal action by the liquidator.

We now come to the important point that I tried to raise in interventions on the hon. Gentleman. We have established that some people, such as the liquidators or the new board after a takeover, might occasionally be in a position to sue. The question, however, is what the loss is. It must arise from the breach—otherwise, there is nothing to sue over—but it is difficult to imagine a breach purely of clause 158 by a director giving rise to a loss to the company, and we should remember that the loss must to the company, not to anyone else. That is why the hon. Member for Bedford (Patrick Hall) was right to say that the clause is about enlightened shareholder value, not pluralism. A pluralistic approach would allow other people to sue on the basis of losses to them. Here, however, it is only losses to the company that count.

One can imagine circumstances in which the company might incur losses because it had neglected environmental legislation, been subject to a massive fine and gone into liquidation. However, clause 158 does not seem to add to that risk because it would be an action under clause 160 “Duty to exercise reasonable care, skill and diligence”. So I cannot see clause 158 adding to the risk of litigation.

Shailesh Vara (Conservative, North West Cambridgeshire)

I would welcome the hon. Gentleman’s comments on clause 158(1)(a), which states:

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

As I read it, that will have an impact on a loss. Decisions can be taken in any manner; it is a broad spectrum. If a board of directors takes decisions that prove to be commercially wrong in the long term, will that paragraph not provide room for them to be sued?

David Howarth (Liberal Democrat, Cambridge)

I am not sure that that is the case because the clause also reads:

“in the way he considers, in good faith”.

All the duties are then expressed in that way. In any case, presumably, that would be subject to the standards in clause 160. I cannot understand how that adds anything extra to the problem that directors will have anyway under clause 160 when making decisions that turn out to be bad. Usually, in those circumstances, the law helps directors. It treats them as reasonable people and asks, “Did they act reasonably?”, not, “Did they act perfectly?”

I come to the real effect of the clause. This is a slightly paradoxical argument, but it seems that the clause is deregulatory and will protect directors. We must go back to section 309 of the Companies Act 1985. It allows directors to have regard to the interests of employees. The cases that arise under that section are not about directors who fail to have regard to the interests of employees, but rather the opposite—cases in which the director does have regard to their interests, but the successful takeover bidder objects to that because it results in the company losing money.

Let us take a well known example: the decision of Mr. Justice Hoffmann, as he then was, in the re Welfab Engineers Ltd case, in which the liquidator alleged that, faced with the prospect of insolvency, the directors wrongly sold the business for less than the maximum amount that it might have fetched at auction. The directors did that because they thought that the highest bidder wanted only the company’s property and would asset strip the business. They preferred the second bidder who promised to carry on the company’s business and preserve employees’ jobs. The liquidator claimed that that decision caused a loss to the company.

The court—Mr. Justice Hoffmann—agreed with the directors on the grounds that section 309 allows directors to have regard to the interests of the employees and therefore that the decision was not illegitimate. That is why the clause is a protective deregulatory clause. In effect, it extends the protection offered by section 309 in those circumstances from simply directors who have regard to the interests of employees to a whole host of other circumstances, including the environment. So a director who has regard to the interests of the environment, but in doing so gives rise to a loss to the company, can say to the liquidator or the successful takeover bidder, “I acted legitimately and you cannot sue me personally in order to recover that loss.”

James Brokenshire (Conservative, Hornchurch)

I have been listening carefully and avidly to the hon. Gentleman’s detailed comments and legal analysis. Does he accept that section 309 said that the company should have regard to the interests of its members and employees, and almost puts them on a level playing field, whereas clause 158 emphasises the regard to the success of the company, and then to certain subservient interests? Does he accept that there is a difference, and that it might lead to different interpretations, such as the one at which Lord Hoffmann arrived in the case to which the hon. Gentleman alluded?

David Howarth (Liberal Democrat, Cambridge)

I do not think so. I would have to go back to the details of the case, but my memory is that the judge assumed that there was an overriding duty to the members, but thought that the clause allowed some regard to the interests of employees. In effect, that is what clause 158 says. There is no risk in a clause 158 case, if we may call it that, of any variation from the approach that Mr. Justice Hoffmann, as he then was, took in the Welfab case. The approach would be the same, because Parliament’s intention seems to be to create that protection.

The clause is deregulatory. It reduces the amount of legal pressure on directors. This is an empirical matter and a question of how we judge the risks. On one hand, there is the remote risk that breaches of clause 158 would be used as the basis of legal action. I cannot see how that would happen. I suppose that in unusual circumstances it might, but the risk is remote. On the other hand, there is the risk of an action by a liquidator, acting on behalf of creditors whose interests are short-term, against directors who have acted on behalf of employees and the environment for the long term. That is a greater risk and that is why, on balance, the clause is deregulatory.

Jonathan Djanogly (Conservative, Huntingdon)

Is the hon. Gentleman suggesting that the irrelevance of the clause means that we should not be bothered about it?

David Howarth (Liberal Democrat, Cambridge)

Certainly not. It is legitimate for company law to offer directors that protection. The issue comes down to what we think is the purpose of company law. Some people say that it should maximise the value of companies for shareholders. However, shareholder value is only an interest. The question is whether shareholder value maximises aggregate social welfare—whether it is for the good of everyone.

My mentor on such matters, Professor Henry Hansmann of Yale law school, provides an example. He said that corporate law would be very unattractive if it allowed shareholders to gain $1 for every $2 that they took from creditors and employees. It would not maximise aggregate social welfare. The question is whether the provisions help to maximise aggregate social welfare as opposed to mere shareholder value.

The notion of enlightened shareholder value is admittedly a bit of a fudge, but it provides a useful exercise in making company law take account of the interests of society as a whole, not just the short-term interests of creditors and shareholders. I say creditors first, because in practice, in terms of who is suing whom, creditors, not shareholders, sue through the liquidated and insolvent company.

Jonathan Djanogly (Conservative, Huntingdon)

Surely the administrators, not the creditors, would sue in the name of the company.

David Howarth (Liberal Democrat, Cambridge)

Yes, but on behalf of the creditors the duty of the administrators and liquidators is to collect all the money that is owed to the company. Their purpose is to further the interests of creditors, and that is why in reality, we talk about creditors, rather than shareholders, against directors.

I suppose that that analysis means that I have a slightly paradoxical view of some of the amendments. Amendment No. 40, for example, which deals with small companies, and amendment No. 42, which has a similar effect, would not help directors of small companies. They would do quite the opposite and expose them to more liability than the directors of large companies, because the welfare defence against an action by a liquidator would not be available. Directors of small companies seem to me to be just as entitled as those of large companies to claim the benefit of the clause 158 defence, as I see it, of acting in the interests of the environment, against a liquidator, a takeover bid or, in the case of a small company, a buyer. On the other hand, amendment No. 39 and similar amendments that would make the test more obviously subjective would help directors. They would help them to claim the benefit of the protection of clause 158 more easily. For that reason they are better worth considering.

As to amendment No. 300, which was tabled by the hon. Member for Bedford, I have some basic sympathy with what he said, but it should be clear from what I said about how the rule works in this context that the amendment will not add much one way or the other to the protection offered to directors. I suppose that a duty would make it more obvious to a liquidator that perhaps no attempt should even be made to sue in the circumstances. There might be an advantage in that, as opposed to the formulation “have regard”. There are, however, disadvantages to the precise wording.

One disadvantage is that the amendment seems to set up the possibility of a conflict of duties. It is possible to “have regard” to contradictory things. It is a quite simple mental process to think about one thing, think about another, and reach a conclusion about the balance between the two. However, asking someone to “endeavour to” do two things that point in opposite directions seems to me closer to asking the impossible.

I am worried by one possible example of contradictions between duties in the amendment, and that is a conflict between employees’ interests and those of the environment. Idealistically we might all wish that that was not a problem, and that in all circumstances the interests of employees could be in line with those of the environment. I am afraid that that is not so. There are jobs in environmentally unfriendly sectors of the economy that depend on environmentally unfriendly activities continuing. That sets up a conflict. A conflict of that kind can be resolved using the formulation “have regard”, but it is more difficult to resolve it using the formulation “endeavour to”.

Patrick Hall (Labour, Bedford)

I am not sure that I understand that point. Surely in endeavouring to do one’s best one does just that, in good faith, going as far as possible without disturbing the rest of the balls that one is trying to keep balanced, including the performance of the company and the interests of employees.

David Howarth (Liberal Democrat, Cambridge)

That is a possible interpretation, but the hon. Gentleman spoke about his amendment being more active. That is where the difficulty comes in; one can do only one thing at a time.

My second doubt is only a small one, and I should be grateful if the hon. Gentleman returned to the matter if he speaks again. The very fact that the word “endeavour” sets a higher test than the phrase “have regard” might reduce the protection under the clause. There is a risk, although only a slight one, that a court might say, “You have not endeavoured, so you do not get the protection”, whereas perhaps “having regard” might otherwise have meant that the same person would get the protection. Since it is harder to endeavour than to have regard, that might have the paradoxical effect of reducing the protection.

Finally, I would like some assistance, because I am not entirely clear about the purpose of the amendments referring to guidelines and would be grateful for further comment. I have two questions.

Jonathan Djanogly (Conservative, Huntingdon)

Quite simply, the concept is that it would be better to remain within the existing common law structure and have non-binding statutory guidelines on how that common law should be applied in practice.

David Howarth (Liberal Democrat, Cambridge)

The amendments refer not to binding or non-binding or to mandatory or non-mandatory, but to statutory and non-statutory. I am unclear about the meaning of those words. There is a bigger problem with “non-statutory”, because there seems to be an inherent contradiction. Non-statutory guidelines in statute are, by definition, statutory. I do not understand what that is about. The amendments should be about something being binding and mandatory rather than something in a statute. There is a problem there.

To whom are the guidelines addressed? There are two possibilities and the two speeches covered one each. One is that they are addressed to the courts, but they are governmental interpretations of the law. I am not too happy about that, because the Government should address the courts via Parliament and not just issue guidelines now and then about what they think the law should be. That is especially important in company law where there has been a tradition of putting important rules in an Act rather than using secondary legislation. Such guidelines would not even be secondary legislation; it would be tertiary legislation and legislation by circular. If that is the aim, I have a constitutional twinge about whether that is the right way to do it.

On the other hand, the hon. Member for Huntingdon had a slightly different view: that the guidelines would be addressed to company directors and would attempt to describe the existing legal obligations on directors. That seems to be an attempt at cheap legal advice and undercutting the legal profession. That has a great deal of merit, but the important question is whether it would work. Would people read and take notice of it, or would they go back to lawyers when they got into trouble? Would it in the end have much practical effect?

My final point about guidelines is that there is always a temptation to make rules rather than standards—to make specific detailed rules rather than vague standards that are clarified later by courts. Sometimes, that temptation should be given into if it is the right thing to do, especially when it involves events that happen over and again in exactly the same way. In such cases, it is a cheap and efficient solution to tell people in advance what their rights and obligations are and what the consequences of not following them would be. However, when there is enormous variety, enormous differences in circumstances and almost unimaginable variety of problem cases it is impossible to write such rules and it is a trap for the unwary because it wastes everyone’s time. People attempt to write a few rules but in fact they do not help anyone. Although it is annoying for legislators, in the end the most efficient and effective thing to do in complicated circumstances is to leave decisions for the future to the courts.

My overall conclusion is that clause 158 is a protective and deregulatory provision, which is why I welcome it, and many of the amendments would have unintended effects.

Quentin Davies (Conservative, Grantham and Stamford)

It is a pleasure to follow the hon. Gentleman. I agree with many of the things that he said, but I disagree with him on two points. One is a point of principle, not an abstract point of theory, and one is a practical point on which I only partially agree with him.

The point of principle is the false and dangerous distinction that the hon. Gentleman tried to make between a company and its shareholders. I am sorry if he taught that to his pupils. He was less than logical in trying to make the entirely spurious distinction between a company’s directors administering it on behalf of shareholders, and the shareholders themselves. Five minutes later he said that when a liquidator or administrator is in charge of a company because its creditors, rather than its shareholders, have taken it over, that distinction does not apply. He ignored the role of the administrator or liquidator and said that it is the creditors who sue. That was illogical and I hope that he reflects on it.

On the hon. Gentleman’s practical point, he is perfectly right that in certain cases clause 158 will protect directors who reach a judgment in good faith and can show the court that they have done so. However, although he did not seem to think it likely, it is very plausible that the reverse situation could arise. Directors could be more likely to be successfully prosecuted as a result of the clause than would otherwise be the case. Take the case of asbestosis, which resulted in the liquidation of a large number of companies, particularly in the United States, including big names such as Babcock & Wilcox and Owens Corning. There have been a lot of class actions against directors in the United States as a result of asbestosis. If a provision such as clause 158 had been in effect at the time, it could have provided a case against a director accused of having neglected health and safety by allowing his employees to work with asbestos. Such a case may not so easily have been made under provisions such as clause 160 alone.

David Howarth (Liberal Democrat, Cambridge)

I understand why directors might have such a fear, but I believe that it is unfounded. The actions against directors would be dealt with under general, court law. The duties set out in the Bill are specifically stated in clause 156 to be duties to a company, which means that the circumstances that were mentioned would not arise.

Quentin Davies (Conservative, Grantham and Stamford)

Of course they are duties to a company, but the suit made by shareholders would be that the company had lost money or gone into liquidation because a director had failed properly to take into account the interests of employees or the interests of the environment as specified in clause 158(1)(d). That is the countervailing argument.

As I said on Second Reading, I approve of the clause, which is a good piece of law. Like any good law, it will protect those who, in good faith, go about their business and try to do a good job from malicious or vexatious prosecution, but it will open the possibility of legal sanctions when people default on their duties and obligations in a marked way. That is what law should do and what the clause will do.

I greatly admire the enormous amount of work that my hon. Friend the Member for Huntingdon has put into the Bill. It has been extremely impressive and throughout our debates he has made good and pertinent suggestions. It was therefore with great regret that, when we reached clause 158, I found myself parting company with him. He is not on entirely the right rails. He described the duties of directors set out in the clause as “seemingly random and arbitrary.” They seem to me a good distillation of the essential duties of directors. He then lost me completely by saying that in common law there are 650 duties owed by directors to their companies. He argued that it would be much better to leave a situation in which nobody knows which of the 650 duties should be performed. We probably do not know what the 650 duties are—probably no human being could comprehend 650 duties at any one time. If there was no guidance at all on the hierarchy of those duties, the law would have no influence on company directors in the pursuit of their obligations. There would be no certainty about what conclusion the court might come to if it were asked to decide whether a director had performed his duty.

Jonathan Djanogly (Conservative, Huntingdon)

My hon. Friend slightly misses my point. I am not saying that any of the duties are not important in themselves. The question I would ask is why choose six as opposed to any of the others.

Quentin Davies (Conservative, Grantham and Stamford)

It seems to me that the six have been well chosen. As someone who has sat on the board of companies on a number of occasions and does so now, if I were presented with a blank sheet of paper and asked to spend an hour or two setting out what I thought were the essential duties of directors, I would pretty much come up with this list.

I would start off by saying that the fundamental duty of a director is to contribute to the success of the company in the interests of its members and shareholders. A director works for the shareholders and has a fiduciary obligation to them. That is an absolute duty. In conducting that duty, he must have regard to a large number of matters, which could run to hundreds or even thousands. They cannot all be codified or predicted in advance. The Bill sets out 11 duties, six in this clause and five in the subsequent five clauses. That is a good distillation and good guidance. What is most important is that the clauses establish clarity. That is a prime purpose of good legislation.

As I said perhaps slightly mischievously on Second Reading, there is possibly one profession in this country that does not necessarily have an interest in removing legal uncertainty and creating legal clarity, but we should not be influenced by that any more than we should be influenced by any other special interest group that may lobby us from time to time. We need to maintain a proper degree of scepticism about all the lobbying that we get from different quarters. As it says in clause 159, directors need “to exercise independent judgment”, which is also what we are supposed to do in Committee.

My hon. Friend gave a number of examples of duties that are not mentioned in the Bill. I listened attentively to those with my mind as open as possible to persuasion. However, I was persuaded that my original stance, as set out on Second Reading, was correct. Among the duties he cited, which are not specifically mentioned, are the duty to prepare accurate accounts and the duty not to make secret profits. If accurate accounts are prepared, there obviously cannot be secret profits. The obligation to produce accurate accounts is elsewhere in the Bill. The obligation not to go in for false accounting is a general provision of the law. Anybody, not just a director, but an accountant, a manager, a banker or anyone else who prepares false accounts, is rightly subject to the full sanction of the law.

I hope that I am being helpful to my hon. Friend, but it does not seem to me that the clause should concern itself with the duties that all citizens have. There would be terrible confusion if we started including in the list of 11 the 650 duties of directors, which are duties that apply to all citizens.

My hon. Friend mentioned health and safety and competition law obligations. Those are obligations in statute law and the regulations that have been made within the ambit of statute law. They apply to everybody, not just directors. Equally, duties to comply with undertakings is clearly an obligation that everyone who is a party to an undertaking has. There is nothing special about directors in that case. It does not need to be set out in great detail.

The duty to consider minority shareholders, which my hon. Friend said is important and fundamental, is well covered by subsection (1)(f):

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

That is a good protection against any suggestion that a director should give greater weight to the interests of a majority of shareholders. It is extremely dangerous when directors who are connected to a majority shareholder are tempted to look to the interests of that shareholder rather than to those of the totality and generality of shareholders. Of course, all directors are under an obligation at all times to consider the totality of their shareholders’ interests and to ensure that everybody—even the smallest shareholder—is treated entirely fairly and equally, and it is important that that is in the Bill. However, we should not go down the road of saying that there should be 650 duties that directors must follow. That would produce anarchy and chaos. There would be a lack of legal certainty and it would not be good law-making. Instead, we should face up to the challenge of seeing whether we can distil directors’ essential duties into one clause, and that has been done rather well on this occasion.

I was also slightly surprised when my hon. Friend said that he wanted non-statutory guidance. Since I have been in the House, I have heard official spokesmen for the Conservative party say over and over again—indeed, I have said it myself as an official spokesman for my party—that any obligations or constraints that we place on the citizen through the law should be made explicit in the relevant Bill, debated explicitly by Parliament and faced up to, so that any citizen who reads that Bill will know exactly what his or her obligations are.

Non-statutory guidance is a very regrettable halfway house. It is not part of the law of the land, and nobody is under a legal obligation to follow it, because, by definition, it is non-statutory. Would a court take it into account in practice? Nobody knows. Once again, there is a great area of legal uncertainty. Perhaps some courts would say, “But Mr. Davies, you should have had regard to the non-statutory guidance.” Other courts might take a much stricter view and say, “We are in the business of enforcing the law of the land, and it is perfectly reasonable for Mr. Davies not to take account of non-statutory guidance. If Parliament had meant it to be part of the law of the land, it would have said so and put it in the Act.” Non-statutory guidance is not a good way of creating obligations on the citizen, and I do not agree that we want it in this case. Indeed, we do not want it all. What we want are clear, general principles that are set out in as unambiguous a way as possible, and that is what we have. Inevitably, the courts will continue with jurisprudence and will add to the common law, but we want to provide the minimum scope for that by giving guidance that is as clear, authoritative and unambiguous as possible.

Finally, my hon. Friend said that conflicts could arise between the different obligations. He mentioned a case in which a firm might need to sack employees to survive, and that is, indeed, sometimes the case. However, his remark led me to reread the clause, and the fundamental duties are quite clear. The director must, “in good faith”, do what is

“most likely to promote the success of the company for the benefit of its members as a whole”—

in other words, for the benefit of its shareholders as a whole. He must also have regard to the other considerations. It would therefore be a full defence for the director to say—indeed, this is what I would say as a director—“My job is to maximise the return for the shareholders and shareholder value. Of course, I took into account other considerations and looked at other desirable objectives, such as giving people a job for life, but it was not possible to reconcile those with the obligation to maintain the success of the company. Indeed, the company might have gone down the tubes if I had not fired people, which, regrettably, is what I had to do. Therefore, I did think about the matter and I decided that, on balance, to carry out my duties I had to take the regrettable decision to make some redundancies.” The Bill provides entirely for that process.

My hon. Friend’s criticism would have been very valid not against the Bill, but against the amendment tabled by the hon. Member for Bedford. As the hon. Member for Cambridge said, the hon. Member for Bedford introduced his amendment very charmingly and lucidly, and I hope that he puts it to a vote because, as he rightly said, a lot of people are riding on it and anxiously hoping that it will become part of the law of the land. If it is put to a vote, however, I hope emphatically that it is defeated, because including it would be a bad move. The amendment would be open to the exact criticism that my hon. Friend the Member for Huntingdon rightly made—that we would have potential conflict and it would be unclear how it would necessarily be resolved.

I take a slightly stronger view than the hon. Member for Cambridge about the language that the hon. Member for Bedford has used and the word “endeavour”. It could normally be interpreted as requiring some effort to be made in a direction. For example, “I endeavour to swim the channel” means not that I thought about it, but that I got into the water and started out. In my case, I would not get very far, but I might at least claim that I had endeavoured after I had done 50 yd, given up and got into the first boat that came along. It would be wrong to impose on directors the obligation to make an effort in directions that might be contradictory. It would be a bad day’s work if we included such a provision in the law of the land.

I am glad that the hon. Member for Bedford spoke to his amendment, because, as we all know, many people outside this House have been expecting us at least to take into account and to have regard to this point of view. We have an obligation to say explicitly why we do not accept the arguments that have been put to us in that context.

My hon. Friend the Member for Huntingdon quoted a lot of letters from law firms—I think that they were letters, although they might have been legal opinions provided by distinguished City law firms. It is important for us always to remember when we are dealing with such things that at least 50 per cent. of legal opinions are by definition wrong. Every point of law that has ever been in dispute has two contradictory sets of legal opinions about it. One says, “My client has a good case” and the other says, “Your client has a very bad case, and my client has a good case.” Some opinions might be worse than wrong; they might be complete rubbish—although they will always be expensive rubbish. A reasonable modicum of scepticism about legal opinions is in order.

Jonathan Djanogly (Conservative, Huntingdon)

To clarify, if all the opinions say the same thing, 50 per cent. of those saying the same thing are still right.

Quentin Davies (Conservative, Grantham and Stamford)

I guarantee to my hon. Friend that if I were a very rich man, which I am not, I could procure an equal number of opinions saying exactly the opposite to the opinions that he has procured. We all know how that game can be played. There is a perfectly understandable interest of a particular profession in selling its services, which is respectable. It is no less respectable than the desire of ice cream manufacturers to sell ice cream. The fact is that the legal profession has an interest in selling its advice. It does not have an interest in clarifying the law or in reducing the scope for jurisprudence and legal uncertainty.

I must emphasise to my hon. Friend that if there are already 650 possible duties of a director, it would be El Dorado for company lawyers. They are probably the pupils of the hon. Member for Cambridge, who I am sure is a kindly tutor and professor who takes an interest in their careers, and no doubt he has some mixed feelings on this subject. I have no interest to declare on this matter, except to say that as a director, as declared in the Resister of Members’ Interests, I do not wish to incur excessive or unreasonable legal costs for my shareholders or excessive insurance premiums for having in future to insure against directors’ liability.

I come now to my amendment No. 297, about which hon. Members will be expecting me to say a few words. I was not going to say much about it, because I do not intend to put it to the vote. I put it forward for discussion, because I hoped it would be helpful. A possible criticism of even the good piece of work in clause 158 might be that some of the duties as set out are not sufficiently closely defined. They could be considered too extensive, giving rise to the kind of legal uncertainty that I want to avoid. That is particularly so in the case of the environment.

In most of the clause, the duties are clear and there is not much scope for difficulties. However, subsection (1)(d) refers to

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

“Community” is specific and refers to something that one can see or hear—companies making a lot of noise or smells, or blocking the traffic. Local people know about such activities and it is reasonably clear what is meant.

Unfortunately, “environment” is a concept of almost limitless bounds, as we know. Is it conceivable that a director could be accused of not having taken into account the potential impact of a small business in Lincolnshire or Liverpool on the Arctic ice cap? It may be said that some molecules from the company’s emissions had an effect on the Arctic ice cap or contributed to creating windstorms in the Sahara. It opens up an indefinable limit to the definition, which is undesirable.

Therefore, I tabled a probing amendment that would leave out “and the environment” in order to get reactions from members of the Committee and to ensure that people focused on the possibility, but I do not wish to press it further. I would be happy to vote for the clause as it is if it is put to a vote—perhaps it will not be. I acknowledge that it is a good piece of work, and I recognise that there is a certain risk in saying that in my profession in case it all turns out badly and ends in tears. Given the difficult choices before us—choices were presented by the hon. Member for Bedford and by my hon. Friend the Member for Huntingdon—the clause is the right one to make. Corporate Britain should be able to live with it comfortably for the foreseeable future.

Margaret Hodge (Labour, Barking)

We have had a wide-ranging and long debate this morning. I agree very much with the hon. Member for Grantham and Stamford (Mr. Davies). His comments on the clause involved a huge amount of common sense, and I am grateful to him for that.

The purpose of the clause is to introduce certainty and transparency to company law so that directors know what is expected of them when they do their job. In the long gestation—eight years—between the Government’s introducing the company law review and the Committee’s consideration of the clause this morning, the issue of certainty has been uppermost in the minds of many who contributed to the debate.

I pressed the hon. Member for Huntingdon on his concern about provisions, because we set out clearly what we intend—even I as a non-lawyer understand it. The clause states:

“A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.

We put two clauses together in another place, so that the provisions would not remain the overriding priority for and purpose of directors, in order to say precisely what the hon. Gentleman feared we were not saying: the range of other factors are secondary to the overriding and overarching purpose of the interests of the company. That is why we had the debate with my hon. Friend the Member for Bedford as to whether there should be competing duties on directors or one overriding duty.

Our other purpose was to introduce the concept of enlightened shareholder value as part of the business of companies, those who work in them and those who have responsibilities to them and to their shareholders. We want to introduce into companies a long-term investment culture. That is the ethos of the clause.

On the one hand, we have been accused of the heavy hand of regulation by the hon. Member for Huntingdon, which he says might kill off companies, and on the other, my hon. Friend the Member for Bedford thinks that we are undertaking too voluntary an approach and destroying our environment. In the middle, the hon. Member for Cambridge, to whom I always enjoy listening, is telling me that I am deregulating, when I thought that I was regulating. I am grateful to him for that contribution and for the fact that he believes, as I do, that clause 158 begins to encapsulate the societal impact and benefit of companies’ endeavours in order to ensure that their narrow concerns protect also the wider ones.

James Brokenshire (Conservative, Hornchurch)

I am finding the Minister’s comments interesting and, in some ways, quite helpful, but I wonder whether she could deal with the apparent dichotomy in her comments. She says that the clause seeks to codify and bring together existing common law duties, but suggests at the same time that something new is being added. That confusion is the cause of some of the issues raised in this morning’s debate.

Margaret Hodge (Labour, Barking)

The clause does not codify all the common law duties, as pointed out by the hon. Member for Huntingdon in his long contribution on the 650 or so directors’ duties—I did not realise that we had got to 650. The clause does codify and bring into law for the first time duties around corporate social responsibility. I do not run away from that; it is a deliberate act by the Government.

That is at the heart of the Bill. For me, one of the key issues is how we marry the commercial success of individual companies and the resulting benefits to, and growth and prosperity of, the economy, with sustainability and social justice. Again, for me, that is a good example of what lies at the core of what this Labour Government are about: trying to see those two issues as part of a single whole and, despite uncomfortable tensions, trying to integrate them as consistent principles, rather than allow them to be competing ambitions with no commonality.

James Brokenshire (Conservative, Hornchurch)

What the Minister has said is interesting. I think that she is making it clear that actually that is codification and that effectively the principle of enlightened shareholder value, which was talked about separately, is in essence the codification of statutory duties, rather than the introduction of brand new or extended provisions. Effectively, we are bringing together those issues and showing that they are relevant.

Margaret Hodge (Labour, Barking)

Well, perhaps we agree; I pause to see whether that is the case.

I also wanted to say was that, for me, the best businesses already do what the legislation provides for—I think that a number of Members have said that. It will bring the behaviour of all businesses up to the behaviour of the best. Our view—I think that it is shared across parties, and certainly by individual Members—is that businesses do best when they can operate on a clear, well defined and level playing field and when they are not placed at a commercial disadvantage by doing the right thing and promoting corporate social responsibility objectives. Again, that is the purpose of the provisions.

I have to say to Opposition Members that that matter was discussed at length in the House of Lords, and amendments were passed to clarify the primary responsibilities of directors and the clause in a whole range of ways. I shall go into the detail so that we are all clear: at the end of that very long debate, the Opposition said that clause 158, as amended, is the right way forward.

Standing Committee D

Clause 158

John Bercow (Conservative, Buckingham)

I remind the Committee that with this we are discussing the following: Amendment No. 39, in clause 158, page 70, line 9, leave out from ‘whole,’ to end of line and insert

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

Amendment No. 300, in clause 158, page 70, line 9, leave out from ‘so’ to end of line 18 and insert ‘must endeavour to—

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

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

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

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

(e) maintain a reputation for high standards of business conduct, and

(f) act fairly as between members of the company.’.

Amendment No. 166, in clause 158, page 70, line 9, after to , insert

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

Amendment No. 297, in clause 158, page 70, line 14, leave out and the environment’.

Amendment No. 41, in clause 158, page 70, line 18, at end insert ‘, and

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

Amendment No. 42, in clause 158, page 70, line 25, at end insert—

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

Amendment No. 43, in clause 158, page 70, line 25, at end insert—

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

Amendment No. 165, in clause 158, page 70, line 25, at end insert—

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

Amendment No. 417, in clause 158, page 70, line 25, at end add—

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

Clause stand part.

New clause 1—Directors to have regard to interests of employees—

‘(1) The matters to which the directors of a company are to have regard in the performance of their functions include the interests of the company’s employees in general, as well as the interests of its members.

(2) Accordingly, the duty imposed by this section on the directors is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

(3) This section applies to shadow directors as it does to directors.’.

New clause 27—Guidance on interpretation of directors’ duties—

‘(1) The Secretary of State shall from time to time publish binding statutory guidance as to the interpretation of the duties imposed on directors by section 158.

(2) Before publishing the guidance referred to in subsection (1), the Secretary of State shall consult such persons or bodies as he considers relevant.’.

Margaret Hodge (Labour, Barking)

In the hope of making some progress, I shall keep my comments brief. The subject was debated for a long time in the House of Lords and Opposition Members there said that the clause as drafted is the right way forward.

Jonathan Djanogly (Conservative, Huntingdon)

Did they?

Margaret Hodge (Labour, Barking)

Yes, they did. If the hon. Gentleman wants the reference, I shall find it for him. It is at column 849.

James Brokenshire (Conservative, Hornchurch)

Date?

Margaret Hodge (Labour, Barking)

It is 9 May 2006—

Jonathan Djanogly (Conservative, Huntingdon)

Third Reading?

Margaret Hodge (Labour, Barking)

On Report. Lord Freeman said that

“we believe that the Government's amendment is the right way forward.”

He said it twice because he also said that

“we believe that Amendment No. 79 is the right way forward.”—[Official Report, House of Lords, 9 May 2006; Vol. 671, c. 849.]

Furthermore—[Interruption.] I cannot help the hon. Gentleman with that. [Interruption.]

John Bercow (Conservative, Buckingham)

Order. I like to preserve reasonable informality in our proceedings, but we cannot have debate conducted by chuntering from a sedentary position. I say that with no discourtesy to the hon. Member for Huntingdon (Mr. Djanogly), but it is better to try to preserve formality.

Margaret Hodge (Labour, Barking)

I will send the hon. Gentleman a copy of the Hansard that I am quoting.

Jonathan Djanogly (Conservative, Huntingdon)

The Minister stood up to make a point. I am not sure what it was but I think that it was about the Conservative party changing its tune or tabling an amendment, but she cannot say which one or, precisely, what it was about. Perhaps she will express her point. We may then be able to respond to it.

Margaret Hodge (Labour, Barking)

In the House of Lords, Lord Freeman, on behalf of the Conservative party, said that he was satisfied that the range of amendments that had been passed brought together all the concerns that Conservative Members there had raised about the original framing of the clause. By the time the House of Lords reached the clause, there was consensus on it. That is my point. That consensus now appears to have disappeared in the House of Commons. It related to the central theme of how to bring together company success with wider social and economic concerns.

I want to make some points of principle about the clause and then to deal with some of the issues in detail. A point of principle is that the clause should not be seen on its own but with the clauses on narrative reporting that we shall discuss later. It should also been seen in the context of wider rights for shareholders, including amendments that I tabled today on the rights of indirect shareholders. I discussed those informally with members of both Opposition parties yesterday and believe that we have reached a consensus on that with all stakeholders. With the new narrative reporting requirements and by widening the access for shareholder participation, the clause will make a difference. That is why we are introducing it.

Another point of principle is that, as I have increasingly acknowledged during the eight or nine years that we have been in government, law of itself will not transform the culture of companies. It will not suddenly create a culture whereby companies take on the social responsibility to which hon. Members alluded. The law can, however, provide a support framework that will lead to a transformation in culture.

That leads me on to the contribution of my hon. Friend the Member for Bedford (Patrick Hall). I shall return to his proposals and amendment in detail, but he suggested that we adopt a more pluralist framework. He felt that we relied too much on what he called the voluntary framework. I share his goals, and the argument is about the best means of achieving them. Like the hon. Member for Huntingdon, I believe that our company law framework needs to ensure that we maintain the UK’s standing as a good place in which to form and retain businesses. I often talk about the promiscuity of capital, and it will place itself somewhere else in the world if we do not have a business-friendly environment that provides the conditions for effective business management and expansion.

That is why we must keep in mind the Bill’s core purpose: providing clarity to business about the objectives of business. Hence the duties in the proposals before us. We cannot diminish the core purpose of business, but Labour Members believe it can carry out that purpose effectively only if it has regard to the wider community’s interests.

The Bill takes a huge step forward in trying to align corporate social responsibility with business efficiency and prosperity. It is a real step change, and I hope that all hon. Members see it that way. To find corporate social responsibility, we must look elsewhere. The biggest advances in proper regard for employees are found in health and safety legislation, not company law. We must consider that with regard to the impact of businesses on the environment and the long-term impact of businesses on their communities. CO2 emissions are being discussed in the statement by my right hon. Friend the Secretary of State for Trade and Industry on the Floor of the House.

Our actions internationally, through Organisation for Economic Co-operation and Development guidelines, the industry transparency initiative that the Prime Minister launched and the round table on sustainability, will be a key factor in taking forward Labour Members’ ambitions to protect the environment for the long term and ensure that companies, when pursuing their interests, do not damage community interests or the environmental interests of communities elsewhere.

The Bill attempts to open up companies to much more public account. Whether through indirect shareholder interest or the voting of institutional shareholders, it will begin to open up the actions of companies to public account. In so doing, those actions could transform consumer behaviour and determine whether consumers invest in or buy products from particular companies. If and when people do so, we will pursue cultural change. That is the route down which we wish to travel. We want to create a framework to facilitate the cultural change that meets the aspirations of many Members, in particular Labour Members.

The issue under discussion is one of the most serious in the Bill. I was disappointed by the contribution of the hon. Member for Huntingdon. I had hoped that I could reply seriously to it, but at the end of the hour it was difficult to find anything that genuinely warranted a serious response. We can all quote lawyers and commentators, and as he did, and I thought of jokes along the lines of “How many lawyers does it take to change a light bulb?” However, I shall give the hon. Gentleman just one quote. It is from another eminent QC who said in a letter in the Financial Times—he quoted one and I am quoting another—that the

“provisions are no threat to the practical running of companies in the UK”.

The letter continued:

“Of the companies directors I see, those worth their salt already have regard to all of these factors and more.”

Quoting one set of lawyers does not help us. As the hon. Member for Grantham and Stamford (Mr. Davies) said, 50 per cent. of lawyers think one way and 50 per cent. think the other.

In my view there is an essential dishonesty in the argument that the hon. Member for Huntingdon attempted to make. On one hand, he said that he favours corporate social responsibility, which is an advance and we welcome that. On the other hand, he predicts that stating in statute that companies should have regard to corporate responsibility factors in carrying out their key duty to pursue their interests spells possible disaster. The purport of his argument was that that would lead to endless litigation. I left it to the hon. Member for Cambridge (David Howarth)—he is a lawyer and I am not—to destroy that argument. The hon. Member for Huntingdon argued that the provision could end in huge costs or wipe out any benefits from our deregulation. That was a dishonest argument.

On one hand, the hon. Gentleman supports the proposition of corporate responsibility. On the other, he rejects it. On one hand he claims—

Jonathan Djanogly (Conservative, Huntingdon)

Will the Minister explain why my argument was dishonest? [Interruption.]

Margaret Hodge (Labour, Barking)

Hon. Members might call it contradictory and I thought of using that word, but it is dishonest to pretend to support the concept of corporate responsibility and then refuse to see that taken forward in action. It is one thing to voice support for a set of policies and another to take it forward.

Paul Farrelly (Labour, Newcastle-under-Lyme)

It is a disingenuous argument.

Margaret Hodge (Labour, Barking)

Disingenuous or contradictory—people can choose.

Crispin Blunt (Conservative, Reigate)

For a stalwart of new Labour to start chucking around terms like “dishonest” is perhaps unwise. I hope that the right hon. Lady will settle for disingenuous.

Margaret Hodge (Labour, Barking)

I note the hon. Gentleman’s preference for that word. I thought long and hard about the matter and had three hours during lunch in which to do so. Hon. Members may choose the interpretation they want.

Patrick Hall (Labour, Bedford)

I am not going to dispense advice on which word should be used. What matters is how people vote in this place and the other place. When it comes to where a party stands on enlightened shareholder values and corporate social responsibility, we had a clear indication of where the Conservative party stands from the way that it voted in the other place. Perhaps it would help if the hon. Member for Huntingdon said whether he intends to follow the line taken by his colleagues in the other place. That would be not honest or dishonest, just clear.

Jonathan Djanogly (Conservative, Huntingdon)

I started by saying—

John Bercow (Conservative, Buckingham)

Order. We cannot have an intervention on an intervention. It is necessary for the Minister to respond to the intervention by the hon. Member for Bedford before any further interventions can be taken. Before the right hon. Lady resumes her remarks, let me also say that there has been no breach of order. It is perfectly in order to describe an argument as dishonest, but not in order to describe another right hon. or hon. Member as dishonest. However, I hope that we are not going to have an endless and circuitous semantic exchange.

Margaret Hodge (Labour, Barking)

Thank you for that clarification, Mr. Bercow. I was extremely careful in the comment that I made. I simply note that the hon. Member for Reigate (Mr. Blunt) accepted that the remark by the hon. Member for Huntingdon was at least disingenuous.

Crispin Blunt (Conservative, Reigate)

No, I do not accept that at all. I am grateful to the Minister for allowing me to make that point, but she was very ill advised to start chucking around the term “dishonest”. There are other ways to describe such things, which are slightly less offensive and would better sustain the Committee’s good spirit.

Margaret Hodge (Labour, Barking)

It was in an attempt to return to that good spirit that I just had to get that in.

Opposition Members must ask themselves how one can support a proposition on the one hand but reject it on the other. How can one claim to promote corporate social responsibility on the one hand, but denounce it on the other? As my hon. Friend the Member for Bedford said, this morning’s debate on corporate social responsibility exposed the inconsistency and the central weakness of the Conservative party. By opposing this part of the Bill, the hon. Member for Huntingdon shows that the Conservative party’s language might have altered, but that its actions remain the same. At the end of the day, it is not what you say in politics that counts, but what you do.

The hon. Gentleman made a very long contribution, and I am not saying that it did not warrant serious consideration, but I interpreted it to mean that business interests had to stand untrammelled by any other public interest, be it the interest of the community, the environment or employees.

Jonathan Djanogly (Conservative, Huntingdon)

Will the Minister give way?

Margaret Hodge (Labour, Barking)

No, the hon. Gentleman might like to hear this point. The Conservative party, in taking the position that it has, is setting itself against Britain’s best and most highly successful businesses, and their leaders, who tell us that the way that we propose is the future for business.

The hon. Gentleman talked about the clause clouding the law, but he is clouding his view and his genuine purpose in this series of amendments. He does not think that companies have responsibilities to the long term, the community, the environment or their suppliers.

Let me acknowledge the contribution of the hon. Member for Cambridge. When he started, I said, “Oh dear,” because he was going to give us a legal thing. Of course, because I love company law, I meant to say, “Hurray!” I very much agree with what he said about litigation, and it is likely to be extremely rare. We do not expect the clause to give rise to significant litigation, just as cases under current case law have been very rare. However, the clause is important, because although most directors might already pay regard to the factors mentioned, it is important that they consider them in thinking about how best to promote the company’s success.

It is important that I briefly take Members through where we are on the clause and why, I am afraid, we must reject all the amendments. I wish to set out how we responded in another place to some uncertainties and misunderstandings about the meaning of the clause. Its title is “Duty to promote the success of the company”, which is the right title to describe the duty. It is not a pluralist duty, which was the other route that we could have taken.

Directors are required to have regard to the factors laid out when promoting the success of a company for the benefit of its members, but if a director puts one of those factors ahead of his overarching duty to promote the success of the company, he acts in breach of that duty to the company.

In another place, the clause was amended to bring together what are now its subsections and make even clearer—I hope to hon. Members, and certainly to those outside who will have to use the law—our intention that while a director must have regard to the various factors stated, that requirement is subordinate to the overriding duty to promote the success of the company.

We had further discussions with business and other stakeholders, and re-tabled a Government amendment to delete from the clause a second “must”, which we considered could be perceived as creating a separate duty. Its deletion does not affect the obligation to have regard to the factors, but it makes it even clearer that clause 158(1) is a single proposition.

We believe that a director should be required to give proper consideration to the list of factors, so far as it is relevant to the decisions that he is taking. That is the essence of enlightened shareholder value. At the same time, a director will not be required to consider any of the factors beyond the point at which to do so would conflict with the overarching duty to promote the success of the company. That would clearly not be helpful or sensible.

In another place, another Government amendment was accepted to delete the words “so far as reasonably practical”. We tabled that amendment for a purpose. The words were originally intended to have a dual effect, operating as a limit on what is required of directors and making clearer the fact that directors are required to do more than pay lip service to the factors in the clause. It became clear during the debate, in which we listened, that there was uncertainty about the effect of the words. That was why we chose to delete them.

I also wish to draw to the attention of hon. Members the issue of good faith business judgment. We believe it essential for the weight given to any factor to be a matter for a director’s good faith judgment. Importantly, the decision is not subject to the reasonableness test that appears in other legislation.

As now, the courts will not be able to apply such a test to a director’s business decisions. That is in sharp contrast to, for example, decisions on public law, to which the courts often apply such a test. We are trying to achieve the effect that a director must give such consideration to the factors identified as is necessary for the decision that he must take. We do not intend a director to be required to do more than apply good faith and, as elsewhere in the Bill, the duty of care and skill is an important ingredient. Nor do we want it to be possible for a director to be held liable for a process failure that does not affect the outcome.

The clause does not impose a requirement on directors to keep records, as some people have suggested, in any circumstances in which they would not have to do so now. That is an important point, because companies might wish to record their decision-making process in respect of key business decisions, but nothing is gained by a box-ticking mentality that records information without proper reason.

Jonathan Djanogly (Conservative, Huntingdon)

Does the Minister not appreciate that almost every commentator writing on the provision says that that is exactly what will happen? It will bring in a box-ticking mentality, with boards having to jump through hoops to justify their thought processes.

Margaret Hodge (Labour, Barking)

No, I do not accept that, and I refer the hon. Gentleman to the contribution made on that point in another place by the Attorney-General. That issue was raised in the debate on that clause by their lordships. All I can do is to reiterate that we do not believe that the clause will end up with an expensive paper trail, which is what the hon. Gentleman has suggested. The reason for that is how the law will work.

The company will have to bring a claim against the director for a breach of his or her duties under the clause, and would need to show that the director had not had regard to one or more of the factors. There is no reason to believe that a director would have to provide written evidence proving that in taking a particular decision he or she had had regard to those factors. That evidence would not be required for him or her to defend themselves against such an action.

Jonathan Djanogly (Conservative, Huntingdon)

Is not the problem that when a company takes advice on how it can best show that it has complied with the clause, it will be told to put it in writing?

Margaret Hodge (Labour, Barking)

The onus will be on the company to prove that the director has not complied, rather than on the director to show that he has. Because the onus lies with the company, rather than the director, the hon. Gentleman’s fears are not justified.

Quentin Davies (Conservative, Grantham and Stamford)

Does the right hon. Lady accept that she has just given the very important assurance that, in her view, the Bill will not require directors to keep further records than those they do currently? In the event of that issue coming up in court, under the Pepper v. Hart rule, her statement this afternoon could be prayed in aid by the director concerned. So, she has just given the Committee a very important assurance, of which we should all be aware.

Margaret Hodge (Labour, Barking)

It was for that reason that I chose to emphasise that point. Clearly, companies need to keep records of their appropriate decision making, but in our view no further burden is required by that particular duty. That is the point that I was trying to make. Obviously, there is a general need to provide effective records. All that the clause does is give fuller expression than is currently in the law, but it should not require further record keeping.

The six factors discussed emerged from the company law review process, but because we know that they might change over time, we said that the list is not exhaustive, which is why “amongst other matters” has been inserted in clause 158. The insertion of those words in no way detracts from the obligation to have regard to the listed factors, but leaves it open. As I have said, the duty cannot be considered in isolation.

That was a quick run through of the general view of the clause, which it was important to put on the record. Let me now deal quickly with the amendments as best I can. On amendments Nos. 40 and 42, which concern the size of a company, a director has a duty, whatever the size of the company, not to put his or her own interests ahead of those of the company. That is as true of a small or medium-sized company as it is of a larger quoted company. The company would suffer a loss in just the same way, whatever its size. So, in our view, those duties should not be different for directors of smaller companies. I am trying to keep my answers as short as I can. I hope that I have answered that question, but if I have not, I am happy to return to it.

On amendment No. 300, which my hon. Friend the Member for Bedford tabled, I am afraid that we think that the phrase “endeavour to” instead of “have regard to” brings a stronger pluralist approach. It might not have been his intent but it is the effect of those words in law. There would be confusion over the duties and there might well be competing duties. That is the argument against the pluralist approach to the directors’ duties framework that we are attempting to establish, and on that basis we do not wish to accept the amendment. It is a “have your cake and eat it” amendment and while ingenious, in that requirements are not quite spelled out in the traditional way, the impact would be such. I sadly must therefore reject the proposals.

The way in which we have framed the clause and brought it together with the narrative reporting clauses, and the opening up to public account through shareholder engagement, which pervades the Bill, will begin to have a massive impact on the corporate social responsibility agenda.

Our view on amendment No. 166 is simply that it is not necessary. We do not intend a director to be required to do more in having regard to the factors than acting in good faith and in accordance with the duty of care and skill. It will, for example, be for the director to make a judgment on the likely longer-term consequences of his decisions in good faith and in compliance with his duty to exercise reasonable care, skill and diligence.

The hon. Member for Grantham and Stamford sought to probe us by suggesting that we leave out the word “environment”. I have a long quotation, which I can come back to if he is not listening at this moment. [Interruption.] I am addressing his amendment No. 297; I do not know whether he wishes to listen to my response on it.

Quentin Davies (Conservative, Grantham and Stamford)

Of course I wish to listen to the response. I am sorry, but the calls of Whips are difficult to resist.

Margaret Hodge (Labour, Barking)

I got the hon. Gentleman’s constituency right. He said that his amendment was designed to probe our thinking a little. Incorporating the concept of the environment into the list of factors came out of the consideration of those factors by the company law review, and I have many quotations in that regard.

I shall suggest to the hon. Gentleman three good reasons why we would want to cover the environment. First, people care passionately about the environment. That might not be something that he shares, but it was considered by most of the people who participated in the company law review process to be one of the key issues of interest. Secondly, in recent years, we have seen the devastating evidence of the impact on the environment of the action of companies, be they large or small, although the hon. Gentleman elected to focus on a small company’s contribution.

Thirdly, the company’s impact on the environment can be a direct route to financial success, and that is shown by the growing number of members of the Environmental Industries Commission. As the Prime Minister has made clear on a number of occasions, we want Britain to be a leading player in the green industrial revolution.

Quentin Davies (Conservative, Grantham and Stamford)

I am grateful to the right hon. Lady for those comments. As I explained this morning, the object of my tabling this probing amendment was to get the Government to think about the matter and to come up with a reasoned response. We have now had that.

The right hon. Lady’s first reason, that people feel strongly about something, is not a good reason for law making. I feel strongly about the environment; I gave an answer on the radio this morning in which I said that I thought that global warming was the most important medium and long-term problem facing the human race, together with nuclear proliferation. However, that is not a good reason for imposing one’s feelings or prejudices on others by law making. The provision should be excluded. The argument that it may be good for companies to be environmentally conscious corresponds exactly to the decision that the director should take anyway under clause 158. They should take strategic decisions in the interests of the company.

It has been an interesting discussion, but I can give the Minister the assurance she looks for: I shall not press the amendment to a vote.

Margaret Hodge (Labour, Barking)

I shall deal with the other amendments.

Amendment No. 41 is curious and we cannot support it. It is unnecessary, partly because it fails to distinguish duties with which a director must comply and matters to which they must have regard in fulfilling their duties, and again, the list is not exhaustive.

Amendments Nos. 43 and 165 are also misconceived. They appear to take the view that clause 158 imposes several different and potentially contradictory duties. However, we have been clear that it is not a question of a hierarchy of duties. One duty is enunciated, and in carrying it out, directors must have regard to the factors. We have said that a number of times. Amendment No. 165 would create a hierarchy, which we do not understand.

I turn to amendment No. 417, and to new clause 27, which is about the publication of statutory and non-statutory guidance. We have said that we will publish non-statutory guidance, so I was amused by that discussion. The purpose of non-statutory guidance and legislation generally is to help people—in this case, companies—obtain a better understanding and interpretation of legal provisions, not to create problems. We will publish the guidance in that regard. It does not need annual renewal and review, so we will not agree to the proposal. We intend to publish non-statutory guidance, which I am afraid does not meet the desires of my hon. Friend the Member for Bedford.

The new clause would re-impose a section of the Companies Act 1985, which we have discussed extensively. The most helpful thing I can do is quote from the company law review:

“There is nevertheless considerable evidence that the effect of the law is not well recognised and understood. This may be in part because the relevant principles are not enacted”—

hence, we are legislating for them today—

“but have to be derived from quite extensive case law, developed over 250 years and rooted in the eighteenth century law of trusts.”

The relevant part of the quotation says:

“The situation is also complicated by the statutory redefinition (or extension) of the directors’ core duty in what is now section 309 of the”—

1985—

“Act.”

The amendment is a curiosity. I take it as a probing amendment more than anything else, especially if one considers it alongside other amendments. If the hon. Member for Huntingdon accepts that, I shall not pursue it.

We have had a long discussion, and hon. Members want to discuss other key matters. It has been a good debate, but I hope that at the end of the day people who support the purpose of corporate social responsibility and do not see any conflict between it and the long-term interests of companies, which in themselves create the wealth that is so important to our nation, will vote with us and not pursue any amendment in any hon. Member’s name.

Jonathan Djanogly (Conservative, Huntingdon)

First, the Minister cited amendment No. 78 and mentioned that our noble Friends supported the clause She is simply wrong. Amendment No. 78 in the House of Lords proposed replacing the words from “act” in the first line with

“in good faith in what he considers to be in the interests of the company”.

That is basically just reasserting existing law and deleting the list of directors’ responsibilities in its entirety. The hon. Member for Bedford was correct. That is what the Lords did and it is not what the Minister said. However, the hon. Gentleman seemed to have missed the fact that I started off the debate today by saying that that is what our noble Friends did and I had to decide whether simply to follow their line or to take a more constructive line of amending the clause to make it more acceptable. That is a point of clarification.

I appreciate that the Government are being pulled in various directions, but this is a situation of their own making. I highlighted the technical problems with the codification of directors’ duties, which many have pointed out. I quoted many commentators who believe that the provisions have real implications for companies. To that extent, whatever view one takes of the clause, the Minister went rather over the top in her denunciation of my approach, which is shared by many other people.

We believe that this is important. By using the “one size fits all” approach, the Government will be tarring the corner shop with the same brush as the multinational. That has the potential to hinder the growth of businesses and UK plc. By attempting to codify the common law duties of a director in statute, the Government have introduced language that almost every corporate law firm that has contacted us has said will lead to greater uncertainty and confusion—the exact opposite of what the Minister said she wants from the clause.

On a rather simplistic level, the Government argue that it would be easier for company directors to refer to a statute than a great amount of case law. However, by putting directors’ duties into rigid statute, a great deal of the flexibility of the common law system will be lost. The Government inevitably end up cherry-picking those items that they think should go into their list, which will in itself lead to uncertainty and lack of clarity. They have also sewn confusion in the debate by maintaining that they do not intend to change the common law while at the same time introducing the concept of enlightened shareholder value. All commentators seem to note that there is a change in the common law position, and the Government should accept that.

There is the old adage that one should always expect the unexpected. That certainly applies to the hon. Member for Cambridge. He made the case that the clause is unlikely to lead to many court cases in practice. I do not think that he is necessarily correct. Clearly the broad spectrum of City lawyers who have been commenting would disagree with him—but that in itself is a debatable issue. Even if he were right, the fact that not many people are to be sued does not justify the clause. He then argued that the clause would protect directors. Again, if there is credence to his argument it is because the change in the law will so muddy the waters that people will be put off going to court.

David Howarth (Liberal Democrat, Cambridge)

That is even better.

Jonathan Djanogly (Conservative, Huntingdon)

Perhaps, but we are looking for a degree of certainty in the Bill.

The hon. Member for Bedford advocated his separate approach in his informed speech. He was confused as to how the Conservatives could support corporate social responsibility but at the same time query enlightened shareholder value. CSR does not need strict definition in an area which does not need definition. What could be a huge effort of presentation of CSR for a small company could be a small effort and not doing much for a large company.

Patrick Hall (Labour, Bedford)

The hon. Gentleman has just alluded to a fascinating philosophical point. While the impact of a large company will obviously be greater globally than that of a small company such as a corner shop, surely the principles of being responsible are exactly the same.

Jonathan Djanogly (Conservative, Huntingdon)

Yes. One could apply the elephant test to a company’s attitude to CSR, but that cannot be done with enlightened shareholder value in the way that the Government propose, as it needs to be defined in the Bill. I have said why I think that that is not desirable. To the extent that it is to be done, we think that there are problems in making it work.

I was pleased that the Minister emphasised that enlightened shareholder value does not extend common law duties, and it was good to have that put on the record, but that does not make the relevant issues any less relevant or important. I agree with that.

The Minister’s attempt to throw up an Aunt Sally that somehow shows that we do not like CSR was pretty weak. The Conservative party has championed a proposal for dealing with climate change that is much more serious than the Government’s suggestion, and we do not propose to use non-specific company law. Our proposals are in our energy review. We believe that championing renewable, carbon-neutral energy sources is the way to make a real difference. Equally, a company law review is not the forum in which to debate climate change policy. If it were, we could spend the next month debating the environment and ignoring all the other common law duties.

The hon. Member for Liverpool, Riverside (Mrs. Ellman) showed where the Government are coming from when she asked whether the good intentions shown by all hon. Members would not be toothless without regulation. What we have here is the eternal cry of the regulator and, dare I say it, the socialist. Perhaps we have moved on from that. Yes, the Government have a role in guiding, in praising good CSR and in castigating bad practice, but, as the Minister herself said, general regulation will not necessarily improve the situation. We maintain that it could make matters worse. Regulation, where required, should be specific, but that is not the case in this situation.

It is worth mentioning the probing amendment tabled by my hon. Friend the Member for Grantham and Stamford. As fascinated as I was by the law according to him, I must say that we do not agree with his amendment, although I appreciate that it is probing. However, I am pleased that he tabled it, because it allows me to reiterate that the Conservative party values the environment as an issue.

While we have problems with the list as a whole, both conceptually and legally, we certainly have no wish to single out the duty that relates to the environment for deletion from the list of directors’ duties. To the contrary—if there must be a list, we are happy that the environment has been included. We remain puzzled, however, as to why so many other duties and responsibilities have not made the list, and are concerned about the potential for confusion that will result from the measure.

The Government have chosen six responsibilities for a director while ignoring hundreds of others. We have been advised that that approach will lead to great uncertainties and confusion as companies and lawyers try to work out which duties rank above each other or are more important. Do they all carry the same weight? The Minister strongly maintained that they do, and we will reconsider what she said. If that is the case, why were only those six chosen? If the codified responsibilities are more important than the uncodified, why is that?

Overly restrictive general regulation is not an example that we should be setting. UK companies that have been spurred on by shareholders and consumers are already beginning to set an example to their competitors on corporate responsibility, and we support that approach over heavy-handed interference. We shall reserve our position on the clause as we move towards consideration on Report because we wish to review the Minister’s words and the sheer weight of amendments has made an immediate response difficult. We also wish to consult further in the summer months. In the meantime, I beg to ask leave to withdraw the amendment.

Clause 159

Jonathan Djanogly (Conservative, Huntingdon)

We move on after a long interlude on clause 158.

Clause 159 introduces to statute a duty that directors must exercise their powers independently and must not fetter the future exercise of their discretion unless acting in accordance with an agreement made with the company or in a way authorised by its constitution. Although clearly based on the current legal position, the wording has been altered significantly.

The provision was debated in the Lords when Lord Freeman moved a probing amendment to omit subsection (1). He said first that directors might be restricted in relying on fellow directors or external advisers, particularly non-executive directors who as common practice rely on advice, reports and recommendations given by others. He also said that nominee directors appointed by a corporate shareholder would, for obvious reasons, be unable to exercise independent judgment.

Lord Goldsmith responded that a director can take advice or copy someone else’s judgment, but the judgment that he exercises must be his own. He said that in some circumstances directors might breach their duties if they failed to take appropriate advice, but that slavish reliance would be unacceptable. In relation to nominee directors, case law supports the notion that they are required to exercise their best judgment in the interests of the company.

The Law Society’s parliamentary brief recommends leaving out the clause. It points out that the law in this area is developing and that the clause casts doubt on whether a director can rely on other directors or external advisers. Furthermore, it states that it is unclear what, if anything, the clause adds to the duties in clause 158. The CBI and a briefing note received from City solicitors Norton Rose point out that it is unclear whether the duty in clause 159 precludes a director from delegating functions to committees of a board. However, guidance from the Department of Trade and Industry seems to indicate that that would be permitted if allowed by a company’s constitution. Will the Minister explain how the Government came to that point of view?

Our concern is that a non-independent, non-executive director—for instance, a nominee director of a large shareholder—might fear that under the clause the duty to exercise independent judgment could be used to make their position more difficult. What can the Minister say to put such people’s minds at rest?

Finally, clause 159(2) notes that a director will not be in breach if he acts in a way authorised by his company’s constitution. On that basis, is it not the case that if a company’s articles said that a non-independent nominee director could act in accordance with the instructions of the nominating shareholder, or at least that he could have full regard to such instructions, that would end or reduce the duty set out in the clause, which presumably overrides the existing common law duty?

Mike O'Brien (Labour, North Warwickshire)

The duty is about directors having to make their own judgments and not follow blindly the views of another without considering the interests of the company. In other words, the role of a director is to exercise independent judgment for the benefit of the company. That is what we expect directors to do. It is surely right that they should have that obligation, given that it is what they were appointed to do. If the clause were deleted as the amendment proposes, the duty would remain an uncodified equitable principle.

Jonathan Djanogly (Conservative, Huntingdon)

To clarify, there is no amendment. I have put to the Solicitor-General a few probing questions for the stand part debate.

John Bercow (Conservative, Buckingham)

We are discussing clause 159. I think we are all conscious of that.

Jonathan Djanogly (Conservative, Huntingdon)

The Solicitor-General referred to an amendment.

Mike O'Brien (Labour, North Warwickshire)

I did refer to an amendment, and I have a note here on it, but I accept that the hon. Gentleman did not move one, so let us deal with the stand part debate.

The aim is to codify the law so that it is easily accessible to directors. The duty does not mean that a director cannot take proper advice from a lawyer, an accountant or anyone else he feels it appropriate to take advice from. He can take such advice from others and rely on it if he chooses to do so. Although he is exercising an independent judgment, that does not mean that he must be independent himself. He might have an interest in the matter, and conflicts of interest are dealt with in clauses 161 to 163. It is only the director’s judgment that must be independent, in the sense that it must be his judgment, not that of someone else.

The director may even adopt another’s judgment, provided that he believes that it is in the best interests of the company—in other words, that his judgment is that someone else’s judgment is in the best interests of the company.

Subsection (2)(a) reflects the current law in Cabra Estates plc and Fulham football club. Under subsection (2)(b), companies can authorise the fettering of the discretion through their constitution, if they choose to do so.

The statutory statement does not affect the current law that a delegate may not delegate unless he has been given the power to do so. Provided that a company gives a director a power to delegate, he may choose to exercise that power, but it is for the company itself to give him it. Directors may delegate the performance of their functions and the exercise of their powers if the company has given them the power to delegate. They will know whether they have that power, because it may be conferred expressly on them by the company’s constitution or by shareholders’ resolution, or it may be implied, provided that it is clearly implied.

Article 15 of the draft model articles for companies limited by shares, which were published in the March 2005 White Paper, provides that, with certain exceptions, directors may delegate any of their functions to any person they think fit. The Law Commission’s draft summary of the general duties did not deal with delegation. The company law review included the principle in its draft statement because it wanted to emphasise the fact that directors may not subordinate their judgment to that of another by delegating their functions unless such delegation is authorised by the constitution. We have concluded that the principle does not belong in the statutory statement. How the directors distribute their functions among themselves on a day-to-day basis is part of how they organise their affairs in accordance with the constitution.

The question arises as to how the duty adds to clause 158. It has been said that most of the fiduciary duties can be seen as aspects of one fundamental duty to act in good faith for the benefit of the company. Even if that is so, the conventional approach is further to classify the duties. That helps to show the range of the duties and the various ways in which they apply. The Law Commission and the company law review both considered that the statement of duties should include a separate reference to a requirement on a fiduciary not to fetter discretion, and we agree with that.

I was asked whether the Bill will change the law on nominee directors. The general duties do not prevent the appointment of nominee directors, who are appointed by a particular party to protect their interests. However, once appointed, the nominee director must be left free to exercise his best judgment in the interests of the company that he serves. The nominee director must ignore the interests and wishes of the person who appointed him, and we rely there on case law, including Scottish Co-operative Wholesale Society Ltd v. Meyer and Kuwait Asia Bank EC v. National Mutual Life Nominees Ltd. The statutory statement does not change that, but subsection (2)(b) will allow the status of the nominee director to be enshrined in the company’s constitution so that the nominee is able to follow the instructions of the person who appointed him without breaching that duty. The extent to which that is possible under the existing law was unclear, but we have now made it clear. However, even when a nominee follows instructions, he must still comply with all his other duties—there may well be other duties—such as a duty to act broadly in the interests of the company. I hope that that deals with the points raised by the hon. Gentleman and I hope that he will be able to support the clause.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Solicitor-General for that helpful clarification.

Clause 160

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 272, in clause 160, page 70, line 34, leave out subsection (2).

The clause is a new provision and codifies the duty to exercise reasonable care, skill and diligence, which is to be judged by both a subjective and an objective standard. Lord Freeman moved a probing amendment in the other place to leave out subsection (2) so as to remove the objective/subjective test introduced by section 214 of the Insolvency Act 1986 as it adds a level of severity. The extent of a director’s duties, failings and liabilities should be determined on the particular facts of a case. This also raises the issue of the standard on which a director who is also a professional should be judged. Lord Goldsmith responded that subsection (2) is essential to establish what the standard of care owed by director to a company is. He said that the wording of subsection (2) is clear and that the duty of care will take into account the general knowledge, skills and experience of that director. He also said, in response to a Law Society query, that if a director is a professional but is not employed by the company in his professional capacity, he would not be expected to bring his professional expertise to the directorship. Will the Solicitor-General provide the grounds on which the Attorney-General made that statement?

The City firm, Linklaters, pointed out in a report that the provision follows recent case law, which has adopted the twofold duty that I discussed. However, adopting such a test, which was originally introduced in an insolvency context, may cause concern if applied in all situations and for all types of company. Directors of smaller companies, particularly those established for non-commercial purposes, would find that standard particularly onerous. Furthermore, non-executive directors are to be judged by the same standard as executive directors. Norton Rose’s report pointed out that non-executive directors will often have more experience than their executive counterparts. Does the Solicitor-General consider that the impact of the clause could be to put directors off serving as directors?

Mike O'Brien (Labour, North Warwickshire)

Those who take it on themselves to act on behalf of or to advise others may have a duty to exercise care and skill in doing so. The clause is concerned with the application of that duty to company directors. The duty of care that a director owes to his company is an important area of law and has evolved significantly over the past 20 years. Historically, there was a very low standard of care and a director was not required to exhibit in the performance of his duties a greater degree of skill than might reasonably be expected from a person of his knowledge and experience. That was in re City Equitable Fire Insurance Company.

Some 19th century cases remain well known, in part because their outcome now strikes us as out of step with modern expectations. For example, in 1892 the court held that the Marquis of Bute, who was appointed a bank president at the age of six months and attended only one meeting of the board in 39 years, had not breached his duty of care. That was in re Cardiff Savings Bank. Standards have changed and the law has developed significantly. The Law Commission considered that we should ensure that our current standard is the right one and that that should be set out in statute. The company law review agreed, as do we.

The duty requires a director to exercise reasonable care, skill and diligence. Subsection (2) explains what that means. It

“means the care, skill and diligence that would be exercised by a reasonably diligent person.”

The duty is based on

“the general knowledge, skill and experience that may reasonably be expected of a person carrying out the”

same functions as the director in that particular company, and the actual

“general knowledge, skill and experience that the director has.”

The former is the minimum standard required by the duty on all directors. If the particular director possesses greater general knowledge, skill or experience than that which may reasonably be expected of a director carrying out the same functions as him in that company, he will have to meet a higher standard of care, skill and diligence appropriate to his general knowledge, skill and experience.

That deals with executive or non-executive directors who might have different levels of knowledge and skill, where they are expected to exercise that. If the director happens to possess less knowledge, skill and experience than that which would be reasonably expected of a director carrying out the same functions as him in that company, he would nevertheless be required to meet the minimum standard set by the objective test in subsection (2)(a), which was referred to also in the case of re DKG Contractors Ltd.

The standard of care takes account of the differences between the responsibilities of directors of different types and in different situations—for example, the chairman, chief executive, finance director, chairman of the audit committee or an independent non-executive director. The objective element of the test looks at the general knowledge, skill and experience that may be reasonably expected of a person carrying out the same functions as the director in that company, enabling the court to take account of all such differences.

In a sense, I have dealt already with non-executive directors. The duty takes into account an individual’s general knowledge, skill and experience that they are expected to deploy. However, the duty does not require the director to use all his skills. For example, a lawyer on the board of a company is not expected to second guess the lawyers advising the company, but to use his general knowledge, skill and ability to look at things. It might be that, as a result of those skills, he will have some questions about a decision with a legal impact and for which legal advice has been obtained. However, he is not expected to go off and spend a week researching the subject that a barrister has been employed to research in order to see if he agrees with it. That is not the required level of diligence. So it is about exercising reasonable care, skill and diligence. The non-executive director will use some of his experience and skill in his involvement, but he is not expected to have all the knowledge about the internal workings of the business that, say, an executive director is, and so the law will take account of people’s different perspectives.

The clause provides sufficient guidance to directors so that they can exercise their roles with a degree of certainty about what is required of them. I hope therefore that the hon. Gentleman will feel able to support our position.

Jonathan Djanogly (Conservative, Huntingdon)

The Solicitor-General explained the test in section 214 of the Insolvency Act 1986 very well, and I appreciate that we have moved on from the Marquis of Bute case. However, I am still not quite sure why we have to go to the level of toughness in section 214.

Tom Mackay, chair of the legal committee of the Quoted Companies Alliance, said that that duty

“could have dire consequences in that directors, especially those of FTSE 100 companies, would be reluctant to become a director of a smaller company. Liabilities will arise as they will be measured by a higher standard of care, skill and diligence”.

Clearly, a number of people are concerned about that, and we will have another look at the clause over the recess, but for the moment, I beg to ask leave to withdraw the amendment.

Standing Committee D

Clause 161

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 256, in clause 161, page 71, line 2, after ‘must’, insert ‘take all reasonable steps to’.

John Bercow (Conservative, Buckingham)

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

No. 323, in clause 161, page 71, line 3, leave out ‘, or possibly may conflict,’.

No. 322, in clause 161, page 71, line 4, at end insert

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

No. 257, in clause 161, page 71, line 11, leave out paragraph (a) and insert—

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

No. 255, in clause 161, page 71, line 21, at end insert—

‘( ) The authorisation may, in either case, be given by them (unconditionally, or subject to such conditions or limitations as they may specify), either in relation to a particular matter or generally, following receipt by them of a general notice in accordance with section 168.’.

No. 167, in clause 161, page 71, line 29, at end add—

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

Jonathan Djanogly (Conservative, Huntingdon)

This is a complicated clause, in what is clearly the controversial part of the Bill. It replaces the existing no conflict common law rule and covers all conflicts between the interests of the director and the company. A significant change in subsection (4) is that independent directors can authorise another director’s conflict. In the case of a public company, such authorisation must be allowed by the company’s constitution. In the case of a private company, authorisation can be given by the directors so long as nothing in the company’s articles invalidates such authorisation. By virtue of clause 156(2)(a), this duty is extended to former directors in relation to

“the exploitation of...property, information or opportunity of which he became aware at a time when he was a director”.

The Law Society, among others, has pointed out that there is a significant difference between the common law rule on conflicts of interest and the wording of clause 161. Notably, the common law rule maintains a negative position, whereas the clause imposes a positive duty. That is a key concern that has been raised by many stakeholders. There is a fear that this positive duty might impact on the ability of a director to assume multiple directorships, which is a feature of the UK company system and provides a number of benefits to companies of all sizes. I should like to quote from a briefing that we have received from the City law firm, Allen and Overy. It states:

“At present, a director may comply with the duty to avoid conflicts of interest by taking appropriate action to ensure that a company is not disadvantaged by any conflict of interest the director may have i.e. by not taking part in a particular matter. Based on the current formulation, which is widely expressed to avoid a situation where there is, or may be, a potential conflict, there is arguably no place for multiple directorships.”

We believe that it will be more difficult for directors to hold multiple directorships, and that could affect the pool of non-executive directors, which is itself a current problem. This is of particular concern to the private equity and venture capital industries, where executives of private equity firms routinely hold multiple non-executive directorships. The British Venture Capital Association made the point clear in a letter of 12 January to Lord Sainsbury of Turville. It stated that the clause

“may result in individuals refusing to hold multiple directorships. If this happens, it will affect the private equity industry’s ability to attract non-executive directors who can sit, or may want to sit, on multiple boards.”

It continues by saying that is it important that the clause

“is amended to avoid any uncertainty in relation to this issue.

It is standard practice within the UK private equity industry for a private equity fund to have the right to appoint one or more non-executive directors (‘NEDs’) to each company that the fund is providing investment to. Invariably, the private equity firm that has organised the company’s investment by the private equity fund will select the NEDs and these will either be executives of the private equity house or independent experts who may have industry-specific knowledge. The effect of this kind of industry arrangement is that often these executives or independent experts will hold non-executive directorships in a number of companies associated with the private equity firm and the funds of which the private equity firm manages.”

The letter then says that the clause

“places an absolute obligation on a director of a company to avoid a situation in which the director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the company. In practice, taking on any additional directorship is likely to give rise to difficulty under this provision as almost any additional directorship ‘possibly may’ conflict. Although this duty will not be infringed if the situation cannot ‘reasonably be regarded as likely’ to give rise to a conflict of interest...it will not always be easy for a director to be able to rely confidently on this safe harbour when accepting an additional directorship.”

The letter goes on to state that the other safe harbour provided in subsection (4)(b)

“which allows the other directors to authorise the ‘matter’, would appear to require specific permission to be given to each additional directorship at the time it is taken on. This would, in effect, amount to a need for an NED to seek permission each and every time he wants to accept an additional NED post, which is not practicable. It needs to be clear at the outset that the NED can take on other directorships, subject only to having to disclose them.”

The letter continues:

“If a person holds more than one non-executive directorship and a conflict arises but the person cannot explain the reason for the conflict (e.g. because the information giving rise to is confidential or price sensitive), it seems that the director’s only option will be to resign rather than to absent himself of herself from decision making as would be the case at present.”

The letter urges that the clause should be amended

“to provide a mechanism for a person to be able to take on multiple directorships and for a person who holds multiple directorships to be able to deal with conflicts in the same way as they can now.”

It goes on to say that it

“should state that a director of a company (the ‘first’ company) should be able to accept an additional directorship with another company (the ‘second’ company) if at that time of his or her appointment as a director of the second company, there is no actual conflict with the interests of the first company. If a conflict arises after the director has been appointed as a director of the second company, the director should be able to absent himself or herself from decision making or obtain authorisation from the directors of the relevant companies as envisaged by”

subsection (4)(b).

Those concerns should not be taken lightly. Private equity and venture capital are growing industries in the UK, and more and more of our successful companies are being financed by private equity. The industry has been a valuable driver of business growth. We should not put barriers in the way of those who want to invest in UK companies, particularly the small start-ups that are often the target of venture capital investment.

Those who practise law in this area have also raised concerns with us. As a City lawyer said to me, the key issue is that, currently, a director in the conflict position can manage the problem by removing himself from the company’s decision-making process when a conflict arises. The draft new law seems to go much further, imposing a duty to avoid the possibility ofa conflict in the first place. If that is not the Government’s intention, an explanation should be provided as to how directors of more than one company can manage a situation in which duties to those companies will conflict. As the Government have not been forthcoming with an explanation, we tabled the amendments to rectify the problem. Amendment No. 167 would meet the concerns by stating that if there is no disadvantage to the interests of the company, a director may hold multiple directorships.

Amendment No. 257 would allow directors to exercise their subjective judgment as to whether a situation is likely to give rise to a conflict. We should show UK company directors that we have faith in their judgment, but the Government seem not to be doing that with this clause.

Amendment No. 255 was drafted for us by the Law Society. A similar amendment was rejected by Lord Goldsmith in the other place, and both the Conservative party and the Law Society sincerely hope that the Government will reconsider their position. The Law Society is clear on this point. In its June 2006 Commons briefing, it states:

“As a matter of principle, we do not think that a director should be at risk of being in breach of duty in a case where he may be unable to prevent the breach arising, because the breach arises as a result of an action by a company of which he is a director, rather than because of an action that he has taken himself...We are very concerned that the effect of Clause 161 will be to make it almost impossible for a director of more than one company to manage conflicts which may arise between the interests of the companies of which he is a director. At present, it is normal for a director who finds himself in such a position to manage the conflict by absenting himself from meetings at which the matter giving rise to the conflict is discussed. Only in the most extreme cases would a director be expected to resign. It is by no means clear that such an approach will be possible in future. As a result, it is likely not only that directors will be required to resign from multiple boards more frequently, but also that individuals will be very reluctant to put themselves forward to take up non-executive posts.”

We tabled amendment No. 322 to make the clause slightly less onerous. The clause could be used against directors’ future conflicts of interests, or in relation to conflicts of which they were not aware. The amendment would limit the scope of the clause to the period when the director seeks authorisation. Similarly, we have tabled amendment No. 323 to remove wording that could be used to threaten directors with possible future conflicts of interest. That would be an onerous requirement for a director to take account of and is not commercially realistic.

Amendment No. 256 has been tabled to allow directors to take all reasonable steps to avoid a conflict of interest. That is a fair allowance for directors who will be running a day-to-day business and should not be unfairly pressured to research every possible conflict of interest that might arise. In his response to amendments to clause 161 in the Lords Grand Committee, Lord Goldsmith said that a director who obtains his board’s consent to another appointment will be entitled to assume that that consent “franks” any subsequent conflict that arises in practice. In our view, and that of most experts, it is far from clear that that will be the case. If that is what the Government believe, however, we would like them to clarify it inthe Bill.

The clause refers throughout to authorisation of “the matter” by the board. It is hard to imagine that, when a specific conflict has arisen between two directorships, a court will take “the matter” to mean the director’s original appointment to the directorship giving rise to the conflict, rather than the circumstances of the conflict. If our concerns are correct, it is unlikely that board approval would be a realistic option in many cases, given the confidentiality obligations to which the director is likely to be subject. In real life, the director will owe duties of confidentiality to each company of which he is a director. In such a case, we fear that the only course open to him in practice will be to resign.

The change may have a significant effect on the availability of suitable non-executive directors for company boards. The introduction of words that specifically provide for general consent will go some way towards alleviating that difficulty. The Minister has heard arguments from legal practitioners with many years’ experience, the Law Society and the venture capital industry. Lord Goldsmith said that he thought he was steering the right course between placing burdens and restrictions on enterprise and looking after the interests of shareholders, but we suggest that he has veered too far in the direction of restrictions. A great number of highly successful businesses will be affected by the provision, and because of it, many smaller businesses may not receive the funding and expertise that they so greatly need.

The Government fail to appreciate, first, that companies often want non-executive directors who are successful in another company in the same sector to enjoy the benefit of their experience, and secondly that such directors will have much to learn and benefit from by seeing other companies in action. The clause could threaten that.

The United Kingdom Shareholders Association and others have objected to subsection (4)(b), which allows directors to authorise the conflict of interest situation without even informing shareholders. The UKSA recommends that such authorisation should at least appear in the company’s next annual report. Under the provision, directors can still authorise the conflict of interest situation without informing shareholders, if the company constitution allows. Any conflict should be reported in the company’s annual report in the case of public companies, but the requirement might be a burden for smaller private companies.

Norton Rose in its report also had something to say on the matter:

“The new clause permits a company’s rights to be waived by the prior consent of the board, provided in the case of a public company, that such board approval is permitted by its constitution. The company can nevertheless provide in its articles of association that shareholder approval is required. In practice, smaller private companies are likely to welcome the ability to sanction a transaction involving a possible conflict by board resolution.”

Will the Government please explain why, if they are committed to encouraging people to become non-executive directors, they do not support our position on that issue?

Quentin Davies (Conservative, Grantham and Stamford)

My hon. Friend has raised an important point, and I hope that the Government will satisfy him that the clause will not prevent people from holding multiple directorships. It would deal the most devastating blow to the way in which business is run, make an exception of this country in the western world, and be a great handicap to business. It would make matters impossible if the results that my hon. Friend foresees were ever to come about. I am sure that the Government recognise that.

It is a benefit if one sits on more than one board, because one takes different perspectives. One sees different sectors of activity and has many of the same classic business problems in different circumstances. One can be much more useful as a director if one has those different perspectives, rather than the limited experience and vision from one company in one sector. It is none the less important to avoid conflicts of interest in life in any role in which one has a fiduciary responsibility, and the role under discussion has an important fiduciary responsibility.

When I read the clause, I thought that it was severely drafted. Amendment No. 257 would go quite a way to making it look more reasonable. I took some comfort when I first read the draft that subsection (4)(b), taken with subsection (5), would provide the obvious solution: if a member of a board wants to join another board, he must not only declare the interest but clear that new membership with both boards. That is a practice that all of us who have been in business have automatically adopted in such circumstances for years. I cannot imagine anyone wanting to do anything else.

I cannot quite remember—the hon. Member for Cambridge may remind me—whether the situation is the same in this country as it is in France, where I also sit on a board. In France it is an absolute requirement that any other directorships held by a director must be declared in the annual report and accounts. That seems a very sensible provision, which we should adopt if we do not already have it here formally as part of law. It is certainly good practice. There should be a declaration of interests. There may be circumstances in which, having declared an interest that may be in conflict, one wants to remind one’s board colleagues about it. Even if the interest has been declared at the outset and one has their consent to hold both directorships, there may be circumstances in which people might feel that they do not want to take part in a discussion on a particular matter because there could be a conflict. That arises in many other fields than just business. It could arise in many contexts in politics, in government, in managing a charity and any other field where one has fiduciary responsibilities.

My hon. Friend has raised an important issue. It would be extraordinarily perverse and I simply cannot believe that the Government would allow a situation to arise in which it was not possible to be a director of different companies at the same time. I do not think that one should be a director of 55 different companies, and I cannot conceive of a scenario in which one can do a proper job on behalf of shareholders of so many companies, even if there is a very small number of shareholders or they are wholly owned subsidiaries.

I do not see the need to provide for blanket authorisations for people to be members of any number of boards without getting consent in each case. It is absolutely elementary that if someone is going to have two different fiduciary responsibilities, they should declare to both groups of people on behalf of whom they exercise those responsibilities that they have the other responsibility too, and to seek authorisation on every occasion. I do not think that that will be very onerous. I do not think that anyone can do a serious job in business if they have such a large number of directorships that it becomes a real problem to seek authorisation each time they take up a new one. I am not entirely persuaded by my hon. Friend on that point, but the main thrust of what he said is extremely important, and I hope that the Government will be able to come up with some satisfying and convincing answers to it.

Mike O'Brien (Labour, North Warwickshire)

There is no problem with people holding multiple directorships. I can see that there may be quite substantial benefits in that from time to time, depending on the circumstances. It certainly is the case in venture capitalism and the way in which private equitable capital is developing that a number of people hold quite a few multiple directorships. All that is required is the exercise of a reasonable amount of diligence and care, getting the proper authorisation and letting people know what is going on. There are clear duties here. I do not think that anyone disagrees with those duties. It is necessary, however, for people to be properly informed about what the interests of directors are. They should have an obligation to avoid conflicts of interest unless those conflicts are clearly in compliance with the law and they have gone through the appropriate procedures in order to get them authorised.

Jonathan Djanogly (Conservative, Huntingdon)

If what the Solicitor-General says is the case—I tend to agree with him—does he agree that we need to delete the words “or possibly may conflict” in the second line of subsection (1), because the director will not know when he becomes a director what may conflict in the future?

Mike O'Brien (Labour, North Warwickshire)

No, I do not. I think that there is an obligation on a director to be diligent and take account of the circumstances that he faces. The possibility of his interests conflicting with those of the company ought to be reflected in statute. The phrase “or possibly may conflict” reflects the way in which the courts have expressed the principle. It is current law, not something new.

Mr. Djanoglyrose—

Mike O'Brien (Labour, North Warwickshire)

If the hon. Gentleman will let me answer his first question, I shall be happy to give way to him.

We are not dragging in an onerous obligation that goes well beyond current ones. The clause reflects current law and is derived from the expression of the rule by Lord Cranworth in Aberdeen Railway Company v. Blaikie, that no fiduciary

“shall be allowed to enter into engagements in which he has or can have a personal interest conflicting or which may possibly conflict with the interests of those whom he is bound to protect.”

Potential conflicts, as well as actual conflicts, may put at risk or appear to put at risk the loyalty that a company expects from its directors. The provision must be read with the exceptions in subsection (4):

“This duty is not infringed...if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest.”

Several hon. Membersrose—

Mike O'Brien (Labour, North Warwickshire)

Several Members wish to intervene, but it will be better if I set out my argument and then take some interventions to deal with the points that have arisen. I might be able to deal with some of them as I progress.

I was asked about people absenting themselves from a meeting. People will not be able to do that as of right. They cannot just walk out of a meeting without declaring that they have interests. If they have been authorised, in advance or at the time, to have a particular interest, there should be no difficulty with them merely absenting themselves from a particular directors’ meeting. In the vast majority of cases, an appointment will be made on the basis that a director will be able to withdraw. He will have declared his interest and should therefore be able to do that.

We have no problem with non-executive directors holding company directorships or with multiple directorships. The clause broadly reflects the current situation, and subsection (1) in particular follows what is regarded as the classic statement of the current duty by Lord Chancellor Cranworth. He was followed by Lord Upjohn, who said in the House of Lords in the case of Phipps v. Boardman:

“The whole of the law is laid down in the fundamental principle exemplified in Lord Cranworth’s statement.”

The statement from Lord Cranworth was thereby backed up in the House of Lords. As Jonathan Parker pointed out in the 2003 Court of Appeal case of Bhullar v. Bhullar,

“the rule is essentially a simple one, albeit that it may in some cases be difficult to apply. The only qualification which is required to Lord Cranworth’s formulation of it is that which was supplied by Lord Upjohn in Phipps v. Boardman, where he said this:

‘The phrase ‘possibly may conflict‘ requires consideration. In my view it means that the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict’.”

We therefore have clear guidance, and as Lord Upjohn also pointed out in Phipps v. Boardman:

“Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.”

Flexibility of application is the essence of the rule, which is why subsection (1) is expressed in general terms. It will be for the courts, as it is now, to determine its detailed application. It seems to me that the general aim behind the Conservative amendments is to water down the duty currently owed by directors. The Conservatives seem to want directors to be free to have conflicts of interest, provided that they have declared them generally. Such a watering down of the law could expose members of companies to unscrupulous directors all too easily. We want directors to be scrupulous and careful and show due diligence, but we also want to ensure that, providing they act in the way that I have described, they can have multiple directorships.

Quentin Davies (Conservative, Grantham and Stamford)

The Pepper v. Hart rule that I have referred to already provides Ministers with the chance to clarify some of those problems in the course of the debate and will give their explanations a particular importance.

In that spirit, I put to the Solicitor-General a question: clearly, there are many obvious situations in which there is a conflict—a director of Shell cannot be a director of BP, and a director of Tesco cannot be a director of Sainsbury. Nobody can predict the future kaleidoscope of business transactions and relationships. Strictly speaking, the words “possibly may conflict” might make it an offence under the law to take up a directorship that leads to conflict, competition or a dispute between two company directorships. A person would then have committed an offence even though they could not reasonably have predicted that such a conflict would arise. Will the Solicitor-General give a clear assurance that a person could not be convicted in such circumstances?

Mike O'Brien (Labour, North Warwickshire)

The hon. Gentleman cannot have listened to what I just said. I quoted Lord Upjohn, who said:

“Rules of equity have to be applied to such a great diversity of circumstances that they can be stated only in the most general terms and applied with particular attention to the exact circumstances of each case.”

So the circumstances of each case have to be considered. Directors can put themselves quite easily in a position in which they avoid circumstances that give rise to unexpected future conflicts.

Mr. Daviesrose—

Mike O'Brien (Labour, North Warwickshire)

The hon. Gentleman must let me answer his question before he tries to intervene again. If he does not like the answer, I shall give way again. We had a long debate on the last issue, and I am trying to make some progress now so he should allow me to set out the argument—it might help him.

The clause recognises that unexpected situations can arise. It states:

“This duty is not infringed—

(a) if the situation cannot reasonably be regarded as likely to give rise to a conflict of interest”.

For as long as that remains true, the director will not be in breach of the duty, even if it turns out that the situation did give rise to a conflict, or was likely to do so. If the director knows that there is a conflict, it is a different matter and he will have to do something about it. However, the director will not be in breach if, as set out in subsection (4)(a), it could not be reasonably regarded as being likely to give rise to the conflict.

If a person cannot possibly foresee a situation, it cannot be reasonably regarded as being likely to give rise to a conflict of interest. On the other hand, if they can foresee it, the director or members of the company should be able to make an informed decision about whether it is an acceptable conflict of interest or whether the matter should be dealt with in accordance with applicable provisions under the company’s constitution.

Quentin Davies (Conservative, Grantham and Stamford)

The first half of the Solicitor-General’s response was of no help at all. It is no use quoting the jurisprudence that is anterior to the potential passage of the Bill. When the Bill becomes an Act, it mightwell be deemed by a court to have set the previous jurisprudence aside. The second part of his explanation was, however, extremely helpful, and I am grateful for that. I think that it has gone a long way to solving the problem.

Mike O'Brien (Labour, North Warwickshire)

The provision will not be lacking in applicability. It is quite clear that we intend the courts to be able to refer to previous jurisprudence, so the situation is not as the hon. Gentleman described it. I quoted Lord Upjohn, because it was relevant.

Amendment No. 256 would allow directors to be in unauthorised conflict regardless of the company’s wishes as long as the director has taken “reasonable steps to” avoid it. That would be the impact of the Conservative proposal. Under the current law, there should never be an unauthorised or potential conflict. That principle exists for the protection of the company and its members.

An amendment to that strict rule, so that a director is not in breach so long as he takes all reasonable steps to avoid it, would be a change to the current law. I emphasise that the Conservatives are proposing a change to the current law, to water it down and to put company members and the operation of UK company law at risk. That is what they are proposing. It would significantly weaken the duty and the protection currently given to companies and ultimately to their shareholders. Unless the matter is authorised or dealt with in accordance with a company’s constitution, companies are entitled to expect from their directors an element of loyalty. The ability of a company to rely on this should not be made dependent on the exercise of reasonable care about whether the director has avoided a conflict.

Amendment No. 323 seeks to delete the words “possibly may conflict”. They reflect the way in which courts have expressed this principle and deleting them would depart from the current law. Potential conflicts, as well as actual conflicts, may put at risk or appear to put at risk the loyalty that the company can expect from its directors. The company should not have to wait until there is a conflict. This provision has to be read in conjunction with subsection (4).

As for amendment No. 322, the clause already recognises that unexpected circumstances can arise. Not all conflicts or potential conflicts are foreseeable. I have already set out why I believe that the director has an obligation to make it clear to his company what those potential conflicts are and to go through the authorised procedure. If he cannot foresee a situation, it cannot reasonably be regarded as being likely to give rise to a conflict of interest. If a person can foresee a situation, the directors or members of the company should be informed about that and can then act accordingly. That is the situation and we want it to continue.

Jonathan Djanogly (Conservative, Huntingdon)

Can the Solicitor-General explain the extent to which information should be given and at what point it should be given? Can a general authority be given?

Mike O'Brien (Labour, North Warwickshire)

May I come to that later, as that is one of the issues that I want to deal with?

Amendment No. 322 fails to take into accountthe ongoing nature of the duty. It would allow unauthorised conflicts to occur as long as they are not identifiable at the time that authorisation was given. This would be an unacceptable change in the law. It would leave companies to bear the risk of whatever unforeseen circumstances might arise, whether or not the company regards them as acceptable. That is the very opposite of the current position where all conflicts, whether they are originally identifiable or not, are unacceptable unless authorised in some way by the company, be that through its directors, its members or its constitution.

I turn now to amendment No. 257. The March 2005 White Paper version of this clause contained an exemption in which there was no real possibility of a conflict of interest. That was based on the way in which this duty has been formulated by the courts in Phipps v. Boardman. However, in the light of the consultation responses, this was replaced with an exception where the situation cannot reasonably be regarded as likely to give rise to a conflict of interest. This already makes a situation easier from the point of view of the director.

Amendment No. 257 would go still further and would weaken the protection that this duty provides for companies and ultimately for their shareholders. It would replace the current objective test with a partial subjective test. That would be a significant departure from the current law, watering down the protection that members have. It would make it much harder for the company to enforce the law. The company would be able to enforce the law in regard to the director only if it could show that the director’s belief was unreasonable or that he was not acting in good faith. Again, the Conservatives are trying to water down the current law. They are exposing members to problems. I do not think that they want that. The problem is that they have not thought this through.

I shall deal now with amendment No. 255. The clause provides a new statutory mechanism for the authorisation of conflicts of interest by those directors who are not interested in the matter. Subsection (5) requires the matter to be proposed to directors and authorised by them. The directors should be able to give informed consent to their fellow director if he is in a situation in which he has or can have a direct or indirect interest that conflicts or may conflict with the interest of the company. The company law review recommended that the authorisation should be reasonably specific. The clause does not go that far, but nor does it provide for the blanket authorisations envisaged in amendment No. 255.

Amendment No. 255 would allow the rule on conflicts of interests to be effectively set aside in an extremely wide manner. The ability to disclose by way of general notice is appropriate in relation to transactions within a company, and clauses 163 and 168 deal with such matters, allowing interests to be declared in the appropriate way, as does current law. It would be going too far to allow authorisation to be given by way of some general notice on other conflicts of interest that may arise. The purpose of a general notice on company transactions is to put the company on notice that a director has an interest in a transaction. The company can then decide whether to take steps to safeguard its interests. As the company is a party to the transaction, it will be aware of its terms, even if not of all the details of the director’s interest.

Jonathan Djanogly (Conservative, Huntingdon)

The Solicitor-General is talking about general disclosure on a transaction. What if a director were to give a general disclosure on the fact that he was interested, or had other directorships, in a certain sector?

Mike O'Brien (Labour, North Warwickshire)

When it comes to other conflicts of interest, the company will not necessarily have all the additional information to hand. For example, it might not know about the property, information or opportunity to which such a conflictas the hon. Gentleman describes relates. A generalnotice might therefore give the company insufficient information to reach an informed decision. Amendment No. 255 would leave the company in the dark, which is what he proposes. It would do away with any need for the directors to be properly informed to give authorisation. A general notice, it seems, would suffice.

Under clause 171, a general notice gives notice that a director has an interest as a member, officer, employee or otherwise of another company or firm, or that he is connected with another person. The notice must also state the nature and extent of the director’s interest in a company or the nature of his connection with a person. That is it. General notices do not need to give any other information. That would not be enough under clause 161. That level of information—to be more accurate, the virtual lack of it—is likely to be completely insufficient for directors to determine whether they should be concerned about a conflict of interest that might arise. By agreeing to a general notice, directors would be authorising every conflict of interest arising in relation to the matter disclosed in the notice. That would leave companies vulnerable, as directors would be able to agree to the setting aside of their duty in an extremely wide manner.

Amendment No. 255 would also provide for authorisation to be given unconditionally, or subject to such conditions or limitations as the directors specify. That is unnecessary. The clause already allows the authorisation given by directors to be unconditional, or subject to restrictions. It is not necessary to make express provision to say so.

On amendment No. 167, there is currently no absolute rule prohibiting directors from holding multiple directorships—I have made that clear—or even from engaging in business that competes with the company. However, a tension results from that tolerance on one hand and the director’s fiduciary duties on the other. The clause does not prohibit a conflict, or potential conflict, of interest, as long as it is authorised or the director acts in accordance with the provisions on such matters in his company’s constitution. The situation is perfectly straightforward: a director can hold multiple directorships and do business. The clause presents no challenge to current law or the opportunities for venture capitalists or others to develop a range of companies and do a good job of promoting our economy.

It is surely right that a company should be given the chance, through its members, directors and constitution, to decide whether conflicts or potential conflicts are acceptable. They will be given that chance, but the Conservatives seem to propose watering down the protection that members of companies have, which is utterly unacceptable. The risks associated with conflicts of interest and the duties arising from multiple directorships are precisely the type of situation that the duty in the clause is intended to catch. The Government wish to widen the pool of potential non-executive directors, but not against the wishes of the companies of which those people are already directors.

Amendment No. 167 would create a new exemption to the duty to avoid conflicts of interests, which would change and water down current law and would conflict with the way in which the duty has been described by the courts over many decades. I could quote at length from Lord Justice James in Parker v. McKenna, but I shall not. It is clearly an inflexible rule that the Conservatives seek to water down.

Amendment No. 167 would weaken the duty owed. Before the company could deal with a director, it would have to show that it had suffered a disadvantage. That is not required at the moment, and it can be difficult to prove in questions of real or apparent bias and perhaps divided loyalties. The duties do not leave everything in the hands of the director concerned. The fiduciary duties were developed precisely because the vulnerable party—in this case, the company, its members and its shareholders—needed protecting from the directors. It is not enough to say that a conflict of interest may take place because, in the mind of a director, it will be all right. The company, through its members or the other directors, should be able to make that decision.

I get the impression that there has been a lot of lobbying from a bunch of directors who have particular fears. I hope that I have reassured them and told them that they can continue with multiple directorships. In some circumstances, there are benefits and they can be encouraged. However, companies have a right to know about multiple directorships when they arise.

I shall deal with whether there is a negative or positive test, which the hon. Member for Huntingdon asked at the beginning. The courts have on occasion characterised some of the rules on directors’ interests as negative rather than positive—disabilities rather than duties. The Bill does not do that. Clause 156(4) requires the courts to have regard to the rules and principles of the statutory statement of general duties. That may include any characterisation of any aspect of those rules and principles as negative disabilities rather than positive duties, and any consequences flowing from that in the interpretation and application of those rules and principles.

It would be wrong to label clauses 161 and 162 as disabilities. The courts have never suggested that the entirety of the rules reflected in those clauses should be treated as a disability rather than a duty. The leading case is Movitex v. Bulfield, which was primarily concerned with a conflict relating to transactions with a company. Such conflicts fall within clause 163, which simply requires disclosure. More recently, the Court of Appeal has questioned the distinction between duties and disabilities in relation to such conflicts of interest. In the case of Gwent Valley Development Company v. Koshi, it was said that, whether viewed as duties or disabilities, all such incidents are aspects of the fiduciary’s primary obligation of loyalty. That is an important point and the general duties should be considered together.

I hope that I have satisfied the hon. Gentleman about the way in which the director may perform. He will need to ensure that he is properly authorised for conflicts of interest. If he receives authorisation, does it properly and the company knows about it, he can do it. If he does not, he may well be in trouble. However, the important point is that he would be now. If the Conservatives were to change it, they would put members and companies at risk.

Jonathan Djanogly (Conservative, Huntingdon)

The Solicitor-General’s full response is appreciated. It will need careful review. However, he started by saying that there is no problem with people holding multiple directorships. That is simply not the case. People have been telling us that there will be exactly that problem. It is yet to be seen whether what he just said will satisfy stakeholders, but I doubt it. He has not helped to allay my concerns that a director will have a real problem avoiding a situation that, possibly, may conflict. If, for instance, I were an electronics expert and a director of an electronics company looking for a non-executive directorship in the electronics field, it could be argued that, if I took up such a post in a field similar to the company in which I was a director, future conflict would be likely—through competition, one company buying another or any number of other possibilities. I would know that that situation could arise, but as things stand it would not present a problem because people declare interests when they need to do so. That point was made clearly by my hon. Friend the Member for Grantham and Stamford, who spoke with an authority that comes from experience. He explained how he has found conflict situations work in practice. For the most part the existing system works pretty well.

We are some way from the Government’s position and we wish to express our concerns on the practical implications of the clause. On that basis, I shall ask the Committee to divide on amendment No. 257. I beg to ask leave to withdraw the amendment.

Clause 162

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 155, in clause 162, page 71, line 31, after ‘benefit’, insert ‘of more than £1,000’.

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss amendment

No. 154, in clause 162, page 71, line 44, at end add—

‘(6) This duty is not infringed if the acceptance of the benefit is approved by the board of the company.’.

Jonathan Djanogly (Conservative, Huntingdon)

The clause introduces a duty on directors not to exploit their position for personal benefit. They will be liable only if accepting the benefit would give rise to a conflict of interest, in which case they will be caught under that duty and that in clause 159. By virtue of clause 156(2)(a), the duty is extended to former directors in relation to

“things done or omitted by him before he ceased to be a director.”

Although that duty is clearly based on the common law duty to account for any secret profit, there is no exact corresponding duty to the duty in this clause.

Lord Freeman moved a probing amendment toleave out this clause. It aimed to obtain a definition of benefit and to find out whether an indemnity to a director from a third party relating to the performance of his duty or non-financial benefits would be caught by the clause. Lord Goldsmith responded that benefit under the clause covers all forms of benefit given to a director as a result of him being a director. We do not think that the Lords amendment needs to be raised again, but we have concerns and have therefore tabled other amendments.

The Law Society’s parliamentary brief raised the point that a director should be able to obtain approval of a proposed benefit from the board or shareholders. Furthermore, where a joint venture company has been established, benefits provided by one of the parties, who may not be an associate for the purposes of subsection (2), to a director may be caught under the prohibition. Norton Rose’s briefing note states that the prohibition in clause 162 will give rise to debate and some uncertainty over what benefits may be regarded as likely to give rise to a conflict. Directors will therefore need advice as to what benefits may be accepted. I should be grateful if the Solicitor-General told us whether he has given any thought to that matter.

The CBI fears that the clause may make directors reluctant to delegate authority to committees. Amendment No. 154 would therefore insert an approval mechanism. Finally, we wonder whether the clause should apply to de minimis amounts. MPs have limits beneath which they do not need to declare sums. Why should not directors have that? We suggest excluding small amounts and £1,000 is proposed purely on a probing basis.

Mike O'Brien (Labour, North Warwickshire)

Our approach to theconflict of interest duties reflects the approach by the company law review. In the words of the review, it strikes the right balance between encouraging efficient business operations and the take-up of business opportunities on the one hand and providing effective protection against abuse on the other. The reviewwas rightly concerned that a strict no-conflict rulemight fetter entrepreneurial and business start-up activity by existing company directors. It is therefore recommended that, in relation to the personal exploitation of corporate opportunities, it should be possible for the company’s rights to be waived by the board acting independently of any conflicted director. That approach was followed by clause 161, which introduces the new statutory mechanism for the authorisation of conflicts of interest by those directors without an interest in the conflict.

The same arguments do not apply in respect of the acceptance of benefits from third parties in the clause. That is why the review rightly did not recommend that independent directors should be able to authorise acceptance of benefits from third parties. The issue is not the relative seriousness of the abuse, although the acceptance of a bribe by a director can certainly be a serious abuse. Rather, it is about whether other considerations, particularly those relating to the need to encourage entrepreneurial activity and business success, counterbalance the need to provide effective protection for companies against the risks of conflicts of interests by their directors. Those other considerations do not arise to the same degree when it comes to the acceptance of benefits from third parties which should go to the company. Therefore, the acceptance of such benefits should not be left to the self-regulation of the directors themselves.

The hon. Member for Huntingdon asked about benefits. To some extent, his question was dealt with by the Attorney-General in another place. A benefit for the purposes of this duty includes benefits of any description, including non-financial benefits. In using the word “benefit”, we intend the ordinary dictionary meaning of the word. The “Oxford English Dictionary” defines it as a favourable or helpful factor, circumstance, advantage or profit.

In Cronin v. Grierson, the courts had to consider the meaning of the word “benefit” as used in section 2(3) of the Betting, Gaming and Lotteries Act 1963, which states:

“A player’s success at the game shall not entitle any person to, or to exchange any prize or token for, any benefit other than those provided for by subsection (2) of this section.”

In that case Lord Morris said that a successful player who won the jackpot was given preferred terms for further playing and as a result was most likely or almost certain to have further gain. He added that that was a benefit. Lord Upjohn said that benefit is a word of wide import and that in this context it means no more than advantage. He said that he could not construe it as being limited to a tangible, corporeal advantage in the sense of a prize token or article. Therefore, while the meaning of the term will ultimately be a matter of statutory interpretation for the courts, it is intended to include, and we consider that it does, non-financial benefits.

As far as the de minimis rule is concerned, we do not agree that it is necessary. Financial thresholds are by their nature arbitrary and sit uneasily with the function of the general duties, which are set out as general principles governing the obligations of directors. There is a general duty owed by the director to a company and as such it is concerned with the underlying harm that will be done to the interests of the company or the risk of such harm occurring.

There is no financial threshold in the current law. The current law does not seem to need one and neither the Law Commission nor the company law review recommended that there should be one. The current law operates a much more sophisticated test based on the risk of a conflict of interest. That is how subsection (4) operates. A director may accept a benefit if it cannot reasonably be regarded as being likely togive rise to a conflict of interest in the specific circumstances of the individual case. This is not simply a matter of the financial value.

I happen to have had a dinner with the hon. Member for Grantham and Stamford some years ago. He will recall the incident because it featured in the newspapers. At one point I remember he bought a very expensive bottle of wine. Some people might regard that as an inducement. However, most people would regard the purchase of a mere meal as not being an inducement or bribe of any sort. But wines varyin price. They can be worth many hundreds andindeed thousands of pounds. What is a benefit? The circumstances must dictate that.

Mr. Djanoglyrose—

Mike O'Brien (Labour, North Warwickshire)

I give way if the hon. Gentleman is really interested in this wine question.

Jonathan Djanogly (Conservative, Huntingdon)

I am. The reason why is because it is rather proving my point. Why have all the complication of deciding whether a wine is an expensive bottle of wine and whether it will influence people or not? Why not just have a de minimis level under which it is considered unnecessary to go into what the Solicitor-General called the sophisticated argument?

Mike O'Brien (Labour, North Warwickshire)

The hon. Gentleman is clearly a discerner of fine wines on the basis that he can afford them. A small company might well find that £1,000 was quite a substantial inducement to a member of a company or a director of a company. Companies vary in size. One thousand pounds may be a mere de minimis amount to him. It may be simply the price of a bottle of wine to him but it will not be for most people. For many people, particularly in a small company, £1,000 is not minimal, but significant. Therefore, it should be for the company to determine in the particular circumstances it faces whether a benefit was one that should concern it.

A director may benefit if it cannot reasonably be regarded as giving rise to a conflict of interest in the specific circumstances of the individual case. Such benefits with a small monetary value may be effective bribes because they take account of the director’s particular interests or passions. For example, the hon. Member for Huntingdon likes wine. I know that the hon. Member for Grantham and Stamford does. A ticket for a one-off performance or a carefully chosen gift for an avid collector of wine may be quite an inducement. I therefore think that we should not have the de minimis clause; we should leave it to the company to consider its own circumstances.

David Howarth (Liberal Democrat, Cambridge)

Does not the Solicitor-General consider that there might be some merit in a combination of the two proposals? For very small amounts, the directors might well be in a good position to give authorisation. Under the ratification provisions of clause 222, the shareholders are required to give authorisation. That seems to be a rather cumbersome procedure for the authorisation of asmall deal.

Mike O'Brien (Labour, North Warwickshire)

If the company wants to set that out in its constitution or to change things, it is able to take the steps necessary to authorise a particular approach by directors.

David Howarth (Liberal Democrat, Cambridge)

That raises a general issue about the degree to which the rules in the Bill are mandatory. Clause 154, which we did not discuss, is understood to be mandatory because all the clauses in the Bill are considered mandatory unless otherwise stated. The Solicitor-General’s comments seemed to go against that.

Mike O'Brien (Labour, North Warwickshire)

A company will need to be able to determine whether a director’s benefits present a problem; it might be concerned only about some benefits. Providing that is all done openly, there will not be a problem that we need worry about. But the company must have the right to intervene if it is concerned about the benefits that a director has obtained.

The de minimis provision presents a technical issue. What is a benefit of £1,000? What does that mean? Many benefits might not be in cash or have a clear monetary value. Who would be responsible for assessing the value of such benefits? The third party might choose also to pay the benefit in instalments. What is the position if a director accepts a payment from a third party of £950 one week, and another of equal value the next week? It is not entirely clear. There are definitional issues here.

The proposal by the hon. Member for Huntingdon would produce all sorts of threshold issues and create fresh opportunities for those who wish to evade their directors’ duties. It would be possible to respond by introducing detailed anti-evasion provisions, but that would further complicate an area of law that we are trying to codify. We do not want to complicate that further, so let us leave out the de minimis provision and ensure that companies can determine the best approach for dealing with conflicts of interest. The duty not to accept benefits from third parties should remain on directors.

Jonathan Djanogly (Conservative, Huntingdon)

I am not entirely sure what the Solicitor-General was going on about when referring to fine wines—I think I got lost on about the third bottle.

From the contributions that I have heard, I am not sure that we have reached the right approach. As the hon. Member for Cambridge pointed out, the clause could probably be improved by being more flexible. The Solicitor-General was not necessarily without reason in querying whether the drafting of my amendments was as fine tuned as it could have been. However, I have made my point. We will think further about the matter over the summer. On that basis, I beg to ask leave to withdraw the amendment.

Clause 163

Jonathan Djanogly (Conservative, Huntingdon)

According to the explanatory notes, the clause replaces the existing rule that directors may not have interests in transactions. The Law Society, however, asserts that it is an entirely new duty with no equivalent in common law. Its parliamentary brief raises the issue that the purpose of the clause is to make a company’s board aware of the interests of one of their number, but the clause states that declaration of interests of which the director is unaware cannot exert influence and therefore need not be disclosed.

The Law Society asked for clarification of a couple of points. Will the clause affect the director of a parent company who has had an interest in a transaction of a subsidiary company? Will the interests of a person connected to a director need to be disclosed? A report in the Solicitors’ Journal pointed out that the requirement to disclose matters of which a director ought reasonably to be aware, is onerous. It will require directors to keep themselves fully up to date with the affairs of the board and its committees, which could be difficult for non-executive directors. It would be helpful to hear the Solicitor-General’s views on those concerns.

Mike O'Brien (Labour, North Warwickshire)

Clearly, a director is able to display only the diligence, skill and knowledge that he has. If he does not know about things, he does not know about things. If he is aware of potential conflicts, he has a duty to declare an interest in a proposed transaction or arrangement.

The clause replaces the equitable principle that directors may not enter into contracts with their company or have an interest in any of the company’s contracts. For the benefit of the Law Society, thecases include Aberdeen Railway Company v. Blaikie Brothers. It is the same principle that prevents an agent from contracting with his principal and the trustee from contracting with his trust, as set out in Keech v. Sandford. Those are the authorities. The reason for the strict rule is that the company is entitled to the collective wisdom of its directors. If any director is interested in a contract, his interest may conflict with his duty, and the law always strives to prevent such conflict arising. The rule applies even if the contract is fair. The courts will not look into the merits but strictly adhere to the law that a possible conflict of interest and duty must not be allowed to arise.

It would, however, be commercially impossible for the strict equitable principal to apply without some qualifications. A director may therefore enter into a contract with a company or have an interest in such a contract if he obtains the company’s consent first. Consent may be given by the members, or in some way through the articles.

In common law, the company is at liberty to waive the rules protecting it as a principle in dealings in which directors have an interest. For that reason, section 317 of the Companies Act 1985 imposes a statutory minimum disclosure requirement. There are three sets of rules about company contracts in which a director has an interest: the strict equitable principle, any relaxation of the principle via the company’s articles, and section 317 of the 1985 Act. The varying requirements of each and their interaction is important.

The hon. Gentleman asked whether directors should not be required to disclose what they do not know. In other words, if they do not know it, how will they disclose it? One purpose of the clause is to ensure that the board is aware of anything that may influence decision making by individual directors, but that is not the only purpose of the rules governing transactions between a company and its directors. The rules exist to protect the company. There must be no conflict or any risk of conflict, and good faith must be manifestly applied.

In the Law Commission’s review of section 317 of the 1985 Act, it noted that article 8(6)(b) of table A excludes from the range of interests to be disclosed those of which the director has no knowledge and of which it is unreasonable to expect him to have knowledge. Its view was that such interests should be exempt from disclosure, and the Bill adopts that approach in respect of the declarations of interest required under clauses 163 and 168. As such, it reflects the current position for those companies. I hope that with that reassurance, the hon. Gentleman will accept that he need not worry unduly. I hope that the Law Society is reassured, too.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Solicitor-General for his reassurance and clarification.

Clause 164

Jonathan Djanogly (Conservative, Huntingdon)

The clause states that the civil consequences of breaching a duty in clauses 157 to 163 will be the same as for breaching the corresponding common-law rule or equitable principle. The Law Society’s parliamentary brief points out that clause 164(2) implies that fiduciary duties other than those codified in chapter 2 apply to directors and remain outstanding, and that that confusion should be cleared up. Other commentators have noted that the clause is poorly drafted, saying that it will not cover situations in which a director has breached a statutory duty for which there is no corresponding common-law rule or equitable principle. Norton Rose’s briefing note raises that issue, stating that it is unclear how the civil remedies will apply as most of the duties concerned are not identical to those established by case law. The courts’ existing remedies may be inappropriate when applied to statutory duties that have been cast in different terms.

Have the Government considered those issues in more detail since their consideration in the Lords?

Mike O'Brien (Labour, North Warwickshire)

The clause explains what will happen if a director breaches his general duties. Subsection (1) states that the consequences will be the same as those that currently apply. There will be no criminal consequences. Subsection (2) is intended to remove any doubt that general duties can be enforced in the same way as the common-law rules and equitable principles that they replace. The fiduciary remedies currently available will still be available following a breach.

Clause 156(3) will tell the courts that each duty contained in the statutory statement is based on a common-law rule or equitable principle. Where those duties have been codified the courts will be able to identify the relevant rule or principle. Where they have been changed the courts will need to find the rule or principle that covers the same subject matter as the general duty contained in the statutory statement. If necessary, the explanatory notes and the comments made here today can assist in that exercise. However, once the corresponding rule or principle has been identified in the courts the question will be what the consequences should be if it is breached in particular circumstances and whether a general duty has been breached.

Clause 164 preserves current law on the consequences, including remedies, flowing from any breach of duties. The fact that the general duties might depart from common-law rules and equitable principles in certain ways will not alter the circumstances flowing from their breach. The question will not be whether the rule or principle has been breached but what the consequences should be once it has been breached.

The consequences of a breach of the fiduciary duty can include damages, compensation, restoration of a company’s property, rescission of a transaction or a requirement of a director to account for any profits made as a result. They may also include injunctions or declarations, although those methods are primarily employed when a breach is threatened but has not yet occurred. The consequences of a breach of the duty of care and skill may include the court awarding compensation or damages.

I hope that the hon. Gentleman will feel that the Law Society’s concerns have been met.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Solicitor-General for that clarification.

Clause 167

Mike O'Brien (Labour, North Warwickshire)

I beg to move amendmentNo. 301, in clause 167, page 74, line 17, leave out ‘or Northern Ireland’.

The amendment extends the provisions of clause 167 to Northern Ireland. At present, charities are subject to similar rules on the management of conflicts of interest whether or not they are set up as companies. The clause modifies the general rules on conflicts of interests so that directors of charitable companies do not face weaker duties than those of other charity trustees.

The clause will reverse the various relaxations to the strict no-conflict rule made by the Bill. Charitable companies will still be able to take advantage of the various relaxations, where their constitutions allow it. That has the benefit of openness and transparency. It will be clear from the charity’s constitution whether it can take advantage of a relaxation of the strict no-conflict rule. Clause 167 applies to England and Wales. The amendment will extend the provisions to Northern Ireland.

Jonathan Djanogly (Conservative, Huntingdon)

I have no comment.

Clause 168

Jonathan Djanogly (Conservative, Huntingdon)

The clause deals with the declaration of interest in existing transactions or arrangements and ties in with section 317 of the 1985 Act. Rather than go over all the debates in the Lords, I shall identify one particular point. Subsection (5) states that a director must declare matters

“of which he ought reasonably to be aware.”

There is no corresponding requirement in section 317.

The Law Society stated that the requirement to declare matters of which directors ought reasonably to be aware is particularly onerous and should be left out. The Solicitor-General will note that I have not tabled an amendment to that effect, but I would be grateful for his views on subsection (5) and reasonable awareness.

Mike O'Brien (Labour, North Warwickshire)

The Government take the view that directors have some substantial obligations and that they ought to declare those things about which they should reasonably have been aware. That is an objective test applied to directors concerned. So it will take into account any relevant circumstances relating to that director; it will focus on the individual director. This is the question that will be asked: whatis it reasonable to expect a director in those circumstances to have been aware of? For example, a non-executive director might be expected generally to be less aware of the individual transactions or arrangements entered into by a company.

I repeat that directors are not expected to disclose things that they do not know. One of the purposes of the clause is to ensure that the board is aware of anything that might influence a director’s decision. The director can disclose only what he is aware of, and if he is aware of it, he ought to declare it. The clause therefore will be clear enough, but anyone who wants clarification can read the notes on the clause or, on the basis of Pepper v. Hart, read my comments in Hansard.

Jonathan Djanogly (Conservative, Huntingdon)

I was desperately trying to keep up with the Solicitor-General there, but I think that I failed, so I shall have to do exactly that and read his comments later. I might possibly return to the matter at a later stage, but I thank him for his clarification.

Clause 170

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 274, in clause 170, page 75, line 21, at end insert

‘provided that, if the company has a secretary, the notice need only be sent to the company secretary.’.

John Bercow (Conservative, Buckingham)

With this it will be convenient to discuss amendment No. 275, in clause 170, page 75, line 25, after ‘post’ insert ‘or by facsimile’.

Jonathan Djanogly (Conservative, Huntingdon)

The clause contains new provisions outlining how a director can make a declaration by notice in writing. It states that such a declaration must be sent to other directors in hard-copy form by hand or by post, unless a recipient has agreed to receive it electronically. Once a declaration has been made by that method, it is deemed to form part of the next board meeting’s proceedings.

The Law Society parliamentary brief proposes an amendment to subsection (2) to require a director who makes a declaration to send the notice not only to the other directors, but to the company secretary, if the company has one. The secretary should be aware of declarations, and a central record should be kept.

The Law Society also proposes an amendment to subsection (4)(b) to enable a director to send the notice in electronic form if another director has, in general, agreed to receive all declarations of interest in that form, and not just if an agreement has been reached on a specific declaration.

In a large company, almost everything will go through the company secretary’s department, and it would probably be seen as rude to send official notices directly to other directors. In reality, many directors will not know where their fellow directors are half the time and they would, in any event, see that as the role of the company secretary. I would be grateful to hear the Solicitor-General’s views on that.

Mike O'Brien (Labour, North Warwickshire)

Our view is that informing a company secretary is insufficient and that the other directors need to know about any declaration of interest by a fellow director.

We do not accept that it is particularly onerous to tell other directors of a declaration, because they will—particularly these days—be in contact with their office or place of business, and there will be a method of sending them a letter or other communication. Directors must already declare an interest under section 317 of the 1985 Act and article 85 of table A, so it is no great change to require them to continue todo so.

Company directors take decisions, sometimes daily, and they should be informed of any issues about which they need to know. A director who declares an interest may send the notice to the company secretary, who may then send it to the other directors—that is not a problem. However, the responsibility for ensuring that it is sent out to the other directors must rest with the director who sent it; he cannot abrogate that responsibility by giving the notice to the company secretary and saying, “Right, I’ve sent it to you. That’s it, I don’t have to tell anyone else. It’s up to you to make sure you contact everyone else.”

It is the director’s responsibility to ensure that the other directors are informed. If they are happy to be informed in a particular way—they might well want to be informed by the company secretary—they can authorise that, but we should not take away the director’s responsibility for telling the other directors.

The hon. Gentleman did not speak to amendment No. 275, but let me address it by saying that clause 807 defines electronic means as including faxes. It depends on the view of the recipient as to whether he is prepared to receive things by fax—some people are, some are not. Faxes are a very inefficient means of communicating, as I found this morning when I tried to receive one. The printer on my fax machine had broken down, so nothing but a blank sheet of paper came through. If the intention had been to inform me of a conflict of interest, I would not have been informed.

Faxes are, therefore, not particularly reliable. None the less, some people may wish to receive the declaration by fax, in which case authorisation may be given. If the recipient agrees that they will receive a declaration by fax, that is fine; if they do not, they should receive it in the proper form, and the director has an obligation to send it in a form that is easily readable. Indeed, these days, e-mail is probably an easier way of getting in contact with people than fax, but e-mails, too, have a habit of going astray.

Jonathan Djanogly (Conservative, Huntingdon)

On the latter point, I thank the Solicitor-General, first, for reminding me that I did not speak to that amendment. I suppose that, as far as the Government are concerned, we now live in a post-fax age, and his view reflects that. I do not necessarily disagree, but some people have only just moved on to fax and have not quite got round to e-mail yet.

On amendment No. 274, we are coming round in a circle so as to decide what the responsibilities of company secretaries should be. The Government have, I suppose, made it clear that they are not much interested in the officer role of the company secretary. What the Solicitor-General just said ties in with that, in so far as he said that company secretaries should not be responsible for sending out documents and that it is the director’s responsibility. I suppose that is in accord with cutting out company secretaries generally. We do not agree about that, but the debate has already taken place. On that basis, I beg to ask leave to withdraw the amendment.

Clause 174

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 276, in clause 174, page 77, line 46, at end add—

‘(8) Any accidental failure in the procedures to submit a memorandum under the provisions of subsection (5) shall not invalidate the approval of the guaranteed term.’.

The substance of the clause is essentially the same, subject to slight redrafting, as the corresponding provision in the 1985 Act. The primary changes arein subsection (5), which states that a shareholder resolution approving a relevant service contract is not valid unless, in the case of a written resolution, it has been sent to all members. No provision for a written resolution is made in section 319 of the 1985 Act.

The Law Society’s parliamentary brief recommends an amendment inserting a new subsection, underwhich the accidental failure to send a copy of the memorandum setting out the proposed contract, which must be sent to shareholders if approval is to be valid, would not invalidate the shareholder approval. The reason for the proposal is that a minor oversight should not invalidate the shareholder approval if all other procedures have been carried out.

Mike O'Brien (Labour, North Warwickshire)

I do not dispute the point dealt with by amendment No. 276. Indeed, the hon. Gentleman will find that it is covered in clause 209.

Jonathan Djanogly (Conservative, Huntingdon)

On the basis of that clarification from the Solicitor-General, I beg to ask leave to withdraw the amendment.

Clause 179

Jonathan Djanogly (Conservative, Huntingdon)

I beg to move amendment No. 426, in clause 179, page 79, line 32, at end insert

‘, or

‘(c) that is in receivership.’.

The February 2006 finance e-bulletin from Herbert Smith, the solicitors, welcomed the changes that will be made to the law by the clause. It was pointed out that insolvency practitioners find the procedure of selling the assets of a company in administration to directors difficult, as shareholder approval is necessary under section 320 of the 1985 Act. That is often difficult to obtain in practice, so such transactions must be structured to exclude any director involvement. The amendment would simply clarify the definition used for the forms of insolvency.

Margaret Hodge (Labour, Barking)

In true collectivist tradition, I shall reply on this amendment.

The general rule is that member approval is needed for a substantial property transaction with a director. The clause provides an exception for transactions made by companies in administration and implements a recommendation of the Law Commission.

The amendment would go further by allowing a substantial property transaction to take place without shareholder approval if a company was in receivership. That could cover a wider range of situations. We do not think that that would be appropriate, as there would be a risk of abuse. A receiver may be appointed by a director or a connected person and would not necessarily be a licensed insolvency practitioner. I therefore hope that the hon. Gentleman will not press the amendment.

Jonathan Djanogly (Conservative, Huntingdon)

I thank the Minister for that clarification, which I understand and agree with.On that basis, I beg to ask leave to withdraw the amendment.

Clause 181

Jonathan Djanogly (Conservative, Huntingdon)

The clause deals with the civil consequences of contravention in property transactions, which is mainly dealt with in the 1985 Act. Will the Minister please explain subsection (7), which is substantially different from section 322(4) of the 1985 Act? Can she give examples of a person not knowing the relevant circumstances that constitute contravention?

Margaret Hodge (Labour, Barking)

I will write to the hon. Gentleman.

Clause 185

Jonathan Djanogly (Conservative, Huntingdon)

The clause replicates part of the 1985 Act. Just as with clause 180, credit transactions that were completely prohibited by section 330 can now be approved by members. Furthermore, clause 185 applies to all companies, whereas section 330(4) applies only to public companies. Private companies that can currently enter into such a credit transaction would have to obtain member approval. That implements a recommendation of the company law review. However, this is a deregulatory Bill, and I note that although public companies have been given the opportunity to provide credit, the clause now brings private companies into the net of requiring shareholder consent. Why is this regulatory move being made?

Margaret Hodge (Labour, Barking)

The simple answer is that it was suggested by the Law Commission, and we followed its recommendation. If the hon. Gentleman wants further clarification, I am happy to provide it.

Jonathan Djanogly (Conservative, Huntingdon)

Yes, but I make the point again that the Bill is meant to be deregulatory, so I see no need to tighten existing provisions. I would happy for the Minister to reply by letter.

The rest of the debate is in Hansard.