Baroness Neville-Rolfe
Main Page: Baroness Neville-Rolfe (Conservative - Life peer)Small Business, Enterprise and Employment Bill
Baroness Neville-Rolfe Excerpts
The Parliamentary Under-Secretary of State, Department for Business, Innovation and Skills (Baroness Neville-Rolfe) (Con)
My Lords, Clause 78 and Schedule 3, which it introduces, will fulfil the UK’s 2013 G8—now G7—commitment to implement a central register of the people who have significant control over UK companies. I am grateful to all those who have spoken on this vital reform. I concur with everything that my noble friend Lord Flight said about the amazing growth of small businesses in this country and the ease of company formation compared with elsewhere. I think that everyone in the Committee shares his wish to try to keep things that way.
Perhaps I may start by outlining what this reform seeks to achieve. The register of people with significant control will ensure that we know who ultimately owns and controls our companies. This will help us to tackle the criminal misuse of UK companies, and that includes shell companies. Perhaps I may also quote the Prime Minister:
“For too long a small minority have hidden their business dealings behind a complicated web of shell companies, and this cloak of secrecy has fuelled all manners of questionable practice and downright illegality”.
Therefore, my noble friend Lord Leigh rightly called this change one which has a noble purpose.
The Metropolitan Police force and other enforcers have highlighted this problem, providing numerous examples to us of fraud, corruption and tax evasion facilitated, I am afraid, by UK companies. The register will also ensure that we meet international standards that aim to prevent terrorist financing and money laundering. It will allow us to implement the soon-to-be-adopted EU fourth money laundering directive.
My noble friend Lord Flight asked whether non-UK shell companies would be caught. The Bill does not apply to non-UK companies, but UK companies owned by non-UK companies will be required to disclose PSCs.
I know some noble Lords will be keen to understand why the register has to be made public. There are a number of reasons for this. Allowing public access is entirely consistent with the way that other company data—such as that on shareholders and company directors—are made available. Public access also helps ensure the accuracy of the data not only because people can flag up inaccuracies and omissions but because the public nature of the data should in itself encourage people to ensure they file correct information first time round. Finally, a lack of corporate transparency does not just affect the UK and UK citizens. As the noble Lord, Lord Watson of Invergowrie, said at Second Reading, the cost to developing countries of companies’ illegal behaviour is “quite staggering”. A public register will support citizens in these countries easily and quickly to access information that will help them hold their own companies and Governments to account.
My noble friend Lord Flight expressed a concern that these new rules were coming in and small companies would not know about them. I understand that point. We are, therefore, setting up a working group to develop guidance on the PSC register. We will ensure—and I can promise this—that a representative of small business sits on that group. One of the group’s tasks will be to work out how best to communicate these reforms before they are implemented in 2016.
The noble Lord, Lord Mitchell, asked why there was not a clear definition of PSC. I think PSC is clearly defined in Schedule 1A and this will be supported by statutory guidance on the meaning of “significant influence or control” and wider guidance on the meaning of PSC more generally, which the working group will help us to develop.
I turn briefly to the amendments—which actually pull in both directions because of the way in which the grouping has been done. Amendment 36A would exempt small companies from maintaining a PSC register or filing the information at Companies House. Clearly, we must minimise burdens on business, and small business in particular, wherever we can. However, I have looked into this and it is not possible to exempt small businesses in this case. It has been widely identified, including by UK law enforcement agencies, that small companies, including shell companies and micro-companies, are frequently used for criminal purposes, as my noble friend Lord Phillips of Sudbury explained.
As the noble Lord, Lord Watson, helpfully pointed out, the burden of applying the rules in any individual case will not be great. It is the cumulative effect of the compliance costs of lots of different companies that leads to a big figure, but the amount of extra information that individual companies will have to supply is, in most cases, very small and we will see the benefits in terms, we hope, of reduced crime and wrongdoing generally. Exempting small companies or micro-companies would significantly risk undermining our intention to tackle the misuse of UK companies and would be contrary to our intention to ensure enhanced transparency, as set out in our G7 commitments.
My noble friend Lord Flight will doubtless also be aware that small companies will be in the scope of the fourth money laundering directive, once that is adopted. Even if we were to find a way of exempting them now, or wished to do so, we would need to re-include them when that directive was transposed.
My noble friend Lord Leigh asked about spouses. I can confirm that a spouse could be a PSC, so if one or more individuals meets the specified condition they will be a PSC whether or not they are married to another shareholder.
I turn now to Amendments 37ZA and 37B. As I have said, we are committed to reducing duplicative reporting and burdens on business. That is why companies listed on UK markets already subject to stringent disclosure and transparency requirements are not required to maintain a PSC register. We have also taken a power that would allow us to exempt other types of company, provided they are bound by similar requirements. For example, we might want to exempt UK companies listed on EU-regulated markets. The same principle applies in relation to those specified circumstances where a company may be listed on a PSC register in place of an individual—that company must also be subject to adequate disclosure and transparency requirements. In deciding to exempt a company, the Secretary of State must have regard to these disclosure requirements. Failure to take them into account would expose him to the risk of judicial review and run counter to our commitment to ensure transparency. The amendments tabled by the noble Lord, Lord Mitchell, are therefore unnecessary to ensure that the powers are used as we would wish.
Amendment 37C would prevent the Secretary of State from exempting a legal entity from needing to be noted in the PSC register except in exceptional circumstances. I confirm that this provision would only be used in exceptional circumstances. However, that fact is implicit in the current drafting of Section 790J(3).
Amendments 48 and 49 would extend provisions in Schedule 3 dealing with limited partnerships to foreign limited partnerships. I cannot add a lot to the very clear explanation given by my noble friend Lord Leigh. I agree that the PSC register should only contain information on individuals who exercise significant control over our companies. I am keen to ensure that we do not inhibit or hinder investment into UK companies or the good partnerships that have been developed. We could extend the limited partnership provision in a way that does not damage the efficacy of the register or, as my noble friend Lord Leigh said, open up risks, for example, in relation to loss of tax. I am therefore grateful to my noble friends Lord Leigh and Lord Flight for tabling these amendments and intend to consider their proposals further before Report.
Finally, on Amendments 47B and 50A and the PSC register, the noble Lord, Lord Mitchell, was right to probe us in this area. Having listened to the arguments, I see merit in requiring the statutory guidance on “significant influence or control” to be subject to the negative resolution procedure. I similarly see the benefit of requiring increased parliamentary scrutiny over regulations setting out exceptions to the ban on corporate directors. I therefore intend to consider both amendments and return to them on Report. In relation to the other amendments, I hope my explanations have provided reassurance and that noble Lords will feel content not to move them.
Lord Mitchell
My Lords, I rise to speak to Amendment 37, to which I have put my name. I pay tribute to my noble friend Lord Watson of Invergowrie for the work he has done in this area and for that very clear exposition of the relevant issues. He has made the important points, so I shall try not to repeat what he said.
Amendment 37 would give the Secretary of State power to make regulations ensuring that the PSC register is current and accurate. My noble friend Lord Watson explained the importance of that, but I shall echo his arguments. It is vital that the register be up to date if it is to do the job we expect of it and shine a light on some of the murkier examples of using anonymous shell companies to obscure the true ownership of an asset. I believe the Government see the register as providing something of a snapshot of the beneficial owners of a company, but in this day and age where technology has made instant communication the norm, rather than the exception, there is no reason why the PSC should not be kept up to date.
In this context, it is worth considering the evidence put before the Committee in the other place by the Institute of Directors, which said that the PSC,
“will be updated once a year and a fair number of people said in our consultations, ‘It’s going to be out of date within minutes of being published.’”—[Official Report, Commons, Small Business, Enterprise and Employment Bill Committee, 14/10/14; col. 19]
In your Lordships’ House there is an obligation on each of us to maintain our register of interests, which is not allowed to be more than one month out of date. Why should companies have an annual requirement? It simply does not make sense in this electronic age. In their response to the consultation, the Government said that they will continue to work through the principle that information will be provided to the central registry to ensure that there are no loopholes or unintended consequences. My concern is that this could be a loophole, so I would like the Minister to address it.
My second point is about accountability. As my noble friend Lord Watson said, this amendment requires the Secretary of State to ensure that the right regulations are in place so that what is on the PSC register is accurate and complete. Parliament will be able to scrutinise these regulations to check that they are capable of delivering an accurate register.
I shall pick up a remaining point from the debate about this group, and I hope the Minister will be able to put our minds at rest. Too little progress has been made in encouraging Overseas Territories and Crown dependencies to have public registers. If we return to the original Lough Erne agreement, it is clear that making progress on this issue is an integral part of fulfilling its spirit. I hope the Minister can update us on whether the Government will consider making such registers obligatory.
Baroness Neville-Rolfe
My Lords, I share the sentiment expressed by the noble Lord, Lord Mitchell, about the contribution that the noble Lord, Lord Watson, has made to this debate. I thank other noble Lords for this group of amendments which are in the spirit of ensuring that the register is effective and informative, which is what we all want. I hope I have understood noble Lords’ various concerns correctly.
I fully support the objectives expressed. We must have a single source of easily accessible information on the individuals who exercise significant control over our companies. However, reform has to be proportionate. It should not come at the cost of imposing unnecessary burdens on business. We have heard very persuasively, particularly from the Government Benches, how important this is. As I will explain with concrete figures, some of these amendments would impose additional costs which I am not sure we could justify because I am not convinced that there would be corresponding additional benefits. I shall explain that.
The noble Lord, Lord Watson, asked about when the outcome of our consultation on corporate directors will be known. We will try to write to the noble Lord before Report with the key findings.
On Amendment 37, the Government agree that information in the PSC register must be accurate, but I do not think we need an extra regulation-making power to ensure that that is the case. I am confident that the existing measures we have in place, and those we will introduce through the Bill, can already deliver noble Lords’ intentions. These measures include: criminal penalties for the provision of false information; public scrutiny of the information; and multiple checks pre and post registration at Companies House. To give just one example, in 2013-14, 9 million submissions underwent multiple checks by Companies House, resulting in nearly 400,000 being rejected. If we were to go further—for example, by requiring companies to use third parties to verify data before their annual filings at Companies House—our provisional estimates for the first year would be in the region of £400 million to over £1 billion, with a further cost of £300 million to £900 million per year thereafter. It is potentially a big bill.
Lord Phillips of Sudbury
Surely my noble friend understands that one is not looking for every company to have to make intermediate or particular requirements on its register. We need a power for the registrar—although it could be someone else—to say to a company, “Show us your books”. That would have a huge deterrent effect. However, we are not suggesting the whole kaboosh should be responsible in that way.
Baroness Neville-Rolfe
My Lords, I am grateful for that clarification. I was hypothecating the use of third parties to verify data before the data went to Companies House. It seems there is agreement that this would not be desirable for the reasons I have stated.
I have listened carefully to the arguments on the benefits of requiring up-to-date information to be filed at Companies House and the Government have listened to similar arguments during the negotiations we have been having on the fourth money laundering directive. Noble Lords may, however, not be aware that we already have the power we need in the Bill to allow us to increase the frequency with which information is filed at Companies House. This was inserted in the event that the statutory review mandated by Clause 79 demonstrated a need for more up-to-date information. I will, however, in the light of the conversations we have had today, reflect further on whether there is a case to use that power once the register goes live and the new system has bedded in.
Turning to Amendments 37A, 39, 41 and 43, I understand the desire for more information on every layer of the ownership chain. However, we must keep in mind our fundamental objective, which is to know who ultimately owns and controls our companies. Requiring additional information risks confusing companies and users of the register. There will also be cost implications in asking a company to hold and keep up-to-date information on every company or individual in its ownership chain. We believe we will have the information we need for investigation and prosecution.
More importantly, this is not a requirement of international standards or the soon-to-be-adopted fourth money laundering directive, which I am glad will bring the major benefits of these reforms to other member states. Noble Lords will, I am sure, share my concern to avoid gold-plating.
The noble Lords, Lord Watson, Lord Mitchell and others, asked why we are not including the overseas territories and Crown dependencies in this legislation. The Prime Minister made clear that he would like a publicly accessible central registry of company beneficial ownership information to be the new international standard. We would therefore like the overseas territories and Crown dependencies to match our policy. We respect, however, the fact that the overseas territories and Crown dependencies are separate jurisdictions with their own elected Governments, under which they are responsible for fiscal matters. We are working closely with the overseas territories and Crown dependencies and keeping them informed of our policy as it develops so that our decisions can feed into their policy thinking. At the Joint Ministerial Council in December last year, the UK and territory leaders agreed to work together on raising international standards and to meet ahead of the G20 meeting of finance Ministers and central bank governors this February to agree a way forward on implementation of the G20 principles.
I hope my noble friend and other noble Lords have found some reassurance from my response and that the noble Lord will agree to withdraw the amendment.
Lord Watson of Invergowrie
I thank the noble Baroness for her response. I think it is fair to say that we are not a million miles apart on most of the issues covered by the amendments. However, in her response, the Minister mentioned Clause 79, inasmuch as the Government would have the power to increase the frequency of the updating of the register—I cannot quickly find the wording that refers to that—and it would be helpful if she could give me something in writing on that.
The amendment states that,
“the central register is as accurate, reliable and up to date as possible”.
I think that everybody would like that to be the case. As the noble Lord, Lord Phillips of Sudbury, said, we are not suggesting that every company should constantly be involved in that and it should not be updated more than once a year. I liked the analogy with our own register given by my noble friend Lord Mitchell. It is important that information is as current as we can possibly make it. However, I noted the Minister’s response and I think we will return to this matter on Report.
I mentioned earlier that the shadow Chancellor said that a Labour Government would require the Overseas Territories and Crown dependencies to produce a register. I do not know what the legal requirements are. I know the difference between the Crown dependencies and the Overseas Territories, but there must be a means of doing that and I hope that the Government will at least bring to bear whatever pressure they can behind the scenes on these dependencies and territories to move in this very important area.
We have covered some important issues in this debate and we may well return to some of them on Report. I welcome what the Minister has said on most of the points and I beg leave to withdraw the amendment.
Lord Leigh of Hurley
Indeed, that is my point. If we are going to do it, we should follow the recommendations of the Financial Action Task Force and have that information verified. However, it does not mean that the register needs to be public. The tax and law authorities not just must but should have all this necessary information to deter misuse. I am not clear why it should necessarily be public. The noble Lord, Lord Watson of Invergowrie, referred to the G7, I think, but the document containing the G20 high-level principles of beneficial ownership transparency, which was published after the meeting in Sydney last year, makes no requirement for any public transparency. It makes a requirement for beneficial ownership to be on a register but, in its carefully worded 10 points, it does not suggest that it should be made public. We are in danger of becoming the only country in the whole of the G20 to insist on public disclosure—and one has to ask why on earth we would do that.
Would not it therefore be advisable to defer the requirement to make the information public until after the report required from the Secretary of State in the Bill? That might permit a better assessment of the quality of data being submitted through the self-reporting mechanism and an assessment of the competitive implications for UK businesses once other countries have had an opportunity to decide how they are going to address their compliance with the G20 report.
It is clear, thanks to the long-term economic plan and the success of the coalition Government’s policies, that the UK is an extremely attractive country to invest in. I declare an interest in my professional capacity. I talk to overseas investors all the time who seek to acquire and invest in UK companies. There is unparalleled interest in seeking to invest in the UK. Likewise, I declare that I went on the UKTI trade trip with the Prime Minister to China, where there is an enormous amount of interest from Chinese companies that wish to invest in the UK. We seem to be obsessing over disclosure of their potential investment in UK companies when, should they choose to invest in a limited partnership or directly into real estate, there will not be any disclosure. These investors will simply be deterred from investing in the UK because this transparency of ownership is an alien culture to them. I wonder whether the concerns over privacy will leave them not just dissuaded but unhappy with the actual cost and regulation that it will require, which is not the case for Delaware companies, for example. I fail to understand why a company should have to bear the onus of a request that might be flippant or irrelevant or just unnecessarily nosy.
Baroness Neville-Rolfe
I thank my noble friends for their amendments and for the wide-ranging debate. It is good that the noble Baroness, Lady Wheatcroft, and the noble Lord, Lord Borwick, added their voices to the Committee’s discussions, which I found very interesting and illuminating. Of course, the common thread in this group is that of access to information in the PSC register, albeit from very different perspectives.
I start by responding on a couple of general points. The noble Lord, Lord Watson, asked about the response to our discussion paper on PSC rights. Last week, I laid a Statement before the House setting out how we will take the policies and discussion paper forward. We intend to publish draft regulations this summer. This sort of consultation, which we have applied throughout the Bill, helps to limit unintended consequences. The noble Lord also asked why a person needs to tell the company how they are using the information. This is essential to ensure that data are used for a proper purpose. It is important to remember that the full date of birth will be publicly available from the company, even though this will not usually be on the public register at Companies House, and we do not want people passing these data on to fraudsters or identity thieves, for example.
There was also a question about the inspection provisions. Concern was expressed that the PSC register would not necessarily be available for use by journalists and NGOs. Any person may inspect the PSC register for a proper purpose. The purpose of the PSC register is to provide transparency of company ownership and control, so a person may inspect the register in the interests of finding out that information, including in the context of journalism, for example. Someone working with a journalist could pass on the information, provided that they had stated the purpose. I agree with my noble friend Lady Wheatcroft that, once things are made public, they are public, but I think that we will reflect on the debate that we have had this afternoon on this point.
My noble friend Lord Flight said that he felt that the protection regime needed extending and that the current proposals were too limited. We are building on the existing directors’ protection regime, which we believe works well—that is, the current one for companies, to which there have been a number of references and of which I have had experience in my company life. It has improved over the years and generally works well. However, as I set out last week, we are considering whether we need to extend it further. The ultimate objective is transparency, so purely commercial reasons, for example, would not be valid.
I now turn to the amendments, starting with Amendment 37D. The noble Lord clearly appreciates the need for the Secretary of State to be able to grant exemptions from the PSC register in genuinely exceptional circumstances. The amendment provides some examples of such circumstances, such as in relation to national security, with which I agree. In these rare cases it would be damaging to require the fact of that exemption to be publicly stated. This could cause people to try to obtain the information in question by other means, which is not what we would want.
Turning to Amendment 44, I know that the noble Lord will want to ensure that civil society is able to obtain PSC information. As my honourable friend Jo Swinson made clear during Committee in the other place, these provisions will not prevent them doing so. The Bill already allows companies to apply to the court to refuse inspection when information is not sought for a proper purpose. This provision will help to prevent misuse of information in the register by fraudsters and those who simply wish to send people junk mail—whoever they are. If the company’s application were upheld by the court, access to the information would be denied.
In Amendments 44A to 44H and 44J, my noble friend Lord Flight obviously comes to the group from a different perspective, seeking to severely restrict the ability of people to inspect a company’s PSC register. I recognise the concerns raised around allowing public access to this information, including the points that my noble friend mentioned—notably the impact on UK competitiveness and personal privacy. However, I remind him that the Government consulted on the question of public access to PSC information and acted on the basis of the responses that we received. I do not think we will be able to agree to an entirely different approach today. It is not our policy to respond to any lobby but to make real and important changes to tackle the criminal use of UK companies, which is a significant problem, made worse in the international digital world. We want to lead in this area, as the Prime Minister has made clear. I hope that the sketch made by my noble friend Lord Leigh proves to be wrong.
Again on privacy, we have carefully considered the impact that this policy has on the privacy of individuals through the conduct of a full privacy impact assessment. That document has been published and is on the GOV.UK website. The assessments indicated that the proposed measures are necessary and proportionate. In reflecting further, it is important that we also revisit that assessment. We firmly believe that a central, public register is the most appropriate option for the UK, and allowing people to access the company’s own PSC register is an important part of that. I will not repeat what I said in opening today, but increased trust is good for business. Making sure that the UK maintains its reputation as a clean and reliable place to do business and invest is very important. We have taken clear steps to protect personal information wherever appropriate.
On effectiveness, which my noble friend Lord Flight raised, we are looking closely at how Companies House and law enforcement agencies can work together to enforce the regime. The criminal sanctions and public nature of the register will also help to deter criminal activity.
On the issue of compliance costs, a final stage impact assessment estimates a net cost to business per year of £97.5 million, which over 10 years is around £1 billion. Those costs are spread over a population of 3 million companies. Of course, some small businesses are not companies and are not covered by this particular provision. In addition, for companies with simple ownership structures that already know their PSCs—that is, the vast majority of companies—the costs will be minimal. For example, the final impact assessment found that there would be a cost of £10 to small, simple companies in updating beneficial ownership information annually, and a cost of £10 in providing information to a central register annually.
On Amendments 47 and 47A, I would have serious concerns about allowing third parties to ask the registrar of companies to review a person’s right to protection. It is important to remember that applications will only be granted in very limited circumstances, for example when someone is placed at serious risk of violence or intimidation as a result of a company’s activities. On that basis, I do not think it would ever be in the public interest to override that decision.
I hope that I have responded to the key questions raised. I have said that we are happy to reflect on the detail of the debate on Amendment 44. I am not sure what the conclusion of that will be, but I listened to what was said today. I hope my noble friend and noble Lords are reassured by this discussion and will agree to withdraw or not move their amendments.
Lord Mitchell
I thank the Minister for her reply. In general, we are reassured. Many things have been discussed today and we will all go away and reflect before Report. There was one moment when the noble Lord opposite mentioned Huntingdon Life Sciences, which made my spine run cold. There was an occasion when a private company in which I was involved, of which I guess I was the PSC, was dealing with Huntingdon. We were leasing computers to it and the animal rights brigade suddenly parked outside my house. That lasted for only a day or two, but it was quite unnerving. However, that is by the by. I thank the Minister for what she said and I beg leave to withdraw the amendment.
“( ) in consequence of any provision made by virtue of paragraph (b), to change or supplement Part 2 of this Schedule so that circumstances specified in that Part in which a person is to be regarded as holding an interest in a company correspond to any of the specified conditions, or would do so but for the extent of the interest.”
Lord Leigh of Hurley
That is the point. Shadow directors can be significant shareholders who have chosen not to sit on the board—in particular, a lender who has become active in the affairs of a business—or simply someone in whose interests and according to whose instructions the directors act, without the person actually being a director. The Bill seeks to clarify the rules governing shadow directors so that people do not deliberately assume that status in order to avoid a lighter touch corporate governance regime. Indeed, the definition of shadow director is not changed by the Bill, only the extent to which they should enjoy the same duties as directors.
At present, the duties of directors apply to shadow directors to the extent permitted by common law rules and equitable principles. These are set out in Section 170 to 177 of the Companies Act and offer up a code of conduct. Clause 86(3) would enable the Secretary of State to make regulations to apply any duties of directors to such shadow directors. The Bill makes provision for the duties of directors to apply to shadow directors,
“where … they are capable of so applying”,
as my noble friend said. This wording, quite apart from adding certainty, will do the opposite and leave the courts little discretion to allow them to apply said duties in a proportionate manner. This wording, “capable of so applying”, amounts to some sort of blanket application of duties from one to the other since it is difficult to conceive of a situation where the duty would be incapable of applying.
Of particular interest is the duty to avoid conflicts of interest. It is not often possible to prevent a conflict from arising, and therefore the prima facie duty to avoid conflicts is typically addressed by having some mechanics: for example, one frequently sees a director excusing himself from any meetings considering such matters which might present a conflict and thus being prevented from voting. The Companies Act specifically considers these mechanisms but, of course, it will not be possible to apply them to shadow directors, who may not seek to be shadow directors and may not even be aware that they are. This could result in an automatic breach of the duty by entirely innocent shadow directors, so I would argue that more flexibility is required.
This is why the amendment offers up an alternative wording, which says that duties will apply,
“to the extent it is reasonable, just and equitable for any such general duty to apply”—
it certainly sounds reasonable to me—and caters for examples such as conflicts of interest. It still allows for the Secretary of State to make an intervention, as well as giving the courts the requisite discretion, but it will prevent the inherent unfairness in the situation that I have just described.
Baroness Neville-Rolfe
My Lords, in responding to Amendment 51, I thank my noble friends Lord Flight and Lord Leigh. Like my noble friend Lord Leigh, I have been a director in the past, but never a shadow director. It may be helpful if I set out how directors’ general duties currently apply to shadow directors and how Clause 86 will improve this position.
The current provision in Section 170(5) of the Companies Act 2006 states that the directors’ general duties apply to shadow directors to the extent that the,
“common law rules or equitable principles so apply”.
This makes it confusing for anyone who may be acting as a shadow director to know whether any duties apply to them and the extent to which those duties apply. Clause 86 clarifies that the same standards of behaviour are expected of shadow directors as of appointed directors, wherever possible.
I am sympathetic to the intention behind this amendment that shadow directors should not be put in a disadvantaged position compared to appointed directors. The Government recognise that there may be circumstances where the directors’ general duties may not be capable of applying to shadow directors in the same way as appointed directors. One example could arise in the context of the duty to avoid conflicts of interest, as set out in Section 175 of the Companies Act 2006. In principle, we would expect any director to avoid a conflict of interest wherever possible. However, Section 175 of the Companies Act also recognises that there are cases in which a director should be able to act in cases of conflict. It therefore allows for authorisation by the company for a director to continue acting on a matter where they have a known conflict in certain circumstances. A shadow director may not be able to seek authorisation in this way.
Clause 86 does not introduce a blanket application of the duties to shadow directors. A shadow director will be able to rely on Clause 86 to demonstrate that, in their circumstances, a duty or part of a duty is incapable of applying to them. Officials have discussed this with the British Private Equity & Venture Capital Association, and in light of the points that have been made, I now wish to consider the issue more fully and reflect on whether there is a need to adapt the way the general duties of directors apply to shadow directors so that they do not find themselves in a worse position than directors. This would be achieved by using the power already included in Clause 86(3). I will write to noble Lords before Report to give an update on my conclusions. I hope that my noble friends are reassured by this explanation and that, on this basis, my noble friend Lord Flight will withdraw his amendment.
Lord Flight
I thank the Minister for what she has said and beg leave to withdraw the amendment.
Lord Mendelsohn (Lab)
I draw attention to my interests recorded in the register and my connection to small businesses. This section of the Bill has our broad support. We welcome any attempt to reduce the burdens of reporting while maintaining the integrity and transparency required to make such registration effective. Clause 89 provides for a new filing requirement instead of the annual return. The new confirmation statement is outlined in some detail in the Bill. I am bound to say that I did not find the old annual return such a hardship, and I hope that I will feel the same with the new statement.
Amendment 54B is a probing amendment. It ensures that sanctions would be the same for companies that do not have and maintain a record of their PSCs and those that did not provide information to the public register. The intention of the amendment is to help to probe and to ensure that the information makes it to the register and can be used meaningfully. We would be grateful if the Minister will set out the thinking behind the difference between these two and why the enforcement is slightly different and provide us with an understanding of how the Government see the mechanisms for enforcement and how they will work over time.
Baroness Neville-Rolfe
My Lords, I am grateful to my noble friend for so graciously moving his amendment and to the noble Lord, Lord Mendelsohn, for his remarks. The confirmation statement in Clause 89 is a replacement for our friend the annual return to Companies House. It will contain important information about the company, in particular about the register of people with significant control, which we have just been debating.
Amendment 54B would increase the criminal penalties we provide for not filing a confirmation statement at Companies House. It is important that penalties should be sufficient to deter and sanction those who do not provide Companies House with a confirmation statement. However, I do not believe that increasing the penalty is necessary in this case, which I think is what the noble Lord may be seeking. Enforcement activity by Companies House is focused on ensuring that information is delivered to it and put on the public register in a timely way. Companies House sends reminders to the company in good time before the company is due to file the current annual return. If a company fails to deliver information, the first aim of Companies House is to seek compliance. In the event of continued non-compliance, Companies House prosecutes the company and its directors. Last year, Companies House prosecuted almost 2,000 companies for failing to file the annual return. This approach to enforcement works. Compliance rates for the annual return are currently running at 98%.
The penalties in Parts 7 and 8 are designed to be consistent with the level and approach of existing Companies Act penalties. The penalty for failing to deliver a confirmation statement to Companies House is equivalent to the existing penalty for failing to deliver an annual return. The Government do not consider that there is a case to increase these penalties. Of course, we take the failure to file information at Companies House extremely seriously. It is important that people should be able to obtain up-to-date information about companies with which they may wish to do business. A continuing failure to deliver a confirmation statement could incur a daily default fine of £500. This would quickly add up to a significant amount. I understand concern that there should be sufficient incentives to ensure that information about people with significant control is put onto the public register. In practice, however, we judge a prison sentence to be highly unlikely to be proportionate to failing to deliver a confirmation statement, even were the law to permit the judiciary to impose such a penalty. It is, of course, important that people should have confidence in the public register. When necessary, enforcement includes the prosecution of criminal activity. Consequently, we consider that the sanctions set out Clause 89 are sufficient. I hope that explanation helps to clarify issues and that my noble friend feels able to withdraw his amendment.
Lord Leigh of Hurley
I am not sure that it is in the register of interests but I further disclose that I used to sit on the Takeover Panel appeal committee some eight years ago, as the alternate to the president of the Institute of Chartered Accountants and in my capacity as the chairman of the Corporate Finance Faculty—finally, I stand up in your Lordships’ House to speak on my one area of expertise. Having said that, the vast majority of my time is spent working with private companies rather than public companies, but I thank the noble Lord, Lord Mendelsohn, most sincerely for raising a matter on which I can speak.
I take this moment to commend the Takeover Panel on the role it undertakes in City life and in the UK economy. It is an extraordinary organisation, which works extremely effectively and well, and which is genuinely the envy of the world. When overseas—in particular, American—potential purchasers of UK companies come to these shores, and the nature and working of the Takeover Panel is explained to them, they are absolutely amazed. They cannot understand how it is we can have such a system, where an organisation exists without any real power and without any real teeth but simply survives through the ability to cold-shoulder an adviser. It is a phenomenon which defies real explanation. Many people would be extremely reluctant to see the good workings of the Takeover Panel interrupted by legislation in any way.
In particular, Rule 24.16(a) provides that an offer document must contain an estimate of, first,
“the aggregate fees and expenses expected to be incurred”—
as has been suggested—and then, separately, a breakdown of those fees and expenses by category, including,
“financial and corporate broking advice”.
Rule 24.16(b) provides that:
“Where any fee is variable between defined limits, a range must be given in respect of the aggregate fees and expenses … setting out the expected maximum and minimum amounts”.
The takeover code already requires the matters specified in Amendment 60B and covers all situations where the payment of such fees would be contingent on the outcome of the offer. It specifies the conditions under which they are payable and the estimated value or range of those payments. We have taken the trouble to look at the last 10 documents that were live in respect of such takeovers, and they all included the fees, costs and expenses—some of those seem high, but contingent fees will be high. They are all there, in the documentation. It may be that Amendment 60P is not required as envisaged.
Baroness Neville-Rolfe
My Lords, I thank the noble Lord for his amendments, the clarity of his introduction and the opportunity to briefly debate the matter of company takeovers. First, in view of his wider points, I will reflect on the changes that the Takeover Panel has made, both recently in response to AstraZeneca/Pfizer, and in response to Cadbury/Kraft earlier in the Parliament, a deal which, as a businesswoman at the time, rather shocked me. I share my noble friend Lord Leigh’s warm words about the strength of the Takeover Panel—we are lucky to have it in this country.
Baroness Neville-Rolfe
I thank the noble Lord for the amendments in this group. He will perhaps be interested to know that we had a sweepstake to try to work out what he was getting at with these amendments. I am afraid we were not particularly successful, so I will make two or three comments on the amendments, which we looked at objectively in terms of the way that they had been drafted, and may take the opportunity to write to him afterwards to pick up some of the points, including the good points he made about rogue trading, which is a concern. The examples he drew our attention to were new to me. He asked what the Government are doing about repeat offenders in this area. The short answer is lots, including taking account of previous failures. The effect of Clause 103 will be to require the court to take misconduct and previous failures into account when deciding whether a director is unfit, especially where it demonstrates a pattern of unfit conduct through a number of companies.
Amendment 60C is in line with the recommendations made by the Delegated Powers and Regulatory Reform Committee, to which I would like to express my gratitude for the consideration it has given this long and complex Bill in a timely manner. We must thank it for the great work it does in aiding scrutiny in this House. I will consider this amendment and will return to it on Report.
Amendment 60D would restrict the consideration a court must give to the loss or harm that a person’s conduct has caused to a company solely to non-executive directors when deciding whether to disqualify a director. The concept of non-executive director is not recognised within the Companies Act 2006 or the Company Directors Disqualification Act. The noble Lord, Lord Mendelsohn, will know only too well that for the purposes of companies legislation, all de jure directors are considered equally, whatever their role on the board may be. Any individual who acts as a director of a company, in whatever capacity, owes duties in respect of the running of the company to, for example, shareholders, employees and creditors. Accordingly, if the actions of any director, executive or not, have caused demonstrable loss for which they are culpable, it is right that they should be liable to be disqualified and that the period for which they are disqualified should take account of the resulting loss to creditors.
To try to change the law on directors fundamentally and to bring in a new definition of non-executive director without extensive consultation would be quite a big ask. I am not sure whether that is being sought in this probing amendment, but perhaps we can discuss the matter further. In the mean time, I commit to study the points that have been raised and to write to the noble Lord, and I ask him to withdraw his amendment.
Lord Mendelsohn
I thank the Minister for her helpful reply. We, too, had a sweepstake on what her responses were likely to be. I have not done badly on some and lost quite badly on others. We also had a sweepstake on what the further replies might be, although I shall not reveal them for fear of putting anyone in a difficult position. In view of the current circumstances and the very helpful replies, we look forward to discussing these matters further. I beg leave to withdraw the amendment.
“(2) In section 24 of that Act (extent), for subsection (2) substitute—
“(2) Subsections (1) to (2A) of section 11 also extend to Northern Ireland.””