PARLIAMENTARY DEBATES

HOUSE OF COMMONS

OFFICIAL REPORT

Third Standing Committee on Statutory Instruments, &c.

DRAFT COMPANIES (SINGLE MEMBER PRIVATE LIMITED COMPANIES)REGULATIONS 1992

Wednesday 8 July 1992

LONDON: HMSO

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The Committee consisted of the following Members:

Chairman: MR. Robert Hicks

Bermingham, Mr. Gerald (St. Helens, South)

Bottomley, Mr. Peter (Eltham)

Caborn, Mr. Richard (Sheffield, Central)

Callaghan, Mr. Jim (Heywood and Middleton)

Carlile, Mr. Alex (Montgomery)

Corston, Ms. Jean (Bristol, East)

Cryer, Mr. Bob (Bradford, South)

Dunn, Mr. Bob (Dartford)

Emery, Sir Peter (Honiton)

Fenner, Dame Peggy (Medway)

Greenway, Mr. Harry (Ealing, North)

Hamilton, Mr. Neil (Parliamentary Under-Secretary of State for Corporate Affairs)

Haselhurst, Mr. Alan (Saffron Walden)

MacKay, Mr. Andrew (Berkshire, East)

Mahon, Mrs. Alice (Halifax)

Maitland, Lady Olga (Sutton and Cheam)

Marland, Mr. Paul (Gloucestershire, West)

Mowlam, Ms. Marjorie (Redcar)

Dr. M. R. Jack, Committee Clerk.

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3 Third Standing Committee on Statutory Instruments, &c. Wednesday 8 July 1992

[MR. ROBERT HICKS in the Chair]

DRAFT COMPANIES (SINGLE MEMBER PRIVATE LIMITED COMPANTES) REGULATIONS 1992

10.30 am

The Parliamentary Under-Secretary of State for Corporate Affairs (Mr. Neil Hamilton): I beg to move, That the Committee has considered the draft Companies (Single Member Private Limited Companies) Regulations 1992. The purpose of the regulations is to implement the 12th company law directive, which was adopted on 21 December 1989. It provides that member states must allow the formation of a private limited company having one member or shareholder and must permit a company to be a single-member company when all its shares come to be held by one person. At present, the Companies Act 1985 requires that a company formed in Great Britain must have at least two members. No doubt the hon. Member for Bradford, South (Mr. Cryer) agrees that the fact that the regulations relate to a European Community directive is itself good enough reason for bringing them before the Committee. However, I assure him that other grounds also make them worth while. Wearing my hat as Minister for deregulation, I am pleased to tell the hon. Gentleman that I would favour the measure even if it had not come from the Community. The Government believe firmly in removing unnecessary restrictions on companies. The requirement that private companies should have at least two shareholders, whilst not in practice a barrier to incorporation, has been an inconvenience with no great advantage to the public. Company founders have generally been able to find a second subscriber to play a nominal role so as to comply with the law, but the restriction produces no benefit—and it can be wasteful and troublesome for both the sole trader and the larger company or group of companies. The regulations will remedy that situation by removing the need for the second shareholder and dispensing with what some business men have complained is unnecessary red tape. The regulations expressly authorise the formation and continuation of single-member companies, and make consequential amendments in two ways. First, they contain a general sweeper clause, which provides that, in the absence of express provision to the contrary, any enactment or rule of law applies to single-member private limited companies, with such modifications as are necessary. Secondly, they contain specific amendments to certain salient legislative provisions set out in the schedule. We are not proposing special arrangements for the single-member company over and above those required by the directive, and, in implementing the directive, we are keeping the burdens on single-member companies to a minimum. I hope that the Committee will feel able to approve the regulations.

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10.32 am

Mr. Bob Cryer (Bradford, South): One ought to question this item of delegated legislation. First, I am not sure that handing over company powers, incorporation, and separate legal identity, to one individual is necessarily a good thing. United Kingdom law specifies two persons to provide a check, one upon the other. In 1985, the Government provided in the first clause of a major and lengthy Act that there must be two or more persons. Perhaps the Minister will explain how the advantages are set out for a single person to be incorporated, other than by providing that they have limited liability, which can be abused. The Minister is aware that it has been known for companies to be incorporated, to trade, and then to disappear and be wound up—with its directors going on to undertake activity in another company. Because the first company had a separate legal entity, it and—all its liabilities—disappear. There is potential for abuse by an individual, because if two or more persons embarked on such a course, at least that would amount to a conspiracy. The necessity to persuade another person in that way presents an additional hurdle, whereas single-member companies would give a nefarious character greater latitude. I imagine that the Minister will be only too eager to draw my attention to provisions in the 1985 legislation that curb that problem. The powers by which the Minister brings that measure to the Committee are important. The procedure is similar to that used in a Henry VIII statutory instrument, and that is quite disgraceful. The Minister is using delegated powers to alter primary legislation, which is wrong in principle. I concede that delegated legislation is necessary in several areas. However, when Parliament has authorised a law, Parliament itself should make alterations to major components of that law. That is the case with section 1 of the Companies Act 1985—it is a major plank on which the rest of that Act is built. We should watch carefully for attempts to alter major legislation with delegated powers. I assume that the Minister is using powers from section 3 of the 1985 Act—particularly from subsection (2), which states: "Regulations under this section shall be made by statutory instrument subject to annulment in pursuance of a resolution of either House of Parliament." That is all right, because an affirmative instrument is involved. However, section 3 sets out powers to specify "the memorandum of association of…a public company…limited by shares" and of "a public company…limited by guarantee", and so forth. It states that those conditions "shall be specified respectively for such companies by regulations made by the Secretary of State". The Minister appears to be using those powers, and possibly other powers that are scattered throughout the 1985 Act, which is a huge piece of legislation. Section 3(2) specifies the narrow conditions on which the powers can be used. It seems that they cannot be used in making a major change of the kind proposed in the regulations. In Committees such as this—I usually call them merits Committees, because they debate the merits of statutory instruments—we must be careful not to pass measures on the nod. The regulations propose a major change to 5 existing legislation. Perhaps they are based on the EEC proposal, which the Minister eagerly supported. It is funny how different are the actions of Ministers when they are in office from when they sit on the Back Benches.

Mr. Hamilton: It is a funny old world.

Mr. Cryer: As the Minister said, it is a funny old world. The fact that the 12th directive is involved does not necessarily mean that we should rush to apply the regulations. After all, the Government allowed some regulations to linger for between 10 and 15 years. They do not let that happen with companies legislation, but they have not been too scrupulous about applying regulations, elsewhere. The fact that the Minister is relying on a directive does not necessarily make his case more powerful. The Minister said proudly that he is the Minister for deregulation. The simplest form of business operation is the individual entrepreneur, who decides for himself which risks to take with his own capital. The idea behind limited liability was to incorporate other persons, as capitalism developed in the 19th century. The old concept of the individual seeking a blind 5 per cent. return on investment based solely on gaining as much as possible was precisely why the limited liability company was established. Risks for a group of individuals in partnership were becoming too great as technology developed and the level of required investment became too high for the individual. In wonder why the Minister for deregulation argues that the individual can now put himself outside sole proprietor status—surely, in his eyes, the purest form of private enterprise capitalism—and no longer be responsible for his debts. The major distinction is that individuals go bankrupt and companies go into liquidation, yet the regulations will allow an individual having an opportunity to go into liquidation and to leave his or her debts behind without responsibility. Has the Minister calculated what effect that will have? Will more people be tempted to form companies—itself a hurdle? There must be a memorandum and articles of association. The memorandum must be submitted to the Registrar of Companies. In fact, it means more regulation rather than deregulation, because returns will have to be made to Companies house. It is surprising to hear the Minister say that he favours the regulations on account of deregulation. When people take the step from sole proprietor to a solely-owned company, they move into regulation. I am not averse to that. Companies should be regulated and make returns, to provide the degree of accountability that is so important. The Minister's position is incompatible with his political philosophy, and we should all be interested in that.

10.42 am

Sir Peter Emery (Honiton): I shall be very brief. The regulations will not stop the single-member company having to appoint a company secretary. The responsibilities of company secretaries will be as great as in the past. That goes some way to meeting the hon. Gentleman's arguments. As to the board, will a company be able to continue with one director, or will there have to be more? Shadow directors are a strange factor in any organisation. Will the Minister confirm that it would be difficult for a sole member of a company not to be either a director or a shadow director? Does not that mean that an individual 6 cannot get out of his responsibilities as a director, which might otherwise be the case? That is important because the sole proprietor can now enjoy limited liability, which he could never do before. If the Minister can confirm that will not be the case, it would help to overcome our fears.

10.43 am

Ms. Marjorie Mowlam (Redcar): I thank my hon. Friend the Member for Bradford, South (Mr. Cryer) for explaining the two underlying anxieties of Opposition Members about the regulations. His first point about checks and balances is especially important. As hon. Members well know, the second director of companies is often a family relative. As present legislation operates, there are no real checks and balances. That does not undermine the fundamental point made by my hon. Friend the Member for Bradford, South that more checks and balances are needed on the way that some companies operate. I regret that we shall not have them under this Government, or through the regulations. There have been discussions on corporate governance, checks and balances, chief executives, and chairs. The shifts that many people want have not occurred voluntarily. It is sad that the Government will not act in respect of company accountability. The analysis is correct, but I do not envisage a positive shift resulting from this measure. My hon. Friend's second point is fundamental and relates to administrations and insolvencies of the kind that we have witnessed in this country. The Minister knows of the frustration that is felt when a company in debt goes into liquidation, re-emerges, and starts trading again almost the next day. Again, the criticism and analysis is correct. However, the directive and the regulations will not bring about the appropriate shifts. That does not mean that we desperately want a change in the administration procedures in the Insolvency Act 1986, but perhaps there could be consideration of chapter 11 and forms of administration in other countries that get around some of the horrific problems—especially given the depth of the current recession. Criticisms of the regulations are well founded. They make some alterations, but the Minister—who he says that he sees himself as the Minister for deregulation—is moving in completely the wrong direction for the changes that we would like. The Minister may see this change as reflecting his role as Minister for deregulation. Incidentally, many of the Minister's responsibilities have already been moved to the Treasury and I am not sure that we shall witness a change in stance there. I hope that while the Minister is at the Department of Trade and Industry, he will acknowledge that regulation—and those before us are a prime example of what we are subjected to—may be cumbersome and unworkable. There is too much regulation, but not enough that works, and achieves the kind of company operation that we want. The Minister is caught in a catch 22, with too much regulation that does not work. I had hoped—this is not what we have this morning—for changes that would simplify matters and, at the same time, make it more viable for companies to function in the interests of their customers, work forces, and own futures. This measure is not one of those changes.

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10.47 am

Mr. Neil Hamilton: We have had an interesting and useful little debate. Like me, this is a modest measure. Many of the topics canvassed in the debate ranged far and wide—especially in the interesting speech of the hon. Member for Bradford, South (Mr. Cryer)—and are beyond the scope of the regulations. I congratulate the hon. Gentleman on the role that he plays, in ensuring that measures, however minor—and this is minor—are subjected to proper parliamentary scrutiny. That is a proper constitutional role—one that, in other circumstances, I have performed and may do so again. Who knows? As the hon. Member for Bradford, South said, it is extraordinary to find myself at this Dispatch Box. I recall that the hon. Gentleman was once a Minister. When I have lasted in office as long as he did, I shall examine my conscience. The hon. Gentleman raised several important topics, but they extended beyond the scope of the regulations and went to the heart of limited liability. There are arguments against limited liability—no doubt they were forcibly put—I believe that that is the date—when it was first introduced into the law of our land. I do not believe that any dangers of abuse of limited liability will be increased by reducing the minimum number of company members from two to one. It must be remembered that the regulations apply only to private limited companies with a maximum capital—paid up or unpaid—of £50,000. The vast majority of companies covered by the regulations will have considerably smaller amounts of capital—a £100 company is a cliche. If abuse exists, it is already in the system, but the regulations will not extend it. It should be remembered that incorporation exacts a price from those who seek to enjoy its privileges. There are disclosure requirements and a variety of legal obligations that company directors and, in certain circumstances, shareholders, must fulfil—

Mr. Cryer: That is regulation.

Mr. Hamilton: Indeed. There are pains and penalties, as well as privileges and advantages. The regulations will not create greater risks for the investing public. The hon. Gentleman for Bradford, South mentioned phoenix companies—those that go bust and are set up again by the same directors or shareholders the next day and carry on merrily, as before. The hon. Gentleman should know that laws exist to prevent fraudulent trading and to provide for penalties against it. Charges can be brought, and there are limitations on companies setting up another company that uses the same name and conducts the same business. Section 216 of the Insolvency Act 1986 places restrictions on the circumstances in which that can be done. The Company Directors Disqualification Act 1986 also confers 8 considerable powers to prevent abuse by company directors of their legal privileges. I shall exercise those powers vigorously in appropriate cases. However, we must have concrete evidence on which to base prosecution, because that is a serious charge to bring against individuals. Nevertheless, there is no lack of will within the Board of Trade to perform the functions for which the law provides. The regulations are modest. We cannot discuss all the wider topics that the hon. Member for Redcar (Ms. Mowlam) raised about corporate governances. The vires for the regulations is not the Companies Act 1985 but, as stated in the preamble to the regulations, sections 2(2) of the European Communities Act 1972. I accept that the hon. Gentleman might not have voted for that measure, had he been in the House between 1970 and 1974. Who knows?—on that occasion I might have had the pleasure of his company in the Lobby. However, as the regulations are introduced under that Act, we cannot go beyond the scope of the directive whose content we are attempting partly to implement this morning. I am grateful for the assistance of my hon. Friend the Member for Honiton (Sir P. Emery). I confirm that the fears of the hon. Member for Bradford, South are groundless, and that the full protection of the law is given by the requirement that a sole director shareholder cannot be the company director. In those circumstances, a shareholder not being a subscriber or an additional director may help to perform the function of a check or balance, if that is how my hon. Friend conceives it. As I said in my opening remarks, the regulations amount to a modest measure to remove an encumbrance that serves no practical purpose. If there were a danger of abuse, we would regard that as very serious. However, there is no reason to believe that all company directors are crooked. The overwhelming majority are not. Without the protection of limited liability and the corporate structure bequeathed by centuries of experience, a modern capitalist economy could not operate. I appreciate that that argument is not the most compelling that I could put to the hon. Member for Bradford, South. However, I hope that it will receive assent from Conservative Members and—who knows, these days?—even from members of the Opposition Front Bench. I hope that my remarks answered all the questions put to me. If hon. Members want to raise any further points, I shall do my best to answer them.

Question put and agreed to.

Resolved, That the Committee has considered the Companies (Single Member Private Limited Companies) Regulations 1992.

Committee rose at six minutes to Eleven o 'clock.

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THE FOLLOWING MEMBERS ATTENDED THE COMMITTEE:

Hicks, Mr. Robert (Chairman)

Bottomley, Mr. Peter.

Caborn, Mr.

Callaghan, Mr.

Cryer, Mr.

Dunn, Mr.

Emery, Sir Peter

Fenner, Dame Peggy

Greenway, Mr. Harry

Hamilton, Mr. Neil

Haselhurst, Mr. Alan

MacKay, Mr.

Mahon, Mrs.

Maitland, Lady Olga

Marland, Mr.

Mowlam, Ms.

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