Company Law Reform Bill

This is the first amendment to the group of clauses relating to directors’ liabilities. It may save time on subsequent amendments if I say a word or two about the structure. The Companies (Audit, Investigations and Community Enterprise) Act 2004 made some important reforms in this area. Clauses 210 to 212 restate Sections 309A and 309B as inserted by that Act without substantive amendment. The 2004 reforms recognised that we need to strike a careful balance in this area: on the one hand, we need a pool of high quality individuals willing to take on the responsibilities of being a company director and willing to take informed and rational risks; on the other hand, the law must be robust to deal fairly with cases where something has gone wrong as a result of either negligence or dishonesty on the part of the director. There were four main elements to the reform package, reflecting the need to strike that careful balance. The reforms also addressed some specific concerns highlighted by the department’s consultation relating to exposure to third party liabilities, particularly from the United States, and the cost of lengthy court proceedings. Where does one start? The starting point for the reform package was a principle going back to our companies legislation in 1928, namely that companies should be prohibited from exempting directors from, or indemnifying them against, liability for negligence, default, breach of duty or breach of trust in relation to the company. However, the reform package also recognised that companies should be permitted to indemnify directors in respect of third-party claims in most circumstances—that is, claims not brought against them by their own company but claims by third parties that often might have been, and some would say should have been, brought against the company. The reforms permitted companies to pay directors’ defence costs as they are incurred, even if the action is brought by the company itself. There are four main possible exceptions to indemnification: criminal penalties; penalties imposed by regulatory bodies; costs incurred by the director in defending criminal proceedings in which he is convicted; and costs incurred by the director in defending civil proceedings brought by the company in which final judgment is given against him. Against that background, I will address the amendments. The effect of Amendment No. 222, as I apprehend it, is to incorporate an exception to the prohibition on indemnification or release of liability in the case of these two categories, namely public interest or mutual interest companies. The effect would be that the prohibition in Clause 210 would go, and it would be permissible for the company to exclude a director from liability for negligence, default, breach of duty or breach of trust in relation to the company itself. The effect of Amendment No. 239, although I may be wrong about this, would be to allow the indemnity to extend more broadly than the law is intended to permit. Certainly, so far as Amendment No. 222 is concerned, which is perhaps all I should say at this stage, it would remove the restrictions on the company in such circumstances from indemnifying or releasing the directors from their responsibilities. I listened to what the noble Lord said, but I do not believe that the case has been made for creating the new category of exemption. Of course, the possible exemptions already provided for in the Bill would apply to such companies, and Clause 211 permits insurance in certain circumstances. I am not persuaded by Amendment No. 222. I think I somewhat mis-stated the effect of Amendment No. 239, which is the definition that would be necessary for the purposes of Amendment No. 222. I cannot accept the amendment.