Company Law Reform Bill [HL]

Clause 497 enables the members of a company to remove an auditor from office at any time by ordinary lotion at a general meeting. This and the subsequent clauses on the notice required and the need to inform the registrar are rewritten, but not substantially changed from the existing provisions in the Companies Act 1985—so we are not talking about anything new. The auditor has the right to make representations and to have them sent to the members, and to attend the general meeting at which the resolution is to be taken. Amendment No. 320A proposes that the notice of the resolution should contain reasons for the removal of the auditor. It is important that the members of a company should have a right to decide who their auditor is, and they should not have to justify their choice. Of course, the auditor is likely to be entitled to compensation if his services are terminated. As Clause 497(3) makes clear, the right of the company to remove its auditor does not prejudice the auditor’s contractual rights. It is important that members should have faith in the auditor, who is acting in their interests to help them monitor the stewardship of the directors. We do not want to oblige them in statute to give reasons for their decision. Such requirement could also create a risk of legal challenges to removal resolutions on the grounds that the notice did not contain tangible reasons. We believe that we should keep to the existing law in the Companies Act 1985, which is simply restated in the Bill. However, Article 36 of the audit directive provides that auditors may be dismissed only where there are proper grounds and specifies that divergence of opinion on accounting treatment is not proper grounds. This is a difficult measure to fit into UK company law. As I have explained, our starting point is that the members appoint the auditors to protect their interests, and that if they lose faith in the auditors, the members should be able to replace them, whatever their reasons may be. We shall of course need to implement this provision of the directive, and we intend to consider carefully the best way of doing so, including consulting interested parties. It would be wrong to implement the directive in such a way that the protection of shareholders was reduced because they could not get rid of an auditor whom they no longer trusted. I can understand that the amendment could be intended as a step towards implementation, but I should prefer to maintain the law as it is at present until we have decided on the overall approach to implementing the new requirement. I hope that that point dealt with the question raised by the noble Baroness.