Company Law Reform Bill [HL]

I start by acknowledging that I entirely understand why the noble Baroness, Lady Noakes, introduced the amendment with the words that she did. This small group of sections is of immense importance to auditors, and I am well aware of the long debate there has been about auditors’ liability, whether there should be ways of limiting that liability and, if so, what they should be. I am told that, if these provisions pass, this will not in fact be the first time that auditors will be able to limit their liability, but apparently you have to go back a long way to find when that freedom existed. It will create an exception to what is an existing ban on a company’s auditors limiting their liability to the company, with important protection for shareholders whose approval is needed. We will come on to the other provisions and safeguards. It is also part of the policy that there should be protection for those who might lose out if the limitation were unreasonably low, as the court will be able to replace the limitation in the contract with some other limitation the court considers to be fair and reasonable. So far so good, and so far we are in agreement. What these proposals intend to do—and I say this a little bit generally, because this is the first time we have touched on these provisions in Committee—is to try and strike the right balance between the interests of the company and its shareholders and the interests of auditors. So the policy is agreed. What is that policy? That company and auditor should have the option of agreeing a limitation on the auditor’s liability; that it will be effective only if approved by shareholders; and, when damages are incurred following fault by the auditor, the agreement will limit the amount the auditor must bear, except if the court decides if that is unreasonable. What about the detail, though? I understand there to be two specific points that encompass all the amendments that stand in this grouping. The first concern is that the words we have used may be too restrictive; in particular, in limiting the limitation to a monetary amount, or a monetary amount derived by the use of a formula such as a number of multiples of an audit fee. I have had the benefit of seeing some of the opinions of learned counsel to which the noble Lord, Lord Sharman, referred, and I am grateful to those who provided them to us. There is a difference of view on this point. It is a perfectly respectable argument that the wording as it stands is not as restrictive as people think it may be. Having said that, I accept that this is something we need to look at carefully in the light of the concerns that have been expressed about the precise words that are used. I shall come back to that. The second concern may be more difficult to deal with. The other amendments that were put down seek to limit the consideration of what is fair and reasonable to things that either were in existence or might have been contemplated to be in existence at the time the agreement was entered into. In the course of this short debate, I have heard only one reason forward for why the limitation should be at that point. That reason, and I understand it, is that, if you look at it at the time when the judge is doling out the judgment, the auditor may be the only man or woman standing. The concern is that the alternative to taking reasonableness at the time of the agreement is that you take it at the time of judgment, and the judge may be concerned to see shareholders in the company properly compensated. That is not the only time one could take, however. There are moments in between—for example, the position at the time of breach—which may take account of the extent of the fault compared with the extent of the fault of others. This is not a criticism, but at the moment I have not heard sufficient explanation of why in the view of those who have moved these amendments the liability ought to be restricted only to those events that take place at the time of the agreement. That certainly is not the way the Government have seen this working. We need to take this part away as well. Even if we have not yet agreed among ourselves what the policy ought to be, I am not personally convinced that it is clear enough on the face of the Bill what that policy is. We need to make that clear. I wanted to indicate, in saying that we will take this away and consider it, that it is important to understand that I am not sure we are yet agreed what that policy should be, in the sense of agreement between noble Lords who have taken part in this debate and the Government. That is probably enough for me to say at this stage. We did not intend the Bill to limit liability to a fixed monetary amount by way of limitation. We see benefit in there being some process, for example, by which an amount might be met, and we can see merit in there being contractual freedom to agree other forms of limitation. We will take that away and look at the wording, even though the wording was thought to be apt to do what I have just said. It is also right that we take away the question of the time at which the test of fair and reasonable will be applied to the circumstances, but I would not want noble Lords in any way to think that it follows from that that the Government accept the logic of limiting it to those matters that were in existence at the time the agreement was entered into. I am not at all persuaded that this would be the right approach. I hope that is sufficient for the moment to indicate that consideration will be given to those important clauses, but I cannot go any further at the moment in agreeing to any of the amendments.