Company Law Bill [HL]

The proposed amendment seeks to insert a new subsection into Section 135 of the 1985 Act, as amended by the Bill. This new subsection would enable any reserves arising from a reduction of share capital to be treated as a realised profit for the purposes of Part VIII of that Act. I am not aware of any requirement in the Bill, or in the 1985 Act, for a company to set up a statutory reserve following a reduction of share capital. I understand, however, that as a matter of accounting practice, it is not unusual for companies to set up a reserve, using generally accepted accounting treatments in order to ““balance the books””. The question is whether credits sitting in such a reserve should be distributable. The Committee will be aware that there is some dissatisfaction—it has been expressed by the noble Lord, Lord Sharman—with the current rules on dividends and other distributions, particularly in the case of private companies, where we are not constrained by the Second Company Law Directive. I do not propose to say very much about this here, as we will come to it when we debate the proposal for new Part 19A. I should, however, explain that the issue is whether realised profits continue to provide a suitable benchmark for the payment of dividends. Notwithstanding these wider issues, we are not convinced that the Bill is the most appropriate place for the statement in Amendment No. A68 given the accepted guidance already provided by the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants in Scotland with regard to capital reductions. We also think that to separate this one particular issue from any other issues of distributions and deal with it in the law would be confusing for companies that currently look in one place for guidance—the technical releases of the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants in Scotland. To try to incorporate all the existing guidance and accepted practice with regard to distributable profits more generally into the law would be a lengthy exercise. There is also the advantage of making a statement in the form of guidance, in that that may be amended relatively speedily to respond to difficulties which arise in relation to its application in practice. Unfortunately, that is not the case with primary legislation, so our view is that the provision in the amendment sought by the noble Lord is more suitable for professional guidance.