Company Law Bill [HL]

We are indeed aware that the Institute of Chartered Accountants in England and Wales is concerned that subsection (1)(a) of new Section 135B, which is inserted into the 1985 Act by Clause 562, is not sufficiently clear in its drafting, as it does not set out a specific test to be applied. I also understand that the Institute of Chartered Accountants in England and Wales has interpreted the requirement in subsection (1)(a) as a ““balance sheet test””—that is, a requirement for the company’s assets to exceed its liabilities at the date of the solvency statement. New Section 135B(1)(a) does not refer to the balance sheet of the company—which is, of course, a statutory document. Therefore, there is no requirement that the consideration of the directors be directly linked to the accounts themselves and, as such, to the value of the assets and liabilities as recorded in those accounts. In fact, the clause does not require that accounts or a balance sheet be drawn up. The Government do not consider it appropriate to include a specific test or rule in the clause, as that may be more restrictive on the company in some circumstances and could be open to potential abuses in others—for example, where the assets in the balance sheet are revalued at the higher end of a range of possible valuations for the sole purpose of supporting the capital reduction exercise. The clause highlights the principle that the directors need to consider not only the cash position of the company—that is, the company’s ability to pay its debts as they fall due in the next 12 months—but the ““situation”” of the company as at the date of the solvency statement as regards its ability to pay or otherwise discharge its debts. New Section 135B(2) clarifies that the directors must take into account all the company’s liabilities, including any contingent or prospective liabilities. The wording in the clause is not new. It is almost identical to the formulation of words used in Section 156(2) of the 1985 Act, which sets out the form of the statutory declaration that the directors must make under the so-called whitewash provision where a private company seeks to give financial assistance for a purchase of its own shares. There would be grounds for the company being unable to pay its debts if the value of the assets was less than its debts. However, where the asset value is greater than the debts of the company, it is a matter for the judgment of the directors whether there are grounds on which the company would be unable to pay its debts. In the consideration of the value of the assets, a balance sheet would of course be a valuable piece of evidence for the directors of the company. However, it will not be the only evidence that they may be advised to use. We would not want to influence the evidence that the directors feel that they need to seek to make such a reduction of capital, such as asset/business valuations that they should obtain, by prescribing how the value of the company’s assets should be determined when making the solvency statement. I hope that that explains why the Government are not minded to accept the amendments and that, in the circumstances, the noble Lord will agree to withdraw Amendment No. A70. I think that Amendments Nos. A71, A72 and A73 are all consequential on it.