Company Law Bill [HL]

moved Amendment No. A70A:"Page 268, line 40, leave out from beginning to end of line 9 on page 269 and insert ““has formed the opinion—" (a)   as regards the company’s situation at the date of the statement, that there is no ground on which the company could then be found to be unable to pay (or otherwise discharge) its debts; and (b)   that, taking into account all the company’s assets and all those debts and claims against the company which would be admissible to proof in a winding up of the company commencing on the date immediately following the proposed reduction of capital, there are no grounds upon which the company could then be found to be unable to pay (or otherwise discharge) its debts; (c)   if it is intended to commence the winding up of the company within twelve months of that date, that the company will be able to pay (or otherwise discharge) its debts in full within twelve months of the commencement of the winding up; or (d)   that the company will be able to pay (or otherwise discharge) its debts as they fall due during the year immediately following the date upon which the proposed reduction of capital takes effect.”” The noble Lord said: This is a further probing amendment, which would remove the whole of new Section 135B(1) and replace it with this quite extensively drafted provision. We argue that the solvency statement and how it is constructed is at the very heart of the production of capital. Again, the issue has been raised with us by practitioners who have concerns about the implications of the present drafting. The amendment makes an important change to the Bill regarding the solvency statement that is required to be produced prior to the reduction of capital. Under the current law, which has been in effect for the past 150 years, companies have been unable to return capital assets to shareholders in preference to creditors when winding up, except in cases where permission has been given by the court to do so. That has required a series of stringent tests. The preference has also been to pay off debts owed to creditors first. The Bill would remove the power to return capital assets to the shareholders from the court to the company by changing the provisions on the solvency statement. We argue that this is not right and the amendment is designed to prevent it from occurring. The amendment makes it clear that, when producing a solvency statement prior to a reduction of capital, the company must have as its foremost consideration its ability to pay debts to its existing creditors after the reduction. As currently worded, the Bill places the emphasis on the time at which the solvency statement is produced—that is, prior to the reduction of share capital. We argue that that probably is not good enough. Under the provisions, a company could legitimately produce a solvency statement saying that all its debts can be paid, reduce the capital and then be unable to pay its debts. If that could happen, it would be extremely prejudicial to the creditors who have engaged in business with the company on the basis of its previous status and commitments. They have not agreed to contract with the company post-capital reduction and therefore should be protected from being treated as such. If the amendment is not accepted, companies would be able to short-change existing creditors and protect their shareholders by reducing their share capital prior to winding up, which would allow them to return capital assets to shareholders in preference to creditors. That could prove extremely damaging to the way in which business is conducted in the UK and is surely a change that we should oppose. I beg to move.