Company Law Reform Bill [HL]

My Lords, unlike some noble Lords, I very much understand the important issue raised by the amendment—that is, that there needs to be clear limits to the liability of directors in connection with the business reviews. As was discussed in Grand Committee, there is a broadly held view that it would facilitate open and meaningful reporting if there was clarity on liability. We have been discussing this issue with interested parties. It is clear that it is unhelpful to look at liability for business reviews under company law in isolation from other reporting and disclosure requirements, including disclosures which will need to be made once we have implemented the transparency obligations directive. What is needed is a coherent and consistent regime. In developing such a regime there are some key factors we must consider. First, there is the risk that, with too strict a liability for narrative reporting, company directors will tend to make caveats and heavily qualified statements, which could impose needless bureaucracy without achieving meaningful forward-looking statements. The same risks apply if the potential liability is unclear. Secondly, if we clarified liability for some aspects of reporting and not others, this could make the position worse. It is desirable to provide consistency in liability across the directors’ reports and other narrative reporting under the Companies Acts as well as the transparency obligations directive implementation disclosures. We would still require a stricter liability regime for prospectuses as required under the prospectus directive as prospectuses are intended specifically to inform investment decisions and invite purchases of securities of the issuer. Thirdly, the nature of narrative reporting, which involves trying to predict future performance, with its inherent uncertainty, is different from accounts reporting, which is, to a much greater extent, objectively determinable. There is also difficulty in drawing a clear line between past performance reporting and forward-looking statements. It is an extremely complex area. As the noble Baroness will be aware, we have issued draft clauses for comment by interested parties covering provision for liability, both under Part 15 of the Bill for directors’ reports, directors’ remuneration reports or summary financial statements derived from them, and for disclosures under transparency obligations directive implementation. In both cases, these provisions ensure that directors will only be held liable for untrue or misleading statements and omissions made in bad faith or recklessly, and where there is deliberate and dishonest concealment. This is very close to what the noble Baroness is proposing. However, our proposals go further in seeking to provide clarity for those to whom the director may be liable. In that context, let me deal with the question of updating. We have not included anything on updating because there is no implication that you have to update reports. If we were to include it in relation to the business review, it could imply that there is a need to update other reports and accounts. Depending on the response of interested parties, we shall consider what measures on this might be brought forward for inclusion in the Bill. It would be unwise to rush today into introducing measures seeking to limit liability. We need to ensure that we set the hurdle for any potential legal challenge high enough so that directors can feel confident in what they say in their reporting but not so high that there is little incentive to be careful. In practical terms, we would like to bring forward clauses at the earliest opportunity but will wish to consider, in the light of responses from the interested parties, whether we can do that in time for Third Reading. I therefore hope that the noble Baroness will withdraw the amendment.