Company Law Reform Bill [HL]

My Lords, first, I shall respond to objections to there being two processes for the two different sorts of companies. I thought that one of the amendments carried earlier was about having one regime for charities which are companies and another regime for companies which are not charities. In a sense, there is a precedent which the House today has recognised. In response to the report of the noble Lord, Lord Sharman, the Government agreed that the Comptroller and Auditor General and his equivalents should have power to audit all non-departmental public bodies, including those in a corporate form. That is our starting point to this debate. Company audits are, however, subject to EC law, in particular the requirements of the eighth company law directive on auditing. Under Article 48 of the EC treaty, which provides the legal basis for an exemption from the company law directives for non-profit-making companies, it is open to member states to exclude non-profit-making companies from domestic company legislation. As the noble Baroness has suggested, the Government could make all corporate NDPBs subject to statutory audit under the Bill for consistency’s sake. That is one proposition. However, the Government believe that that is not a good enough policy reason to gold-plate Community obligations. It is right that non-profit-making NDPBs should be able to make use of the EC treaty derogation in the same way as the UK allows small companies to be exempt from these requirements. Non-profit-making NDPBs will still be subject to the rigorous C&AG financial audit and parliamentary accountability. I hope that that response to the noble Baroness has helped to explain the reasoning behind the provisions related to ensuring that the Comptroller and Auditor General and his equivalents become eligible to audit NDPB companies and their equivalents. I hope that that has persuaded noble Lords to accept that the clauses remain part of the Bill. In addition to the desire not to gold-plate where there is no valid policy justification, exempting non-profit-making NDPBs from the statutory auditor provisions will also address the anomaly arising from the fact that government departments are subject to the C&AG’s financial audits where a government department that set up a corporate vehicle for non-trading purposes is subject to the Companies Act regime. The Government believe that there is no policy reason to justify this different treatment. Of course, where government-controlled companies are trading commercially and might be considered profit making, they should—and will, under the Bill—be subject to a statutory audit. It might be helpful if I explain some of the Government’s thinking behind the provisions in Parts 16 and 32 that are designed to permit the Comptroller and Auditor General, and his equivalents, to audit certain companies in the central government sector. It was in response to the report of the noble Lord, Lord Sharman, that the Government agreed that the Comptroller and Auditor General and his equivalent should have power to audit all non-departmental public bodies, including any in corporate form and any companies that they own. However, the commitment is not straightforward to implement. One reason is that there is no legally valid definition of an NDPB, hence the Government proposed the process under the Government Resources and Accounts Act 2000, under which new NDPBs that the Comptroller and Auditor General should audit are listed one by one. Another consideration was the requirement in the EU eighth directive that auditors of corporate entities should be recognised as qualified by a competent authority. The provisions in the Bill are an honest attempt to find a way in which the Comptroller and Auditor General can be given that power without falling foul of the EU eighth directive. On the mechanics of the Bill, noble Lords are familiar with the device in Part 32 that makes the Comptroller and Auditor General and his equivalents in the devolved administrations eligible to audit any company. This was unavoidable because of the undefined nature of NDPBs. However, the Comptroller and Auditor General and his equivalents have agreed to seek to use this power only to audit corporate NDPBs and any corporate bodies they own, thus closing the power down just to the field required by the Government’s commitment in response to the report by the noble Lord, Lord Sharman. Copies of letters that set out these commitments have already been placed in the Library. I can assure the noble Baroness, Lady Noakes, that the provisions in the Bill do not represent some unreasonable extension of the Comptroller and Auditor General’s power. I note the noble Baroness’s concerns about the different treatment and separate provisions accorded to profit-making and non-profit-making companies. But the short answer is that under the directive, profit-making companies retain the power to appoint an auditor other than the Comptroller and Auditor General, though of course the Government expect that in practice they will appoint the appropriate auditor general. Taking advantage of the exemption in the treaty using the process of an order under the Government Resources and Accounts Act provides a one-off legal process for each NDPB. A Comptroller and Auditor General audit of NDPB non-profit-making companies could thereafter only be overturned with Parliament’s approval. I hope that that response has helped to explain why the Government have done what they did. They have acted in good faith to try to address the recommendations in the report of the noble Lord, Lord Sharman. I hope that that has explained why we have these arrangements.