Company Law Reform Bill [HL]

My Lords, I acknowledge that this is a slightly difficult area. What lies behind the difficulty is that over a long period there has been a debate about the extent to which the constitution of the company ought to protect directors from liabilities which they incur. The Greene committee of 1926 reported that it was common for the articles to exempt directors from liability for loss except when it was due to their wilful neglect or default. Some went even further and exempted directors in every case except actual dishonesty. The Greene committee considered that this type of article gave an unjustifiable protection to directors. When one considers that often the constitution of the company is drawn up by those who then go on to be the first directors and perhaps remain directors for quite a long time, one sees that they can have regard to their interests at the time that the constitution is drawn up. As a result the Companies Act 1928 introduced a provision making void any provision in the articles exempting directors from liability for negligence, default, breach of trust or breach of duty. Its successor is Section 309A of the Companies Act 1985, to be replaced by Clause 211 of this Bill. The problem, and the reason that I have raised all that, is that the amendment as it is proposed appears to permit the constitution to provide a very wide exemption from liability. That would go against the movement. I am reluctant to get into detailed consideration of the Movitex case, which lies behind part of the assessment of what the current law is, but essentially that case attempted to reconcile the principle that it was not open, according to Section 309A, to exempt directors from certain responsibilities, with the no conflict rule. The court concluded that the general principle forbidding directors from putting themselves in a position where their duty to the company might conflict with their own interest was not a duty in the strict sense of the word, but was a disability. Thus, it is not caught by Section 309A of the Companies Act 1985. That is where we are. We do not want the articles of the company to be prevented from doing what they can do now in relation to those matters which fall within Clauses 159 or 160. The noble Lord asked whether our drafting had succeeded in achieving that. It is fair to say that because Clauses 159 and 160 are characterised as duties, that means that the particular route which was used in the Movitext case—I apologise for being technical—may not be available. I do not believe that the amendment which the noble Lord has tabled provides the right solution because it would go far beyond the current law. It appears that, under the amendment, the only limits where it would not be possible to exempt directors’ liability would be where actual fraud or dishonesty were involved. Those are probably the only things that the common law, as it were, prevents. That goes way back to the situation that pertained before the position which was established by the Greene committee. It follows from what I have said that the point that the noble Lord has raised, which is not quite the same point that we debated in Grand Committee, is one that we ought to consider. I make no promises about what the end result of that would be. However, we should consider this between now and Third Reading. On that basis I invite the noble Lord to withdraw the amendment.