Company Law Reform Bill [HL]

My Lords, as has been outlined by the noble Baroness, at present a company is entitled to remove its auditor at any time by ordinary resolution and does not need to justify its decision. This provision is currently in Section 391 of the Companies Act 1985, and it is repeated here in Clause 501. The audit directive—the replacement for the eighth company law directive, which was finally adopted on 25 April—will oblige us to ensure that auditors may be dismissed only where there are proper grounds. We are implementing some of the new provisions in the new audit directive in this part of the Bill, notably those relating to the senior statutory auditor and to auditors’ resignation statements. Other implementing provisions are to be found in Part 32. For the rest, we shall consult fully after publication of the final text of the directive before deciding how to implement it. The provision about the dismissal of auditors is difficult to implement in the UK. There is no distinction in the UK between the company and the members acting in general meeting. In other European jurisdictions, however, the general meeting of the members of the company can be an organ of the company, distinct from the company itself. The directive, or at least the provision in it about dismissal of auditors, appears to be predicated upon the distinction between the company and its members in accordance with which a company could act against the interests of the members by dismissing the auditors by resolution of the directors. This, however, is not possible in the UK, where not only is the company identical with the members in general meeting but it is only by resolution in general meeting that auditors may be dismissed. We shall need to do some work to find a way of constraining the company’s ability to dismiss its auditors without preventing the members in general meeting being free to dismiss auditors in whom they no longer have confidence. In Grand Committee, and again today, it was suggested that it is fanciful to imagine the members deciding to get rid of an auditor, but in the real world the directors decide such a thing and the shareholders probably take little interest. It is important to remember that the provisions in UK company law and the audit directive about dismissal of auditors apply to all companies. It is not just about the small minority of companies with hundreds of thousands of shareholders; most of the companies affected are relatively small, private companies, and in most of those the shareholders are few and engaged. At present, such shareholders can dismiss their auditor without having to justify their decision. We believe it is right that they should be able to do that, so we need to think carefully about how to implement the new audit directive. It has to be implemented by June 2008, and we see no reason for haste on this aspect. We need to consult those affected and to find the best way of doing it. We may find that we need to introduce a statement of reasons into a notice of a resolution for removal, as in Amendment No. 336; or we may be able to use the statement of reasons that the company has to send to the audit authority under Clause 514 when an auditor leaves. In any case, there will need to be some method by which the reasons are disclosed and recorded. But that in itself is not enough: to comply with the directive, we shall also have to provide a rule that the reasons must meet certain criteria, so as to be ““good reason””. We will somehow need to work in the reasons that according to the directive are not to be counted as good reason. We shall also need to decide whether to provide specific mechanisms for challenging the reasons given and whether to provide specific remedies in the event of reasons being found to be adequate or of challenges being found to be unjustified. It is our strong view that it would be best to work out the best overall approach to this requirement in the directive, to consult widely with all of those who will be affected and then to implement it as an overall solution rather than to introduce parts of a possible piecemeal approach. Accordingly, I ask the noble Baroness not to press the amendment.