Company Law Reform Bill [HL]

My Lords, as we discussed in Committee, these amendments concern the distribution of profits and the payment of dividends. I am grateful to my noble friend Lady Goudie for raising this important issue. We are very aware of concerns about the current rules that link the payment of dividends to realised profits. These have become more acute for public companies because of the application of new international accounting standards to the treatment of some elements of income and expenditure, and the consequent effects on a company’s accounts. The proposed Part 19A would, of course, apply only to private companies, not to public ones. However, it would have relevance for public companies as it would affect their private company subsidiaries. As noble Lords may be aware, the EC’s second company directive constrains what we can provide in respect of public companies. The Commission has undertaken to review distributions in the context of wider capital maintenance issues, and is beginning the process with a study of the issues. The likely outcome of that work is not yet clear. In the meantime, companies’ experience of the International Financial Reporting Standards is in its early stages, the first full year of IFRS accounts having just finished, and views on the issues that cause most difficulty in presenting accounts are still evolving. We have continued to keep in contact with representative bodies and companies that have made representations to us in the course of the Bill’s passage. They are gathering and assessing data from the last year, which we will discuss further with them when more information is available. In that respect, the work that the accounting institutes, among others, have done in promoting awareness of the issues with the International Accounting Standards Board has been successful. Recent indications are that the board will, at least, look at ways of easing difficulties in determining the cost of a subsidiary on transition to IFRS. We believe that we should assess the need for any change in the light of all information available to us, including the new information that interested parties are collecting. We do not believe that the proposed new clause has the right way forward. The proposed solvency test would only require directors to consider debts falling due in the next year, thus allowing the company to pay a dividend even though its long-term liabilities might exceed its assets. For the longer term, there would be no clear rules—none in the Bill, certainly—to prevent the dissipation of assets for long-term obligations such as pensions. While the amendments’ approach is thus not the right one, we agree that it would indeed be desirable to have flexibility to tackle the issue. Therefore, in the light of our decision to drop the reform power, we will be bringing forward a power in relation to capital maintenance matters. While we agree that this area requires attention, that needs to be done in a slightly broader context than the one here. These amendments do not meet the issue without having some other undesirable side-effects. I hope that, in this light, the noble Baroness will not press her amendment.