Insurance effected for officers or auditors (Hansard, 26 October 1989)

§ Mr. Redwood
I beg to move, That the clause be read a second time.

Mr. Deputy Speaker
With this, it will be convenient to take Government amendment No. 257.

§ Mr. Redwood
There have been problems if companies pay for liability insurance for directors under the provisions of section 310 of the Companies Act. New clause 33 would enable companies to take out insurance against those liabilities for negligence, default or breach of trust on behalf of its officers and auditors, without that insurance being void. It also requires the existence of such insurance to be disclosed in the directors' report. The remainder of the new clause simply tidies up the drafting.
1175 Amendment No. 257 is a consequential amendment to the Building Societies Act 1986. This will enable the provision in that Act that is analogous to section 310 to be amended so as to ensure that companies and building societies continue to be subject to equivalent provisions.
I know that many hon. Members will welcome this change in the law. My hon. Friend the Member for Dorset, North (Mr. Baker) moved a similar amendment in Committee. It will be especially beneficial to non-executive directors, paid only a few thousand pounds a year for their services, but jointly liable in law with their executive colleagues for substantial sums. It may be of some help to the House, which showed considerable enthusiasm for non-executive directors in previous debates.

§ Mr. Nicholas Baker (Dorset, North)
I welcome the introduction of this new clause and I am delighted that my hon. Friend the Minister has moved it. I have two small worries, however, which he may want to look at, but perhaps at a later date. The first concerns the problem that, although there is permission for companies to enter into insurance policies under which legal costs of impending proceedings can be paid, this does not appear to be so if somebody loses the case. The new clause says that the cost will be paid if the case is won. Should not one consider the alternative, which is if the case is lost?
Secondly, section 310 of the Companies Act 1985 does not prohibit the relief provision, but renders it void. The drafting of the permission for this kind of insurance that the new clause provides does not take account of it. It is not clear what the position will be in relation to the policies in force. If they were rendered void under section 310, it is not clear whether the new clause brings them to life again. I hope that my hon. Friend will take away these small but significant concerns and see whether some later amendment should be made.

§ Mr. Hanley
The new clause amends section 310 of the Companies Act 1985 so as to clarify that a company is able to purchase insurance for its officers and auditors against any liability that may be incurred by the company. The effect of section 310 was uncertain and the clarification is most welcome. The amendment, however, does nothing to address auditors' fundamental liability problems. Through the operation of the legal principle of joint and several liability, an auditor is liable to be required to meet the whole of a loss for which he is only partially responsible. Secondly, for larger firms the professional indemnity insurance cover at levels that they would regard as desirable is almost impossible to secure at any price. Measures to limit the liability of auditors are therefore extremely necessary. I have raised this issue in new clause 50, which we shall reach later in our proceedings. This is an ideal opportunity to raise the matter, however, because it is linked to new clause 33.
In 1986, a group known as the Heads of the Profession saw the then Secretary of State for Trade and Industry, my right hon. Friend the Member for Southend, West (Mr. Channon). The delegation met representatives of the DTI and of the Lord Chancellor's Department. The result was that in 1987 and 1988 the Government appointed a series of fact-finding studies into the liability problems of various professions, including the auditors. The report on the auditing profession is believed to have been in the 1176 Department's hands at least since May. Unfortunately, it has not yet been published and the Department has made no statement on it.
Members of the Standing Committee that considered the Bill will remember that in June the then Minister with responsibilities for these matters, my hon. Friend the Member for Warwickshire, North (Mr. Maude), issued a consultation paper on one of the proposals set out in the study team's report. That proposal I have reproduced as new clause 50. In essence, it allows the shareholders of a company to fix a reasonable limit to the auditor's liability to the company. This is not a solution to the problem but it would be a step in the right direction. The Government have not taken up the proposal in their consultation paper and have made no statement on the results of their consultations.
It would be most helpful, therefore, if my hon. Friend the Minister could provide some information about the Government's actions in respect of liability problems of the auditors' profession and of the many other professions that participated in the consultation process to state their great difficulties. The problems were aired in a debate in another place at some length. I shall be grateful if my hon. Friend will explain the timescale for the results of the consultation process, which was set in place when the Bill was being considered in Committee. Many of us have been surprised that there is no reference to the matter being brought before the House on Report.

§ Mr. Redwood
I have taken some quick advice on the two issues raised by my hon. Friend the Member for Dorset, North (Mr. Baker). The new clause is as neutral as possible in respect of existing policies. The position would have to be determined in accordance with existing law. My hon. Friend will know that it is a moot point whether existing policies are valid under that law. My hon. Friend asks why there should not be protection if the case is lost. In that event, the director would have been found liable in respect of one of the points set out in section 310. I think that it would be inappropriate that the company should have to pay his costs.
I can tell my hon. Friend the Member for Richmond and Barnes (Mr. Hanley) that the Likierman report should be published soon, which I think that he will welcome. I cannot offer him any joy in respect of new clause 50 and the arguments that he is advancing in this debate. I believe that auditors have to be held liable, that auditors owe a duty and there has to be a fair trial in the courts if there is any potential negligence. The sums involved can be large but only because the amounts that may be lost by relying on inaccurate accounts can also be large. Any limitation on auditor's liability would inevitably mean that in some instances people who lost money in that way through no fault of their own would not be able to recover their losses in full. The onus must be on those who propose a change in the law to demonstrate that such a change would be in the overall public interest. I do not believe that that has been established.