HL Deb 21 February 1989 vol 504 cc508-21

2.56 p.m.

Lord Strathclyde

My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill. Moved, That the House do now again resolve itself into Committee.—(Lord Strathclyde.)

On Question, Motion agreed to.

House in Committee accordingly.

[The LORD ABERDARE in the Chair.]

Lord Strathclyde moved Amendment No. 227Z(80A):

Before Clause 91, insert the following new clause: ("A company's objects and the power of the directors to bind it. .—(1) In Chapter III of Part I of the Companies Act 1985 (a company's capacity; formalities of carrying on business), for section 35 substitute

"A company's capacity not limited by its objects.

35.—(1) The validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of the fact that it is beyond the objects of the company stated in the memorandum of association.

(2)This does not affect any right of a member of the company to bring proceedings on that ground to restrain the doing of such an act; but no such proceedings shall lie in respect of any act to be done in fulfilment of a legal obligation arising from a previous act of the company.

(3)Nor does this affect any liability incurred by the directors, or any of them, by reason of such an act having been done.

Power of directors to hind the company.

35A.—(1)In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution

(2)For this purpose

  1. (a)a person "deals with" a company if he is a party to any transaction or other act to which the company is a party;
  2. (b)a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors; and
  3. (c)the limitations under a company's constitution include limitations deriving from a resolution of the company in general meeting or a unanimous resolution of the members otherwise than in general meeting.

(3)Subsection (I) does not affect any right of a member of the company to bring proceedings to restrain the doing of an act which is beyond the powers of the directors; nor does it affect any liability incurred by the directors, or any of them, by reason of anything done.

(4)Where in relation to an act of the company the board of directors exceed any limitation on their powers which flows from the objects of the company stated in the memorandum of association—

  1. (a)the act may be ratified by the company by special resolution, and
  2. (b)in the absence of such ratification, the above provisions of this section apply as in relation to any other limitation on the powers of the directors.

No duty to enquire as to capacity of company or authority ofdirectors.

35B. A party to a transaction with a company is not bound to enquire as to whether it is within the objects of the company to enter into it or as to any limitation on the powers of the board of directors to bind the company or authorise others to do so.".

(2)In Schedule 22 of the Companies Act 1985 (provisions applying to unregistered companies), in the entries relating to Part I, in the first column for "section 35" substitute "sections 35 to 35B".").

The noble Lord said: As on the previous day of the Committee stage, I shall refer to the amendments by the numbers and letters in brackets rather than to the full number and letter title.

This clause is the first of a series of new clauses and amendments put forward by the Government which deal with the capacity of a company, and the related issues of the authority of the board of directors and the rights of shareholders. These issues go to the heart of the operation of the limited liability company. They concern the scope of what a company may lawfully do, the protection of third parties dealing with a company, the duties of directors to their shareholders, and the rights of shareholders in relation to those who exercise power on their behalf.

The clauses are therefore of no little importance to commercial life in this country. They also happen to be difficult, technical clauses. Accordingly they need to be looked at carefully and thoughtfully, and I know that Members of the Committee will seek to do that. I should like to offer some general remarks which Members may wish to bear in mind in considering the clauses.

First, each provision forms part of an overall package. We have sought to give a very substantial degree of protection to third parties dealing with a company, and by giving greater legal certainty to the validity of a company's acts we aim to assist those involved in the process of wealth creation. But we also wish to guard against the risk of these protections being used as an instrument of fraud; we wish to maintain the accountability of the directors of the company to their shareholders; and we wish to ensure that these shareholders are able properly to protect their interests. Further, we have thought it necessary, because of the public interest in charities, to propose a modified regime relating to the capacity of charitable companies and the authority of their directors, and to require such companies to disclose their status so as to prevent that modified regime undermining our proposals for companies in general. Members of the Committee will appreciate that a careful balance has needed to be struck to reconcile these different ambitions, and that the provisions have to be looked at as a whole in order to appreciate that balance.

My second general remark is that this is not of course the first occasion that Parliament has legislated for these matters. There are several provisions of the Companies Act which deal with restrictions on directors from taking financial advantage of their position, and with the remedies available to shareholders to prevent their property being disposed of. These provisions will of course remain and need to be considered in the overall balance. Further, Parliament has already legislated in the area of a company's capacity and the authority of its directors by what is now Section 35 of the Companies Act. As I shall explain, that section has, however, been found to have a number of defects and not to work in practice as intended. In many ways, the major effect of the present proposals is simply to correct those defects.

My third general remark is that this is an area in which the European Community has legislated. The first company law directive contains provisions on a company's capacity and the authority of directors, and our domestic law needs to reflect those provisions. The Government's present proposals comply fully with this directive. That could not be said of the existing Section 35 because of one of the defects which I have mentioned.

Finally, I should say that the present proposals are the result of a process of consultation with interested parties. In 1985 the department commissioned Dr. Prentice of Oxford University to advise on the implications of abolishing the ultra vires rule; that is the rule by which a company's capacity is limited in the way which I shall explain in a moment. Dr. Prentice's report effectively recommended abolition of the rule and made some related proposals. The department received a number of comments on the report, and as a result of those and of developments subsequent to the report the department put forward proposals which it was hoped would achieve substantially the same beneficial effects as Dr. Prentice's proposals but would avoid some of the pitfalls that had been identified with them. The present clauses were drafted in the light of comments on those revised proposals.

In part because of the delays inherent in that process of consultation, it was not possible for the present clauses to be ready at an earlier stage, and I am sorry that Members of the Committee have not therefore had a great deal of time to assimilate them. But consultation with interested parties in this area is obviously important and I can assure the Committee that the main thrust of the department's proposals was widely welcomed. Nevertheless, this is a technical and difficult area and we would be happy to consider at Report any improvements which Members of the Committee may care to suggest.

I hope the Committee will forgive that extended preamble. Perhaps I may now turn to the problems which this new clause addresses. Members of the Committee will realise that the clause deals with both the capacity of a company and the authority of the directors to bind it. The capacity of a company has been limited by the courts through what is commonly called the ultra vires rule. Under that rule, a company may only carry out acts which are expressly or by necessary implication sanctioned by the objects clause of its memorandum of association. Any other acts are void and money or any other property transferred may be recoverable. The basis of the courts' ruling was a finding of implicit legislative intent. Under earlier enactments, a company could not alter its objects clause, and it may only do so now under the Companies Act in certain circumstances. If companies could pursue activities outside their objects, they would in effect be altering their memorandum of association. The courts therefore concluded a company's capacity must by implication be limited to its objects.

It has been widely recognised that the effects of this rule were unfortunate. It conferred little or no protection on anyone, not least because companies could get round it by drafting their objects clause so widely that they could effectively do anything; hence, the very lengthy objects clauses of many companies. But where their powers are not sufficient, companies were put to the trouble and inconvenience of changing their objects by special resolution before they could legitimately pursue new business opportunities. At the same time, third parties dealing with a company could not be certain that a company would be able to enter into a transaction with them, unless, that is, they were prepared to scrutinise a company's objects clause to see if a particular activity was permitted. That was a rather wasteful activity.

All in all the rule had little utility, but it served as a trap for the unwary or for the negligent draftsman of a company's objects clause. The chief losers from its capricious effects were innocent third parties engaged in commercial dealings with a company.

The unfortunate effects of the ultra vires rule have been ameliorated by what is now Section 35 of the Companies Act. That section purported to implement provisions of the first EC company law directive, but it did not do so fully and it has not completely overcome the problems associated with the ultra vires rule.

Section 35 states that in favour of a person dealing with a company in good faith, any transaction decided on by the directors is to be deemed to be within the company's capacity, and the power of the directors to bind the company is deemed to be free of any limitation on their authority contained in the memorandum or articles of the company. Members of the Committee will see that the section deals with both capacity and authority; that is, the power of the directors to bind the company. The Government's new clause also covers both these questions, in recognition of the fact that in the last resort it does not matter to a third party whether he cannot enforce his contract on the ground of lack of capacity or the ground of lack of authority, although it is at present open to the shareholders of a company to ratify an act which was beyond the directors' authority, but not an ultra vires act.

As I have suggested, there are a number of difficulties with the operation of this section. First, it only protects third parties. It gives no protection to the company itself should a third party wish to resile from an ultra vires act. Secondly, there have been difficulties over determining whether the provisions cover gratuitous acts and what is meant by a transaction decided on by the directors. What is clear is that it does not assist a person dealing with agents of the company who are not directors in respect of transactions which do not have board approval. Finally, the good faith test in the section has been interpreted by the courts as meaning that merely if a person knows of any limitation on the authority of the board of directors to bind the company deriving from the company's constitution, he will not be protected. As a result, the section does not fully implement Article 9 of the first directive.

The new clause is designed to remedy the defects in Section 35. It provides, first, that the validity of an act done by a company is not to be called into question on the grounds that it is beyond the company's capacity. Thus a transaction will be valid even if a third party has acted in bad faith. Further, the company itself will be protected. Complete protection of a completed transaction against the ultra vires rule will therefore be given. So far as concerns authority, the clause provides that in favour of a person dealing with a company in good faith the power of the board of directors to bind the company, or authorise others to do so, is to be deemed to be free of any limitation under the company's constitution.

A person is not to be taken as acting in bad faith merely because he knows that an act is beyond the powers of the directors, so third parties are to have substantial protection against any lack of authority. However, they are not to be protected if they are acting dishonestly. We do not think that the first directive obliges us to confer protection on a person who has been a party to fraud or assists directors if abusing their powers.

I would also note that in the case of a lack of authority under the constitution, a person will be protected not just if he is dealing with the board of directors but also if he is dealing with any single director, employee or other agent who has actual or ostensible authority deriving from the board to carry out the act. We believe that the application of the doctrine of ostensible authority sufficiently accords with commercial practice, without going further and conferring authority on individual directors.

It will be seen that the clause will in practice abolish the effect of the ultra vires rule on relations between a company and other parties and confer absolute protection on such parties, unless they have acted in bad faith, over acts beyond the authority of the board. The ultra vires rule will still operate internally; that is, for the purpose of defining the directors' duties to their shareholders. The clause specifically allows shareholders to go to court to restrain an ultra vires act, unless the act is in fulfilment of a legal obligation arising from a previous act; and directors will be fully responsible for any breach of their obligations. The clause allows the shareholders to ratify an ultra vires act if they wish, but this and any other questions relating to the directors' duties will remain a matter for the directors and the shareholders. It will not affect an honest third party. We believe that these provisions strike the right balance between the interests and responsibilities of the directors, the shareholders and third parties. I beg to move.

Lord Lloyd of Kilgerran moved, as an amendment to Amendment No. 227Z(80A), Amendment No. 227Z(80B):

In section 35, leave out subsections (2) and (3).

The noble Lord said: Perhaps I may say at once that I found the preamble by the Minister very helpful, particularly his reference to the fact that the Government are to some extent harmonising the law on this matter with the European Community.

The two amendments that I move in this new Section 35 may be considered to be matters of semantics, but in the introduction we had by the Minister I did not find any reference to the relevance of the matters contained in my amendments. My amendments are to shorten the new section. As the noble Lord said, there have been considerable difficulties with the 1985 Act in this field. New Section 35(1) would appear to be adequate to cover most of the matters adumbrated by the Minister.

Going into some detail, new Section 35(2) states: This does not affect any right of a member of the company to bring proceedings on that ground to restrain the doing of such an act".

I should have thought it quite unnecessary to introduce that. The subsection continues: but no such proceedings shall lie in respect of an act to be done in fulfilment of a legal obligation arising from a previous act of the company".

I should have thought that also was self-evident. There is a further clarification—it is intended to be a clarification—in subsection (3), which I suggest should be deleted, which reads: Nor does this affect any liability incurred by the directors, or any of them, by reason of such an act having been done. One has to go hack to the early part of the new section to understand what act is referred to.

I do not want to take up the time of the Committee any further except to say that so far I have heard no justification from the Minister for the inclusion of subsections (2) and (3) of new Section 35. I beg to move.

Lord Strathclyde

As the noble Lord explained, his amendment would delete two subsections from new Section 35 which deal with separate issues. I take them in turn.

Subsection (2) concerns the right to restrain proposed ultra vires acts. The earlier new subsection (1) establishes that once an act has been done—for example, a transaction has been entered into—that act or transaction cannot be called into question on the grounds of a lack of capacity.

New subsection (2), however, preserves the present right of a shareholder to go to court to seek an injunction to restrain a proposed ultra vires act. Two considerations in particular have led us to allow the ultra vires rule to continue to operate in these circumstances. First, our aim is to give security to commercial transactions, and this can be achieved by ensuring that an act cannot be called into question once entered into. It is not necessary to deal also with proposed acts in order to achieve our aim.

Secondly, there are circumstances where it may be important to an individual shareholder to restrain a threatened ultra vires act of a company. We think that it might tip the balance that I mentioned earlier too far away from the rights of shareholders if this existing right—which was recognised as long ago as 1860—were removed.

I now turn to the second subsection with which the noble Lord is concerned; namely, subsection (3). The intended effect of the removal of this seems to be to remove any liability which the directors may incur by reason of an ultra vires act being done. The limitations imposed on directors by the statement of objects in a company's memorandum serve the purpose, in addition to limiting a company's capacity, of defining the duties and authority of the directors vis-à-vis their shareholders. It will be apparent from what I said on the Government's clause that we do not wish to disturb these limitations on the directors if the shareholders wish to have Vol. 504them. We believe that the "internal" operation of the ultra vires rule is an important safeguard which shareholders ought to be able to keep in place if they so choose. Here again the noble Lord's amendment would tip the balance away from shareholders, in this case more steeply.

In introducing the new clause I suggested that the ultra vires reforms had to be seen as a careful balancing of several conflicting interests. I hope that rather than pressing this amendment, the noble Lord will consider it sensible for him now to reflect upon the rather lengthy remarks I made and to consider coming back at Report stage if he then believes that the Government have not got this delicate balancing act right.

3.15 p.m.

Lord Brightman

I ask the Committee not to accept the amendments tabled by the noble Lord, Lord Lloyd of Kilgerran. As I understand the amendments, the effect would be that directors will be at liberty deliberately to act in excess of the powers contained in the memorandum of association. The effect of that will be that a company might just as well tear up the objects clause contained in the memorandum because the limitation set out in the objects clause will neither bind a member of the public acting innocently nor a director who is acting deliberately in contravention of the constitution of the company. I ask the Committee not to accept these amendments.

Lord Morris

This amendment begs the question raised by the noble and learned Lord on the Cross Benches of what is the point of maintaining the objects clause in a memorandum of association. I suggest that much of the confusion has been caused by misunderstanding the roles of the memorandum of association and the articles of association within a company.

If the capacity of the directors is to act bearing in mind the interests of the shareholders and the company generally, controlled by the articles of association rather than the memorandum of association, the objects of the company should be placed therein rather than the other way round.

Whether Her Majesty's Government or the department have considered this matter in changing the form within the Companies Act for what are generally called the statutory books, I do not know, but I sincerely hope that the Government will look at this matter because it might answer many of the questions and clear up some of the confusion.

Lord Lloyd of Kilgerran

I am much obliged to the Minister for having explained more fully in a learned speech the reasons why he wishes me to reflect further on this matter.

I have not had much time for reflection. The Committee will forgive me for saying so, but last Thursday nine-and-a-half pages of government amendments descended upon me and I tabled these amendments immediately. To my surprise the Government put down another three-and-a-half pages of amendments on Friday, saying that they were to substitute the amendments originally tabled and to which I had directed my amendments. I did not receive those until yesterday and I crave the indulgence of the Committee in not having had adequate time to deal with these important matters.

The Government have set down their amendments rather late in spite of the fact that, as the Minister said, there have been close consultations for years on this matter. Nevertheless, it was necessary for the Minister to work his colleagues behind the scenes rather hard and they must have done a great deal of work in order to produce the amendments.

In the face of the positive intervention of the noble and learned Lord, Lord Brightman, I shall not waste the time of the Committee any longer. I will consider whether this matter should be raised on Report and in the meantime I beg leave to withdraw the amendment.

Amendment No. 227Z(80B) to the amendment, by leave, withdrawn.

[Amendment No. 227Z(80C) not moved.]

Lord Lloyd of Kilgerran moved, as an amendment to Amendment No. 227Z(80A), Amendment No. 227Z(80D): In subsection (4) of section 35(A), line 6, leave out from ("resolution") to end of line 10.

The noble Lord said: This is an amendment to the new Section 35A which is directed to the power of directors to bind the company. Subsection (4) is a long subsection, but I agree that paragraph (a) is satisfactory. However, I believe that the next paragraph is unnecessary. My amendment is therefore directed to the deletion of subsection (4)(b) which states: in the absence of such ratification, the above provisions of this section apply as in relation to any other limitation on the powers of the directors". In the absence of the ratification by the board of directors I should have thought that it was perfectly open for anybody to deal with the matter and therefore the words, the above provisions of this section apply as in relation to any other limitation on the powers of the directors". are totally unnecessary. I beg to move.

Lord Strathclyde

I shall respond first to the noble Lord, Lord Lloyd of Kilgerran. We are very sorry that these amendments were put down late. I expressed regret in my earlier remarks that the Committee had not had time to consider them before today's discussion. They were tabled last Wednesday; so I suppose that we have had more time to discuss them than we have had for one or two other amendments.

Lord Lloyd of Kilgerran

They were tabled on Thursday. On Friday further amendments were tabled in substitution for the earlier amendments.

Lord Strathclyde

I do not want to make an issue of this. We are sorry that the amendments were late. I understand that those tabled on Friday were simply a re-ordering of the amendments. They were not different amendments. I hope that the noble Lord will accept that.

Lord Lloyd of Kilgerran

I am very grateful to the noble Lord for explaining now that there was a reordering of the amendments. I did not realise that when I received them on Monday. Mr. Keith in the Public Bill Office has been very helpful. He told me today that it was merely a re-ordering of the amendments. It would have been helpful if I had been told that simple fact.

Lord Williams of Elvel

I accept culpability for the re-ordering. In the light of the amendments that the Government tabled earlier, I asked them to break up the clauses so that we could have debates of a separate nature rather than having to deal with a whole raft of clauses in the same debate. It is my fault that the Government accepted my suggestion and re-tabled the amendments in the form in which they now appear.

Lord Lloyd of Kilgerran

I intervene once again to deplore the fact that there has not been closer cooperation between my noble friend Lord Williams of Elvel and myself on this matter.

Lord Williams of Elvel

Perhaps we should meet in Wales.

Lord Strathclyde

That is an entirely different question with which I am not proposing to deal at the moment. I turn to the amendment moved by the noble Lord, Lord Lloyd of Kilgerran.

Subsection (4) of new Section 35A allows a company by special resolution to ratify an act of the company in which the board of directors have exceeded any limitation on their powers which flows from the objects of the company. Such ratification is at present impossible. A company has always been able to ratify acts which breach other limitations on the directors' authority, but because objects clauses go to capacity, and acts in breach of them are ultra vires, it has not been within the powers of the company to ratify such acts. This change will not of course affect honest third parties who are dealing with the company. They will be protected whether the act has been ratified or not. But it would, among other things, enable the company itself to enforce the contract if that is what the shareholders believe to be in the interests of the company.

The part of the subsection which the noble Lord, Lord Lloyd, would have deleted provides that in the absence of such ratification, the provisions of new Section 35A are to apply as they do in relation to other limitations on the powers of the directors. Perhaps the most important of the provisions in this case are the right of members to restrain a proposed act which is in excess of directors' authority, and the liability of the directors in respect of any such act which has been carried out. We have already spoken about these two points, and I have tried to explain the thinking behind them. I therefore ask the noble Lord once more if he will consider reflecting further in the light of what I have said.

Lord Brightman

I take exactly the same view as the noble Lord, Lord Lloyd of Kilgerran. On a brief reading it seems that the amendment is right. Subsection (4)(b) is totally unnecessary. In the absence of the ratification set out in paragraph (a) I ask myself what else could happen except that, the above provisions of this section apply as in relation to any other limitation on the powers". I believe that the amendment is correct and that paragraph (b) plays no useful part whatever.

Lord Lloyd of Kilgerran

I am grateful to the noble and learned Lord, Lord Brightman, for that very positive support. He reflects entirely the views that I have. I wonder whether the noble Lord the Minister wishes to make any reply. In the face of such a positive statement from the noble and learned Lord surely the Government have either to accept my amendment or agree to take it back and to reflect on what has been said in Committee. The noble Lord has had some help; and I believe that he has had enough time to read the papers before him. I ask him to reconsider the position that he has taken in the face of the very postive statement of the noble and learned Lord on the Cross Benches.

Lord Strathclyde

The noble Lord, Lord Lloyd of Kilgerran, asks why paragraph (b) is needed. It is accepted that new Section 35A(4)(b) might be strictly unnecessary. However, in our view it provides a useful pointer to the operation of the section. When first replying to the noble Lord, I asked him to consider reflecting further on the matter. In the light of what has been said in Committee the Government should reflect and come back again at the Report stage.

Lord Lloyd of Kilgerran

With that assurance of reflection by the Government I hope that the result will be a very positive one. I beg leave to withdraw the amendment. Amendment No. 227Z(80D) to the amendment, by leave, withdrawn.

Lord Williams of Elvel

In speaking to the main government amendment I think it appropriate to echo the words of the Minister. We too believe that the present arrangements for ultra vires have largely come to a fullstop. We accept the conclusions of the Prentice Report. I differ somewhat from the Minister in that once you give away the ultra vires doctrine and try to substitute something else you create for yourself an enormous number of problems of a rather different order that I shall come to in a moment.

I echo also the words of the noble Lord, Lord Lloyd of Kilgerran. We have had very little time to study these amendments. I apologise to the noble Lord for not warning him that I was trying to break down the debate rather than having to take five new clauses in one debate. There has not been time for us to put down amendments as is normal in dealing with matters in Committee. We are therefore reduced to a series of what I call clause stand part debates to make our comments. The noble Lord, Lord Lloyd of Kilgerran, has initiated what I regard as almost a clause stand part debate by saying "Leave out subsection this and subsection that" without being entirely precise. He has every reason to do so.

I shall go through the amendments that the noble Lord has proposed, making points which relate more to clause stand part debates than I would have wished. Under the procedures of the Committee we are unable to recommit these clauses. Once they have been approved they cannot be recommitted. If the Government had moved the clauses on Report we could have moved for recommitment and then had a discussion on proposed amendments. The clauses having been tabled at the time they were, we have either to throw them out altogether or accept them as part of the Bill emerging from Committee. We are unable to recommit them. So we have to adopt Report stage procedures and that affects the debate.

Lord Lloyd of Kilgerran

I am sorry to interrupt the noble Lord. In order to help in this very technical matter, can he tell me which clauses he is going to attack on a stand part basis? I can then strengthen my argument, contemplating what he is going to do.

Lord Williams of Elvel

I intend to attack the proposal to insert new Sections 35, 35A and 35B. As the Committee will later discover, I shall also attack new Section 322A. I am going to attack "Insert the following new clause", and so on. All are new clauses which I shall attack upon a general basis. I would have preferred to have been able to move amendments to them.

Lord Lloyd of Kilgerran

I am obliged to the noble Lord. I think I shall leave him alone in his attacks as at present advised.

3.30 p.m.

Lord Williams of Elvel

I am grateful to the noble Lord.

We accept that the Government are right to try to produce something in place of the present ultra vires arrangements which have now become not quite a dead letter but so easily avoidable that they are no longer effective. Perhaps I may examine some of the drafting of the Government's proposed new clauses to Chapter III of the Companies Act. They contain a series of difficulties which I should like to explore with the Committee. New Section 35(1) is the main substantive subsection abolishing the ultra vires provision. I wonder whether after the expression "lack of capacity by reason" we should not have the words "only of the fact". The noble Lord explained that it is possible for a special resolution of a company's members to authorise an act which may be beyond the objects of association. The vires is provided by a special resolution, not by the objects. Therefore we should have in that subsection a limitation that does not exclude—and this is something that is inserted by later amendments—the vires provided by a special resolution.

Secondly, there are the words: it is beyond the objects of the company". I wonder whether that should not read, "it was not authorised by the company's objectives". Once an act has taken place, it has taken place in the past. The validity of that act which has taken place in the past would seem to be what we are talking about. We are not talking about an act that is at the moment being done. I should prefer to have the past tense rather than the present tense.

In new Section 35(2) we find the words: right of a member of the company to bring proceedings". Is that an unqualified right? The well known case of Foot v. Harbottle appears to qualify the right of members to bring proceedings against companies. Is that being ignored? Does this new statute override those provisions? What will happen if the act in question is itself sanctioned by special resolution? Will that be intra vires and therefore not within the scope of new Section 35(2)?

In new Section 35(3), what is the meaning of the word "this"? I accept that in some cases the parliamentary draftsman is becoming rather colloquial in his language but normally, syntactically, the word "this" would refer to what has happened in the previous paragraph. It would not refer to what has happened in the paragraph before the previous paragraph. We argue that the word "this" in new Section 35(2) does not affect any liability. That seems to be an odd construct and I think that the draftsman might well feel it necessary to look again at that point.

Before I finish with new Section 35, perhaps I may say that subsections (2) and (3) confer new rights on shareholders over acts which are at present intra vires. I should be grateful if the noble Lord would comment on that point.

I do not wish to detain the Committee longer than I have to, but we must go through these points. Does the authorisation mentioned in new Section 35A(1), include, as 1 think I heard the noble Lord say, ostensible authorisation, or is it strictly authorisation determined by some procedures about which we have to learn? If it is ostensible authorisation that should be set out in the statute. On the next line we have the expression "under the company's constitution". I have never met this expression before in company law. I know about memoranda and articles of association but I have never heard of "the company's constitution", though I quite understand why the Government have suddenly adopted this expression instead of the normal expressions to which we are used. Furthermore, what is in new Section 35A(1) is inconsistent with what is in new Section 35A(2). I should like the Government to look at that again.

New Section 35A(2)(c) refers to the limitations under a company's constitution, whatever that may mean. They include, limitations deriving from a resolution of the company in general meeting or a unanimous resolution of the members otherwise than in general meeting". What about those members of a company who are not ordinary shareholders? They may be preference shareholders, but such shareholders are members of the company. Should it not read "members or classes of members"? In subsection (3), is the right presented to us an unqualified right or is it a qualified right?

What will happen under subsection (4)(a) if the act is ratified in advance by special resolution? There is no provision and so we do not know. We are left at the moment in the air. If that act is ratified in advance it cuts straight across the provisions on new Section 35. Without changing the objects of a company, shareholders can ratify in advance by special resolution and thus create the vires under which the company operates. It has nothing to do with the objects or with what the Government are pleased to call the company's constitution.

The Committee will be anxious to move on to the Statement. I do not wish to detain proceedings for long but in this initial amendment there are some serious problems. In fact some people describe it as something of a mess. No doubt the noble Lord will be able to respond to what I have said. If he cannot respond perhaps he will be able to look at it again and respond when we come to Report stage.

Lord Strathclyde

In the space of a few minutes the noble Lord, Lord Williams, asked a number of detailed questions. These new sections have been carefully drafted and have benefited from advice from all kinds of interested parties. We believe that the new sections work but the area is difficult and technical. As the noble Lord has suggested improvements, we shall be glad to consider them.

Perhaps I may remind the noble Lord that the thrust of the amendments has been strongly supported by third parties, and that we announced at Second Reading that we would be dealing with this question. I sincerely hope therefore that the Committee will be able to accept the new sections and consider detailed drafting at a later stage.

The noble Lord asked about the tense in new Section 35(1). We are happy to look at this point. He also asked about the right in subsection (2). The right is unqualified by various legal cases but statute does not override this. There is an existing law for this. We are preserving the existing right; we are not creating a new one. The noble Lord asked about the word "this" in subsection (3). "This" refers to new Section 35(1). The word "this" is controlled by the "Nor" two words previously. That therefore means that the reference must be to new Section 35(1) and not to the preceding paragraph.

The noble Lord asked about new rights. The key words in subsections (2) and (3) are the words "any". We are preserving these rights. The noble Lord also asked about ostensible authority. There is no need to refer explicitly to ostensible authority. The courts have developed a doctrine on that aspect and therefore there is no need to go any further.

Lord Williams of Elvel

Perhaps I may interrupt the noble Lord for a moment. Does that mean that in the new clause which he is suggesting the word "authorise" includes ostensible authorisation?

Lord Strathclyde

Yes, that is precisely what it means. However, perhaps I may continue. The company's constitution as set out in Section 35A(2) is an omnibus word conveying all constitutional limitations. As I said, it is well understood by the courts and practitioners. I think that I have covered most of the points raised by the noble Lord, Lord Williams. However, if he feels that there are any outstanding matters, I am sure that he will be happy to discuss them again at a later stage.

Lord Lloyd of Kilgerran

Perhaps I may intervene just to say this. If I understood him correctly, when he was dealing with Section 35A(2) the noble Lord, Lord Williams, indicated that that was one of the provisions which was giving new rights. However, the Minister has not dealt with that aspect. I fully appreciate that this has arisen at short notice and that he has not had warning about these points. Nevertheless, perhaps he will be good enough to consider whether subsection (2) gives new rights.

The Minister will remember that I did not move Amendment No. 227Z(80C), which proposed to leave out subsection (2). It was not moved because I thought that it was inappropriate. However, I hope that he will be able to look at the matter and, in the gracious words which he uses on these occasions, perhaps reflect upon it and write to me further.

Lord Strathclyde

I was well aware of the reasons behind the decision of the noble Lord not to move the amendment tabled in his name which dealt with subsection (2). As I said earlier, we are keen to reflect on all suggestions made by noble Lords. Indeed, on some suggestions no doubt we shall come back at a later stage. As regards this particular subsection, it explains the use of terms in subsection (1) and does not create new rights.

On Question, Amendment No. 227Z(80A), agreed to.

The Earl of Arran

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.