MPs should copy company law for expenses reform

Published on Sunday 14 June 2009 19:41

IF YOU haven't heard about MPs and their claims for duck islands, moat-cleaning, church donations and other such frivolities – and the calls for reform – where have you been?

As we are now aware, MPs can claim expenses for the cost of running a second home and for sundry other items needed to fulfil their parliamentary functions. Claims were supposed to be above reproach, only be for expenses necessarily incurred in the performance of parliamentary duties, and not give (or appear to give) rise to improper personal financial benefit.

They were also to be made grounded in concepts like honesty, integrity, selflessness, accountability, openness and leadership. MPs had to sign a statement declaring their claims were legitimate and, on the back of that, were usually paid without challenge.

Result? MPs have had a largely unchecked ability to spend taxpayers' money on expenses and allowances.

There have been many suggestions for reform, from introducing US-style primaries to the return of the stocks, or worse. But perhaps we could learn something from the law governing private limited companies. After all, much of it is derived from Westminster legislation and there is no obvious reason why what is sauce for the goose…

In company law, directors are appointed by shareholders to run the company, much as MPs are elected by the public to run the country. There are other analogies, because directors, whether or not employees of the company, are barred from making inappropriate personal gains and have a variety of duties of disclosure and good faith.

Thus, if a director, wearing his employee hat, acted in the manner of some MPs with their expense claims, he could easily find himself summarily dismissed for gross misconduct.

As far as acting in his capacity as director is concerned, if 50.1 per cent of shareholders vote in favour, the offending director can be removed from office.

But what if, as with many private companies, the offending director owns most of the shares? The general legal position after the case of Foss v Harbottle used to be that, except in very rare cases, shareholders would find it hard to bring a so-called derivative action (an action in the name of the company against the directors).

Since the board of directors would hardly be likely to bring an action against itself on behalf of the company, the combination of this very limited right under Harbottle and, in the alternative, a need to be able to outvote the directors, effectively meant the aggrieved shareholder had no remedy exercisable by the company against the directors.

However, parliament (remember it?) recognised this was not acceptable and the limited exceptions developed by the courts were added to by the Companies Act 2006.

Now, a shareholder can more easily raise an action against a director on behalf of the company where there has been any actual or proposed act or omission by a director involving negligence, default, breach of duty or breach of trust. To draw a parallel with offending MPs, they could certainly be seen to be breaching trust if even half of the recent news reports are true.

So far, so good.

However, instead of having to convince the board to sue itself, to raise a derivative action a shareholder must first have leave of the court and, since the introduction of the 2006 Act, this has proven a high hurdle to get across, with several applications failing at this preliminary stage.

Leave has also been granted, though, and one of the reasons for refusing leave has been the existence of other legal remedies for the shareholder.

One such remedy is to apply to the court for an order that the company's affairs are being, or have been, conducted in a manner that is unfairly prejudicial to the interests of some or all of its shareholders.

Generally speaking, there must have been some breach of the terms on which the shareholder agreed the affairs of the company should be conducted.

Again, to compare this with the MPs row, it could be argued that some MPs have acted in a manner which breaches the public's reasonable expectations as to how they should behave in running the UK.

It is sometimes tempting to think our MPs are making the simple – an expectation they will serve with integrity and lead by example – unnecessarily complex. A good starting point might be to copy the law the rest of us are bound by if we serve as directors.

&#149 Pamela Abbott is a solicitor with CCW Business Lawyers