Justice Committee

Meeting date: Tuesday, September 28, 2010

Official Report 508KB pdf

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Criminal Sentencing (Equity Fines) (Scotland) Bill

Item 4 is the Criminal Sentencing (Equity Fines) (Scotland) Bill. At its meeting on 4 September, the committee agreed to invite Bill Wilson MSP to give oral evidence on the legislative competence of his bill. I welcome him and Eric Swanepoel, who is a researcher with the Scottish National Party. I apologise for keeping you waiting, Mr Wilson. As you have probably gathered, the committee has been dealing with an exceptionally complex matter this morning. I understand that you are happy to proceed straight to questions, of which we have only a few. You should be able to get the crux of your arguments across to us in responding.

Before we continue, I point out that Eric Swanepoel is not a member of the Scottish National Party.

That will be noted in the Official Report. However, he is assisting you today and is welcome to do so.

The Presiding Officer’s view is that the bill seeks to legislate on issues of company law that are reserved to the UK Parliament and which are, therefore, outwith the legislative competence of the Scottish Parliament. The Scotland Act 1998 provides that the

“creation, operation, regulation and dissolution of types of business association”

is a reserved topic. Companies are included within that; thus, the question of legislative competence appears to turn on whether the bill seeks to deal with the “operation” or “regulation” of companies. What is your view of that analysis?

I do not think that my proposals would affect the

“creation, operation, regulation and dissolution”

of companies any more than the levying of a financial penalty on a company would affect the

“creation, operation, regulation and dissolution”

of a company. The fact that a company might be affected by an act of the Scottish Parliament does not automatically make it a reserved matter. For example, the Smoking, Health and Social Care (Scotland) Act 2005 ensures that a company cannot operate in a certain manner. Similarly, banning cigarettes at the point of sale ensures that a company must alter its operation, but that does not make it a reserved matter.

The purpose of my proposal is to deal specifically with sentencing, not with the regulation of companies. I cite the example of salmon farming, in which the licensing of salmon cages directly impinges on the Crown Estate’s ability to manage the foreshore, which is a reserved matter. It was decided that that could go ahead because the purpose was to license salmon farming rather than to regulate the management of the Crown’s terrain. The purpose of my bill is to introduce a new penalty, not to oblige a company to be regulated in a particular manner.

You will be aware of the case law on the matter, the most recent of which seems to be against you. There is case law dating way back, including some from what has been euphemistically described as the dominions, but there was also a case in 1990. Are you aware of that?

No. Can you fill me in, please? I want to be sure that we are thinking of the same thing.

The practice has always been to relate to what is called the pith and substance of the issue. A legislative competence assessment requires to bear that in mind. The most recent case appears to be Martin v HM Advocate in 2010, in which Lord Hope of Craighead in his judgment applied a very restricted view of what might be competent in that respect. Have you had a look at that case?

No, I have not. I would need a description of exactly what the circumstance was before I could give an answer on that case.

Basically, it is a fairly recent case that went to the House of Lords in 2010. The ability to make legislation of the type that you propose is particularly narrow. The Scottish Parliament information centre has produced a document for us in which the case is dealt with at some length. Have you not had the opportunity to see it?

I have seen a SPICe document that was produced for me; I am not sure that I have seen a SPICe document that was produced for the committee.

The clerk has drawn my attention to the fact that it is a private paper.

In that case, I have not seen it. I make the point that the Scotland Act 1998 specifies that the conditions should be read as narrowly as possible so as to permit competence. Section 101 clearly states:

“Such a provision is to be read as narrowly as is required for it to be within competence”.

Given that the bill is specifically on sentencing and that sentencing is not reserved, I cannot see why it would be regarded as dealing with a reserved matter. Indeed, as the committee is aware, the recent sentencing review in England and Wales did not cover Scotland, but included issues of company criminality. Does that mean that Scotland has no way of modifying sentencing at all? If the issue is reserved under the Scotland Act 1998 but sentencing reviews in England and Wales do not cover it, in effect we have a black hole. Surely that cannot be the situation.

So that you are not at a disadvantage, I will quote from Lord Hope’s judgment, which states:

“If the substance of the legislation is within express powers, then it is not invalidated if incidentally it affects matters which are outside the authorised field. The legislation must not under the guise of dealing with one matter in fact encroach upon the forbidden field. Nor are you to look only at the object of the legislator. An Act may have a perfectly lawful object e.g. to promote the health of the inhabitants”,—

which deals with the smoking ban argument—

“but may seek to achieve that object by invalid methods, e.g. a direct prohibition on any trade with a foreign country.”

That is another example. Do you have any comments on that?

I repeat that the bill would not make any prohibition or regulation upon a company. Nothing in the bill says that a company must do anything, other than pay a fine, but of course a company can already be obliged to pay a financial penalty. For instance, if we wished to modify the financial penalties on a company, nobody would argue that that is a reserved issue. We accept that the Scottish Government can order financial penalties if it wishes to do so. Logically, the bill will do exactly the same. It says, “You must pay a penalty; the penalty is shares and not money.” However, that is not regulation of the company.

That might be a thin argument. The company would have to issue shares as you say, but that is obviously a financial consideration or penalty.

Yes, but let us say—speaking hypothetically—that companies can be fined for a particular offence and £500,000 is the maximum fine. Would we then say that the Scottish Parliament cannot increase the maximum fine from £500,000 to £1 million? That would also be levying a cost upon a company, and the company would then have to respond to that financial penalty. As far as I am aware, no one argues that we cannot modify financial penalties. If we can modify financial penalties, there is no obvious reason why we cannot introduce a new penalty. It is exactly the same requirement.

We have got to the nub of the issue. You made an argument along those lines in your letter to the committee of 17 August. That means that your proposal wrecks—if it does—purely and simply because just below the waterline is the fact that the shares have to be issued in the context of companies legislation, which is reserved.

That comes back to my original point. We would be using company legislation to issue the shares; we would not be modifying that legislation in any way, shape or form.

In the same manner, if we tell the Crown Estate that we intend to license its ability to fix salmon farms to the foreshore, we are altering its ability to manage, but that is not the purpose of the measure. It goes back to the pith and content, which is a penalty, not an attempt at regulation. [Interruption.] Eric Swanepoel tells me that I mean the pith and substance—I am sure that Bill Aitken, too, would have corrected me.

We are using the law, not changing it—there is nothing to say that we cannot use an existing law. Eric Swanepoel has pointed out to me that, arguably, the bill would lessen the impact on companies. If a £1 million financial penalty is imposed on a company, it will have to modify its behaviour. There is nothing unique in what I am proposing, in terms of what it would do to a company.

In principle, I accept that point absolutely. It will be a great deal easier for a company to issue £1 million-worth of shares to a market, assuming that it is possible to sell those shares. That begs a few questions about private companies, rights of pre-emption and all sorts of things. The point is—we have had this discussion elsewhere—that all of those matters come under companies legislation. That is the issue that is lurking just below the waterline.

I will try to talk you through a case of which you may be aware: Regina (Hume and others) v Londonderry Justices, of 1972. Does that ring any bells?

Vaguely, but I do not have my notes with me. Will you talk me through it?

I will. The Parliament of Northern Ireland decided that it would like to give the security forces, on which it drew widely, the power to break up assemblies of people. However, it was only a power—there was no duty. That is what I find interesting about the case. The legislature tried to give the Army, among others, a power to break up assemblies. When the case came before, I presume, the Privy Council, the court judged that the legislature was going too far, because it had no right to do that. It was probably obvious that it had no right to tell the Army what to do—that it could not tell an Army officer that his or her duty was to do X or Y. I am interested in the fact that legislation that simply gave it the power to do something was also struck down.

You seem to be arguing that the legislation was struck down because the Army could not be given the power that it conferred.

I am drawing the conclusion that, if the ruling in the case was and still is correct, the Scottish Parliament cannot do what you want us to do until Westminster has given us the power to do that.

I do not agree. In one case, the issue was whether the Army could have a power or duty to act under civil law to disperse individuals. In the other, we are arguing about whether the court can have the power to issue a penalty. The court has the power to do that; we are debating the kind of penalties that it can issue. Are we saying that we cannot introduce new sentencing of any form in any court? That is what it comes down to.

It does not.

If the Parliament has the power to modify sentencing and to introduce new penalties, it already has the power that we seek.

The power to issue penalties is not in dispute. With respect, the issue just below the waterline that will wreck the bill is shares—nothing else.

I do not accept that. It comes down to whether the court has the power to issue a penalty. It does. There is nothing in the Scotland Act 1998 that says that we cannot use existing law. Company law exists—we are not modifying it. If you read section 101 of the 1998 act as narrowly as possible—as you have been told you should do—surely all that I am doing is extending a new power of sentencing to the court. I am not modifying or touching any existing law.

Forgive me, but that is exactly where Regina (Hume and others) v Londonderry Justices comes into play. The Army was there and the soldiers’ feet were on the ground. The legislature did not give them a duty or demand that they do something—it simply gave them a power to do something. However, the court of appeal—I am not sure whether it was the House of Lords or the Privy Council—decided that it could not do that.

The ability to disperse individuals was a fundamentally new power to permit the military to act as a civil authority to disperse individuals. That is a far-reaching power that is very different from giving courts that already have the power to issue a penalty against a company a new type of sentence. That is simply giving courts a new sentence that they already have the power to apply. It is not the same as creating a new power.

15:15

Do you not accept that giving the Scottish courts the power to change at least the level of shareholding of a company is going beyond the powers of the Scottish Parliament?

No, of course not. The reserved matters are reserved in the sense that we cannot modify or alter the reserved law. If we are not altering the reserved law, the situation does not exist.

We are using the existing laws. We are not changing them; we are simply introducing a new sentencing. If you are right, we are potentially in the situation in which no one can modify the sentences of Scottish courts. It is not being done in the sentencing review in England and Wales. If Scotland cannot do it, who can modify the sentencing in Scotland? Are we saying that it is stuck in its present position ad infinitum?

I actually agree with you. We will not agree on the bill, but my reading is that Westminster has to say, “Yes, you may do this” and then we have to decide subsequently in legislation to do it. That is a constitutional and legal nonsense, but nonetheless that is where I think we are.

I want to go back to the Scotland Act 1998, where the issue starts. The act states that the reserved competence is the

“creation, operation, regulation and dissolution of types of business association.”

Surely, altering the share capital, for whatever purpose, would affect the operation and regulation of a company and is therefore reserved.

It would do so no more than would imposing a financial penalty on a company. If we hit a company with a £1 million penalty—sadly, corporate companies do not usually get those penalties, even when they kill people in substantial numbers or cause major environmental damage—the company would almost certainly have to modify some of its behaviour to meet it. The bill would not modify a company in any way that would be different from a financial penalty.

Is not there a distinction between a direct order of the court that requires certain things to happen and a more general order, such as a fine, that can have certain implications but over which the company has entire control on how to meet it—in other words, its actions are not a matter for legislation? There is a real difference between fining a company, which can pay in any way it wants, and ordering specifically a change in the share ownership of the company.

I do not see the difference; I see them both as the same thing. We are saying to the company that it will pay a penalty, whether it is a financial or share penalty. It will be up to the company to choose how to meet the penalty—it might buy back shares or it may issue new shares.

I accept that point entirely, but that brings us back to the restriction to a reserved issue of the operation and regulation of companies. It is manifest that, whatever else it does, an order of the court that alters the share capital affects the operation and regulation of a company, and it is therefore forbidden by the Scotland Act 1998.

No, it does not. First, the issue of the shares may not have any effect on the company’s operation. It will certainly have an effect on the shareholders’ value, which is the intention of the fine, but it does not necessarily affect the operation. If we hit a company with a large financial penalty, it may have to sell off various assets—that would affect the operation. A share penalty will not necessarily affect the operation. As for the regulation, the share penalty does not regulate company behaviour any more than a financial penalty regulates company behaviour.

With great respect, it does—it regulates the share composition of the company. I do not see how much closer we can get to regulating the operation of the company.

That is not a regulation of the company; it is an alteration of a shareholding. It does not regulate the company’s ability to operate or behave. It does not touch any of those things.

Would you accept that you are trying to restrict the wording of the Scotland Act 1998? I understand why you are doing it, but we are not in a position to make our own interpretations of these things—we have to follow the common English meaning of the words. Regulation of a company manifestly includes the memorandum and articles and share structure. There are probably definitions in the Companies Act 2006 to that effect, too.

First, that is not clearly stated, so I do not think that it “manifestly includes” it. Secondly, let me repeat that section 101(2) of the Scotland Act 1998 states:

“Such a provision is to be read as narrowly as is required for it to be within competence, if such a reading is possible, and is to have effect accordingly.”

The Scotland Act 1998 specifically states that we should seek not to put something outside competence and should read the act of incompetence “as narrowly as” possible.

In that light, I say again that if you read regulation of a company to mean the regulation of its behaviour and activities as it operates as a company—what it sells, where it sets up, where it does or does not have business headquarters—that would not be affected by a share issue. It might, arguably, be affected by a financial issue. If a company were hit with a large enough penalty, a chunk of it might have to be sold. That would be regulation.

I cannot see how you can say that the ability to alter the financial penalties on a company, perhaps to make them extremely punitive, which might force a large section of the company to be sold, is not regulation, whereas forcing it to sell shares, which would not have that effect—it would have a different kind of effect—is regulation.

Would you take the same view if an order were made to wind up the company or to do something of that sort?

That is precisely my point. That would be regulation, which is clearly prohibited. One cannot order a company to be wound up.

That is just one example.

One cannot order a company to be wound up, but the issuing of shares would not result in a company’s being wound up: a company could exist whether or not the shares were sold. The issuing of shares is less likely to affect the company’s operating capital and therefore less likely to affect its operation. From the point of view of operation and regulation, my proposal is less likely to have an impact than would a financial penalty. Its purpose is to try to alter the behaviour of companies by directly affecting the value of shares, thereby discouraging people from buying shares in companies that break the law. As far as the operation and regulation of a company is concerned, I think that a requirement to issue shares would potentially have less—certainly no greater—impact than a financial penalty.

You must accept that your policy objective is to ensure that public limited companies adequately invest in measures to ensure that they comply with the law. Do you accept that in order to do that, as others have pointed out, you are using the justice framework under the Scottish Parliament’s devolved powers to achieve an outcome that might involve restructuring share capital, which clearly comes under the remit of the Companies Act 2006?

Again, I would say no. Your argument is that to impose the proposed penalty on a company is an attempt to modify its behaviour, but any penalty, from jailing the heads of the company to hitting them with a financial penalty or an equity fine is, I presume, a penalty that is intended to change their behaviour in the long term. That applies to any penalty, whatever it is, so that per se cannot be a reason for saying that the bill would modify the regulation of companies.

As far as the rest of your question is concerned, can you give me the second part of it again, just to ensure that I understood it correctly?

Essentially, you are trying to ensure that companies invest correctly. As part of that, you want to give certain powers to impose fines, which could result in the reorganisation of share ownership. In my opinion, that would normally come under the remit of the Companies Act 2006, but because such matters are reserved, you are trying to do it through the vehicle of the justice portfolio under the devolved powers of the Scottish Parliament.

The imposition of a heavy fine might affect shares; it may or may not cause shares to be sold.

I still think that it comes down to the fundamental issue that for my bill to be said to deal with a reserved matter, I would have to be modifying reserved law. Nothing in my proposal would modify reserved law; reserved law would not be touched. There would be no change to the Companies Act 2006, as there is no proposal to modify it. If you read the bill as narrowly as possible, there is nothing in it that would alter a single aspect of reserved law.

Do you accept that the way in which shares are organised within companies comes under the remit of the Companies Act 2006? You must accept that—it is a given.

The point is that section 101 of the Scotland Act 1998 says that proposed provisions should be read as narrowly as possible. The whole point of the bill—the pith and substance of the bill—is to introduce a new penalty, not to modify company law. Company law would not be modified in any way, shape or form. If you read what the bill proposes as narrowly as possible, it would not modify company law; it would not touch company law. It may use company law, but the Scottish Parliament has passed lots of different acts, for example to do with smoking and point of sale, that you could argue clearly affect a company’s ability to take certain actions and which therefore use company law. The use of company law, per se, is not reserved. It is only the modification of company law that is reserved and I am not seeking to modify it.

Surely the implication is that if the bill were to be passed, the logical follow-on would be a need to amend the Companies Act 2006 to deal with the consequential issues of the reorganisation of share ownership.

No, I do not think that we would need to amend the Companies Act 2006. That is why I want to allow companies to issue the shares as they see fit. All the court will say is that a company will issue a certain quantity of shares and sell them by a certain date. No modification of company law would be involved, and I am quite confident that there would be no need for modification of company law. In that sense, we are not touching reserved law. That is my point; the bill does not touch reserved law.

What about companies that trade in Scotland and England, or companies that are registered in England? Are we not getting into a very complex area, to say the least, if the bill seeks to alter the share structures of companies that are in that situation?

I will make two points on that. First, companies can be penalised whether they operate out of England, the United States or anywhere else. That is the simple truth. The penalty can be financial or otherwise. Secondly, even if the situation were incredibly complex, it is not relevant to the discussion about whether the bill covers a reserved matter. You might decide, “This is too complicated to do, so we don’t want to do it”, but I hope that you will accept that it is not relevant to the question whether it is or is not a reserved matter.

We could say, for example, that we would apply the provision only to companies that are registered in Scotland, which would remove the complexity. I am not suggesting that you want to do that, and I am not suggesting that I would like to do that. I am simply making the point that it does not affect the reserved matter issue.

Would you like to say anything else?

The bill offers Scotland an opportunity to implement a new form of sentencing and a chance to set Scotland up as an example of an ethical country that is working and pushing for ethical businesses. I do not believe that the bill would affect reserved law. It does not touch company law; it simply uses it. There is precedent in other Scottish Parliament legislation that does exactly the same. I would like the committee to reconsider.

If the committee does decide that the bill touches on reserved matters, it will have to ask who has the ruling, and who can alter the Scottish law on sentencing. We cannot be in a situation in which neither the Scottish Parliament nor the Westminster Parliament can modify certain aspects of sentencing. That is not satisfactory.

Finally, I thank the committee for giving me its time.

Thank you for your attendance, and I also thank Mr Swanepoel for coming. The committee will make a determination in due course.

13:27 Meeting suspended.

13:28 On resuming—