It is a measure of how disinterested the City of London has become to the increasing regulation of business that the DTI's recent paper, Company Investigations: Powers for the 21st Century, was published without so much as a murmur.

The paper proposes significant changes in relation to the scope of DTI inquiries and the powers of those conducting such inquiries. The proposals should be debated by those likely to be affected, but the short period available for responding to the paper has recently passed and the proposals will soon be given statutory effect without full consideration of the consequences.

Surprisingly, given their importance in relation to the effective policing of companies, the DTI's investigation powers were not included in terms of reference of the long-awaited Company Law Review. However, on 30 March, 2001, the Rt Hon Stephen Byers MP, then Secretary of State, announced a separate review of the powers, which was published in October 2001.

It was no coincidence that he made the announcement while publishing the inspectors' report on Mirror Group Newspapers, which involved explaining why that inspection had lasted nine years and cost £8.5m. The Maxwell case highlighted the fact that the various DTI powers of investigation are not proving to be the best investigation tools in the modern era.
The existing investigation powers of the DTI are contained in Part XIV of the Companies Act 1985. This legislation provides for two types of inquiry, namely inspections and investigations.

Inspections are the full scale inquiries that are usually conducted by independent inspectors appointed by the Secretary of State to investigate the 'affairs of a company' in cases of fraud or mismanagement (circumstances prescribed by S432(2) of the Act) where it is considered in the public interest to have an independent and public inquiry resulting in a published report. The DTI inspections in relation to Mirror Group, Guinness and House of Fraser are instances of these S432 inquiries, which usually last years and cost millions of pounds.

The Secretary of State can also use other powers to order inspections to investigate company ownership, require information about shareholdings or investigate contraventions of shareholdings, but these hardly ever occur. The wide-ranging powers of the appointed inspectors are set out in S434 of the Act and include the powers to require documents, attendance before the inspectors or all other reasonable assistance in relation to the investigation.

The Act also places positive duties on officers and agents of the relevant company to provide such material or assistance. In the event of non-compliance an inspector will certify the failure to the High Court where the defaulter may be punished as though in contempt of court. Inspectors are entitled to use their powers not only against the company being investigated, but also against subsidiaries and holding companies.

In contrast, investigations are conducted under S447 of the Act by an officer of the DTI, are much smaller in scale and therefore quicker and cheaper. The vast majority of DTI inquiries are conducted in this way. Investigations are confidential and it is a criminal offence to publish information or documents relating to a company obtained during such an investigation.

The investigators are entitled only to the production of any relevant documents and an explanation of any such documents, but not more, and cannot compel answers to general questions or other reasonable assistance. Non-compliance in relation to an investigation is a summary criminal offence punishable by a fine.

The current regime belongs to a different age when the legislature still thought it appropriate to limit the circumstances when the Secretary of State could order an inspection (fraud cases etc) and also to set out the different specific types of inspections (company ownership, share dealing, affairs of the company and so on) to ensure that the limits of the inquiry were clearly defined.

The major exception to these principles is S447, which permits investigations wherever there is "good reason". But, as suggested above, Parliament provided that in relation to such investigations the relevant officer's powers would be limited to obtaining documents and explanations of them. Attempts by the DTI to use this power to require explanations of documents as if it were a power to ask general questions of a company have been resisted by the courts (see AG Ref, No.2 of 1998 [2000]). The resulting situation is that the Secretary of State is left with a poor choice between a full blown lengthy and costly public inquiry where inspectors can use their extensive powers or a quicker confidential inquiry where investigators' powers are obviously limited.

Under the justification of "simplification of the law", the proposed new powers take the best bits of the current powers (from the DTI's point of view) and provide investigators and inspectors with fuller powers to obtain "all relevant information and material" and to require "all reasonable assistance" in the investigation. The distinction between inspections and investigations is retained, but only to ensure that the distinction between public and confidential inquiries is preserved.

The new powers will be exercisable in all cases where the Secretary of State believes there is "good reason" and the range of persons who can be required to assist will include not just those with a past or present connection with the company, but also company advisers, any person who has transacted business with the company and any person the investigator considers may have relevant information or material.

Moreover, the investigation will be capable of extension not only from one company to another, but also into the business affairs of partnerships and individuals who have been directors (including shadow directors), employees or those holding a participating interest in the relevant company. The only safeguard against abuse of these new powers is that exercising many of them will require "authorisation" by the inspector of companies or a deputy inspector. Non-compliance will in all cases be referred to the High Court as a possible contempt.

The existing provisions that enable the DTI to prosecute those who destroy documents or mislead investigators are retained, as is the power to obtain a search warrant, which will be supplemented by a power to enter premises and inspect company records on notice and a power to require companies to bring their records up to date for inspection.

Another important development is that the enforcement options of the Secretary of State will be enhanced. At present the options are a petition to wind up the company, disqualification of an individual from acting as a director or the initiation of a prosecution. These are blunt instruments and the review proposes additional options of restraining a company from engaging in a particular activity or seeking a court order that a person be removed as director of a particular company.

The powers are likely to be used often, being less drastic than existing provisions, and in relation to companies that are considered generally sound, but deserving of attention by the DTI in relation to a particular aspect of their business. Commercial lawyers are therefore more likely to be called on to advise their clients about the scope and effect of such powers.

Adam Cowell is a partner at Irwin Mitchell.