An alliance of opposition parties and cross-bench peers mustered four votes more than the Government.
Another defeat was narrowly avoided when a last-minute deal was reached with the Liberal Democrats over an amendment designed to restrict the number of documents sent to schools. Ministers will now have a legal duty to consider the impact of guidance on teachers' "professional expertise".
Baroness Blatch, Conservative education spokesperson in the Lords, attacked the compromise. "What we have got is just what the Government has being saying for the past five years. I am very disappointed on behalf of schools," she said.
The issue of companies was due to be debated again on Wednesday evening with the prospect of the Bill being sent backwards and forwards between the Lords and the Commons.
Peers remained angry at what they see as a failure by ministers to explain who would be liable for companies' debts and are concerned that local education authorities could be left to pick up the bill.
With the Commons rising for the summer recess the same day, failure to reach agreement would delay approval of the Bill until October.
As The TES went to press the Government said that it was "hopeful" of overturning the Lords' vote.