§ Order for Committee read.
MR. HEADLAMsaid he would appeal to his right hon. Friend the Vice-President of the Board of Trade, not to proceed with this Bill at that time. It was a measure of the very highest importance, as affecting the commercial classes, and he was surprised that it should have been fixed for a morning sitting. The appearance of the House afforded a sufficient reason why a Bill of this nature should not at that hour be proceeded with. He very much doubted if there were Members enough present to constitute a legal House, and he must ask his right hon. Friend to defer the Bill for the present. The second reading had been, taken at a late hour of the night, when it was impossible to discuss the principle of the measure, and it was not likely that they could give to it the consideration which it deserved in the then state of the House.
§ MR. HADFIELDsaid he concurred with the hon. Member for Newcastle, in requesting that the Bill should be postponed. He had received a letter signed by every bank in Sheffield, strongly urging that it should be deferred for another Session. He assured his right hon. Friend that this was no factious opposition, but his constituents felt that important principles were involved in the question, which they feared would be endangered by hasty legislation.
§ MR. LOWEsaid that the numerous appeals which had been made to him afforded a very good illustration of a practice which a popular writer had described to be extremely prevalent—"how not to do it." He reminded his hon. and learned Friend the Member for Newcastle (Mr. Headlam), that he had introduced the Bill at an early hour, and that both upon that occasion and on the second reading his hon. and learned Friend had not found it convenient to attend, and that to postpone the measure now, even for a brief period, would be practically to postpone it for the remainder of the Session. The Bill had been printed on the 25th of June, and it was now the 21st of July, and he thought that ample time therefore had been afforded for its consideration by those who were interested in the subject. The London and country 120 joint-stock banks and the Scotch banks had considered the measure very carefully, and their suggestions had been for the most part embodied in the amended Bill. He assured the House, that if he did not consider the measure to be one of great practical importance, and to be earnestly required, he should not press it on their attention; but although the constituents of the hon. Member for Sheffield (Mr. Hadfield) might be satisfied with the law of banking as it stood, he did not believe that the country was satisfied with it. The great object of the Bill was to improve the mode of winding up joint-stock banks, and to prevent the recurrence of such disastrous consequences as had taken place in the case of the Royal British Bank recently. The matter was a very important and serious one, and he thought that he should be amenable to the charge of neglecting his duty if he consented to postpone such a Bill upon the vague and general assurance that hon. Gentlemen had not time to consider it. He firmly believed the public were satisfied with the measure as it stood, and under the circumstances, he certainly would not take upon himself the responsibility of perpetuating the present system of winding up banks, by which Law, Equity, and Bankruptcy, were all let loose upon the unfortunate creditors at once. He must therefore press the Motion for proceeding with the Bill.
MR. GLYNsaid he felt bound to agree with much of what his right hon. Friend had stated, and he was willing to admit that the Bill in its amended shape was calculated to remove many of the objections which had been entertained to it in its original form; but there were still several clauses in the Bill which caused great dissatisfaction throughout the country. For instance, he must express his surprise that the twelfth clause was still retained, because his right hon. Friend surely could not intend to enact that seven individuals, with a subscription of £350, should be enabled to start a joint-stock bank, and to enjoy therefrom all the status in society, and all the advantages which a joint-stock bank enjoyed. He thought that the Court of Bankruptcy was the proper tribunal for winding up concerns of this description. The officers of that court collected and distributed the assets speedily, and he contended that it was better qualified by its machinery for the adjudication of matters of this description than the Court of Equity, or any other existing tribunal; and if the 121 Lord Chancellor would appoint some higher Judges for more serious cases than now came before that court, it would be most satisfactory to the commercial world. On the whole, he should be glad if his right hon. Friend would delay the Bill for another year, in order to afford further time for the consideration of this important subject. He would also suggest to his right hon. Friend, as Parliament had long legislated for the benefit of joint-stock banks, that private banks were also entitled to some consideration. At present private banks were not allowed to consist of more than six partners, and they were thus prevented from strengthening themselves by adding to their numbers, however desirable such a step might be. He did not wish to admit an unlimited number of partners into private banks, but he thought those establishments, which were no doubt a great convenience to the public, should have the power of increasing the number of their partners to ten or twelve. This was a subject which had long and anxiously engaged the attention of the late Mr. Freshfield, and he hoped that the day was not far distant when some beneficial legislation with respect to private banks would be undertaken.
§ House in Committee, Clauses 1 and 2 agreed to.
§ Clause 3 Provides that the second section of the Joint-Stock Companies Act, 1856, shall be repealed so far as relates to persons associated together for the purpose of banking, subject to a proviso, that no existing or future Banking Company shall be registered as a Limited Company.
MR. HEADLAMsaid, he rose to move the omission of the proviso, for the purpose of raising the general question as to whether banking companies should or should not hereafter be capable of being registered as limited companies. He could not, however, I consent to adopt the opinion of a House consisting of about thirty Members as conclusive upon a subject of this importance. It had been his duty some time ago to investigate the causes of failures of several joint-stock banks in the North of England, and the result of that investigation was to show to him the evils that resulted from the principle of unlimited liability. But the general law at that time was all in favour of the principle of unlimited liability with respect to commercial establishments of all descriptions. He was therefore not at all surprised that the House should have rejected the Bill he introduced 122 at that time, which Bill was based on the principle of limited liability. A general feeling of dread existed as to the number of limited liabilties as applicable to joint-stock banks alone. Since then, however, a change had taken place in the opinions of men. The principle of limited liability had now been generally adopted in the commercial relations of this country, and experience, so far as it had gone, had proved the wisdom of the change, and the fallacy of the arguments by which it had been resisted. The question, then, now arose whether there was any sufficient reason why a special and peculiar exception should be made with reference to joint-stock banks. It was a mistake to suppose that unlimited liability had originated in any desire to protect the public, it having been introduced solely on account of private and selfish interests. Previously to 1826 there was only one bank in this country which was based upon the principle of limited liability, and that one was the Bank of England, every other bank throughout the kingdom being based on unlimited liability. The Bank of England possessed no other advantage at that time which was not common to every other bank, but while the Bank of England with limited liability throve and prospered, many of the other banks, with unlimited liability, broke and fell in the commercial panic of 1825. These occurrences naturally excited great attention at the time, and Lord Ashburton, then Mr. Baring, who was anxious to promote the prosperity of joint-stock banks, proposed to enable private individuals to associate together in the establishment of banks on the principle of limited liability. Mr. Huskisson upon that occasion admitted that it would no doubt be a great improvement if, under a proper system, chartered banks were established on the principle of limited liability; but the Bank of England, animated by anything rather than a desire for the prosperity of those competitive institutions, opposed the application of this privilege to other banks, and consequently the principle of unlimited liability with respect to them was still retained. Subsequently, in 1833, upon the expiration of the charter of the Bank of England, Lord Althorp, who was then Chancellor of the Exchequer, and no rash speculator, proposed, in the case of joint-stock banks not issuing their own notes, that the shares should not be less than £100 each, and that the partners should be liable and responsible only for the amount of their respective 123 shares. That was the proposition which Lord Althorp made in 1833, in the interest of the public at large, but the noble Lord did not persevere with it, avowedly on account of the strenuous opposition of the Bank of England. That was the cause why the principle of unlimited liability had been so long adhered to. The question, however, now was why after making a change in the general law, joint-stock banks should still be made an exception. To show how the principle of unlimited liability operated, it might be sufficient to refer to the history of the British Bank, of the Tipperary Bank, and of many others which had failed before, in all cases spreading devastation and ruin over the districts where the failures had occurred. In the first place he contended that the direct tendency of the present law was to lower the character of the shareholders and directors in such establishments. He perfectly admitted that there were joint-stock banks as well and respectably managed, and numbering as honourable men among their directory and proprietary, as it was possible to have; but he maintained that the tendency of the law was to lower the class of shareholders and directors, because men of wealth would be chary before they staked their all in such undertakings. It would be found, as a general rule, that very early after the establishment of these banks with unlimited liability a large portion of the paid-up capital was frittered away, or, as he was sorry to say, found its way into the hands of individual directors. If the company were limited it would have no credit other than attached to its good management and to its paid-up capital, so that if failure occurred the loss would be a first loss, and the evil resulting from it would not be so wide-spread as otherwise; but a bank with unlimited liability possessed fictitious amount of credit altogether independent of its good management, and arising from the fact that every shareholder was liable to the full amount of his fortune, and these banks were thus enabled for years before the final crash came to live upon false and fictitious credit. In order to maintain this credit, they were compelled to pay dividends to justify the position which they occupied in the eyes of the world; and so they went on, sinking from year to year, but still paying dividends, until the question at last arose whether they must not stop and cease to continue any longer. What, in such cases, was the course pursued by those who wished 124 to save the bank from destruction? Suppose an honest shareholder proposed a call upon the proprietary; if he succeeded, and a large sum were thus raised, the establishment might surmount the difficulty for a time; but if he failed, the final destruction of the bank would only be accelerated, He contended, then, that the tendency of this practice of unlimited liability was to give to banks so established the opportunity of spending their capital in the first instance, to continue to them a fictitious credit which ought not to exist after the capital was spent, to hold out inducements for the payment of dividends when they were in a state of utter ruin, and to offer direct premiums to all directors not to attempt to resuscitate the establishment with which they were connected, but to endeavour to get out of it as fast as they could. Strange to say, that though the principle of unlimited liability was kept up in this country, it did not apply to the Colonies, which seemed to prove that the Government themselves, when unfettered, were in favour of the principle of limited liability; and this he thought probably afforded one of the strongest reasons why the principle should be universally adopted. He could not conceive any social evils more serious and more wide-spread than those which resulted from the failure of such institutions as the British Bank and the Tipperary Bank. It was little satisfaction to reflect that the creditors might ultimately be paid; for the shareholders and creditors were persons very much in the same class of life, and it was poor compensation, indeed, to be told that after years of suffering and misery twenty shillings in the pound were extracted from the small tradesman who had invested his little capital in the shares of a bank of this description. Remote as was Tipperary from the town he had the honour to represent, yet the latter place suffered severely from the failure of the Tipperary Bank. The ruin and misery were not confined to the poorer classes. The names even of hon. Members of that House were tainted from their connection with that and the British Bank. After the failure of these banks, they had the spectacle of the Attorney General, contrary to his own opinion, compelled by public opinion to strain the criminal law, with a view of meeting the cases which arose out of the failure of these banks, and thus the Legislature will, by its own unwise laws, subject men to undue temptation if they attempted to prevent 125 the natural consequences of it own act, by threats of harsh criminal prosecutions. The Bank of England was founded on the principle of limited liability. Several of the Scotch banks were founded on the same principle. All the commercial establishments in this country might be conducted on the principle of limited liability. Under these circumstances, and upon these authorities, with their experience, he asked upon what ground banks alone wore to be excluded from the advantage of the application of the same principle that had been decreed right and correct as to other commercial enterprises.
MR. BERNARDsaid, that as the holder of 300 shares in the London and County Joint-stock Bank, he felt much interested in this question, and he should support the Amendment, as he thought that the folly and inutility of the system of unlimited liability had been sufficiently illustrated by the example of the Royal British Bank. He maintained that few measures better calculated to insure the safety of the public could be devised than the extension of the principle of limited liability to joint-stock banks, and the enabling of private banks to double the number of their partners. He therefore trusted that the right hon. Gentleman would take into his favourable consideration the observations of the hon. and learned Member for Newcastle.
§ MR. HASTIEobserved, that he should support the clause, and he could not but express his surprise that the hon. Member for Newcastle, who had devoted so much time and attention to the subject, had not presented them with some more practical arguments than he had done in favour of the Amendment which he had proposed. He (Mr. Hastie) contended that to adopt limited liability in the case of joint stock banks would be to introduce into banking one of the must dangerous elements which had ever been introduced into the commercial regulations of this country. It would give no security to the shareholder, the creditor, or the public. It was notorious in every department of commerce, that when a man's risk was limited he was inclined to go the full extent of his tether, and he believed that nothing would be so calculated to promote speculation as the introduction of limited liability; while, at the same time, it diminished the security if the speculation turned out a failure. The hon. and learned Gentleman had endeavoured to illustrate his argument by a 126 reference to the British Bank, but he had failed to show how limited liability would have saved that establishment; and he (Mr. Hastie) was satisfied that, so far from saving that bank, it would only have provided additional inducement to the directors to enter upon a wider field of speculation in the hope of retrieving their misfortunes. In new countries, where it was deemed desirable to induce persons to invest their capital in joint-stock banks, limited liability, no doubt, might be suggested with the view of promoting such investments; but here inducements of that nature were altogether unnecessary, and he should strongly deprecate the introduction of the principle into joint-stock banks in this country. If the Amendment were to become law immediately, he did not believe that any joint-stock bank of respectability would be able to adopt the principle of limited liability, because the moment that it did so the suspicion of the public would be excited, and he believed that the result to the banks themselves would be rather disadvantageous than otherwise. He trusted, therefore, that the right hon. Gentleman would on no account adopt the suggestion of the hon. and learned Member for Newcastle.
MR. GLYNsaid, he thought that the present was not a convenient opportunity for discussing so important a question as that raised by the hon. and learned Member. The subject deserved consideration, for no one could say that the law with respect to joint-stock banks was in a healthy or satisfactory state, because, although we had nominally unlimited liability with respect to banks, special Acts were frequently introduced to confer limited liability upon particular establishments, and the consequence was an amount of uncertainty in the legislation upon the subject which was required to be investigated. But he was not at all satisfied that limited liability, so far as it had been adopted in this country, had been attended with favourable results. It had not been sufficiently tested here to enable persons to speak with confidence of its operation, while in the United States, where it had been most largely adopted, its application had been decidedly unfavourable and unsatisfactory. The success of banking operations must depend altogether upon good management, and whether good management was most likely to be secured under limited or unlimited liability was a question upon which no doubt there would 127 always continue to be a great difference of opinion. Seeing the small attendance of hon. Members, he regretted that his right hon. Friend had not in the first instance yielded to the appeal which had been urged upon him to postpone the measure till another Session.
§ MR. H. B. SHERIDANsaid, he should support the Amendment, as he could see nothing in the circumstances of the great discount companies in the City which should induce Parliament to confer the privilege of limited liability upon those companies and to refuse it to joint-stock banks. If limited liability were extended to all, persons would inquire for themselves before they invested their money, and he believed that a much sounder and safer system of investment would be the consequence. He saw no necessity whatever for insisting upon unlimited liability in the case of joint-stock banks, but he suggested, if any medium course could be pursued, that it might be desirable to limit the liability of shareholders to, say, two or three times the amount of the shares they held.
§ MR. BRISCOEsaid that all that had fallen from the hon. and learned Member for Newcastle only convinced him of the fallacy of the principle he advocated. In the year 1837 no less than 600 banks with limited liability had failed in the United States, and he thought that this was a fact which should weigh with the Committee, and should make them resist the application of the principle to joint-stock banks in this country. It was the duty of Parliament to legislate for the protection of the public, and he contended that they would be utterly neglecting their duty if they did not maintain the principle of unlimited liability, because no one could doubt that in proportion to the responsibility that was thrown upon bank directors would be the amount of prudence and caution which they would bestow upon the management of their several concerns. He thought it could hardly be said that the Bank of England was a bank founded on the limited liability principle, seeing that all the property of the shareholders was liable for the payment of their circulation. He could easily understand that shareholders in these undertakings would be desirous to limit their responsibility, but, on the part of the public, he trusted that the Government would not yield to the arguments of the hon. and learned Member for Newcastle.
§ MR. BUCHANANsaid he thought that limited liability instead of being a ground of confidence to the creditors of a bank was a reason why they should think their interests in peril. The best way of trying this question was by a reference to the state of the joint-stock banks in the City of London. It appeared to him that those banks stood in a very delicate position if a period of pressure came upon them. They all of them had large deposits, and their means of meeting them consisted of securities, which it might be difficult to realize in a moment of panic. This state of things required a great deal of caution, prudence, and foresight; and was it to be supposed that a limited amount of prudence, caution, and foresight, would improve this state of things? He thought that limited liability would not give so much security as unlimited liability. In fact there were no such reckless traders as those who were under limited liability. A striking example of that was afforded by the railway companies, who were playing, not with their own money, but with that of the public, and every one knew the result. He did not think it was the best time to legislate on this subject, when their feelings were excited from the disclosures respecting the British Bank. But the British Bank after all did not pay so bad a dividend. It paid 16s. in the pound, 8s. was paid already, and another 8s. was to be paid soon. And he doubted whether it would have been so much, had it been established on the principle of limited liability.
MR. RIDLEYregretted that the subject under discussion had not been brought on when there was a fuller attendance of hon. Members, because no division which might be taken could afford any criterion of the real opinions of the House upon this question. Although he should be inclined to vote for the Amendment which had been proposed by his hon. and learned Colleague, he was not at all sure that it would be desirable at present to extend the principle of limited liability to joint-stock banks, nor was he prepared without further investigation to admit that limited liability, as adopted in commercial transactions generally, had been attended with those advantages which many persons attributed to it. With respect to the proposition of the hon. Member for Dudley (Mr. H. B. Sheridan), he thought that that would be even less satisfactory than the present system; because, if it were sanctioned, he feared that directors who were 129 inclined to speculate rashly would proceed, not upon the basis of the £100 paid upon each share, but of the £200 or £300 additional for which every shareholder would be liable. They must not forgot that a very large amount of the trade of the world was carried on by credit, and that was done through the faith men had in the unlimited liability of the great firms, or the small firms, through whose agency they carried on the commercial speculations. He thought the question ought to wait some little time before they took decided action upon it.
§ SIR JAMES GRAHAMsaid, that attracted by the great importance of the subject they were then discussing, he came down to the House to have information upon it. He had heard some important speeches on the subject; but, seeing the small attendance of Members, looking at the period of the Session, and remembering the inquiry which was now proceeding before the Committee on banking upstairs, where this subject was being fully investigated, and where the most competent witnesses had been examined on the very points under consideration, he did not think that the hon. and learned Member for Newcastle would do justice to the subject which he had undertaken, if he pressed it to a division in the present state of the Committee. He (Sir J. Graham) should be sorry also if at this time, when the subject was undergoing investigation and inquiry, the Government were prematurely to commit themselves to any fixed opinion with regard to it. He agreed with the hon. Member for Kendal (Mr. Glyn) and with the hon. Member who had last addressed them that they had not yet had sufficient experience of the result of limited liability in other concerns to justify them in agreeing to extend that principle in the present state of their information on the subject to banking. The hon. Member below him (Mr. Hastie), who had a large experience in these matters, was greatly opposed to the principle of limited liability generally; and, without urging any arguments upon the Committee with reference to the merits of the question, which he wished to be altogether suspended for future debate and decision, he (Sir J. Graham) reminded them that the onus of proof would rest with those advocates of limited liability who contended that there ought not to be an exception in the case of banks, and that limited liability ought to be extended to those establishments. Before 130 that point could be decided, however, he thought that it would be desirable to test more than had yet been done the applicability of limited liability to commercial operations generally; and under the circumstances, he appealed to the hon. and learned Member for Newcastle not to press his Amendment to a division.
§ MR. LOWEsaid, that he thought the right hon. Baronet (Sir James Graham) had given his hon. and learned Friend some very good advice. The object of the present Bill was not to prejudge the question to which his right hon. Friend had referred, but to effect a practical improvement in the manner of winding up joint-stock banks. His hon. and learned Friend well knew what his opinion was with respect to limited liability, but he did not think that he would promote his object by taking the decision of the Committee in that stage of the question. Indeed, the only result of doing so would be that he might miss a practical advantage in a vain attempt to obtain a speculative one.
MR. HEADLAMsaid, he fully concurred with the right hon. Baronet that the present state of the House and the advanced period of the Session certainly were not favourable to do justice to the subject of limited liability. He thought, however, he was justified in bringing forward the subject, in order that it might receive that public attention which its great importance demanded, for he had no doubt that the more the question was considered and discussed the more would the principle which he had advanced gain weight and favour; but, after the appeal which had been made to him by the right hon. Baronet the Member for Carlisle, he should not press the Amendment which he had proposed.
§ Amendment withdrawn.
§ Clause agreed to, as were also Clauses 4 to 11 inclusive.
§ Clause 12.
§ MR. H. B. SHERIDANsaid he wished to know why the Government had fixed the shares of joint-stock banks at £100 each. He thought such a determination was most extraordinary, as he could not see why ten shareholders of £10 were not as good as one shareholder of the larger sum.
§ MR. A. W. KINGLAKEsaid, that the Bill would in his opinion lead to the creation of banks which would not afford sufficient security to the public. Under this Bill banks called the Royal Board of Trade 131 Bank, or the Royal Robert Lowe Bank, would be established, and the public, led away by those attractive names, would be induced to invest and deposit their money in them.
§ MR. LOWEsaid, that he knew of no valid reason why the amount of the share should be £100 more than any other sum, but the law was so now. With regard to the more important question raised by the hon. Member behind him (Mr. Kinglake), it was not the object or intention of this Bill to throw any securities round the trade of banking. As the law now stood any six persons could form a private bank, and he merely proposed that seven persons should have the power of doing what six persons could do, under a corporate name, and making them capable of suing and being sued under that name. He did not think it was possible for any Government to protect the public. Individuals must protect themselves by their own vigilance and care. The law required the British Bank to have a certain amount of paid-up capital, but every one knew how that law had been evaded. Every other trade in this country was practically free, and he saw no reason whatever for making an exception in the case of the present banking trade. He could understand why existing bankers should oppose the Bill, but he could not understand why any one should oppose it on the part of the public. He was sure of this, that no freetrader could oppose it.
§ MR. H. B. SHERIDANsaid he did not feel satisfied with the explanation, and he should therefore move that the shares be fixed at £10.
THE CHAIRMANsaid it was not competent for the hon. Member to move the Amendment. The question was that the Clause stand part of the Bill, therefore no Amendment could be put.
§ Clause agreed to, as were the remaining Clauses.
§ House resumed; Bill reported; as amended to be considered To-morrow.