§ Order for Committee read.
§ Bill considered in Committee.
§ (In the Committee.)
§ Clause 1 (The Advance of Money on Contract to receive a Share of Profits or to share the Loss not to constitute the Lender a Partner).
§ MR. HUBBARD
said, he wished to ask how far the lender of a sum of money under its operation would be enabled to satisfy himself, in the event of the business of his debtor showing a loss, as to the actual position of affairs. Would he be entitled to take part in the examination of the debtor's books, or otherwise interfere in the business, as if so he would be a partner.
§ MR. MILNER GIBSON
said, that the clause would leave the law precisely as it stood, except in so far as it would enable a person to lend money to a trader on the understanding that he was to receive a share of the profits, instead of a fixed interest, without by that Act constituting himself a partner. If he were to do anything else which would subject him to the liability of a partner, he might be dealt with as at present.
§ MR. MOOR moved in line 8, after "contract," to insert "in writing."
§ Amendment agreed to.
§ MR. MURRAY
said, it appeared to him that when a debtor was likely to come to grief the lender might get his money out of the concern without the knowledge of the creditors. The terms of the contract should, therefore, be known to the creditors. They should know the nature of the advance and how it is to be repaid. If it could be repaid without the public knowing anything about it, the debtor might repay it on the eve of bankruptcy, and have the money subsequently relent to him, but the creditors would not be paid. There should be a provision that, if insolvency existed at the time of repayment, the lender should be liable to his share of the loss. He suggested that a memorandum in writing of the contract should be filed in the registrar's office for the information of the public.
§ MR. CAVE
remarked that the very same objection would apply in the case of a lender who advanced his money at a fixed rate of interest. He would be able to withdraw it at any moment he pleased, as 527 well as the man who received by way of interest a share of the profits of a business; and there was no reason why the results should be more disastrous in one case than in the other.
MR. THOMAS BARING
said, that there was nothing in the clause to show that the lender under its operation was to bear any share of the loss which might accrue in carrying on the business of the borrower. If he were not liable to any loss, was it not clear that he would stand in the position of a preference claimant?
§ MR. MILNER GIBSON
said, the clause merely enacted that the lender of money upon the terms that the lender should receive for the use of the money a rate of interest fluctuating with the profits should be no more constituted a partner by the Act than if the money were advanced at a fixed rate, and therefore the question raised was not appropriate to the particular matter before the Committee.
said, he did not see the force of the objection which had been raised by his hon. Friend the Member for New-castle-under-Lyme. There was, bethought, no difference between the withdrawal of money lent on the condition of receiving a share of profits and that lent at a fixed rate of interest, so far as the general creditor was concerned. There might be fraud connected with the withdrawal in both cases, but then he apprehended the law as it stood would reach a transaction of that kind.
§ MR. HUBBARD
said, he thought no commercial man could pass the clause as it stood. If the lender was not to bear a proportion of the loss when it occurred, was it to be charged in the following year against his share of the profits?
§ MR. MILNER GIBSON
said, no compulsory contract was forced upon any one by the clause. It merely stated that if a person made a certain contract he should not thereby be constituted a partner.
§ MR. BOVILL
said, he challenged any Member of the Government to deny that under the wording of the clause cases similar to that which occurred at Liverpool might not happen every day. A man lending £50,000 might draw out of the profits of the concern £100,000, assuming that so much was made in the course of a single year, and after that might draw out his £50,000; and yet in the next year, if it happened to be a season of loss, he would be absolved from any liability whatever.
THE SOLICITOR GENERAL
said, the Bill did not absolve anybody. The 528 Bill simply enabled a man, instead of lending money at a fixed rate of interest, to take a certain share of profits without becoming a partner. If no profits were made he did not receive anything, and to that extent encroached less on the general fund available for creditors than if he took a fixed rate of interest.
§ MR. HORSFALL
admitted that the clause did put the lender in a somewhat advantageous position, but suggested as a safeguard that some limit—say twelve months—might he fixed within which money drawn out should still be liable to the debts in case of bankruptcy before that period had expired.
§ Clause, as amended, agreed to.
§ Clause 2 postponed until after Clause 3.
§ Clause 3 agreed to.
§ Clause 2 (Lender not to rank with other Creditors in cape of Insolvency).
§ MR. MOOR
said, he moved to leave out Clause 2. In doing so he felt that he was not opposing, but forwarding, the principle of the Bill, Clause 2 being inconsistent with its immediate predecessor. The Bill was brought in to do away with an old principle, and introduce anew and different principle, and it was rather strange that a clause inflicting a penalty should be inserted in order to restrain that new principle. The object of the Bill was to encourage loans of money to traders, but by this second clause the lender was subjected to this penalty, that he should not be repaid his loan in case the trader became bankrupt, until all the other creditors were first satisfied. What did that amount to? Why, to an absolute prohibition. For in ninety-nine cases out of 100 a trader failed to pay 20s. in the pound. He put it to the common sense of the President of the Board, of Trade whether any person would lend money on such conditions, when by lending upon a promissory note or bill of exchange he could get 30, 40, or 50 per cent interest, and if the worst came to the worst still be able to go in and prove his debts, and receive an equal dividend with all the other creditors. Under the existing law any partner to whom money was owing by a co-partner could not go in and prove his debt against the estate till all the rest of the creditors were paid. But this Bill, after providing by the first clause that the lending of money should not constitute a partner, actually fixed the lender with penalties similar to those that the existing law attached to the position of a partner. The Committee could not blow hot and 529 cold with the same breath; the principle of the Bill was either right, or it was wrong. If the right hon. Gentleman divided in support of this second clause he would find himself in the lobby with all the Gentlemen who disapproved the principle of the Bill, and who would gladly help him to strangle his own child. He would take the sense of the Committee upon the clause.
§ Amendment proposed, "To leave out Clause 2."—(Mr. Moor.)
THE ATTORNEY GENERAL
said, the question raised must be considered with regard to the principle involved, and also with regard to the practical operation of that principle. With regard to the principle, the strongest argument in favour of the present state of the law was that a man might, under a change of the law, carry on a business which was not substantially his own without incurring the risks of that business. This Bill did not in any way interfere with the liability of the person carrying on a trade. But it could not be denied that the ordinary creditor would be inevitably influenced by the capital visibly employed in the trade, by the stock-in-trade, and by the means which the trader was able to present to the world as the foundation of his undertaking. Credit was, therefore, given to the trader on account of his visible means or stock-in-trade. But, supposing the person who took no share of the risk furnished all the means, then the whole resources of the undertaking would be derived from the loan so made, and there could be no doubt that there might be some risk of injury if the creditor who went in for an unlimited share of the profits were able to go in also for a share in the assets of the business to which the credit might have been given. The person who advanced the money had sent the trader into the world with the appearance of solvency, and the stock-in-trade ought, therefore, in the first instance, to be subject to the Ordinary creditors. It had been suggested that by possibility the real trader might not hold out his name to the world, that he might furnish ail the means and stipulate for the whole of the profits, and in that way avoid running any risk. This clause was intended to supply a practical security against any evasion of the law of that description. It might be objected that the lender could withdraw the amount of his advances before the other creditors got possession of the bankrupt's property, but in such a case an investigation 530 could take place to ascertain whether there had been a fraudulent preference, and if so it could be dealt with by the existing law. What was proposed by the hon. Member for Brighton (Mr. Moor) would enable the person who might be the real trader to come in at the last moment and sweep away the ostensible means of business pari passu with the other creditors, or perhaps in preference to them. It might be said that the possibility was left open of practically doing the same thing by means of loans at an exorbitant interest. That was an objection which deserved to be carefully considered. His own opinion would be by no means unfavourable to the drawing of a line, if it could be done, beyond which it should be determined that a high rate of interest was a mere cover, and of placing such persons in the same situation as the lender who contracted for a share of the profits. But they had better do one thing at a time. They were dealing now with an important branch of the law of partnership, and he believed the proposed change would be a great boon to the trader. Let them do what they could at present, and under such safeguards as they believed to be desirable and good, and if found to work well it might afterwards be considered whether there were not other cases to which it might be expedient that the same rule should be extended. But there was an important practical distinction between the cases. If the person carrying on trade borrowed money at an exorbitant interest he made himself liable to pay both that interest and the capital, whether the business was prosperous or the reverse. That person would see, therefore, that it was very much to his advantage to procure money on the terms of sharing in the profits, and it might be also to the advantage of the lender to lend upon such terms. The clause would in reality act as a check on the formation of a fraudulent undertaking between the trader and the partner who advanced him money on the condition of participating in the profits of the business. The partner enjoyed the benefit of the business if it was prosperous; and if it was not prosperous he ought to share to the limited extent to which he had embarked capital in it, in the loss which it entailed. He was of opinion, then, that they would be proceeding safely and cautiously and taking good securities against abuse if they were to adopt this clause.
said, he was not convinced by the arguments of the hon. and learned Gentleman. It was clear that the Government were afraid of their own measure, for if this clause were agreed to it would substantially defeat it. He had voted for the second reading, because to lend money in the way proposed by the Bill was a fair legal transaction. But he did not see why they should put a penalty on that which they said was a loan. If the Attorney General's argument was sound, he doubted whether the Bill was sound.
THE ATTORNEY GENERAL
said, that if a man lent money at the ordinary rate of interest he could not be said to be investing it in the business, because he left all the benefit as well as all the risk to the man who was carrying on the trade.
said, that everybody knew that the mercantile rate of interest I was not 4 per cent as for money lent on mortgage. What was the ordinary rate of: interest?
§ MR. HUBBARD
said, that of the two arguments, that of the hon. Member for Brighton (Mr. Moor) appeared to him more consistent. If the lender had nothing to do with the loss while the trader lived, why should he be saddled with the loss when the trader died? He agreed with the Attorney General that it might become necessary to bring in a Bill to put some check on the rate of interest in certain transactions. Hon. Members talked of the ordinary rate of interest, but since the repeal of the Usury Laws the interest of money had varied from 1½ to 10 per cent within a few years. There was now no such thing as a legal rate of interest. From all that he had heard he was more than ever convinced of the impolicy of the measure. He would not vote for the expurgation of the clause.
§ MR. ALDERMAN SALOMONS
said, that the hon. Member (Mr. Hubbard) stated that there was now no such thing as legal interest. He should have said that there was no such thing as illegal interest.
§ Question, That the Clause stand part of the Bill, put, and agreed to.
§ Remaining clauses agreed to.
§ MR. MILNER GIBSON moved the following clause:—
(Receipt of profits in consideration of sale of good-will not to make the seller a partner.)
No person receiving by way of annuity or otherwise a portion of the profits of any business, in consideration of the sale by him of the good-will of such business, shall, by reason only of such receipt, be deemed to be a partner of or be subject
to the liabilities incurred by the person carrying on such business.
§ Clause agreed to, and added to the Bill.
§ MR. JOHN PEEL
said, that as the hon. and learned Gentleman (Mr. Selwyn) had placed upon the paper a new clause on registration he would not press that of which he had given notice, but would accept the clause of the hon. and learned Member, with the addition of a few words which he would propose.
§ MR. HORSFALL
said, that there was a great difference between the two clauses, and he much preferred that of the hon. Member for Tamworth (Mr. John Peel).
(Register to be kept by Joint Stock Companies.)
A register shall be kept by the Registrar of Joint Stock Companies in which shall be entered the name of every person or partnership contracting any loan under the provisions of this Act, and this Act shall not apply to any person entitled to participate in the profits of any trade or undertaking unless the same shall be carried on under a name or firm concluding with the word "registered," and by some person or persons whose name or names, or whose style or firm, shall be entered in the said register.
The clause was similar in principle to one which was carried in Committee last year, and added to the Bill. He did not dispute that limited liability had met with large success, and had made much progress; but the House ought also to remember the very large losses which had been occasioned by it, and the amount of litigation to which it bad given rise. No doubt it had been extensively adopted by the mercantile world, but experience had shown the wisdom of Parliament in the safeguards it had provided, and especially in compelling companies to use the word "limited" in their titles. The principle of the clause he now proposed was exactly the same. As the Attorney General said, when a similar clause wa3 proposed last year, persons who were endowed with these new privileges ought to go into the world avowedly as they were. The present Bill made a great innovation, and extended the principle of limited liability one step lower down. He trusted, therefore, that the House would proceed with the same caution that had guided its footsteps before. The hon. Member for Bridport had on a former occasion put before the House what was called the sentimental view of the subject. He had imagined the case of a young man of industry and ability, but lacking means, and lie said it was very
hard that a capitalist could not lend this young man money with which to carry on his business without making himself liable for his last acre and his last shilling. The House might assume that the capitalist, like most others of his class, would take care of himself. He might stipulate for 19–20ths of the profits, and the interesting youth would get the rest. That being so, the latter would carry on business upon a different basis from that of his neighbours, and in all probability would be more speculative, because he had so little to lose. At the same time he would gain credit by the regularity of his payments, and by his apparent command of capital. Ought not the public to have some safeguards in order that they might know the actual state of things I Of course, all would be well so long as the business prospered, but when the crash came, and the young man went into the Gazette, the 19–20ths of past profits would be beyond the reach of creditors, the capital would be proved to have belonged to others, and the creditors would receive 6d. in the pound, while the remaining 19s. 6d. would be added to the list of bad debts. Thus, the tendency of the Bill would be to increase throughout the country the aggregate of bad debts, which was already very large, which had increased considerably under the influence of recent legislation, and was a heavy burden not only upon creditors but upon the whole community. It was not too much to say that the price of every article of consumption, of everything we ate, drank, or wore, was considerably enhanced by what was termed the allowance for bad debts, and that the aggregate amount was equal to that of any tax imposed for the benefit of the Imperial Exchequer. This Bill would give facilities to capitalists for increasing the amount of bad debts throughout the country unless some safeguard were introduced for the protection of the public. The clause he proposed was in no way inquisitorial; it did not require the name of the lender, nor the amount or terms of the loan to be stated, but simply required that the fact that a person was carrying on business on this system, different from that of his neighbours, should be made known by the addition of the word "registered" to the style of his firm. It was said that this requirement would cast a stigma upon the firm, but in what did the stigma consist? There was no greater stigma than in the use of the word "limited" in the case of a limited liability company. If the stigma consisted
in the term, he was not wedded to the word "registered." He had selected it because it was short, and because it would be true; but if the hon. Member who objected to it would suggest any other word or sign, or anything else which would serve the same purpose, he should be content. If, on the other hand, the stigma consisted in the publication of the true state of things, the objection to registration involved the admission that credit was to be obtained by a concealment of the truth. He had been very careful that his proposition should not involve anything unnecessarily minute or vexatious, The sole object was to put the public on their guard, and if after due warning, they did not take proper precautions, then any loss they suffered would be through their own neglect. He contended, that the clause was quite consistent with the principle of truth, honesty, and fair dealing.
§ Clause (Register to be kept by Joint Stock Companies,)—(Mr. Selwyn,)—brought up, and read 1°.
§ Question proposed, "That the Clause be now read 2é."
§ MR. CAVE
said, that the case of a "limited" company was quite different from that of a firm availing itself of this Bill. In one case the partners were not liable to the whole extent of their fortunes, and it was absolutely necessary that this fact should be known to the world, otherwise the public would manifestly be liable to deception. But here the persons who appeared before the world were liable to their last penny. Why, then, should the word "registered" be put after their names? Such a mark, if it had any effect at all, would really show the public that they had a better security than they would otherwise suppose, and it would tempt them to give greater credit than before, because they would then know that they not only had the security of the partners whose names appeared, but the money of certain unknown capitalists besides.
MR. THOMAS BARING
said, that if this word was not a stigma, and was likely to give the firm a standing with the public, there could surely be no objection to the use of it, inasmuch as it would do the firm no harm and supplied information which the public ought to know. These persons, though called lenders, were really traders; yet, while they shared the profits, they might guard themselves against a share of the loss. It was only fair to the public, 535 then, that they should be apprized when any firm was profiting by the provisions of this Bill.
§ SIR FRANCIS CROSSLEY
said, he could not understand why registration should be required in the case of money lent at a variable rate of interest any more than when money was lent at a fixed rate. The House should take it for granted that people could conduct their own affairs and would not trust others foolishly. The hon. and learned Gentleman (Mr. Selwyn) said that a person lending money might take almost all the profit of the business, but it was not likely that a man working a concern and exerting all his ingenuity in carrying on the business would allow nearly all the profits to be carried off by another. But whatever the arrangement might be, it was entirely matter of bargain between the borrower and lender, and he did not think that the use of the word "registered" was at all necessary. He agreed with the hon. Member (Mr. Cave) that this was an entirely different case from that of a limited liability company.
§ MR. MILNER GIBSON
said, he thought that the proposed clause, if added to the Bill, would prevent it from being of any use. In looking back to past times they found that there had been constant difficulty about letting people make contracts with respect to money, and it was only after a great struggle that the Usury Laws were repealed and persons were permitted to contract for loans of money at any rate of interest they might think fit. The present measure was a sort of supplement to the repeal of the Usury Laws. It was now said that if persons in trade borrowed money at a fluctuating rate of interest they ought to be registered. He could not agree with that proposition; and, indeed, he regarded it as opening a door to fraud, for a man might get a credit which he would otherwise obtain by writing in a book in a public office that some person had lent him £10,000 or £12,000. There was no provision in the clause against a fraudulent entry. No man was obliged to give another credit, and if the people were asked to supply an individual with goods or to lend him money, it was their business to see that he was a person who could be relied on. He did not see that where there was no limitation of liability, and when a man was responsible to his last shilling, which was the position of the person to whom credit was given, they should require this registration. Seeing 536 that all the members of great joint-stock associations possessed the advantage of limited liability, he thought that in justice the House should remove every obstacle now standing in the way of the operations of private traders.
said, he had received several letters, including one from the Chamber of Commerce at Leicester, requesting him to oppose the Bill unless a provision similar to that proposed were inserted.
§ MR. WEGUELIN
said, the question had been argued as if the person carrying on business was bound to carry on the business in his own name. That was not implied in the Bill. It seemed to him that it would be quite possible, as the Bill now stood, for a member of a well-established firm to retire, and for the remaining partners to carry on the business with his credit. If he left any money in the firm he would be liable to a certain extent only, though the concern would benefit by his name. Again, it appeared to him that it would be competent for any large capitalist to retire from his business, and put in his place some one of comparatively limited means, and the person carrying on the business would thus have the advantage of the names of the established firm. It was for this reason that he thought registration desirable, as it would be the means of directing the attention of the commercial world to the exact position of the firm.
THE ATTORNEY GENERAL
said, that if any person held himself out to the world as a partner, he would be liable under this Bill just as much as he was under the present state of the law. He must disclaim the interpretation which had been put upon his former arguments by his hon. and learned Friend the Member for the University of Cambridge (Mr. Selwyn). What he had expressed last year and what he still adhered to, was the opinion that it was proper a partnership should appear to the world to be what it really was. Speaking of the Bill brought forward last Session by the hon. Member for Birmingham (Mr. Scholefield), he had said that if they created a new description of partnership, having in it some members with limited liability, and some without it, it was right that that new description of partnership should be advertised to the world as what it was—a partnership of a peculiar kind newly constituted under a particular law. But the present Bill proceeded on a better principle than the measure of last year, making a man no longer 537 a partner merely because he lent a sum of money to a trading concern. His hon. and learned Friend's Amendment was absolutely needless as applied to the Bill as it stood. The Bill as it stood provided that persons who were not known to the public, and to whom credit was not given, should nevertheless risk all the money they embarked in the concern, and therefore the public would get the benefit of that. He did not see that the Amendment would do any good. To be good for anything it ought to be carried much further than it was.
§ MR. C. TURNER
said, that a man who lent money on condition of receiving a share of the profits was really and practically a partner. He was a partner as far as regarded the profits; the only thing was that the Bill would relieve him from the position of a partner as far as regarded the losses. The President of the Board of Trade said there was no difference between a person who lent money for a rate of interest and one who lent money for a share of the profits; but in practice there was a great distinction between them, and it seemed to him that parties who objected in these cases to the word "registered" must be ashamed of the real nature of their transactions. If they meant fairly by the public, and did not intend to deceive it, he could not see why they should have any aversion to that word; and he should therefore cordially support the Amendment.
§ MR. BOVILL
said, that a division took place in the House last year on the very point they were now discussing, when the Attorney General supported a clause to the same effect as that of his lion, and learned Friend the Member for the University of Cambridge (Mr. Selwyn). The House then affirmed the principle of registration, and thereupon the Bill was abandoned. The Attorney General suggested last year, that those who carried on business in a way different from the ordinary way, ought to be held out to the public as carrying on business in that different way.
§ Question put, "That the Clause be read a second time."
§ The Committee divided:—Ayes 65; Noes 105: Majority 40.
§ MR. HORSFALL moved the following Clause:—
(Registration of lenders and borrowers.)
The names, addresses, and descriptions of
the lender and borrower, the amount of the loan, the time of repayment, and the proportion of profits to be paid on the loan, shall be registered at the office for the registration of Joint Stock Companies; and any variation in the amount of the loan, or in the proportion of profit payable upon it, or any extension of time for repayment, shall also be registered in like manner.
He said it was the clause of which the hon. Member for Tamworth (Mr. John Peel) had given notice, and it differed in one important respect from that which had just been negatived by the Committee.
§ Clause (Registration of lenders and borrowers,)—(Mr. Horsfall,)—brought up, and read 1°.
§ MR. DENMAN
said, that as a point of order, he put it to the Chairman whether the clause was not in principle the same as that which had just been disposed of.
said, the clause of which the hon. Member for Tamworth (Mr. John Peel) had given notice was not moved by him, and therefore it was competent to any hon. Member to move it; but seeing that the clause so closely resembled that which bad just been disposed of, he did not think it was competent for the hon. Member (Mr. Horsfall) to propose it.
§ MR. BOVILL
said, the two clauses could not be identical in principle, because the hon. Member for Liverpool (Mr. Horsfall) who proposed this clause, had voted against the clause of the hon. and learned Member for Cambridge University (Mr. Selwyn).
§ MR. ROEBUCK
said, the clause last disposed of contained two propositions. The combination might be objectionable, while one proposition by itself might be worthy of approval. For himself he opposed both clauses, but, as a matter of fairness, he thought this clause ought to be put.
§ Question put, "That the Clause be read a second time."
§ The Committee divided:—Ayes 59 Noes 101: Majority 42.
§ MR. BOVILL
said, he wished to move a clause of which he had not given notice, to the following effect:—That persons who had taken profits, and who had contributed the capital upon which credit was given to the firm, should be responsible for one year to return those profits to the creditors should the concern become insol- 539 vent, and also that they should not be at liberty to withdraw their money, or if they did that they should be responsible to the creditors for one year. The clause was prepared by analogy to a provision in the Companies Act which, whilst limiting a shareholder's liability, made his liability extend to a period of one year after he had ceased to hold shaves, in case of the company being wound up. This clause in like manner would apply to the case of the firm executing a trust deed or becoming bankrupt.
§ MR. MILNER GIBSON
said, it was inconvenient to discuss a clause of which notice had not been given, but he was informed that the law, as it at present stood, guarded against collusion between partners, and would compel a return of the money under the circumstances described. He thought, therefore, it would be better not to limit the period of liability.
§ MR. BOVILL
said, the clause was not directed against collusion, and that certainly the law would not meet the case which he had suggested, and which would frequently occur under this Bill.
THE ATTORNEY GENERAL
said, that in the judgment of his right hon. Friend and his own too, the law as it stood did as much as it was politic or necessary to do, and would deal with all cases of collusion between debtor and creditor for the withdrawal of capital within the year of bankruptcy. Although he did not pretend to say there might not possibly be some cases in which creditors might be defrauded, he thought that the Bill provided reasonable securities by exposing to the risks of trade capital embarked in a business and not withdrawn, and leaving to the operation of the law as it now stood cases in which such capital was collusively withdrawn.
§ MR. C. TURNER
said, he thought that some protection should be afforded to the public for handing back the money in cases in which capitalists embarked their money in a business with the intention of enjoying the profits, and put an irresponsible party forward as the owner of that business.
§ Clause negatived.
§ Preamble agreed to.
§ House resumed.
§ Bill reported; as amended, to be considered on Monday next, and to be printed. [Bill 156.]