§ THE CHANCELLOR OF THE EXCHEQUER
, in rising to move—That the Chairman he directed to move the House that leave be given to bring in a Bill to amend the Law with respect to the liability of members of Banking and other Joint Stock Companies; and for other purposes,said: I am anxious, on all accounts, Mr. Raikes, to save the time of the Committee, and therefore I shall not preface what I have to say with regard to the Bill I am about to ask leave to introduce by any lengthened discussion of the reasons which make the Government think its introduction necessary. It is perfectly within the knowledge of all who hear me what the circumstances have been which within the last few months have called the particular attention of the country to the position of our joint-stock banks. Those who hear me are aware that, in consequence of some failures that took place in the course of last autumn, very great uneasiness and alarm has been created among shareholders in unlimited joint-stock banks; and, although I do not think that a panic or a great excitement is a reason for legislation upon a question of this kind, it 791 cannot be denied that the alarm which has been excited and the considerations which have been brought forward in consequence of that alarm have opened our eyes to some defects and inconveniences in the law which at present affects joint-stock companies, and especially joint-stock banks. What I would wish to call especial attention to is, the two great inconveniences which have been discovered in our system. They are these. In the first place, as hon. Gentlemen are aware, we have under the present law two, or rather three, systems of the formation of these companies. They may be unlimited in their liability, or they may be limited to the amount of the shares held by each individual shareholder, or they may, thirdly, consist of what is called limited liability with a guarantee. The third form is, I believe, but little used. Practically, therefore, there are but two forms used, and all companies are either unlimited, in which case every shareholder is liable to the whole extent of his means for the debts of the corporation, or the company is limited, and the liability is limited to the amount of the shares held by the individual. According to the provisions of the Joint Stock Companies Act of 1862, it has been optional for any company to register itself either as limited or as unlimited; and many joint-stock banks have availed themselves of one or the other of these alternatives. It was perfectly competent for any joint-stock bank to register itself in the first instance with certain precautions as a limited company; and many banks used that power which was supposed until recently to be a continuing one—that is to say, that a bank which had been originally registered as an unlimited corporation could at any time be re-registered afresh, under the other provision, as a limited concern. When, however, the attention of some of the banks was directed to this matter in consequence of the alarm created by the failures to which I have referred, they found, upon taking legal advice, that that was not in their power, and that it was not possible for a bank which had once elected to be registered as an unlimited company to become limited. In consequence, a great deal of uneasiness, and I do not think I am going too far in saying a great deal of alarm, was created among the shareholders of 792 these companies at the idea that they had put themselves into a position which rendered it impossible for them to extricate themselves from the very serious consequences which they saw might flow from this condition of unlimited liability. We must bear in mind that this question of unlimited liability is one in which the public have a very considerable interest. Amongst many persons it is supposed that the unlimited liability of the shareholders of a bank is a very great security to the public, however inconvenient it may be to the shareholders themselves. But there are considerations on the other side which must not be lost sight of. We see that where a bank which is conducted upon the unlimited liability principle fails—if the failure is for a very large amount—it involves the shareholders, or, at all events, a large proportion of them, in nothing short of absolute ruin. The consequences are, in the first place, that, when any such event occurs, those of the shareholders who have the means to escape from their liability are tempted to take measures for realizing their property and withdrawing themselves from the liability to which they are justly subjected; and thus a loss is entailed either upon the creditors, or on the other shareholders, or on both. That is, of course, only in exceptional cases, which may occur on particular occasions, on the failure of any great institution. But beside that exceptional and occasional inconvenience, there is also the probability that we may find ourselves subjected to a still greater inconvenience, a larger and more permanent one, and that is, that persons of undoubted means will be shy of joining associations in which they may be exposed to such serious consequences. The result of this will be, that gentlemen of large means, who are just those whom the public would desire to see occupying positions as shareholders in great institutions, will be unwilling to put themselves in that position, and will withdraw; and so this unlimited liability will lead to the substitution as shareholders of a very inferior class of persons whose liability, although unlimited in name, will not be worth nearly so much to the public and the creditors of the concern as might be the limited liability of a superior class of persons. Therefore, we have 793 before us the inconvenience, to which I have adverted, of the law being in such a state that a company cannot now change itself from being unlimited to limited; and, in the second place, we have the inconvenience that the law practically gives an alternative between two conditions and classes of companies only. You must either have companies in which the liability is absolutely unlimited, or you must have companies in which the liability is limited to the amount of the share or shares. While also there are inconveniences, which I have just noticed, in the tendency of the superior class of shareholders to withdraw from connection with unlimited concerns, so, too, when the liability is strictly limited to the amount of the shares, and they have been largely or entirely called up, there may be very little or no reserve left for the creditors to fall back upon, in the event of the failure of the bank and the loss of its capital. This suggests the idea that it may be desirable to find some intermediate condition between that of wholly limited liability and the other of wholly unlimited liability; and such an intermediate position appears to be suggested by that which is occupied by a good many of our Colonial banks. In many cases of the Charters granted to the Colonial banks, the liability is not limited to the amount of the shares, neither is it entirely unlimited; but it is limited to the amount of the shares and some multiple of the amount of each share in addition. For instance, where the shares are £100 a-piece, the liability of the holders may be, in the whole, £200 or £800 per share. It appears to be very desirable to adopt some provision which, at all events, would render it competent to a banking company to adopt that constitution. In two words, then, I may say that the object—the main object—of the Bill which I am about to ask leave to introduce is, to enable banking companies to re-register themselves either as limited companies under the existing law, or to re-register themselves on a footing similar to that which I have just been describing, as being the footing adopted in many cases by the Colonial banks. I am anxious to propose as little as possible in the way of Government interference with the management of institutions of this kind. There is a natural tendency on the part 794 of many persons, when any great catastrophe happens, to call at once for Government interference and assistance. I am very shy indeed of making proposals in that direction. I do not propose that there shall be anything in the way of legislation which shall be of a compulsory character. We propose simply to remove an obstacle which has now been found to exist, and which at present prevents a bank from taking into further consideration the form and constitution which might suit it best.
I alluded just now to the various inconveniences which arise from the terror which unlimited liability has caused in the minds of certain classes; and I can hardly pass over this subject without saying one word upon a particular class of persons who have been very severe sufferers, I fear, from what has taken place, and from what now appears to be the state of the law. I allude to trustees. I suppose, with regard to them, there is but one feeling throughout the country, and that is one of sympathy with those who have found themselves in a position so serious as that in which many of these trustees appear to be. They are persons who, having undertaken a duty not at all remunerative, and not at all agreeable, but simply an irksome duty, for the benefit and convenience of their friends, have found themselves, quite unexpectedly in most cases, saddled with the most serious consequences. At the same time, such appears to be the law; and I fear it is quite impossible for us to propose anything, or to contemplate anything, which would in any way be a relief to these unfortunate persons. Of course, however, we have to consider what will be the state of matters for the future; and we cannot help seeing that the effect of the judgments which have been delivered, and of the misfortunes which have befallen trustees, will be to drive away trustees from making investments, or allowing trust funds to be invested, in banks of unlimited liability. Therefore, it seems that the only remedy which we can suggest is that of introducing and making easier the introduction of the limited liability principle, so as materially to diminish the effect of that great inconvenience.
Having now stated what is the principle of our Bill—to give facilities for re-registration—it becomes a question 795 what the method of procedure should be. According to the present Act, it is necessary that notice should be given by any bank desiring to change its provisions and become a bank of limited liability, to each individual who is in any way in the position of a creditor or customer of the bank. That is a matter of serious magnitude. It is very difficult for a bank to find the means of making individual communications to every customer; and, moreover, individual communications of that sort are apt to cause unnecessary alarm and misunderstanding amongst those to whom they are addressed. Therefore, my proposal will be, that we should only require certain advertisements of a character which will give general publicity to the change which is about to be made in the position of the bank. I propose that these advertisements should, be placed, for example, in the newspapers which circulate in the vicinity of the place in which the bank has its offices, and, of course, notices should be put up in the offices of the bank itself; and this we consider should be sufficient to admit of a bank in a certain time changing its position. I have spoken of the position as an intermediate one between limited and unlimited liability; and the question naturally arises, what title should be given to the banks which may take that position? There is a great deal of sensitiveness on that subject. It has been one of the great stumbling-blocks which the representatives of the banks have urged on the Government in the various representations which they have made to us. They have said not only is there a technical and legal difficulty in changing their position from an unlimited to a limited company, but they have a feeling of reluctance to making the change, and adopting the word "limited," because they fear it may lead to a good deal of misunderstanding, and may, perhaps, injure their credit. They are unwilling that any term should be adopted which should appear to be of a character which would shake public confidence in them. It is, however, rather difficult to know what sort of term we can adopt which shall at once express the real condition of the bank—that is to say, that the liability is, to a certain extent, limited, and, at the same time, not alarm the public generally by lead- 796 ing them to suppose that the bank is more limited than it really is. I propose that the term which should be used in describing banks of this intermediate class should be "reserve liability," and that a bank in such a position shall be spoken of as a "Reserve Liability Bank." I admit the phrase is an awkward one, and I am not so wedded to it as not to be prepared to change it, provided the ingenuity of the House can suggest a better term. I should have no scruple in making such a change, if it can be done. Of course, it will not do to call these banks limited, and it will not do to call them chartered, and the phrase which I have mentioned appears to be the only one available at present. There must, naturally, be certain notices and proper proceedings, like the meeting of shareholders, &c. But all these are matters of detail with which it is not necessary I should now trouble the Committee. But the necessary conditions being complied with, I propose that these banks shall have the power of assuming the position of reserve liability banks. Now, that is a proposal which, so far as the great body of the non-issuing banks is concerned, is very simple, and it is one which, I think, will meet the necessities of the case; but then we come to the question of the banks of issue, and here there are some considerations which it is necessary to bear in mind. I have laid it down more than once in this House—and the principle has been repeatedly adopted by preceding Governments—that there is a broad distinction between the business of banking, and the business of issue; and while I have said, on the one hand, that it is our duty as regards banking to put as few restrictions as possible, and leave it as much as possible alone, when you come to the question of issue different matters arise; and the State has a right, at all events, if not the duty imposed upon it, of regulating the issue. There is considerable difference detween the position of the man who voluntarily deposits his money in a bank, or otherwise enters into relations with it, and the man who takes from another a bank note which, practically speaking, he can hardly refuse, and which yet he may find is worth nothing if the bank should fail. It has been suggested that the present system of issues in this country is one of a temporary, and therefore not of a very satis- 797 factory, character, and that the time must come when some change must be made in it; and, no doubt, there is a great deal to be said in favour of taking up the whole of this question, and in endeavouring to deal with it. But I am not ashamed to say I think that it is a question which it would not be desirable for us to attempt to grapple with at present. It would lead to a great deal of difficulty, and I feel that this measure, which is one of somewhat pressing importance, might be jeopardized if we were to weight it with an attempt to work on the principles on which I should like to deal with the whole question of issue. If we do not attempt to deal with this question on a broad basis, we must, at all events, take care in what we are doing that we do not put fresh and further difficulties in the way of dealing with it whenever it may be considered the proper time to do so. Now, what is the position at the present moment of issue banks which become banks of limited liability? I believe there are only a few such, some four or five, which are now banks of limited liability which have the privilege of issue. Hon. Members who are acquainted with the Joint Stock Companies' Act of 1862 will be aware that there is a clause in that Act, I think the 182nd, sometimes known by the name of Lord Overstone's Clause, which provides that, where a bank of issue becomes a limited liability bank, the limitation of liability shall not extend to its issue of notes. The clause is one which is rather complicated, and it is a little difficult to make out from it what the precise operation would be, in the event of such bank becoming insolvent, in what order and in what manner the notes would be met. I propose to alter that section so as to make it somewhat clearer than it is at present, and to make it applicable to all banks which have the right of issue, which may become either limited banks, or banks of reserve liability. I propose to provide in substance that the assets of the bank shall go, in the first instance, pari passu, for notes and for general liabilities, and that the separate assets of the partners shall be responsible for the balance that may be due on account of the notes. The precise way in which it is done is best shown by the clause, which was rather a difficult one to draw, and I should prefer that the Committee 798 would wait until they see the exact words. That would be a provision which would fairly well meet the case of the English banks, because that case, as the Committee is aware, is one of a comparatively simple character. In the case of an English bank which has the right of issue, the total amount of issue is limited by the terms of the law, and cannot be exceeded. In the case of the Scotch and Irish banks there is a difference, especially so in regard to the Scotch banks, where difficulties arise from the system upon which the issues of Scotland are conducted; because there, over and above the amount of the authorized issue, you have what is roughly described as an issue of notes upon gold. Now, there are some features of this system which are not altogether satisfactory. It is difficult to be quite sure that there really is gold held against all the notes which have been issued. I admit this is a thorny subject with which to deal, and I am rather unwilling to go into the controversy which we are naturally led to enter upon when we come to the question of Scotch issues. I propose, therefore, we should make this provision with regard to the right of banks to become limited, or to take position of reserve liability banks, common to all banks of the United Kingdom, and that we should make the clause which I propose as a substitute for the Overstone Clause applicable also to all parts of the United Kingdom; but, in order to keep within bounds the difficulties which arise under the Scotch system, I shall propose by that clause to make this condition—that a bank of issue shall not register itself as a reserve liability bank, or, after the passing of this Bill, as a limited liability company, if and so long as it has any house of business or establishment as a bank in any part of the United Kingdom other than that in which the principal offices are situate. The effect of that would be to confine a bank of Scotland to Scotland, a bank of England to England, and one of Ireland to Ireland. Upon the whole, though that falls short of the mode of dealing with the whole question of issue as I should like to deal with it if I had the means, yet, I think, it provides a convenient temporary arrangement. At all events, with regard to a difficult and important part of the question, these are the leading provisions of the Bill which I ask 799 the leave of the Committee to introduce; but there are just one or two subsidiary points I must mention.
First, there is no satisfactory provision at present for the publication of accounts, and I propose there should be a form given in the Schedule of the Act which should regulate the accounts, which, at all events, should be presented by banks once in every year. I am unwilling to make that account too complicated, or to go into so much detail as the hon. Member for Glasgow (Dr. Cameron) has done in the Bill he has introduced. That is a Bill of a very interesting character, and the hon. Member has spent a good deal of trouble in framing the account contained in the Schedule of his Bill; but I think it more complicated than is desirable. Then there is another important matter, which is this—there is at present no proper provision for audit. With regard both to the publication of accounts and to audit, we desire to be distinctly understood as repudiating, in anyway, Government interference with the matter. We do not desire to have either the publication of accounts subject to the regulation of the Government, or through the Government in any way, nor do we desire that the audit should be conducted by a Government Department or under its direction. All that we propose is that in every bank there should be a provision made for the appointment of an auditor or auditors, independent of the directors, who shall audit the accounts and publish the report certifying whether the accounts are given correctly, and disclose a true and fair statement of the accounts of the bank as shown by the books. It is impossible for an auditor to go into the books and say from them whether this is a good bill, or that is a good security. That is not only impossible to effect, but to attempt it would be delusive and dangerous. We keep free from that. What we propose in the Bill is, that a proper examination shall take place of the books, and that the auditor shall declare, assuming their correctness, the statement of accounts is properly put together, and that it does give a full and fair description of the state of the bank. I have now gone through the provisions of the Bill, which I think it of some importance should be short and simple, and I hope the effect of the amendment of the law which I now propose may 800 conduce partly to improve our joint-stock system of banking, and partly also to allay the uneasiness which I fear has existed as to the legislative measures that might be proposed owing to the failures which have occurred. I have now to move for leave to bring in the Bill.
Motion made, and Question proposed,
That the Chairman be directed to move the House that leave he given to bring in a Bill to amend the Law with respect to the liability of members of Banking and other Joint Stock Companies; and for other purposes."—(Mr. Chancellor of the Exchequer.)
§ MR. ANDERSON
Sir, I do not like to be too sanguine about the character of a Bill from the statement made in introducing it, because very often the provisions contained in the Bill itself are after wards found to be rather disappointing. I have, however, listened to the statement of the right hon. Gentleman the Chancellor of the Exchequer, and I think, on the whole, the Bill he has proposed is a fairly good one. There are certain parts that I do not at all like; but I rise, however, to support the principle of what he calls "reserve liability." I do not like the name, but the principle is, I think, good, although I do not think it will ever work well with such a name attached. He has not, however, named what particular principles of liability are to be the rule; he has not named what the particular extent of the proposed mutiple of liability is to be. The Bill does not seem to deal with this like the liability of the American national banks, which have one simple rule, which is, that whatever amount of stock a partner holds, he is liable for a similar amount in addition; and that extent of liability has been found to work well, and to be satisfactory both to the public and the partners. The right hon. Gentleman does not propose to adopt any such rule. If a bank chooses, it may make its partners liable for as much more capital as they have, or twice as much more, or three times as much more, or four times as much more. I do not see that that is a very good plan, because it will introduce a great amount of confusion. Different banks may, and probably will, adopt different modes. Much simpler would it be that the banks should have to adopt a particular reserve liability to the extent of as much more as their 801 capital, or twice as much more, so that it should be a uniform principle applied to all the banks. Again, the Chancellor of the Exchequer has not explained about the three chartered Scotch banks, which are supposed to be limited, but as to which limitation there is a great deal of doubt. Does the right hon. Gentleman declare them limited, or do they require to come under the new law? I think he is quite right, in regard to the banks of issue, that the partners should be liable for the notes, that there should be no reserved liability as to issues; but that should be a sufficient guarantee for the notes. I do not think any further guarantee should be adopted, such as kicking all the Scotch banks out of London, which the Chancellor of the Exchequer has proposed to do, as if that would be an additional security for the notes. For that I do not see any ground; in fact, I do not see how the right hon. Gentleman can take from the banks their offices in London, and confine such banks to the Provinces, without giving them compensation. It would be simply a case of confiscation. The banks might have been stopped from coming to London by an Act of Parliament some years ago; but having been allowed to come under the law which existed, and having established business in London, I do not see how you can deprive them of that business without giving them compensation for it. Well, as regards trustees, we all feel deeply for the position in which they are placed. Whatever the situation of the law in England, the law in Scotland has generally been believed to be, that trustees who did not participate in the profits were not liable, and under that understanding people have become trustees for orphans, and in that way they have done a great deal of kind and loving work for orphans; but, under the declared condition of the law, that is all upset. I am very sorry indeed that the right hon. Gentleman does not see his way to make some change in that law, so as to allow the same kindly work to be done for widows and orphans in the future as has been done in the past, without this dreadful liability. The result will be that people will decline to act as trustees at all, and that work which would be done from kindness will have to be handed over to paid lawyers to do; and I do not think there will be any gain to the community in that. I 802 regret exceedingly that the Chancellor of the Exchequer has declared he cannot touch that part of the law, and make some provision to avoid the difficulty. About controlling the banks, too, something else seems to be required which the right hon. Gentleman did not even name. For instance, as to the City of Glasgow Lank, we know it to have been kept up before the public by keeping up its shares, the directors continuing to traffic in the shares, and buy up all that were offered. Under an existing Act of Parliament, usually called Lee-man's Act, an Act passed to prevent the wrecking of banks, the banks have a great protection for their shares which no other share company has. A broker cannot offer a bank share on the Stock Exchange without giving the numbers of the shares that he is offering. In that way there is no over-speculation, and that was a very wholesome provision to prevent the wrecking of banks; but when banks have that protection the public ought to have a protection against bank directors. Therefore, if banks are to be protected by Leeman's Act, they should also be prevented from trafficking in their own shares; and there ought, therefore, to be a provision in the Chancellor of the Exchequer's Bill making it penal for directors of banks to buy up with the bank's money the shares that are offered on the market. We see what the City of Glasgow Bank directors did. Whenever a share was on the market they went and bought it up, and the shares were held for the bank. By reason of the directors being able to buy up the shares, they kept their credit up in a way that could never have been done otherwise, and by so prolonging their career intensified the disaster. The Chancellor of the Exchequer, therefore, will do well to consider whether he cannot introduce some provision making it penal for banks to traffic in their shares; but how it is to be regulated may be a question. Of course, directors come into possession of shares, and that cannot be obviated; but there ought to be a limit of time as to the period they should be allowed to retain them. On the whole, I congratulate the Chancellor of the Exchequer on the Bill he has introduced.
§ MR. HEYGATE
said, he thought, whatever might be the case in Scotland, the proposals of the Chancellor of the 803 Exchequer, so far as they had been shadowed forth, were such as would commend themselves to the banking community of England generally, and would be received by them with satisfaction. His right hon. Friend had certainly not exaggerated the alarm and uneasiness which prevailed amongst the numerous class of persons in this country who were interested in the shares of unlimited banks. Ever since they knew the weight which would fall upon them in case a failure of their bank occurred, there had been a feeling of great anxiety throughout the country upon the subject that could only be allayed by additional facilities being given for the adoption of the principle of limited liability. The only reason why that could not be sooner adopted was, as had been explained by the Chancellor of the Exchequer, owing to an accidental and not an intended disability, which was connected with several of the banks that had adopted the principle of the Act of 1872, and registered under it for special purposes; and having once registered under it for those special purposes, it seemed it had been held by the law that they were in a position which rendered them unable to re-register. The removal of that disability was the one great object which was desired throughout the country; and as he was one of those who had been so bound his satisfaction was sincere, and he thought the right hon. Gentleman would be conferring a great benefit upon the country, and especially upon the banking community. He must also congratulate the right hon. Gentleman on having avoided the rocks upon which he might have come to difficulties if he had attempted a more ambitious policy, and had launched a new scheme of note issue. There was a hard task for any Government who would undertake that subject. The right hon. Gentleman the Member for Greenwich found the hornet's nest he had to deal with when he attempted to deal with it in 1864. With regard to the trustees, he (Mr. Heygate) quite agreed that theirs was a position which all must commiserate, and he wished it could be dealt with in the Bill. At the same time, he thought a wise policy had been adopted in limiting the Bill as it had been limited. The position of trustees was one which required not only in Scotland, but in England, a further definition. Although it was supposed they all 804 understood the position of a trustee, he was by no means certain that the law on the subject was altogether clear; and at all events, speaking for himself, he thought the law was by no means just. The facilities which were proposed for giving notices to customers as to the adoption of limited liability were exceedingly valuable. It would have been a matter of some difficulty to have given the notices, unless it had been clearly laid down that sufficient notice should be given, and the manner in which it was prescribed. The proposals for audit and the publication of the accounts in a certain form could not be objected to; and he endorsed all that had been said with reference to the improvement in the class of shareholders which was likely to follow from the facilities afforded by the Bill for the adoption of limited liability, and the prevention of the deterioration of the present class of shareholders which would have followed if the present state of things had been continued. He believed the directors would be also improved. Everyone connected with banking business knew there was no greater difficulty than that of finding a good set of men to undertake the management of a joint-stock bank; and if the principle of the Bill was adopted, so as to become general, he thought it would tend to the advantage of the public in securing both a better class of shareholders and a better class of directors. He would only add, that he thanked the Chancellor of the Exchequer for the Bill, and hoped that the right hon. Gentleman would make it one of the first moment, and push it forward with all the energy of the Government.
§ MR. RATHBONE
said, he thought it better that, as suggested by the Chancellor of the Exchequer, they should reserve any discussion of what was in the Bill until they had the Bill itself before them. But there was one point which the Chancellor of the Exchequer said was not in the Bill, which he would venture to ask the right hon. Gentleman to consider. The Chancellor of the Exchequer intimated that he would defer dealing with the whole question of the circulation of notes, and he spoke the opinion of the commercial community, when he said that question was not at all on a satisfactory footing. But he (Mr. Rathbone) would ask the Chancellor of the Exchequer to consider 805 whether it was not desirable, without raising any very great difficulties, to give an inducement to put that system on a better footing than it was. At the present moment, the circulation of this country and of Scotland really rested upon no security at all. Now, would it not be well, in giving the privilege of limited liability which was proposed to be given to banks of issue, to give an option of depositing Consols at 80, or other sufficient security, for their extreme issue, which should still be confined to their original limits as an outside limit; and, where a bank accepted that option, the limitation of liability should extend to its note issue, as well as to its general liabilities. In that way, it being optional, he could not help thinking country bankers would find it a convenience and a security to them to so deposit Consols. The public he would then feel there was a public security, and such banks would be guarded against the chance of a run on that part of their liabilities; and they would get 3 per cent on that amount of their issue, which was a very fair remuneration. He thought, if that plan were adopted—as it was to a certain extent in Scotch banks with their limited issue—it would give them a chance of attaining a better security and a better system of issue than they had at present.
§ MR. SAMPSON LLOYD
said, he joined most cordially with the hon. Member for South Leicestershire (Mr. Heygate) and others in rejoicing that the Chancellor of the Exchequer had brought in a Bill to deal with this question. On the whole, the Bill was moderate in terms and not complicated. There was one point, however, on which he failed to see the benefit of the distinction created by the Bill between that and other forms of partnership. This proposed partnership with reserve liability might, it seemed to him, be equally well met by limited liability. What was the difference between a bank with £50 shares and £10 paid up and the reserve liability which was contemplated by the Chancellor of the Exchequer's distinction? If he was right in that view, he thought it was a great pity to complicate the matter by a different form of partnership contract. There was also something said about the title. Now, he spoke from practical experience; and he believed that the 806 term "limited" would injure no bank, provided that the subscribed capital was sufficiently large and the general management good. Therefore, he thought it would be a pity to adopt a third somewhat complicated and confusing title, when an existing title answered every possible purpose. One thing was to be noted in all these bank failures. He believed not a single bank had failed for years past which had had a good and thoroughly satisfactory audit. Neither the City of Glasgow Bank, nor any of the banks which had been subject to comment lately, ever was audited by auditors who were independent of the directors, and who were sufficiently remunerated to do their work thoroughly. If they gave their auditors £50 to audit the accounts of a bank with 20 branches, they might expect to have an audit which was worth nothing; but if they gave them 500 guineas, and encouraged them to make their auditing thorough, then he believed that an audit by public accountants was an effectual security against any public disaster, and the most effectual security that could be devised. As regarded Scotch banks in London, if he understood the Chancellor of the Exchequer rightly, a Scotch bank would be under the same disability as regarded trading in England as at present an English bank was with regard to trading in Scotland. If the right hon. Gentleman's remarks went so far as that, he could only say he thought the principle was a just one. As to what the hon. Member for Glasgow (Mr. Anderson) had said, he should have thought the Scotch banks that had ventured into English waters had got a sufficiently sobering experience in connection with the City of Glasgow Bank not to wish to bank in London much more. Be that as it might, he thought it was perfectly just that the two countries should be placed on an equality as regarded local privileges, and that which was denied to English and Irish banks in Scotland should be denied to Scotch banks in England and Ireland; or else that all should be free in the three countries, and, perhaps, that would be the best notion of the two. He also thought the proposal about the balance-sheet was one that no well-managed bank would object to; but the public would be well aware that honest and well-managed banks did not require all these pre- 807 cautions, and as to the dishonest, they would find means to deceive the public in any balance-sheet that might be devised. It was impossible, for instance, to tell from the balance-sheet what the bills were, and what were the securities, and so on; but still it was well to attempt it, because it satisfied a certain section of the public. The hon. Member for Glasgow had said something about directors trafficking in shares, and, of course, that was a most objectionable practice. It was his (Mr. Sampson Lloyd's) impression that there was a clause in the Articles of Association of most banks to prevent that; but if not, it was as well that it should be done. He could not help thinking that the remark with which he begun, as to the non-necessity of the new form of partnership, was worthy of consideration; but he was quite sure that hon. Members would all agree with him that they should be happy to support the Bill when it came into the House.
§ MR. COURTNEY
congratulated the Chancellor of the Exchequer on the simplicity of the scope of the Bill, which was cautiously limited, as far as possible, to facilitating the conversion of unlimited banks into limited ones. With respect to the term reserve liabilities, he (Mr. Courtney) thought, with the hon. Member for Glasgow (Mr. Anderson), that it would excite a good deal of alarm and be very generally misunderstood, and he did not at all share the idea which was represented to be entertained by the managers of existing banks that the addition of the word "limited" to their title would excite any feeling of insecurity whatever. On that point he thought the experience of the hon. Member for Plymouth (Mr. Sampson Lloyd), who had actually tried it, was conclusive. With respect to the new form of liability, he took the meaning to be this—that, in the case of shares, with a small proportion of their nominal amount paid up, there would be no practical difference between the existing liability and the new form; for instance, in the case of £50 shares of which £10 was paid up, or £100 shares with £20 paid up, they must contemplate the possibility of the £50 or £100 shares with the whole sum paid up; and it was, he presumed, to apply to that that the right hon. Gentleman had framed his plan. Well, he ventured to 808 suggest what he thought was worthy of consideration, and would avoid this question of introducing a third class of banks of unknown liability. It was—that any bank registering as a bank of limited liability should be liable to the extent of its shares, provided always that if the share were so called upon as to trench upon more than half of the nominal amount, the liability of the shareholders should ipso facto increase, so as never to be less than double the amount called up. So that with £100 shares, of which £60 was called up, the liabilility would be £120 per share; with £100 shares, £80 paid, the liability would be £160; but if there was less than half called up the liability would be, as at present, only to the full amount of the shares. He believed that few limited liability banks existed with half the amount of their shares called up; so that they would never have that proviso brought into operation at all, except, perhaps, in the case of some Scotch banks; but in the event of its being done, they would then have the guarantee brought into operation, which would be perfectly sufficient for the security of the creditors, and would remove the objection which the Chancellor of the Exchequer had in view, and would also avoid this "reserve liability." The right hon. Gentleman said he thought it would not be necessary to require that notice should be served on all the customers; but he (Mr. Courtney) disagreed with that, because in country districts many outlying customers, who came to the bank only once or twice a-year, would not be made aware of the change. He did not believe it would be so difficult as the right hon. Gentleman supposed to serve a notice upon all the customers of the bank; but if that were not done, the unlimited liability ought to continue for a considerable time. With respect to banks of issue, the right hon. Gentleman did not propose to alter the Overstone Clause, but only to expound it, so that it would be only made more clear. The case of the trustees was certainly very hard; but he (Mr. Courtney) did not see that it was possible for the right hon. Gentleman to do anything to relieve them of their liability. If trustees were recognized as a separate class of shareholders, a new and unfair kind of liability would be created, and creditors would be debarred of the 809 rights to which they had a just claim. He agreed with the hon. Member for Glasgow (Mr. Anderson) in the strong antagonism which that hon. Member had expressed to the proposition of putting a prohibition upon Scotch banks against coming into England. That he understood was a clause to be attached to them in the event of their becoming limited banks. Now, the object of the Bill was to induce banks to become limited. No case whatever had been made out for driving those banks out of London and out of this country; everybody except the London bankers was delighted at the increase of competition. He was sorry to hear the Chancellor of the Exchequer say he was going to put forward a prescribed form of accounts. He did not believe much in that, especially when it was coupled with this declaration—that these returns were not to be sent into any Office whatever. He did not know, therefore, what kind of penalty there would be if the prescribed form was not adhered to. It was quite certain that no form of accounts could give any real guarantee to the creditors of the bank as to its solvency. They would have in the accounts "bills discounted," so much, "advances to customers," so much; but whether the bills bore good names, and whether the advances were made on good and satisfactory security, could not be found from any form of accounts whatever.
§ COLONEL MAKINS
said, that, so far as the Bill would go in abolishing unlimited liability, he quite approved of it; but he agreed with the hon. Member for Plymouth (Mr. Sampson Lloyd) in deprecating the introduction of a third form of liability. He thought the plan sketched out by the hon. Member for Liskeard (Mr. Courtney), if he understood it correctly, was an improvement. With regard to the audit, he should like to suggest that the depositors were a class who ought to be represented, as it might be possible for the directors, by manipulating the proxies, to secure the appointment of auditors favourable to themselves. It would be desirable, therefore, to secure that they should have an independent auditor representing them, as well as the auditors representing the shareholders. He did not agree with the hon. Member for Liskeard in disapproving of forms of accounts, because he thought it would be much more simple and useful 810 to those who were shareholders in more than one bank, who might wish to know exactly where to look for any item in which they took an interest. He believed everyone but the hon. Member for Glasgow (Mr. Anderson) had admitted that it was impossible to abolish the liability of trustees; it would, in fact, be a premium to speculators to do so. He did not see how their liability could well be abolished without opening the door to fraud. People would have themselves registered as trustees, in order to escape their just liability. He hoped, therefore, no attempt would be made to amend the Bill in that way; because it would only impede its progress, and probably cause it to fail altogether.
§ MR. LYON PLAYFAIR
said, he quite agreed with the Chancellor of the Exchequer in the desirability of postponing the discussion of the Bill; but there were one or two questions on which he was very anxious to get an explanation from the right hon. Gentleman on a subject which excited great interest in Scotland, and on which a full understanding would be very valuable. There were a certain number of banks in Scotland which believed that by Charter and by Act of Parliament they were limited already—such as the Bank of Scotland, the Royal Bank, the British Linen Bank, and others. Well, as he understood it, this Bill was a permissive Bill, and these banks, believing themselves to be limited by the powers they already possessed, would not require to re-register under the Act. Then, if that was so, those banks might have offices in London; but the other banks in Scotland—take such as the Clydesdale Bank, the Commercial Bank, and others, which were banks of unlimited liability—if they desired to take advantage of the Act, they must put the term "limited" or "reserve limited" upon their names, and then they were placed in a different position altogether from the other banks, and were not to be allowed to have offices in London. If that was to be the case, the Bill would certainly act injuriously upon some banks and very beneficially upon others. He wished to know whether he had given the right explanation, and whether that would be the effect upon these different banks? He admired the simplicity of the Bill; but he should like to reserve any discussion upon the sub- 811 ject until he had seen the terms of the measure, and until he had seen exactly in what manner it would bear upon the different banks.
§ SIR SYDNEY WATERLOW
believed the discussion would be a great service to bank shareholders, and the result would be to relieve them of some of the extreme liability which they now possessed. He did not agree with the hon. Member for Plymouth (Mr. Sampson Lloyd) when that hon. Member ventured to suggest that there was not much difference between the position of a shareholder in a bank with only £10 paid out of a subscription of £30 per share, and the kind of reserve liability which the Chancellor of the Exchequer suggested. Why, the marked difference was this—that in the first case the remaining £20 might be called up, and then there was no reserve; but the reserve liability contemplated by the right hon. Gentleman was not to be called up, except in case of winding-up. It was only intended as a protection to the depositors and customers of the bank, and not to be available for purposes of ordinary business; and, therefore, he trusted the right hon. Gentleman would not be persuaded to give up this new form of "reserve liability." It had been said, with some force, that the large unlimited banks were very anxious not to have a ticket or label added to their names which might shake their credit. He thought they were not so much afraid of it because of its effects in this country; but these banks had enormous operations abroad, all over the world; and, therefore, the Committee could understand why they did not wish to have a word attached to them which might cause misapprehension or shake confidence. Now, the right hon. Gentleman had told them he could not see his way to use the word "charter;" but he was good enough to say he was not wedded to the term "reserve liability," and was quite ready to receive and consider any suggestions. The right hon. Gentleman spoke of Colonial banks, and it appeared he thought they were a very good model; they were of modern construction, and their constitution was, perhaps, rather a model for the Bill. Now, he (Sir Sydney Waterlow) thought he would ask the right hon. Gentleman to reconsider the matter, and to see whether it was not possible to make all the banks char- 812 tered. If he attached to the Bill a Schedule of a Charter, every bank registered under the Act would be chartered in the form set out in the Schedule; but the banks might be called anything they liked—for instance, "The Bank of London, chartered 1879." Anybody would know then that the Act of 1879 would give a copy of the Charter and constitution of the bank; there could never be any doubt as to what was the extent of the liability; and it would be a distinguishing mark which everyone would understand. He believed the word "chartered" would be much more acceptable to the unlimited banks than the word limited, which was unpalateable to them.
§ SIR GRAHAM MONTGOMERY
said, he was disappointed when he heard his right hon. Friend the Chancellor of the Exchequer speak of his intentions with respect to the Scotch banks. It seemed rather hard that they should have to give up their offices in London in order that they might become limited. The proper time to stop them coming to London would have been when the Royal Bank of Scotland got a Private Act to come here, or after the Report of the Select Committee on Banks of Issue, by bringing in a Bill at that time. But nothing was then done, and because of that many of the banks had since come to London and opened offices besides purchasing premises; and he did say it was very hard now, by means of a side-wind, to attempt to drive them out; and he therefore trusted the right hon. Gentleman would reconsider the matter before the second reading of the Bill.
§ SIR JOSEPH M'KENNA
believed it to be unworthy of the occasion, and of the Chancellor of the Exchequer's statesmanlike proposal, if he were to complicate this measure with any limitation of the privileges of Scotch and Irish banks. On one other point he desired to remark. He did not think the creditors of the bank ought to be presumed to have received complete notice by publication in The Gazette or in newspapers. All creditors should have notice of change in the liability of a bank on a form that would be supposed to reach them personally, such as a postal circular; and they should not have their consent to the change assumed, if not given expressly.
§ MR. RAMSAY
said, he had no wish to continue the discussion; but could not omit saying that if the right hon. Gentleman expected that the measure he had explained would be satisfactory either to the Scotch banks or to the Scotch people, he was labouring under a misapprehension. It would be very prejudicial to Scotch bankers to restrict their trading in England. He would remind the hon. Member for Plymouth (Mr. Sampson Lloyd) that English bankers were merely prevented from going to Scotland by their own interests. True, they had not the same rights of issue as the Scotch banks; but there was nothing to prevent their going to Scotland to carry on banking business, properly so-called. He had had the opportunity of hearing the views of public bodies in Scotland on this question of banking expressed on more than one occasion; and he believed that the only way in which the Government could give satisfaction to the people of Scotland, and, indeed, to the people of Great Britain, was to repeal the Act of 1845, and to restore the law of Scotland to the position in which it was before that Act was passed. Under such a state of things he believed there would be no occasion either to guarantee notes, or to interfere in any way with the business of banking. He could see no ground for any interference with the business of banking, any more than for interference with any other business; and the provisions the right hon. Gentleman made with regard to joint-stock banks should equally apply to any other joint-stock associations. There should be no exclusive monopoly conferred on them, any more than any other branch of business.
§ THE CHANCELLOR OF THE EXCHEQUER
Sir, I must express my acknowledgments to the Members of the Committee for the kind manner in which they have received the proposal I have just made, and thank them also for several suggestions made by Gentlemen well qualified to give advice upon the subject. I have no doubt that in the course of discussion on this Bill, we shall get some valuable suggestions, and I shall be most ready to avail myself of any which I find it possible to make use of. At the present moment, I hope I may be excused from entering into the rather difficult and weighty 814 question connected with the banks in Scotland. That is a question very much by itself; and as it is one which we shall be called to speak upon again, I will not say anything about it at the present moment. With regard to one or two other questions that have been raised, and especially that which is raised by my hon. Friend the Member for Plymouth (Mr. Sampson Lloyd), I may say one word. We are asked why we should have a third form of liability? I do not know that there is any absolute necessity for having nominally a third form. All might come under one designation, and all might not improperly be called "banks of limited liability," if it were absolute in one case, and in another limited to something more than the actual amount of shares. There can be no doubt that there are a large number of banks, the circumstances of which are such that the mere limitation of liability to the amount of their shares would not be a satisfactory arrangement. I remember hearing the manager of one bank say—"Limited liability would suit us exactly, because in our case not more than a fourth or a fifth of our shares are called up, and the remaining three-quarters or four-fifths are as good are serve as any we could provide in any other way." On the other hand, other bankers with whom I have had communication say—"Oh, that will not suit the case of our banks at all, because something like three-fourths or four-fifths have been called up; and if we, being now unlimited, were to turn ourselves into a limited company, and tell our customers that there is only one-fourth or one-fifth of the value of the shares to fall back upon, they would be greatly alarmed, and the bank would be greatly discredited." So that in such a case it is necessary to do something which would give a greater reserve for the customers to fall back upon. The hon. Member for Liskeard (Mr. Courtney) seemed to me to take up the objection of the hon. Member for Plymouth (Mr. Sampson Lloyd), and then to make a suggestion which really, as I understood it, set up my case as against that I of my hon. Friend, because he said—"Undoubtedly, if you do limit the liability to the amount of the shares, you may find they are in some cases nearly or entirely called up, and you might provide that there should be always an 815 amount of liability beyond the amount of the share." That is exactly what I propose.
§ MR. COURTNEY
I suggested it as what the right hon. Gentleman proposed to do, but I suggested it a simpler way of doing it.
§ THE CHANCELLOR OF THE EXCHEQUER
The objection which I have to that way of dealing with it is this, and it is the same as that which I would take to the hon. Member for Glasgow (Mr. Anderson)—that you should fix precisely by law a uniform amount of liability over the amount of the shares. The principle is to provide by law as little as may be, and to leave as much as may be to the managers and shareholders of the banks themselves—to allow the one to take a larger liability and the other a smaller, provided they give proper notice and make it clearly understood. These are matters, however, which will be better discussed when we have the Bill before us. I am afraid there will be considerable difference of opinion as to the suggestion of the hon. Member for Plymouth (Mr. Sampson Lloyd) that the use of the word "limited" would increase the credit of the bank. I believe it to be very reasonable that it should do so; but, as a matter of fact, I believe it is not the opinion of a large number of bankers that it would. But possibly one of the effects of the discussion we may anticipate on this Bill will be to remove some of the prejudices and false impressions with regard to liability, and to render it easier to make that change without producing a false impression. Probably I shall best consult the convenience of the Committee by not going further tonight, but waiting until the Bill is in the hands of hon. Members.
§ Question put, and agreed to.
§ MATTER considered in Committee.
§ (In the Committee.)
§ Resolved, That the Chairman be directed to move the House that leave be given to bring in a Bill to amend the Law with respect to the liability of members of Banking and other Joint Stock Companies; and for other purposes.
§ Resolution reported:—Bill ordered to be brought in by Mr. CHANCELLOR of the EXCHEQUER, Mr. Secretary CROSS, and Sir HENRY SELWIN-IBBETSON.
§ Bill presented, and read the first time. [Bill 126.]