§ Question again proposed, "That the Bill be now read a Second time."
§ 6.1 p.m.
§ Mr. Hammersley
When the proceedings were interrupted, I was about to say that the second general principle underlying the Bill has also received general approval. That is the principle that no large dividends should be paid out by reason of the ability of companies during the war to make dividends which they could not have made had it not been for war conditions. I think that principle has the support of the House and the country. It appears to me that to a great extent the necessity for this Bill as far as that principle is affected has been very greatly weakened by the Finance Bill, which imposes 100 per cent. Excess Profits Duty in respect of earnings made by reason of war circumstances. Therefore, it would appear that the general effect of this Bill is to act on principles with which we are in entire agreement, but at the same time to cause a considerable amount of inequality. I desire particularly to draw the attention of my right hon. Friend to some of those inequalities.
Let us take the case of a company which has not only made no profit, but has found it desirable, by reason of the 364 absence of a profit-earning capacity, drastically to write down its capital. It is clear that if there is a drastic writing down of capital the small amount of capital which is left in the company on which it is permissible to pay only 4 per cent. does constitute a grave hardship to those particular shareholders. This is dealt with, of course, in Clause 2, Subsection (4). I understand that such individuals will be able to make application to the Capital Issues Committee. I suggest that it is very desirable that the regulations which my right hon. Friend suggested would soon be made should be made very quickly. Who is going to take the initiative? Who is to be the first person to make these applications? If the applications are delayed, the position of the shareholders will be thereby jeopardised. On the other hand, if all the companies make application, the position of the Capital Issues Committee, having all these applications before it, will be a very unenviable one. Therefore, in practice, it might be desirable for the Treasury to arrange with a certain number of selected companies to make their applications as soon as possible so that the commercial community may have some guidance. Clause 4 makes some provision for the kind of inequality which I have in mind. It gives to the Treasury the power to make regulations in respect of special classes of companies. Here again, one would like to know on whose incentive these regulations are to be made. Some information on that point from the Financial Secretary would be helpful.
There is one small point of detail which requires consideration. It is with regard to Clause 5, Sub-section (2, c), which deals with the prevention of the application of assets to the payment of uncalled liability. Let us take the case of some of those companies which have shares carrying uncalled liabilities. Naturally many of these companies have not been in a position to pay dividends. It seems to me to be desirable, in the interest of the shareholders, that any sums which might be put towards the satisfaction of that uncalled liability should be allowed to be so used on condition, perhaps, that there should be no dividend paid in respect of the new paid-up capital. This would not in any way contradict any of the principles underlying the Bill, and at the same time it would give some security to many shareholders who have shares with un- 365 called liabilities. These shares in depressed industries are not an asset but a very great liability. Therefore, I hope that when the Committee stage of the Bill is reached, the Government will give consideration to these inequalities which have been pointed out.
§ 6.7 p.m.
§ Sir Reginald Clarry (Newport)
We had yesterday an excellent example of what the House can do when an emergency arises. When it was represented to the House, on the Emergency Powers (Defence) Bill, that it was necessary in the national interest, that Bill went through all its stages in a few hours. I am sure that on any other Measure on which it could be shown that it was in the national interest, there would be similar rapidity in getting the Measure through the House; but after listening to the Debate to-day, I wonder whether this Bill is really worth while. It is called the Limitation of Dividends Bill, but I think it might be freely interpreted as the limitation of the spending capacity of certain specified citizens. Without exaggeration, that would appear to be its effect. Those assets and that cash are to be retained in the company. That is the effect of the Bill. The real question before the House is, will the company spend that money to better national advantage than would certain citizens who are to be deprived of that income? There is no indication that it will do so.
As far as I can see, the amount involved is not—as we are talking in hundreds of millions these days—a vast sum. In general terms it does not seem that the Bill is justified in making the upheaval which it will do in the financial world, for there is no doubt that this limitation of dividends will have a serious effect on new capital being brought in, particularly capital to be used on matters connected with the national war effort. One cannot get any return in the period of time, which is limited, when dividends and profits can be earned. I think this has to be taken into consideration. Another point which has occurred to me during the Debate is that the Bill will reduce the income or spending capacity of a certain class of consumers—that is to say, shareholders in public companies. Surely, to be logical—I do not advocate this—one should limit the spending capacity of every other section of the community, wage earners, salary earners, and traders.
§ Sir R. Clarry
If the spending capacity of one section is limited, why not limit the spending capacity of the whole community? That would seem to me to be inevitable from a logical point of view. However, I do not make a great point of that. If it can be proved at a later stage that this will be advantageous, I shall not be against the Bill. I should like to refer to a technical point that was mentioned by my hon. Friend the Member for Elland (Mr. Levy) concerning the definition of ordinary capital. In Clause 9, ordinary capitalis denned as follows:'ordinary capital' in relation to a company means the whole of the company's issued share capital other than preference capital.In Clause 2, Sub-section (3), ordinary capital is computed in a certain way. The question I want to ask is whether there are any other computations of paid-up ordinary capital than this one shown here in detail. I think the definition should be clarified to mean the same thing. By making a special computation in this Clause, there is an inference that there is some other computation in the definition. I should be glad if the Financial Secretary would elucidate that point when he replies. At a later stage I shall perhaps be helpful by trying to make this a workable Measure, if it is proceeded with.
§ 6.12 p.m.
§ Mr. Lewis (Colchester)
As I understand it, the Government have three objects in view in introducing this Bill, two of which may be described as primary objects and one as subsidiary to the others. The primary objects are, first, to restrict the consumption of consumable goods, and secondly, to make available more savings for Government borrowing. The subsidiary object appears to be to strengthen the reserves of certain companies for that difficult period which will follow the conclusion of the war. With regard to the principal objects, I should like to say this. As to the restriction on consumption, undoubtedly the Bill must have some effect in that field. A smaller amount will be distributed by way of dividend than otherwise would have been, and, undoubtedly, some part of it would have been spent on consumable goods. To that extent that purpose is accomplished.
367 As regards the second purpose—to make available additional savings for Government borrowing—I think the effect of the Bill is a little less certain. After all, if these extra amounts which will not be distributed now had been distributed, some part of them at any rate would have been used by the shareholders themselves to lend to the Government. On the other hand, now that these amounts are to be retained by the companies, some part of them at any rate will not be lent to the Government. It depends on what the difference between the amount that would have been lent by the shareholders and the amount that will be lent by the companies works out to be. This seems to me to be in the realm of guesswork. It is perhaps reasonable to suppose that on balance there will be some increase, but I think it is a mistake to imagine that, as far as that purpose is concerned, very much is likely to be accomplished. The subsidiary object—to strengthen the reserves of certain companies—will no doubt be accomplished. Conservative directors who would in any case be inclined to distribute a small proportion of the profit will find their hands strengthened, while reckless persons who might be in charge of other companies and who might be inclined to distribute more largely will find themselves restrained. Undoubtedly, on balance, some companies at any rate will one day be thankful that this Measure was passed.
So much for the purposes which the Government have in mind. Now for the objections to the Bill. Stress has been laid upon anomalies and hardships which are likely to arise. No doubt, there is provision in Clause 4 (1, a) for dealing with such cases, but I noticed a very interesting thing in the Chancellor's speech. He kept referring to Lord Kennet's Committee and said that people would have the right to go before that committee and that the committee would consider this, that and the other. I cannot find in the Bill, however, any mention of that committee. The only body mentioned in the Bill is the Treasury, and there is no obligation on the Treasury to consult the committee. As my right hon. Friend has thought it worth while to impress upon us the advantage of this committee, and how it strengthens the position of persons who may be affected by this Measure, I suggest that something 368 should be put into the Bill to ensure that the committee will be consulted. I do not think that an unreasonable proposition. As the provision reads at present, not only is there no mention of the committee, but there is no mention even of hardship. If we read this all-important Sub-section we find that under it:The Treasury may make regulations for(a) modifying the provisions of this Act in their application to special classes of companies to which this Act applies.That is all. It does not give any guidance to the Treasury as to the reason why they should make any modification. For all the Bill says, the purpose might be that the Treasury should make the Bill even stricter and not that it should make it possible, in certain cases, for more dividends to be distributed. The purpose might be in certain cases to reduce the limits even below those already put in the Bill. That seems a perfectly reasonable interpretation of the language of the Sub-section as it stands. I suggest that if the purpose of the Government is to prevent, as far as possible, hard cases arising, then words should be inserted to show that that is the intention and that the purpose of Clause 4 (1, a) is to enable relaxation of the existing restrictions to take place where such seems desirable, and not to increase those restrictions, I ask my right hon. Friend, between now and the Committee stage, to consider with his advisers whether those two points should not be met—first, that there should be a definite reference in the Bill to Lord Kennet's Committee, and, secondly, that it should be made clear that the purpose of Clause 4 (1, a) is that of mitigating and not increasing the restrictions. Having said that, I would add that while I do not entertain quite such high hopes of this Bill as some have expressed, it seems to me that, in the circumstances, a good case has been made out for it.
§ 6.19 p.m.
§ Sir Herbert Williams (Croydon, South)
I speak under some disadvantage because, owing to the fact that I have been serving on a Select Committee, I have missed the bulk of the Debate and it may be that some of the points which I propose to raise have been dealt with already. I was very much surprised when the right hon. Gentleman's predecessor introduced this Bill. I tried to 369 find out what its purpose was and up to now I have failed to see any real good purpose behind it.
§ Sir H. Williams
I remember, if the hon. Member for Dumbarton Burghs (Mr. Kirkwood) has forgotten, that on many occasions he has gone cheerfully into the Division Lobby in support of proposals to inflict penalties on companies because they did not distribute enough in dividends. I would refer him to Section 21 of the Finance Act, 1922, and the numerous amendments which have been made to it. Those provisions are not limited to private companies as many people think. They are limited to companies which are under the control of not more than five persons. If I remember aright, the "persons" now include relatives of the people concerned and, in fact, now a substantial number of public companies are under a penalty if they fail to distribute enough in dividends—the object being to prevent the avoidance of Surtax. One of the evils of the Bill is that it will limit the amount which we take from taxpayers in Surtax. I do not suppose that the hon. Member for Dumbarton Burghs realises that one of the effects of the Bill is that definitely less tax will be collected if the Bill is passed, than would be collected if it were not passed. Year after year, we have had amendments of Section 21 of the Finance Act, 1922, all aimed at stiffening up its provisions in order to make it more difficult for people to avoid Surtax by retaining what the Inland Revenue regarded as unduly large reserves. The object of this Bill is the exact opposite. Therefore we should have some justification for the complete reversal of a policy which, if my memory serves me aright, has been urged on the House by Chancellors belonging to all three political parties. Indeed, one might accurately describe the Bill as the Payment of Surtax (Limitation) Bill.
The Bill will also encourage waste. If I discovered a company which was making very large profits and was prohibited from distributing them, what is there to prevent my saying to that company, "These dividends are not much good to you and you might as well give me a very fat job. It will not cost you much and as you cannot give the money to the shareholders, you might as well 370 give it to me, because I know a very good use to which I could put it." I am certain that in a large number of cases the effect of this limitation will be to encourage wasteful administration of public companies. We all know that that was the effect of the Excess Profits Duty in the last war. The combination of the present Excess Profits Tax and this Measure will further encourage wasteful administration of businesses and is therefore in conflict with the public interest.
Let us also take into account those institutions which depend largely on dividends received from others. I am thinking of insurance companies and investment trusts. They represent a very large amount of the collective savings of the people, both of the well-off, and of those who are not by any means well-off. An insurance company or investment trust endeavors to distribute its investments in such a way that it can look forward to a fairly steady income. Naturally if they are skilful in their chain of investments, that brings about the effect of increasing their net receipts. Under this Bill you will have this situation. Where they make losses on the swings—because in time of war the yields of many enterprises diminish and the dividends from those will be reduced—the insurance companies and investment trusts will not be in a position to make up that loss on the roundabouts, that is to say by increased dividends from shares in companies which, in war time, are making larger profits. Thus, an embarrassing situation will be created for insurance companies and investment trusts. I hope the Chancellor of the Exchequer will take that fact into account. Very often these insurance companies and investment trusts affect, not a few rich people, but literally millions of people many of them in quite humble circumstances. That is an aspect of the question to which full consideration must be given.
It often happens that for perfectly legitimate and proper reasons, companies are converted from private to public companies. I am not certain whether under Clause 2 (2) a company which is the successor in title to a private company, is to be regarded as an entirely new company. If that is the case, clearly any private company which is doing fairly well, even though it is in the public interest that it should be converted into a 371 public company, will not dare to allow itself to be so converted because the net result will be that its dividends will be limited to 5 per cent., though the company may be earning substantially more. Therefore, there will be an interference with economic development which may be definitely adverse to the public interest I find a little difficulty in regard to Clause 2 (3). I think this is the point which was referred to by my hon. Friend the Member for Newport (Sir R. Clarry). There is a definition in this Sub-section of "paid up capital." It is not easy to interpret exactly what that definition means, but if I can read English aright, it is in conflict with the definition of "ordinary capital" for other purposes under the Measure, as set forth in the Definition Clause. I hope we shall hear from the Financial Secretary to the Treasury the reasons for this contrast. It is well known that shares are, sometimes, quite properly issued at a premium and where there is an issue of shares at a premium it seems to me that considerable difficulty will arise. Yet it would be improper not to issue shares at a premium, assuming that permission is given for the raising of additional money and in some cases it is right and proper that additional money should be raised. These are circumstances which seem to arise under this part of the Bill and to which proper attention should be given.
I have indicated that I do not understand what good purpose can be served by the Bill and I can see that it might do substantial harm. We are all anxious not to embarrass His Majesty's Government in any conceivable way at this time. We do not wish to be fractious in criticism or opposition. I think, however, that this Bill calls for considerable amendment if the public interest, and not the selfish interest of a few rich people, is to be properly preserved. I hope that the Financial Secretary to the Treasury will give us some assurance that he and the Chancellor of the Exchequer will give reasonable consideration to any Amendments which are put forward, from any part of the House, in order to deal with the problems which have been raised in this Debate.
§ 6.27 p.m.
§ The Financial Secretary to the Treasury (Captain Crookshank)
We have spent a considerable time on this Bill, the Second 372 Reading of which actually raises only one point, namely, the desirability of limiting dividends in the present emergency. The speeches made to-day have dealt with very minor points on Clauses, some of them almost drafting points; but I do not complain, because this may save time later. All I can say to the hon. Member for South Croydon (Sir H. Williams) is that the whole object of debate on a financial Bill is to offer opportunities to the Chancellor of the Exchequer and myself and our advisers to take account of criticisms and of points made to us where these are of substance, and to indicate where the Bill needs to be amended in order to carry out the purpose for which it is intended. My right hon. Friend has made to-day, his first speech in this House as Chancellor of the Exchequer. I am sure we all hope that his occupancy of that high office will be most successful notwithstanding the fact that he is undertaking it at a very grave time. He gave a very full explanation of the Bill and I do not propose at this stage to go into all the details which were mentioned in the subsequent Debate. There were however one or two points which I may, without disrespect to any speaker, describe as rather more important than others, and to these I wish to refer.
First, there is the point made by the right hon. Gentleman who opened the Debate. He asked whether, in fact, there might not be some curious results if, while the actual dividends themselves were limited, a company could declare a higher dividend. So it could under the Statute, but it could not distribute that dividend. That point had been raised elsewhere, and we have, of course, considered it to see whether there was anything in it, but I do not think that there is, because the suggestion that the dividends might be declared of an amount in excess of what this Bill, if enacted, would allow does not seem to be a course which is very likely to commend itself to a responsible company. Why should a company take such a course at all so long as the proposed Act is in operation, that is to say, for the war period? All it would be doing by adopting such a plan is entering into a sort of promise, so far as it was concerned, to be put into effect after the war—a promise that it would make a payment in circumstances which could not possibly be foreseen. That, I should have 373 thought, would be a rash and somewhat foolish thing to do.
But, even if a company did enter into such a course, it would not, in fact, be evading the proposed Act, because this Bill deals with limiting the amount paid out during the war period. Therefore to that extent this point does not exactly constitute a loophole; but, of course, if such should be the case, which I do not think it could be, and something along these lines could be twisted into an evasion of what is proposed under this Bill, that loophole would have to be stopped up. I hope that the hon. Member will agree with me on this point. I know that he did not put it forward as his own suggestion, because it is not sensible enough to be his, but he had heard of it, and he rightly put it forward. On the whole I think that this aspect of the matter will work out as I have described.
The other series of questions which were raised really dealt with the problem of the exclusion of private companies, and the hon. Gentleman who has just spoken and others—the hon. Member for Elland(Mr. Levy) was, I think, the first to do so—have referred to Section 21 of the Act of 1922. The fact remains that there is possibly a small number, a very small number so far as I am aware, of public companies which were concerned with that Section of the Act and subsequent legislation. There may be a few, and in so far as there are a few, it might be that what has applied to them in the past would in fact be what will apply under this Bill. If that were not so, it might very well have to be dealt with, but, on the other hand, the provision for the so-called hardship case would probably come into effect. Generally speaking, all the subsequent legislation has been dealing with private companies.
Then the question which followed, and which the hon. Gentleman asked, is why are no private companies brought within the ambit of this Bill, and that is the chief question which has been asked during the Debate. My right hon. Friend did deal with that in his opening statement. Very briefly, I will repeat the point. A great number of private companies are akin to partnership firms and so on, and therefore, quite apart from the difficulty of finding out what is distributed by a private company by way of divi- 374 dends in time of war, one group belongs to that type. But the group with which this House has been for so many years concerned has been an entirely different kind of private company, and generally speaking hon. Members have got rather into the habit of considering them as private companies and ask to-day why they are excluded from the Bill. The answer to that, broadly speaking, is that the reason, the method, and the theory behind all the recent legislation has been in regard to taxation; it has been an endeavour to get proper contributions, more particularly by way of Surtax, from those companies, some of which were formed primarily for the purpose of evading Surtax. This Bill, as my right hon. Friend pointed out, is not a taxation Bill, and I am trying to explain that the tax law as it has now been evolved by this House is based upon the principle that the whole of the income of the company of the type I am talking about is distributed to an individual behind it so as to secure the maximum payment of Surtax. It would obviously be illogical and completely wrong to turn round now and say that we are going to take action to limit the amount of dividends which such a company is deemed to pay out. In such cases of tax dodgers it would be found that there would be merely a distribution of a very much less sum, and that is why from that aspect the private company has been excluded from the Bill. On that point the argument is, I think, conclusive, and I hope that hon. Gentlemen who have attended the whole of the Debate and have heard the case put will agree that that is so.
The hon. Member for Ealing (Sir F. Sanderson) inquired whether there was anything which would prevent under this Bill an insurance company or bank calling up unpaid capital. There is nothing which prevents them from doing that. What we are dealing with is the problem the other way round, that is to say, that they should not distribute their profit in the way referred to in Sub-section (2, c) of Clause 5 That is quite a different problem from the other one of being allowed to call up unpaid capital. Several hon. Members, and more particularly the hon. Member for Colchester (Mr. Lewis), have touched on the Kennet Committee. It is quite true that the Bill does not say that the Treasury acts on the advice of the Capital Issues Committee, but, on the 375 other hand, it is a fact that ever since the Defence (Finance) Regulations were introduced and ever since the control of capital has been enforced, it has been done on the advice of that committee. The committee has earned the approbation of all those who come into contact with its knowledge of the problems involved and with the methods with which it has dealt with them under the distinguished chairmanship of Lord Kennet, who was so long with us in this House and whom we all know. The members of that committee give their services voluntarily, and it may be found that that is the explanation why the cost of this Measure is not anticipated to be very much. The figure quoted in the Financial Memorandum on the front page of the Bill really covers what we think is likely to be required in the way of extra clerical staff, but the main work will be conducted by that committee on a voluntary basis as in the past.
The hon. Member for East Wolverhampton (Mr. Mander) read out from a document a list of what he called private companies. I did not take them all down, but he may take it from me that those cases and other matters mentioned in the House will be looked into. I do not think in fact that he will find all his fears are correct. Some of the companies the names of which he read out may be technically private companies, although I do not know, but the fact remains that what we are dealing with in this Bill is not the subsidiary units but the final unit which does distribute dividends to the public.
§ Mr. Mander
I think the Chancellor of the Exchequer himself rather tended to mislead the House in the sense that he gave a high figure for private companies. I fancy that a considerable amount of the dividends of those companies would actually be collected by reason of the fact that they are subsidiary, and I should be glad to know that that was not the case.
§ Captain Crookshank
I do not know, but so long as we reach the objective on which we are all agreed, I think it would be better to proceed on those lines rather than to engage upon a statistical research at this moment on matters of this kind. The point is that we are dealing with the amount which is finally distributed to the shareholders and not the dividends which pass, say, from one subsidiary to another—perhaps to a parent company—where 376 the public is not at all concerned. The public is concerned at the end, and in dealing with the Bill I think a great deal of confusion, at any rate outside this House, would be saved if it were remembered that we are not talking about percentages, but about the actual total amount of money which was distributed in the standard years and the amount which is to be distributed now. If we keep in the front of our minds that we are dealing with the amount, we shall avoid confusion about percentages, and, above all, we shall realise what is the primary object of the Bill. As my right hon. Friend said in his opening remarks, the object—and this has also been pointed out by his predecessor when the matter was first raised in this House—is to avoid increasing purchasing power. If that were not so, we all know that we should very soon get into a situation of rising prices with all its disadvantages and dangers. To avoid that position is the primary object of this legislation. The Bill, I think, does achieve that, and the general impression of the House this afternoon has, I think, been that it does. I will not claim that all the details of the Bill are necessarily in the right form, but we shall look at all the points which hon. Members have made to-day, and I hope they will excuse me if I do not answer them in detail now. We shall look into the points, and as there will probably be Amendments proposed at a later stage, I think it would be better to wait and deal with the points when we see the Amendments.
Generally speaking, we have to remind ourselves that this is not a taxation Measure. It is part of the method of dealing with the general economic problem. In answer to some things which have been said to-day about the fear that if dividends are limited it must inevitably lead to great extravagance by companies and so on, I would only say that we should remember that we are not now in either 1914, or 1915, or 1916, or 1917 or 1918. What may have happened during the last war as regards this and many other problems will not automatically be repeated now. The opportunities which companies or individuals had of expenditure then will not necessarily be available to-day. We are in the middle of a difficult week and in the throes of a very serious struggle, and if this Bill can help in some measure on the economic 377 front it will serve its purpose. My right hon. Friend is very much obliged for the way in which the Measure has been received. We will look into the matters which have been raised, and I hope it will not be unduly long before the Bill gets on to the Statute Book.
§ Mr. Levy
By an oversight my right hon. and gallant Friend forgot to answer a question which two hon. Members and I put clearly and definitely. We asked whether he would give us a definition with regard to Clause 2, Sub-section (3), which deals with paid-up capital, because it conflicts with the definition of issued capital which is dealt with in Clause 9.
§ Captain Crookshank
I never purposely fail to answer questions, but I did overlook that one, and I apologise. I think that is just the sort of case that had better await the further stages of the Bill, because it is apparently my hon. Friend's view that the words in Clause 2 conflict with the words in Clause 9, and I am advised that they do not. Perhaps my hon. Friend's legal advisers and mine take different views. If his question is, "If you issue a 5s. share at 10s., what is the capital?" the answer is "5s."If, however, there is a conflict, it will have to be resolved at a later stage, but I am advised that there is no conflict.
§ Mr. Levy
If you issue a 5s. share at a premium of 5s., making it 10s., the capital of the company as written in the company's books will be the money which is subscribed for the share, irrespective of its face value. If I am right, there is a conflict with the definition in Clause 9, which deals with paid-up capital on the basis of the issue of the shares.
§ Question, "That the Bill be now read a Second time," put, and agreed to.
§ Bill read a Second time.
§ Bill committed to a Committee of the Whole House for Tuesday next.—[Mr. Grimston.]