§ Mr. Spens (Ashford)
I beg to move,That an humble Address be presented to His Majesty, praying that the Order in Council, dated 18th July, 1941, adding Regulation 78 to the Defence (General) Regulations, 1939, a copy of which was presented to this House on 29th July, 1941, be annulled.The Regulation to which the Motion refers is an addition to the series of Defence Regulations which enable Ministers to control undertakings and companies in the national interest. The House will remember that, under the Defence Act, two alternative powers were given to the Executive, either to take possession of an undertaking or to control an undertaking. In cases where possession is taken, the procedure is fairly simple; the requisitioned premises are at the disposal of the Government, and those interested in them are entitled to the compensation laid down by the Compensation Act. In cases of control. the procedure is altogether different and somewhat more complicated. The undertaking remains the undertaking of the company, who still continue to own it. Originally, the procedure for control consisted in the Minister of Supply, where he thought fit, making an order that certain industries or certain undertakings should be controlled, and that having been done, the controller appointed was in a position to give directions as to how the undertaking should be carried on.
In the great majority of cases, undertakings were carried on under those directions without any difficulty, in the national interest. In cases, the control had to be tightened up, and under Regulation 54, the Minister of Supply was entitled to appoint authorised controllers of the undertaking; and then any 2051 competent authority was entitled to give orders to those authorised controllers how that particular undertaking was to be carried on. I think the competent authorities now include almost all the Departmental Ministers, with the possible exception of the Minister of Information, who I do not think is yet a competent authority. I do not think that my right hon. and learned Friend the Attorney-General is a competent authority. With those exceptions, and one or two others, practically every Departmental Minister is a competent authority.
The controller appointed in fact becomes at once a kind of super-director. The board of directors and management remain, but they have to act under the directions given by the controller. In some cases, almost inevitably, clashes arise between the controllers and the board of directors of the company. The board of directors and the management have, after all, the legal obligation to consider the interests of the particular undertaking, both its immediate interests and its future interests, and however much they may desire to do matters in the national interest, there are occasions on which what the controller thinks necessary in the national interest may conflict with what a perfectly honest, honourable and patriotic board of directors think desirable for their own particular company.
I give a simple instance. Assume that a company has a large issue of debentures and has accumulated a reserve fund for the purpose of meeting those debentures when they mature in the year 1945. The controller may think that the reserve fund would be better spent, for the momentary national advantage, in purchasing new premises and equipping them, or in carrying on some new activity. The board of directors may say that that would land the company in bankruptcy and insolvency after the war, and there may be a perfectly genuine and honest conflict of opinion between the board of directors and the controller. There have been such instances, and to meet that sort of case this new Regulation is being added to war-time legislation. It deals with two matters. In cases where authorised controllers have been appointed, it authorises the competent authority, at their will, to dismiss any director or manager if, in the opinion of the competent authority, that director 2052 or manager has been in any way obstructing the controller in what he thinks ought to be done. In such a case, the competent authority will no doubt come to a decision on the advice given by the controller. Secondly, the new Order authorises the competent authority, if it thinks fit, to acquire the whole of the share capital of the company by having it transferred to nominees of the competent authority, at a price to be fixed by the Treasury or, if that is not acceptable to the shareholders, at a price to be fixed by an accountant to be nominated by the Lord Chief Justice.
These are extremely drastic powers for the Executive to take. I will not say that such powers are not necessary in some shape or form, but I venture to criticise the Order as it is worded at present and to point out how utterly unfair it is that every option in the matter should be given to the Executive while the shareholders and others interested in the company should have no right to protest against what is being done or to prevent their shares being acquired. The first point is that the question of whether the shares shall be acquired is a matter which, by the Order, is left solely to the wishes of the Treasury and of the competent authority. The position therefore arises that in cases where the competent authority thinks fit to turn out a board of directors or a manager, and to continue to have the business run by the nominees of the competent authority, the shareholders may have no right whatever to have their shares paid for.
What is more, tucked away in the Order is a provision that no application to wind up the company may be made by anybody. Therefore, you may have the position, during the whole of this war, that a company may be run by the nominees of a Department, carrying on work unauthorised by its memorandum, and disapproved of by the shareholders, and no sort or kind of relief or remedy given to the shareholders. I do suggest that that position may be so grossly unfair to the shareholders that it should not go through this House without some protest against it. I do not necessarily want the Order to go on the scrap heap, but I suggest there is unfairness in its present form. An option ought to be given to the shareholders. If a majority of their elected directors are displaced in this way, simply by a piece of paper signed by the competent authority, they should have the right, if the majority 2053 of them think fit, to say to the competent authority that "In these circumstances you have to buy our shares." The option should not be solely in favour of the Executive, leaving the subject no sort of right at all. That is the most important alteration I should like to see made in this Order.
There is a second, and almost equally important point. While the Order seems to contemplate that in certain circumstances it may be proper for the competent authority and the Treasury to buy share capital, there is nothing in the Order about what is to be done regarding loan capital. But there is in the Order—and this is all-important—provision that no application for winding-up a company is to be made at all. You may get a case in which a company at the present time has shares of very little value, has very little share capital, and has been financed by loan capital. It may have reserve funds accumulated for the purpose of paying back that loan capital. The whole of the board may be displaced, the nominees of a Department may come in, and the business may be run for any purpose those nominees think fit. As far as I can see, the debenture holders and those who have loaned money are left without any sort of remedy at all. They can bring an action but, if they get judgment, unless they are in a position to enforce that judgment by winding up the company, they are absolutely helpless. In some cases it may be possible to bring an action for the appointment of a receiver on the ground that their security is in jeopardy but nothing is said about it in the Order. 'No one seems to have considered the position of companies financed by loan capital and the position of those who have loaned money to that sort of company. I suggest that the Government ought to treat this matter in exactly the same way as if some other company were going to acquire the company concerned by not only buying up the shares but also by paying off the loan capital or coming to some arrangement so that they are content that it shall go on under this drastic method of management by nominees of the Ministry.
Those are the two most important points. There are other points. Take the position of the director or manager who has a long-term agreement with a 2054 company and whose whole living depends on the remuneration he gets from that company. What is to happen when he gets notice to quit, by this chit which he is to receive from some official? Has he any claim against anybody? The company has not broken his contract. Are the Government to give that man any compensation, or is he to go straight into the gutter? That point seems to have been entirely overlooked. To turn men out from managing businesses which they have built up themselves, and on which their living depends is going far beyond what is normal, even in war-time.
I return to the question of preventing any application for winding up a company. That means that these nominee directors may carry on a company and run it into debt, and the creditors will have no remedy. There is a great body of law which lays down the duties of directors to their companies. Those duties are in the nature of quasi-trustee duties to the concerns of which they are in control. I am reasonably certain that if the directors of a company, whether they are the original directors or nominees put in by a competent authority, use the assets of the company for any purpose which, however important nationally, is against the interests of the company, they will be considered by a court of law to have committed misfeasances, unless some very clear legislation is passed. A whole series of actions will arise in the courts, with shareholders or other interested people asking for injunctions to restrain directors from acting against the interests of their companies.
I ask those responsible for this Order to reconsider the position. There will be a great many cases where boards of directors and managers will, in the interests of their companies, endeavour to fight the Order, unless it is made more fair. What is envisaged as the future of these concerns? At the end of the war all Departments will have shares vested in nominees. There is nothing in the Order to say that the original owners shall have any chance of getting their businesses back. Are the owners who are dispossessed to have no right whatever to get back their interests? It seems to me that the matter is one which raises not only the difficulties of administration of procedure which I have mentioned, but 2055 matters of principle, which are of very great importance to the future of industry in this country and I do beg that the Order shall either be reconsidered and a new Order brought in, or that my hon. Friend will promise that the points raised shall be carefully considered with a view, if possible, to bringing in an amending Order at an early date.
§ Sir Patrick Hannon (Birmingham, Moseley)
I rise to support the able, comprehensive and eloquent statement just made by my hon. and learned Friend the Member for Ashford (Mr. Spens), which is the view of many of us who are associated with industry in this country. What is the origin of this Order, and under what circumstances did it arise? Can my hon. Friend the Parliamentary Secretary tell us why it was made? Is there some distrust of the administration of companies in this country? No doubt there are, here and there, recalcitrant directors who will not comply with the requests of His Majesty's Government to discharge to the full their obligations in respect of the production of munitions of war, but this Order is a slight on the integrity, honour and outlook of those who are responsible generally for the direction of industry throughout the country.
What has happened to the organisation of industry that makes it necessary for an Order of this kind to be introduced? Believe me, boards of directors in this country are just as alive to their responsibilities as any member of His Majesty's Administration. They are anxious to discharge their obligations in every possible way they can. Now this Order places them in a position of being liable to discharge at a moment's notice at the behest of various authorities. This Order ought to be modified to make it quite clear that only when those responsible for the direction of industry are not discharging their duties to the full in relation to the war effort should the Order be applied. Further, the interests of loan capital should be carefully safeguarded within the limits of this Order. We are living in days when Departmental legislation is becoming a disease in the body politic. In the last war it was the same, and there ought to be some limit to the drastic power of an Order such as this.
§ The Joint Parliamentary Secretary to the Ministry of Supply (Mr. Harold Macmillan)
I am very grateful to the Mover and Seconder of the Motion for the moderate way in which they have stated the very natural anxieties that must be felt about an Order which is admittedly drastic in its character. My hon. and learned Friend the Member for Ashford (Mr. Spens) said frankly that, in his view, its drastic character did not in itself make the Order undesirable. In time of war a large number of drastic and unusual things have to be done. It will be within the recollection of hon. Members that at the very beginning of this Administration a solemn declaration was embodied in an Act of Parliament by which the person and property of every subject of His Majesty were made and declared to be available for the purpose of the better conduct of the war.
My hon. and learned Friend pointed out with truth that the powers already in the hands of the Administration are very large and have worked satisfactorily in the vast majority of cases. We have a power to requisition the tangible assets of any commercial undertaking, and we have a power to control it. Let me deal first with the power to take the tangible assets. That is a useful requisitioning power which is continually invoked for the purpose of taking land, houses and things of that sort. But when it comes to taking over a working, organised company, that may be a very inconvenient method of dealing with it, because a working productive company is something more than the mere land, machine tools, buildings and so on. For a variety of reasons it is not a convenient way to use the existing power of requisition, and, indeed, I think it would be rather an unreasonable method to use in order to get possession of a particular undertaking. Production would be interrupted by the temporary disorganisation caused by requisitioning, and although shorn of its tangible assets, the company would still remain in being. The position of its contracts and sub-contracts would be very obscure, and the creditors of the company would be far more prejudiced by the requisitioning of all the tangible assets than by the taking over of the company as a whole.
§ Mr. Macmillan
I was pointing out that the power of requisitioning, although a proper power to take concerning certain assets, such as land for aerodromes, is not, for a variety of reasons, with which I will not deal in detail, as my hon. and learned Friend agrees with me, a very appropriate power for dealing with the structure of an entity like a production company. There is, then, the power of control, which, as my hon. and learned Friend pointed out, really takes two forms. There are declared to be controlled undertakings, which range over a very wide field of production, and they are merely declared, in effect, to be essential undertakings for the prosecution of the war. There is, then, the power in Regulation 55 (4), subsequently amended by another Regulation, by which the competent authority may put in an agent or controller to carry on the business of a particular undertaking. The cases in which we have done that, or would wish to do it, are very few in number, and I should like at once to reassure my hon. Friend the Member for Moseley (Sir P. Hannon) that this Order is in no sense a slight upon the great engineering and production companies of this country. Far from it. It is only in a tiny number of cases that we should wish to use these powers, and, in fact, have used the existing powers under the present Regulation, to put in a controller. I would say that the percentage of cases in which I can conceive of these powers being used is less than 1 per cent., a fraction of 1 per cent.
After all, the normal relationship between a Supply Department and the great industries of the country is one of friendly and co-operative partnership, and I hope my hon. Friend will use his great influence to let industries know that this Order is not in any way intended for any other purpose than to deal with one or two rather intractable and difficult cases that have, in fact, arisen. I will be quite frank. Had these cases not been connected with rather important aspects of supply, we might have been content with the powers of requisitioning and the power to put in an agent or controller. But it so happened that in one or two cases we have had refractory and difficult managements in undertakings engaged on munition production of the very highest national importance.
2058 What are the powers we have? At present we have the power to put in a controller or an agent—this is under the existing Regulation. That agent has the right to take control on behalf of His Majesty of any undertaking for the purposes of exercising such control as may be provided by the Order, and he can provide that the undertaking shall be carried out in accordance with any directions given by the authorised controller, and any persons functioning in functions of management must comply with such directions. That would appear to have been a sufficiently powerful Regulation to achieve our purposes in these very small numbers of cases. But in fact it has led—and this is the reason for this new Order—to a rather foolish and undesirable position. In the particular case I have in mind, the controller or agent was appointed under the existing Regulation. The affairs of the company were then being carried on by the controller, with the existing board, or some of its members, doing everything they could to make his position impossible in important and unimportant matters. Friction between the authorised controller and the existing board of directors took place, and a situation arose under which the affairs of no undertaking could be carried on—certainly not to the advantage of the shareholders.
§ Sir P. Hannon
Have the provisions of the Regulation been put into operation in the particular cases I have quoted to the House?
§ Mr. Macmillan
Yes, Sir, and with the -results I have described. There was a very unfortunate series of conflicts. When we put in a controller or manager, we usually obtain the services of a distinguished and well-known industrialist, who in this case was voluntarily acting as a piece of national service on behalf of the Government. Such a man finds himself in a very ludicrous position when he is put in by the Government to control a factory doing vital munition work if he is obstructed in every way, both in petty and important matters, by the existing board of directors or some of its members. The board in this particular case went so far as to bring an action against us. I think the House will agree that this is not a very satisfactory way of carrying out important contracts for munition work. Therefore, it has been decided to take two additional powers, and, as my hon. and learned 2059 Friend has said, they are, of course, drastic powers. They give power to remove directors and appoint directors in their place.
It is quite true that under those powers we can remove the whole board of directors and allow the controller to carry on his duties unhampered by a recalcitrant board. When seeking advice on this matter, we were very much impressed with the very point my hon. and learned Friend has made. It does seem to be a rather strong measure even in war-time to remove a board of directors. Therefore, we have taken a second power, namely, to purchase at a fair price the total share capital of the undertaking, for the very reason indicated by my hon. and learned Friend, that if we were to go so far as to remove the directors, the fair thing to do was to acquire the whole business. In other words, instead of merely requisitioning the tangible assets of the business, which of course we could do at the beginning of the war, we should go further and requisition the share capital.
§ Sir P. Hannon
Does this process of acquisition of capital and the removal of directors take place without any reference at all to the shareholders?
§ Mr. Macmillan
Yes. In addition to requisitioning the tangible assets, a piece of machinery or a building, we will have the power of requisitioning the actual shares. There seems to be no particular reason why, if the Crown has under the stress of war the right to seize real property, or any fixed or tangible asset, and purchase it at a fair price, it should not also have the right to purchase the share capital of an undertaking. I do not think my hon. and learned Friend objected to that. The history of the matter started with control working reasonably well, though there were one or two cases of difficulty. We then wished to get practical control unhampered by obstructive directors, so we have taken the power to appoint our own directors. In some cases the majority of the board might be friendly to the Government and the controller, and there would be only one or two directors whom we should wish to remove. There we should act under these powers. But I feel the force of the argument put by my hon. and learned Friend, and I will have the point carefully inquired into. If we 2060 felt that the whole board, representing all the shareholders, was so out of sympathy with the Ministry and so unwilling to work in any kind of co-operative spirit that we wished to remove them all, I can give a definite undertaking that we should certainly proceed with the second power and purchase the whole business at the true and proper value of the shares.
The only point that remains is whether this option of purchase of the shares should be an option only exercised by the Government or whether the share holders should have the right, if the whole board is removed, to say, "You have put in a controller and turned out all the directors; you ought to buy all our shares." As a matter of practice that is what we should do, and it is because we thought the right to purchase the shares was a fair accompaniment of the right to remove all the directors that we put in that part of the Order. But I will examine it again to see whether some equivalent and balancing power might be introduced by amendment. I can only say at this stage that that is the way the Government intend to work the Order. If we made a complete sweep of the board, we should think the proper thing was to buy the shares.
§ Mr. Macmillan
That is a point which arises in the valuation of every estate. When shares are valued for Estate Duty purposes, the value: has to be that as between a willing buyer and a willing seller, at arm's length. If there is any disagreement, there is the right of the shareholders to ask for arbitration, which is made by an accountant appointed by the Lord Chief Justice. On the first and major point, we should wish to operate this in a very small number of cases, and if we did more than remove one or two directors who had not the confidence of the shareholders as a whole, we should in fact operate this right of purchasing the shares. I will see whether we can introduce an Amendment which will make that right reciprocal and allow the shareholders to demand to be bought up if these powers are used to their full extent.
My hon. and learned Friend also raised the question of loan capital, that is, either bank loans or long-term or short-term 2061 loans in the shape of first or second debentures. These remain the liabilities of the company, and when the Government buy the shares these are as well secured as, before unless it can be thought that the management of the company by the Government's controller would be less likely to put it in a position to deal effectively with the loans than the directors. In point of fact, this is a power which would be exercised in a very small number of cases because the Government are not anxious to get themselves loaded with the shares of all kinds of industrial undertakings. They will only exercise control because they intend to place large orders with the company, and that will put the company in a rather good financial position. I do not think, therefore, that there is any reason to suppose that the loan capital or loans will be any less well secured when the Government are using the company for placing large orders than they are at the present time. I will, however, have that point more specifically looked into to see whether any amendment ought to be made.
With regard to the directors, it is true that there are companies in which there are long-term contracts. not usually between directors as such, but more often with managers. These, of course, will remain as an obligation on the companies, because the new owners of the shares will not be relieved from any ordinary obligation by the mere purchase of the shares. In practice, the purpose of taking over a company is in order to run it, and it is not probable that the Government would wish to remove those directors or managers, who are valuable to the management of the company. I see the difficulty that there may sometimes be with long-term contracts of this kind. I do not think that they have been a very desirable feature of our industrial operations. They are very often based upon services which are being paid for in this particular way without any real return. I am bound to say that, if we consider the circumstances in which this control is exercised and the fact that it is only for a tiny percentage of cases that these; powers are asked for, and having regard to the fact that we are at war and to the immense losses which the community have suffered, it is not a very serious power to ask for.
§ Sir P. Hannon
I apologise for interrupting so frequently, but will my hon. 2062 Friend make this clear? He knows that the contracts with works managers and various officers connected with the organisation of industry in this country are sometimes for three, five or seven years. These are men of first-class importance, key men in industry. Will the position of these men be secured under this Order?
§ Mr. Macmillan
No, Sir, I must be frank, they will not be legally secured The object of the Ministry is to secure the best possible production, and unless such managers conducted themselves in such a way as to try to prevent the company making munitions or other products which the Government required I do not think the Government would remove them. I do not think there is a very serious danger of that, although there is a theoretical danger.
§ Mr. Spens
I want to emphasise this point, that any of the directors may have a permanently bona fide, honest difference of opinion with the controller. The hon. Gentleman speaks of "obstructing the controller," and in a sense they may be, because they may take the view that what he is doing is going to land their company into bankruptcy, and that may be the reason why they object to doing what the controller asks. If they are then thrown out they ought to be secured in some way.
§ Mr. Macmillan
I was coming later to that point. There is the power of issuing winding-up orders, but here again I do not think that is a very great danger, because it seems to me that the credit of a company is as likely to be as good with the Government behind it as it was when it was being conducted in its present form. There is, finally, the question of the future of shares which may come into the hands of the Government. I can only say, and I can see the eye of the Financial Secretary of the Treasury upon me, that I should think the last thing the Government would wish for would be to find itself landed with large blocks of shares of a large number of engineering companies at the end of this war. We do not wish to exercise these rights for the sake of doing so, and we shall make almost every effort not to exercise them. I can think only of about three cases in which up to now we should wish to exercise these rights, but, of course, we shall hold them in terrorem 2063 in a few more cases in which we think firms have not been playing the game in the national effort.
That leads me to the final and what is perhaps the real underlying point in my hon. and learned Friend's speech. He seems to think that there might be a real uncertainty in the mind of a director of a company as to whether his duty to his shareholders should lead him to continue to do one kind of work and his duty of the nation lead him to take on another find of work. If my hon. and learned Friend will forgive me, I think that. is rather a narrow way of looking at this matter. There may be a company whose normal business is to make some product which is not one of the munitions of war but whose plant is admirably adapted to making tanks or guns or something of that kind. That company may do itself better service by trying to keep out of war production, keep on with its specialised business in order, perhaps, to "do down" some of its more patriotic rivals who have turned over their plant to meeting the needs of the nation. I say it is far too narrow a view of the duties of a director that he should say, "My company is all that matters; England may be beaten, conquered by the Germans, but we should go on making boxes or boilers, because we can sell them after the war, and if we change over to the making of guns we shall endanger the future of the company." I do not believe that is an attitude which the directors of any companies do take, or should take, and if they do take them I think they are taking too pedantic a view of their responsibilities to their shareholders. Their main responsibilities are much more in conformity with what my hon. Friend the Member for Moseley has said.
The engineering concerns of this country, of which only a tiny percentage were employed before the war in making munitions, have changed over their businesses, are learning a new technique, and without regard to what may be their future advantages or disadvantages have placed the whole of their knowledge, power, executive authority and technical skill at the disposal of the Government, because they regard such a step as overriding the interests of their shareholders in the need for bringing the war to a successful conclusion. 2064 Therefore, although I frankly admit that these Regulations are peculiar and drastic and certainly will not form part of the permanent structure of the legislation of the country in peace-time, I want the House to believe that we have asked for them, step by step, to meet one or two tiny cases—tiny in relation to the great structure which has been built up to meet the national needs—and that they will be used very sparingly. If we can, after very careful examination, we shall do our best to circumscribe our powers, but we wish to have them and we ask for them only because they are necessary in the national interest.
§ Mr. Spens
May I ask the leave of the House to make a few further remarks? Everybody, I think, takes exactly the view that he does of what we should like to be the views of directors of companies. I want to raise a matter of law, the question of whether there is sufficient in the law as it stands to-day to justify directors taking the view that all of us want them to take. We have to remember that the rights and wrongs of what they do now in the national interest may be threshed out after the war in the cold and grim atmosphere of a post-war liquidation. Directors may be asked how it came about that the assets of their companies were dissipated. If they answer that they were told it was in the national interest, I doubt whether that will be considered a complete defence to the claims of the shareholders and the creditors. I very much wish this point to be seriously considered by those who draft these Regulations. I do not desire to press this Motion, but I hope that the matter will be reconsidered and that an amending Motion will be introduced, if necessary, to deal with the considerations which I have raised. I beg to ask leave to withdraw the Motion.
§ Motion, by leave, withdrawn.
§ The remaining Orders were read, and postponed.
§ It being after the hour appointed for the Adjournment of the House, Mr. SPEAKER adjourned the House, without Question put, pursuant to the Standing Order.