HC Deb 25 June 1947 vol 439 cc516-25

7.30 p.m.

The Solicitor-General

I beg to move, in page 68, line 22, at the end, to insert: 'employed' means employed as an officer and 'employment' shall be construed accordingly. During the Committee stage, attention was drawn to the fact that the definition of an employed person is not in its correct place alphabetically in Clause 59. This Amendment seeks to take it out of the paragraph which begins with the word "officer," at the bottom of page 69, and to put it definitely in its correct place alphabetically in the list of definitions on page 68.

Amendment agreed to.

The Solicitor-General

I beg to move, in page 69, line 36, after "capital," to insert "and proper provision."

This and the following Amendment— in line 36, to leave out "and obsolescence "—hang together. They are purely consequential on the Amendment to Clause 40 which was considered yesterday.

Colonel Clarke

They may be conseqential, but I think that some comment should be made on them. With regard to the first Amendment—after "capital" to insert "and proper provision "—I agree that that is an' improvement, but it is a matter of opinion as to what the word "proper" means. I cannot help feeling that the Solicitor-General will agree with that. This does call attention to the fact that there is a very real need for some valuation of assets, because this cannot be carried out without some valuation of assets. The Amendment is to insert, after "capital," "and proper provision" and the paragraph reads on: for depreciation and obsolescence." It is impossible to do that unless one knows the value of what one is taking over, which is not known, and the Government, refused to accept our Amendment, which suggested that a valuation should be made in the first two years.

Amendment agreed to.

Further Amendment made: In line 36, to leave out, "and obsolescence."

In line 50, to leave out from "servant," to the end of line 51.— [The Solicitor-General.]

Colonel Clarke

I beg to move, in page 70, line 29, to leave out "stock, debentures and," and to insert "or stock other than."

This is a matter which has been debated before and I do not want to go over old ground, but there is a great difference between hon. Members and right hon. Members on this side of the House and hon. Members and right hon. Members on the other side of the House as to the distinction between ordinary and preference shares and debentures. On the other side of the House, hon. Members are of the opinion that there is virtually no difference between them. On this side, we believe that there is a very great difference. We believe that debentures are really debts and not in any way the same thing as the equity of a company. I cannot understand the difficulty that there seems to be in distinguishing them. It appears to me to be clear that a debenture is a first charge on the assets of the company. If the company is wound up, the first thing that has to be done is to pay off the debenture holders. They have to be paid off, as a rule, in cash according to the terms in the document that created the charge on the company.

During the Debate upstairs the Parliamentary Secretary said: We regard debentures as marketable securities, dealt with and quoted on the Stock Exchange in exactly the same way as other stocks and shares."—[OFFICIAL REPORT, Standing Committee E, 15th May, 1947; c. 1055.] I would agree with him that that is so, as long as the company on which the debentures were raised is still in existence. Then they are marketable, the same as mortgages are marketable, but directly the company on which those debentures were raised or secured goes out of existence, it appears that the debentures are no longer marketable. It seems to me that just as debentures are the first charge to be paid off on liquidation they should be paid off now on nationalisation. The difference between equity shareholders and debenture shareholders is shown by the fact that debenture holders have to have trustees to protect their interests. Again there is the word "foreclosure" associated with debenture holders—suggesting quite a different relationship with the company to that of equity shareholders. From the shareholder's point of view the debenture holder does not think of himself as part of a company in the sense that the equity holder does. He looks on himself as having a charge on the assets. Lastly, I suggest that the prejudice which exists against companies holding their own debentures is' evidence that the two classes of security are quite different. For all those reasons, I want to make this last appeal for debentures and the other stock —preference and ordinary stock—to be treated as something different. I am certain that they are, but the Solicitor-General appears to think that they are exactly on the same basis.

Colonel Crosthwaite-Eyre

I beg to second the Amendment.

We on this side of the House consider for two reasons that the acceptance by the Government of this Amendment is essential. In the first place, while the Clause stands as it is now, one of the fundamental principles of commercial practice will be transgressed by the Government, and the other reason is that this distinction as it stands is unworkable and will lead to endless litigation, to endless questions of interpretation, and will do no good either to the case the Government are trying to make or to the people who have invested in this form of security. The fundamental principle involved is this. Whereas stocks and shares are the holdings of people who are partners in the company, debenture holders are creditors of the company. The two situations are, therefore, entirely distinct and different, and there is no comparison between the shareholder and the debenture holder. One holds a stake in the company and the other is a creditor of the company. We discussed this at some length in Committee, and I do not wish to weary the House again with those arguments. Indeed, they were accepted by the Government; I would only quote the Parliamentary Secretary to the Ministry of Fuel and Power, who stated: I do not think we can possibly contest the fact that, in a formal legal sense there is a distinction between a debenture and an equity share; that is to say, a debenture is a loan from some person, in the formal legal sense to the company, whereas the equity share is part of the ownership of the company."— [OFFICIAL REPORT, Standing Committee E, 20th May, 1947; c. 1059.] That is quite sufficient to show this distinction, and the essential basis on which we again raise this matter. If once the Government say that in any plan of nationalisation they are going to repudiate the debts entered into by a company the whole of their position seems to me to be untenable. In fact, in this Bill the Government have taken great care, except in this one respect, to safeguard the position of the companies' creditors. There- fore, the first question we would ask the Government is, why this distinction? How can they, if they are sincere in what they have done in the rest of the Bill, make this differentiation on this point? For what reason do they say that they will acknowledge all the creditors of the company except the debenture holders— who are equally creditors—and whom they are going to abandon? That question needs very considerable thought by hon. Members opposite. And I hope that whoever is to reply will have something rather more convincing to say than had the Parliamentary Secretary in Committee, because the only statement he made was: We regard debentures as marketable securities…"—[OFFICIAL REPORT, Standing Committee E,15th May, 1947; c 1055.] I think I am right in saying that. I have been through the speeches very carefully, and in. the whole of his rather complicated argument that was the only statement he made. He went on to say, when we tackled him further on this matter that mortgages were acknowledged as debts whereas debentures were not. He said that debentures were marketable securities and mortgages were not. In fact, as every hon. Member of this House knows, that is not true. In a large number of cases mortgages are equally marketable securities. As for instance was mentioned in the Committee, agricultural mortgages are in many cases freely marketable, and, therefore, the first aspect of his case falls to the ground.

7.45 p.m.

I would stress this also to hon. Members opposite. If they will look at the Schedule which sets out the companies whose assets are being taken over and whose debenture holders are being compensated in this way, they will find that 75 per cent. of the companies have no Stock Exchange quotations for their shares. It is, therefore, a safe assumption to say that at least 75 per cent. of the debentures which the Government wish to take over at the moment are not marketable securities in the sense that the Parliamentary Secretary used that phrase. Therefore, either from the point of view of distinguishing between debentures and mortgages, or from the point of view of the actual facts of what he said, neither of his arguments can be substantiated.

I ask the Parliamentary Secretary further, if he is making this distinction between debentures and mortgages, on what basis does he make it? It is a fact that the exact definition of the term "debenture" has baffled the law lords for a considerable time. There are many cases, as the hon. and learned Gentleman opposite knows far better than I do, in which the highest legal authorities in this country have been unable to state exactly what comprises a debenture. I think that will be more easily realised in the light of the fact that in any ordinary deed creating a debenture the term "mortgage" is always used, and a debenture can only be created where, as some part of the deal, a mortgage is created on the assets so as to guarantee that debenture. If that is so, how is it possible to distinguish between a mortgage and a debenture? As far as I can see the only answer we can receive is that where, by accident, the term "debenture" appears in a particular case, it is to be treated as a debenture, but where by accident, the word "mortgage" appears in a particular case, then it, is to be treated as a mortgage. If that is so, the case of the Government again falls to the ground, because they will be saying that a debt in the creation of which one word happens by chance to have been used is to be honoured, whereas a debt in the creation of which another word happens by chance to have been used is to be cast aside.

Will the Solicitor-General tell us very clearly what definition of debenture he proposes to apply? There is none in existence at the moment, and if he intends to leave it as a matter of chance the Government will indeed stand convicted of a gross breach of trust. We on this side of the House have, obviously, an irreconcilable difference of opinion with hon. Members opposite about the principles of this Bill, but there is one thing which we have brought up time and time again during the last three days, and that is that the Government have trampled upon all the established practices of commercial law. [HON. MEMBERS: "Hear, hear."] Hon. Members opposite cheer. They would do well to think before they do so. Nobody is more keen than hon. and right hon. Members opposite to state that the success of this country depends on private enterprise and industrial reconstruction. Every time they disregard one of these fundamental principles, every time they show that they have no regard for that which has been sanctioned by this country over a great many years, they make the alternative of "work or want" which faces this country less of an alternative and more of a certainty that the latter will hold.

On this matter, one of very great importance, one which, as my hon. Friend said, has no political importance, we appeal to the Government to respect tradition. We appeal to them to respect the contracts which have been acknowledged throughout the long period of our commercial history. Above all, we appeal to them not to try to differentiate between two types of debt, identical in nature, in such a way that one type will be paid and the other disregarded. If they do not accept this principle, I cannot see what hope they have of convincing the country of the sincerity of their intentions.

The Solicitor-General

I was not quite able to understand what this particular Amendment had to do with the question of merits as between a planned economy and a planless, chaotic economy. That mystery I shall have to leave locked in the bosom of the hon. and gallant Gentleman the Member for New Forest and Christchurch (Colonel Crosthwaite-Eyre) who advanced the argument, but so far as the Amendment is concerned I would say with the hon. and gallant Gentleman the Member for East Grinstead (Colonel Clarke), that there is not really very much to be added on either side to what has already been said. We take the view, for the purpose of compensation as between Clause 17 and Clause 13 (10) of this Bill, that debentures can fairly be said to come within the category of marketable securities. This has been said already and I simply repeat it.

Colonel Crosthwaite-Eyre

It is quite true.

The Solicitor-General

Looking at it through the eyes of the ordinary person who has money to invest I should have thought that, broadly speaking, he would consider what securities he could purchase in the stock market and would put them on one side, and that on the other side if he were minded to enter into an individual contract of loan to be secured by a mortgage, he would treat that as an entirely different category of investment for his money. After all, one is an individual contract with individual incidence and individual liability as between borrower and the lender; the other, a debenture, is a security which has probably passed through a number of hands.

Colonel Clarke

It may have passed through a number of hands, but the security on which it is based has always been the same. Now it is intended to change that. The security was on a certain company's assets; it is now to be on the Treasury. I do not want to be critical as to which is the more valuable, but the fact remains that the security is to be changed.

The Solicitor-General

There are two kinds of security. One, as I say, is a security of which the terms are set out in an individual contract between the borrower and the lender—the ordinary mortgage. I quite accept the fact that one can purchase mortgages, but there is a limited and not an organised market for that purpose. There is no regularly quoted price for mortgages if one wants to buy them, but with regard to debentures that is not the case. One purchases debentures in the ordinary way on the Stock Exchange, and the prices are quoted, whereas in the case of an ordinary loan, generally speaking the creditor is the person who originally advanced the money, whereas in the majority of cases the person who is for the time being the holder of the debenture is a person who has purchased it from somebody who previously held it, and he has no relationship to the original lender of the money. It would be idle for me to controvert and useless to repeat the well-known differences between an ordinary quoted share and a debenture, but I am not suggesting that they are precisely parallel. In the one case the debenture holder is a creditor, usually with a charge, and in the other case he is a member of the company concerned.

That has been said over and over again in the course of this present discussion, but broadly speaking the practical way of dealing with this point is to ask, "What can you say is a marketable security—a recognised Stock Exchange security—on the one side, and what must you class in a category apart from that as a loan of money pursuant to an individual contract between a borrower and a lender?" The hon. and gallant Member for New Forest and Christchurch said that 75 per cent, of the companies in the Schedule had issued securities which were not quoted on the Stock Exchange. I am told, subject to verification, that 90 per cent. of the values of the securities issued by those companies set out in the Schedule are in fact quoted. Therefore, we are drawing the distinction between a marketable security on the one side and a personal individual debt on the other. I do not think that it would advance the Debate if I went on to repeat the arguments which have already been used, and which the hon. and gallant Member for East Grinstead very kindly ascribed to me, although the eloquence was really attributable to my hon. Friend the Parliamentary Secretary.

Colonel Crosthwaite-Eyre

Before the hon. and learned Gentleman sits down, will he answer one question I put to him? How does he define the differentiation between a debenture and a mortgage?

The Solicitor-General

It is not a definition but it is a term which is clearly understood and which is ordinarily easily distinguishable from the sort of mortgage which is a charge which secures a loan as between an individual borrower and lender.

Mr. J. S. C. Reid

I must say that I am puzzled after hearing this argument because the definition drawn in the Bill —if it is drawn at all—is a distinction between a debenture and a mortgage upon the disposition of a security, whereas the distinction in the hon. and learned Gentleman's argument is between something quoted on the Stock Exchange and something not so quoted. I want Jo ask the hon. and learned Gentleman what is the position of something which, by any test, is quite clearly a debenture but is not quoted on the Stock Exchange. There must be such, and I want to know which class they come into—the class of security or that of debt. It is plain that the hon. and learned Gentleman's argument is directed entirely to those debentures—for all I know they may be 90 per cent. as has been suggested—which are quoted on the Stock Exchange. But supposing there are only 10 per cent. which are not quoted; how are they to be treated? I am not arguing whether they ought to fall in one class or the other; I do not profess to have argued that out, but I am asking a straight question—into which class do the Government propose to put them?

There are a great many persons interested in debentures for comparatively small sums who certainly ought not to be asked to go to lawyers to work out this puzzle. Somebody, for example, who has a debenture for £100, £200 or £300 from a small electricity company ought not to have a legal puzzle put in front of him when he wants to know into which class he is going to fall. He should be told. As I have said, I do not want to argue which class it should be, but to know which class he will in fact fall into under the Bill. I think he will fall into the debenture class, although I think it is intended that he should fall into the debt class. It seems to me that if this definition is to carry out the apparent intention of the Government it ought to be modified now or at a subsequent stage in the Bill. I hope that the hon. and learned Gentleman will tell us that he will modify the definition to bring it into line with the argument he has put forward.

The Solicitor-General

If it comes within the definition of a security, then we have to look back at Clause 17. If the security in question does not come within Subsections (2), (3), (4) or (5), it falls to be valued under Subsection (7). Those that fall within Subsection (2) are those in respect of which there is a Stock Exchange quotation on particular dates.

Amendment negatived.