COMPANIES

HC Deb 28 June 1972 vol 839 cc1563-9

Sir Elwyn Jones (West Ham, South)

I beg to move Amendment No. 471, in page 13, line 37, leave out subsection (1).

We turn to a somewhat esoteric part of the Bill, in that it deals with company law. The Clause is an attempt to bring company law in Great Britain into conformity with Community requirements. It is based on the directive of the Council of 9th March, 1968 on co-ordination of the safeguards which, for the protection of the interests of members and others, are required by Member States of companies or firms within the meaning of the second paragraph of Article 58 of the Treaty with a view to making such safeguards equivalent throughout the Community The most important change in our law which is sought to be achieved by the Clause is to modify the ultra vires doctrine in it. No doubt every right hon. and hon. Member will be fully familiar with the doctrine of ultra vires in company law, although it may be less mother's milk to some of us than to others. As I understand it, a company cannot act as a legal person outside the powers defined in the objects clause of its memorandum. An act which is ultra vires the company is null and void in the same way as an act done by a local authority outside its statutory authority is null and void. If the company concludes a contract which is ultra vires, neither the company nor the other contracting party can sue upon it. It is unenforceable.

[Sir ALFRED BROUGHTONin the Chair]

It is not a problem which arises very often these days, because companies now make the range of objects which they set out in their memorandum cover a multiplicity of activity. The problem undoubtedly arises occasionally, but the view seems to be that although when the registered company was a comparatively new institution the ultra vires doctrine was useful in checking abuses, like an investor in a gold mine finding, as Professor Gower has described, that he was holding shares in a fried fish shop, nowadays its disadvantages outweigh its benefits. I hope that the fried fish shop phenomenon is a thing that nowadays comes rarely in our commercial activity.

In principle we have no objection to modification of the ultra vires rule, if that is done within the context and the ambit of a full restatement of our company law, but that is not the position here. The Clause tries to deal with a small corner of the company law. It is not an important corner. Indeed, I think the problem is somewhat academic now, and I believe that the absence of the Clause would not affect our entry into the Common Market.

Mr. Percy Grieve (Solihull)

If, as I suspect from what the right hon. and learned Gentleman has been saying, he considers that as part of a major reform of the company law the provision would in itself be a desirable reform, what conceivable objection does he see to making it now as part of the change in the law desirable on our adherence to the European Economic Community?

9.45 p.m.

Sir Elwyn Jones

If the hon. and learned Gentleman does me the honour of listening to what I am about to say, he will perhaps understand why I am moving an Amendment to leave out subsection (1) from the Clause. My main objection is that subsection (1) is obscure and ambiguous, as indeed is the directive upon which it is based. The important matter is that a piecemeal change of this kind in a little bit of a very technical part of company law has repercussions, and is liable to have repercussions, over other branches of the law.

When I was Attorney-General I was constantly criticised by my then opposite number for piecemeal changes in the law, particularly in technical matters. It is happening here.

As I recollect from the days of the previous Administration, the Board of Trade was then working hard on a restatement of the company law, on a new Companies Bill. I take it that the sudden break which happens when one Administration succeeds another did not affect the work which was being done on company law. I expect that in the last two years the Department of Trade and Industry has continued that work. Indeed, as I understand it, a new Companies Bill is on the stocks for next Session, assuming that this Administration will still be in existence and will have taken some control over their legislative programme.

There it is. I do not want to be controversial on a theme which is so placid as the companies law, though at this hour a little refreshment is probably a very good thing for us all. I must ask the Minister for Trade why this has been thought necessary. Albeit that in principle it is not a bad thing to make this attempted adjustment to the ultra vires rule, why could we not have waited for a proper Bill to do the matter properly next Session? There is no urgency about this. It would not affect entry into the Common Market. Most of the rest of our company law would not present any difficulty.

I suspect that the Clause is a kind of sop in the Bill to render a little flesh in the naked skeleton with which we have been dealing up to now. It would have been very unattractive to have had a four- page Bill, so the Government have thrown in a little extra dealing with company law to give a convincing air to an otherwise bald and skeletal structure. That may be an explanation, but perhaps I am being a little unkind in putting it in that way.

I have heard from some of my colleagues in the Temple who are expert in this branch of company law that the attempt of subsection (1) to give effect to Article 9 of the Council's directive, which I find somewhat obscure and confusing in itself, is a highly unsatisfactory attempt, because it leaves much that is ambiguous and propounds much that is obscure. They have told me that they believe that the subsection will give rise to a good deal of litigation.

It is curiously thought in the Committee that lawyers regard that as an excellent thing. That is utterly incorrect in practice. What lawyers like are certainty and clarity in the law. There is plenty of litigation about—there is no lack of it—and we do not want to create an easy opportunity for more. Nobody except lawyers in the Committee will believe me when I say these things, but this is in fact the true situation, and it is because we believe that the subsection is neither clear nor certain that we think it ought to go.

The aim of Article 9 of the directive upon which this subsection is based, and which, indeed, the subsection seeks to embody into our law, is to protect the interests of third parties who bona fide enter into legal relations with what are called the "organs" of a corporation when it transpires that those organs have acted ultra vires the memorandum or articles of that corporation.

"Organ" in this context is a continental expression which is never expressly defined in the directive. Some sort of definition of it can perhaps be found in Article 2(1)(d) which says: The appointment, termination of office and names of the persons who either as a body constituted pursuant to law or as members of any such body: (i) are authorised to represent the company in dealings with third parties and in legal proceedings, (ii) take part in the administration, supervision or control of the company. It must appear from the disclosure whether the persons authorised to represent the company may do so alone or must act jointly. It would seem from that language that the organ is the person or group of persons vested with power to bind the corporate body, and to issue and accept the service of writs on its behalf, and/or being concerned, as the Article says in the administration, supervision or control of the corporate body.

It would accordingly seem that "organ" in this context is the office or institution within the corporation vested with power to bind it.

Subsection (1) of this Clause would appear to be ambiguous on its face, because it renders and translates the phrase or concept of "organ" as "the directors". It does not state expressly whether this means the directors individually, or collectively as a board of directors, or both. The phrase in the subsection any transaction decided on by the directors might be taken to imply only the second alternative I have mentioned, namely, any transaction decided on by the board of directors. If that is right—and no doubt the right hon Gentleman will enlighten us upon these matters—the subsection does not cover, for example, the managing director acting individually, even, presumably, where he enjoys very wide powers which can be delegated to him under paragraphs 107 to 109 of Table A in Schedule 1 to the Companies Act.

It has been put to me by practitioners in this field that the Clause should have specified what is in fact intended, whether it be the board of directors, a director, a managing director or whatever the intention of the Government may be. Perhaps we shall have a clue about this in the Minister's reply.

Article 9 of the directive indicates that the abolition of the ultra vires principle is not meant to extend to acts of organs that exceed the powers conferred or permitted to be conferred by law. This applies only to acts the law allows, but the memorandum and/or the articles of association do not. That would seem to be the meaning of the first part of the first paragraph in Article 9 Acts done by the organs of the company shall be binding upon it even if those acts are not within the objects of the company, unless such acts exceed the powers that the law confers or allows to be conferred on those organs. That does not seem to be very clear in the transcription of the idea in subsection (1). Subsection (1) provides that …any transaction decided on by the directors shall be deemed to be one which it is within the capacity of the company to enter into… That seems to be regardless of both the memorandum and articles of association provisions and the general law. It is right, however, that it goes on to say, in relation to such transactions presumably, that the directors …shall be deemed to be free of any limitation under the memorandum or articles of association". It could mean that they are not free of any limitation imposed by the general law. Perhaps this matter may be clarified.

I find difficulty in the language of subsection (1) in speaking of transactions which are within the capacity of the company to enter into. The word "capacity" is such an all-embracing word that it is perhaps difficult to envisage things which a company cannot do. It must, I suppose, be contrasted with things that a company must not do—for instance, enter into an unlawful contract. Transactions a company must not enter into are presumably to be treated as they are treated before the Bill comes into effect and will continue to be unenforceable whether or not the third party is in good faith.

One tentative example of "capacity" which I invite the Committee to consider might be the ownership of a highway qua highway. No company or any other person, as opposed to the public at large, or the Crown, can own a public highway. If it cannot be owned of course it cannot be sold. But what if a fraudulent managing director of a company in this country purports to sell to a foreigner a slice of the M1? I do not know whether there would be any buyer for it, but I suppose if it were offered on terms of telling the foreigner that he could levy tolls on it, then it might seem an attractive proposition.

Mr. Charles Fletcher-Cooke (Darwen)

The more usual example is Brooklyn Bridge.

Sir Elwyn Jones

Brooklyn Bridge is perhaps a more obvious example that might be well known in Amsterdam, Utrecht or wherever it may be.

Major-General Jack d'Avigdor-Goldsmid (Lichfield and Tamworth)

I remind the right hon. and learned Gentleman of the transaction which took place just after the war when an ingenious intelligence officer on Lord Mountbatten's staff conveyed the entire state of Burma to some rather speculative-minded Indians.

Sir Elwyn Jones

I hope that the hon. and gallant Gentleman was there to pre vent the completion of the transaction. Let me be not diverted by too many illustrations—

It being Ten o'clock, The CHAIRMAN left the Chair to report Progress and ask leave to sit again.

Committee report Progress.