§ Again considered in Committee.
§ Question again proposed, That the Amendment be made.
§ Sir Elwyn Jones
I was dealing with the potential sale of a slice of the M1 and the attractive possibilities were raised of the sale of Burma and the Brooklyn Bridge. I was raising the question—I shall be fascinated by the right hon. Gentleman's answer in due course—of a fraudulent managing director of a company in England purporting to a foreigner to sell a slice of the M1, telling him, as I have suggested, that he could levy tolls upon it. If that unfortunate foreigner, attracted by such a dizzy prospect, did not know English law and was behaving in good faith, he could, if the subsection stands, be entitled to obtain damages from the company for his loss of what would be a considerable prospective revenue. Perhaps we shall be told the answer to that interesting question.
§ [Sir ALFRED BROUGHTONin the Chair]
Regarding the question of good faith, I confess that I find myself not greatly assisted by what it means in this context. There is no guidance to anything which might be called a definition. Article 9 seems to contemplate actual knowledge of the memorandum or articles before the party can be shut out and deemed not to be acting in good faith if in those circumstances he still seeks to enforce the ultra vires contract. Article 9 goes on to say
that the third party knew that the act was outside those objects or could not in view of the circumstances be unaware thereof.
That follows these words:
Member States may provide that the company shall not be bound where such acts are outside the objects of the company if it proves that the third party knew that the act was outside those objects…".
For my part I confess I see no great distinction between proof that the third party knew that the act was outside the objects and that the third party could not in view of the circumstances be unaware thereof.
§ Perhaps that is the kind of distinction that lawyers enjoy in drafting this sort of article. Nevertheless, do these words, and does that somewhat opaque reference, cover recklessness by the third party? In principle it should, and perhaps it is intended that recklessness should be covered.
§ But what about mere negligence? Can a third party be deemed and considered to be acting in good faith if he is negligent about entering into the transaction in question? Again, is the test of good faith subjective or objective? Is it to be different for third parties in England as opposed to third parties outside the shores of Great Britain?
§ I do not find these questions easy to answer. I have little doubt that right hon. and hon. Members will have their own questions to ask on this subsection. It does not seem either accurately to reflect Article 9, so far as that is capable of being done, or to leave the state of our law, as I suggested at the beginning of my speech, clear and certain if we make this subsection part of it. For this reason, I submit that not only should the subsection be left out, but, better still, that Clause 9 should be left out, and in 1571 the next Session of Parliament we should deal with this small and somewhat academic point as part of an overall re-statement of our company law.
§ Mr. Fletcher-Cooke
The right hon. and learned Member for West Ham, South (Sir Elwyn Jones) has done his best to find fault with the subsection, but has made very few bricks with very little straw. There is nothing wrong with the subsection, and the right hon. and learned Gentleman knows it.
The subsection is perfectly desirable in itself. Apart from our entry into the Common Market, all lawyers of any experience and all laymen who have come across the law have the view that the ultra vires law is out of date. Indeed, the Cohen Report, as long ago as 1945, said:We consider that, as now applied to companies, the ultra vires doctrine serves no positive purpose but is, on the other hand, a cause of unnecessary prolixity and vexation. We think that every company, whether incorporated before or after the passing of a new Companies Act, should, notwithstanding anything omitted from its memorandum of association, have as regards third parties the same powers as an individual. Existing provisions in memoranda as regards the powers of companies and any like provisions introduced into memoranda in future should operate solely as a contract between a company and its shareholders as to the powers exercisable by the directors.In other words, third parties should not be damnified by any exercise of powers beyond those given in the memoranda.
§ Mr. Brynmor John (Pontypridd)
Would the hon. and learned Gentleman include in his strictures of people who have experience in this sphere the Jenkins Committee, which found no such evidence for the abolition of the ultra vires rule?
§ Mr. Fletcher-Cooke
That is an exaggeration. The Jenkins Committee did not go as far as the Cohen Committee. Jenkins recommended significant modifications of it. I do not wish to get involved in the various Jenkinses involved in this matter. Lord Jenkins, as I think he then was, recommended modifications on the lines of the Clause. It is now generally recognised that the ultra vires doctrine works unfairly against the individual, who is damnified by it in his contracts with a company, and in favour of the company. I should be surprised if, when we come to legislate fully on companies in the next 1572 part of the Bill, the Opposition vote against the abolition of the ultra vires doctrine, because I am sure that will, or should be, included.
The only objection to this provision is that it does not go far enough. To my mind it still gives the company a defence if the managing director, rather than the directors, goes beyond his powers. Since we are now legislating on this matter, it is a pity to stop so short.
It would be absurd for the Opposition to vote against such a marginal matter, which is merely a difference of opinion. Those in favour of the individual and against the corporation should welcome the step that is being taken tonight and any opposition to it is quite absurd.
Some interesting problems are raised by this modest Clause. One must first consider how modest the provision is. It is an attempt—I am sure a successful one—to bring our company law into line with the minima required by the Common Market. It shows how far our company law has already advanced in that it is only in this respect that it is necessary to do so. Common Market law has various requirements relating to disclosure, protection of minority interests, take-over bids and similar matters, all of which are already embodied in our law. I hope they will be developed in the future, but it shows how far we are advanced that we need only this small Amendment to our company law to comply with the requirements of the Community. It is surely a great credit to our company law that, in advance of our future partners in the Community, we have only to make these very small Amendments.
English company law does not fit very easily into Continental concepts. The right hon. and learned Gentleman has rightly referred to the directive in question, It is directive 68/151 of the EEC. which he obviously has read carefully. A great deal of it is in Dutch.
§ Mr. Fletcher-Cooke
It is double Dutch so far as I am concerned. There is one item dealing with the nullity of a company, which is a concept I do not understand. I hope that my right hon. Friend the Minister for Trade will explain 1573 the concept of nullity in this respect. Nullity to my mind smacks more of the Family Division of the High Court than the Companies Court. I hope he will explain how this fits in with the Companies Acts as we know them. We see in Article 12(2) the following:Nullity shall entail the winding-up of a company in the same way as dissolution.Does that refer to marriage or what? What does nullity mean in those circumstances? Perhaps my right hon. and learned Friend the Lord Advocate from his experience of a different system of law will be able to help in the meaning of the word "nullity" in this provision.
I am surprised that so long a time is being taken over this Clause when time is so very short.
§ Mr. Fletcher-Cooke
I do not think there was much co-operation on the question of time. Surely on such a modest desirable and thoroughly inoffensive matter as Clause 9 which is in the interests of the subject both here and abroad this provision should be passed without a Division.
§ 10.15 p.m.
§ Mr. Denzil Davies (Llanelly)
I beg to differ to some extent from the views expressed by the hon. and learned Member for Darwen (Mr. Fletcher-Cooke). I do not think this is such a simple matter as he tries to make out. Clause 9 has emerged, not as a result of any deep study of the situation by the British Government, but as a consequence of Directive 68–151 issued on 9th March, 1968. Article 9, which embodies the directive, apparently purports to abolish the ultra vires rules in relation to the countries of the Six.
Before I embark briefly upon a discussion whether it is right to abolish the rules, perhaps the Minister will answer some questions about the directive. I was under the impression—and the text books I have consulted bear this out—that there was no such thing as ultra vires in the Six. We have been told by academic and professional writers that the doctrine is peculiar to English company law. Indeed, this is one of the reasons adduced for doing away with it. I understood that there was no such thing 1574 as ultra vires in the corporation laws of the Common Market countries long before this directive.
Are the Government sure that Article 9 purports to abolish the ultra vires rule in relation to the original Six? Surely they never had it anyway, so what is the Article about? We are owed an explanation of why, in a bunch of directives relating to freedom of establishment, and not company law, the Commission has brought forward one relating to a legal system which had nothing to do with ultra vires anyway.
Then there is the question of the translation of the directive. The translation of Article 9 refers to the "…Organs of the company…". That phrase is not familiar in English law. Professor Gower, in his book on modern company law, states that the organs of the company are the members in general meeting and the board of directors. But the phrase "organs of the company" is a loose phrase. It has no meaning to an English lawyer, whatever the word "organ" may mean to a French lawyer in French law. The Government owe us an explanation why the directive has been introduced in the first place and, secondly, whether the translation "organs of the company" has any direct and definite meaning in English law.
Does the word "directors" in Clause 9 mean merely the board of directors or does it extend further to an individual director? But assuming for the sake of the debate that the Clause does what the Explanatory Memorandum says it does—seeks to abolish the ultra vires rule which has existed for a long tune in our company law—the onus is still on the Government to show that, as a matter of considered opinion, it is commercially beneficial to the country to change our company law for this purpose.
There is nothing illogical in the ultra vires rule, whatever has been said against it. A company is governed by its constitution, which comprises its memorandum and articles. If a company acts contrary to those, it acts unlawfully. Therefore, it is logical that any act carried out against the memorandum and articles is illegal. Thus, the ultra vires doctrine at least is based on the logical proposition that a company can act only in accordance with its constitution. The change which the Government purport to make 1575 is illogical because it seems to cloak with legality an act which itself is intrinsically illegal and unlawful.
Apart from that, I submit that the reason for the ultra vires rule is that it has sought throughout the years to protect creditors of a company. Through limited liability, the shareholders are protected. Creditors, on the other hand, are protected to some extent by the ultra vires rule. For example, if a bank lends money to a company on the basis of its accounts and profitability in a certain line of business, it knows that if that company embarks on a frolic of its own in another line of business, any other creditor in the new line of business undertaken by the company will not be on the same level in relation to the recovery of debt from the company as the bank which originally lent money to the company for the original purpose under the memorandum and articles.
The doctrine of ultra vires is not as odd or unusual as has been made out. It can be justified on the grounds of logic and also on the grounds of commerciality because it gives protection to the creditor of the company.
§ Mr. Keith Stainton (Sudbury and Woodbridge)
Surely a much more cogent point to be advanced would be the restriction of borrowing powers in the articles of a company.
§ Mr. Davies
I do not think that restriction on borrowing powers comes into this debate. I accept that this may in some circumstances be restrictive upon a company, but on the other hand it is a protection to the creditors of a company so that the company does not over-extend itself at the expense of its original creditors.
May I raise another point about the ultra vires rule, with which I would like the Minister to deal? There was a case involving a daily newspaper, the Daily News Limited. The case I believe was called Parke v. Daily News Limited. It was decided in that case that a company could not give its money or assets away, that it could not, in that case, perform what was a very worthy objective, I should have thought in the circumstances, and make what were in effect redundancy payments to its employees. Basing its 1576 judgment on the ultra vires rule the court said that a company has no power to give away its assets unless the Memorandum and Articles of Association allowed it to do so.
What is the effect of this Clause upon that situation? Does it mean that the case of Parke v. Daily News Limited has been over-ruled? If a company decides to give away its assets, and provided the do nee acts in good faith, does it mean that such a transaction is treated as legal between the company and the recipient of the company's bounty?
We all know that companies like to transfer money to their subsidiaries and that they see nothing wrong in this. If a parent company transfers assets or money to a subsidiary without adequate consideration, or no consideration, this is getting close to a fraud upon its creditors. That kind of transfer is void under present law because of the ultra vires rule, because a company is not entitled to transfer its assets without any consideration for so doing. The question that is posed is: is a parent company entitled to tranfer its assets or money to a subsidiary without any consideration coming from that subsidiary? Is that kind of situation made legal as a result of Clause 9? Does the subsidiary have the right to receive the assets? This is important for the creditor of the parent company because he loses, in effect, his security in relation to those assets.
This matter is not as easy or as simple as the hon. and learned Member for Darwen tried to make out. There are good valid, commercial reasons for the ultra vires rule. As we have heard, the Cohen Committee went one way, the Jenkins Committee the other and the Law Society did not agree with the Jenkins Committee. There has been no legislation in this country seeking to change the ultra vires rule until now. The Government would have been better advised to look at this matter and analyse it in depth and then to come forward with a solution, rather than following Article 9 of the Directive.
§ Sir Derek Walker-Smith (Hertfordshire, East)
On that point about the effect upon the creditor of the company by a transaction between the subsidiary and the holding company, or main company, is the hon. Gentleman certain that that 1577 transaction would come within the wording of Clause 9:In favour of a person dealing with a company in good faith"?Would that include the subsidiary of the company?
§ Mr. Davies
I accept entirely that the word "dealing" is not very clear. The draftsman has not used the word "trading" for instance. He has used a wider word and I should have thought that with a subsidiary receiving money from its parent for the purpose, possibly, of subsidiary trade or dealing with a company in good faith, it would be possible to argue that that kind of transaction would fall within the words of the subsection. My other example of the situation in Parke v. Daily News Limited is, I accept, more difficult. Certainly the words are not clear and the Minister should tell us whether this kind of transaction which in the past has been held to be ultra vires is now to be clothed with the legality which Clause 9(1) seems to confer.
I ask the Minister to explain Article 9 a little further. It is contained in the directives relating to the freedom of establishment. It does not seem to have anything to do with the reform of company law in general. It is merely a convenient directive to enable companies to trade and operate in different countries in the Common Market. One can see that it is convenient that an indigenous company, say, in this country or in France should not be bound by the rule when it was trading in, say, Belgium 1578 or Germany because the recipient of the company's trade in that other country would find it very difficult to discover what were the objects of the company in another country. Therefore, on the basis of expediency, I can see why, in a larger grouping of the Common Market, the Commission would want to make it easier for the person in the foreign country, as it were, to trade with a company which was registered in one country and whose memorandum and articles were located in the indigenous country. From that point of view, one can see some sense in the Article.
But they have tilted the balance in favour of the person who trades with the company in the foreign country at the expense of the creditor of the indigenous country. It has been done not because of any feeling that the ultra vires rule is wrong but purely because of the exigencies of the Common Market sector and because we are involved with a number of countries without company law governing all the companies. Therefore, we are pushed into this situation to try to meet the practical difficulties.
The Government would do well to withdraw the Clause. It would not break the Common Market. As far as I can see, it is not necessary for our entry. They should analyse the problem and set up a commission, if necessary. If commercial opinion is that the ultra vires rule should go, then it should go, but not purely on the basis of a very am biguous directive issued by the Commission.
§ Mr. Grieve
Despite the habitual suavity, in which he always excels, of the speech with which the right hon. and learned Member for West Ham, South (Sir Elwyn Jones) moved the Amendment, I fancy that he was not 100 per cent, behind the arguments which he adduced. To almost everybody who practises in the law the operation of the ultra vires rule vis-à-vis third parties trading with companies has appeared to be an anchronism for a long time. At one time, but not most recently, it has perpetrated a very large number of injustices.
It was common many years ago to find companies taking advantage of the ultra vires rule in their dealings with individuals, partnerships and other companies. One was familiar in defences to claims with the plea that the claim on the company must fail because that which the company had done in its transaction was ultra vires. To that extent, the rule has wrought injustice for many years. It is true that in recent years, because the rule also militated against the efficiency of companies, we have been accustomed to seeing draftsmen who were settling memoranda and articles of association making long lists of the purposes for which the company was setup, so that it was by no means unusual to find that somebody who thought he was investing in a gold mine was taking shares in a fish and chip shop. The right hon. and learned Gentleman warned himself against diverting from the thread of his argument by his interesting and amusing illustrations. But we, too, should warn ourselves against diverting ourselves from the fact that the rule is now anachronistic.
§ 10.30 p.m.
§ Refering to the arguments of the hon. Member for Llanelly (Mr. Denzil Davies) it appears tome—I think that this was the point that my right hon. and learned Friend the Member for Hertfordshire, East (Sir D. Walker-Smith) was making—that this subsection in no way abolishes the ultra vires rule. What it does is to modify it in respect of the transactions between companies and third parties, be they individuals, partnerships or other companies. To that extent, I should have thought that it was an absolutely unexceptionable reform.1580
§ As my hon. and learned Friend the Member for Darwen (Mr. Fletcher-Cooke) reminded the Committee, it is one which a few months ago met with the approval of the Cohen Committee and with qualified approval from the Jenkins Committee. It is one which it is almost certain we should have seen in any future company reform brought before the House of Commons. If it would have been right to have it in a Bill reforming company law in 1973 or 1974, I cannot see why it is wrong to have it in this Bill, which brings about the modifications in English law and Scottish law which are necessary for our adherence to the European Economic Community.
§ If we reject the subsection we shall also be rejecting the opportunity of bringing about a reform which for long, by many practitioners in the law, has been considered eminently desirable. I cannot see the force of the arguments of the right hon. and learned Member for West Ham, South, who suggests that this is piecemeal legislation. It is not piecemeal so far as this Bill is concerned. This is a necessary part of the legal fabric of our adhesion to the Community. At the same time, it anticipates a change in the law which for many years has been considered eminently desirable.
§ During the argument of the hon. Member for Llanelly, I was astonished to hear him speaking from the Opposition benches extolling the virtues of the ultra vires rule as a rule which had existed for a long time. That, I thought, was a consideration which very rarely appealed in itself as a sole reason for maintaining any part of our law to those who sit on the Opposition benches.
§ We are here very much killing two birds with one stone. We are doing that which is necessary to secure our adhesion to the Community. We are also bringing about a desirable reform. I hope very much that the Committee will reject the Amendment.
§ Mr. Elystan Morgan
My right hon. and learned Friend the Member for West Ham, South (Sir Elwyn Jones) and my hon. Friend the Member for Llanelly (Mr. Denzil Davies), with their usual cogency, have deployed very strong arguments to show that the subsection as drafted is riddled with uncertainties. Particular reference has been made to the 1581 uncertainty which enshrouds the position of directors. It is not clearly stated in the subsection that it refers only to directors acting in such capacity. In order to remove every trace of doubt, it would be to the advantage of the subsection, in the opinion of everyone in the Committee, that the words "acting in such capacity" should be added immediately following the word "directors" wherever it appears in the subsection.
We look forward with interest and enthusiasm to the opportunity which the Minister will have for saying that he would have no objection to a manuscript Amendment on those lines being submitted, for it is a simple and mechanical matter and there is no earthly reason why it should be rejected.
I shall with very great deference disagree with my right hon. and learned Friend about the necessity of the ultra vires rule. There are two reasons why the rule should be maintained as a central part of our law relating to corporations. It goes to the very root of the existence of a corporation. The essence of a corporation is that it is a pygmalion, it is an artificial creation. It is an absurdity in law. Although by every logic it is absurd, it is not a natural personality, it is acknowledged by the law within certain limits and these are set out in its memorandum and articles.
It is on that basis that the law has been willing to recognise the limited liability company. In the earliest stage the law construed these rights very strictly because it regarded the limited liability company as being very much on the same basis as the public body. That was in an age when public bodies such as railways and canal companies were encroaching on the liberties of the individual and it was necessary to define their powers within the strictest limits.
The next stage was that the courts took a rather more benign attitude towards private corporate bodies and were willing to acknowledge that they had the power to do anything except and in so far as there was a specific prohibition to the contrary in their articles and memorandum. It is only in the third stage, which has lasted for about 100 years, that we have had the ultra vires rule in its present form. I refer to the judgement of Lord 1582 Cairns in what is a leading case, Ashbury Railway Carriage and Iron Co. v. Riche in 1875. It is contained in Law Reports, 7 House of Lords 653.
After referring to the requirement of the Act—in that case the Companies Act 1862—that the company's object should be stated in its memorandum, he added:if that is the condition on which the corporation is established—if that is the purpose for which the corporation is established—it is a mode of incorporation which contains in it both that which is affirmative and that which is negative. It states affirmatively the ambit and extent of vitality and power which by law are given to the corporation, and it states, if it is necessary so to state, negatively, that nothing shall be done beyond that ambit, and that no attempt shall be made to use the corporate life for any other purpose than that which is so specified.I do not think anyone could put it in a way which is comparable with that because that is a description of the essence of a corporate entity and if once it is said that these main timbers, these walls, these boundaries no longer count for anything at all, then clearly the whole rationale and structure of the corporate being has been completely destroyed.
The second reason is that whenever persons become members of a company they join that company on the basis of certain well-defined rules which exist at the time of their joining. Those limitations and those powers are clearly set out in the memorandum and articles.
Referring in the same case to what was virtually a social contract, which created this community of interest between the member and the company, Lord Cairns said:The covenant, therefore, is not merely that every member will observe the conditions on which the company is established, but that no change shall be made in those conditions; and if there is a covenant that no change shall be made in the objects for which the company is established I apprehend that that includes within it the engagement that no object shall be pursued by the company, or attempted to be attained by the company in practice, except an object which is mentioned in the memorandum of association.Therefore, the destruction of the ultra vires principle means that there is destroyed by the same act, and at the same time, that implied contract which exists between the member of every company and that corporate body.
1583 There has been reference to the Cohen Report, but I do not think the point made by the hon. and learned Member for Darwen (Mr. Fletcher-Cooke) can have been very valid. The Cohen Committee reported in or about 1945. In 1947 we had the most massive and comprehensive codification of the company law we have ever had, and therefore it must be clearly accepted that Parliament specifically rejected that recommendation of the Cohen Committee in the Act which came into force on 1st January, 1948.
§ Mr. Grieve
Is the hon. Gentleman telling the Committee that a proposal to abolish or modify the ultra vires rule was in the Bill and was rejected by the House, or simply that it never arose for the consideration of the House?
§ Mr. Morgan
I am sure the hon. and learned Gentleman knows far better than I that the basis of that legislation was the Cohen Report. It was the fons et origo of the whole legislation. Most of the report is incorporated in the Act. Clearly Parliament applied its mind to this most specific recommendation and rejected it. Therefore, I do not think any argument can be based upon that recommendation of the Cohen Committee.
Reference has already been made to good faith. As my right right hon. and learned Friend has said, this would cover most cases where there had not been a deliberate act on the part of the third party, but it would not of necessity cover every passive case. For example, it would not cover a case of wilful blindness. But the question posed was what would happen if there were gross negligence on the part of the third party.
I give this example. What would happen where it could be shown that in the ordinary course of commercial matters the party concerned would have examined very closely the memorandum and articles, as has happened over the past 100 years, and in the case in question the man involved had failed to do so. Does such gross negligence mean that the third party concerned cannot be regarded by law as acting in good faith?
We have assumed up to now, it seems, that the directors referred to in the subsection are human personalities, but is that of necessity correct? Is it not pos- 1584 sible that a company in itself would be a director? What effect would that have upon the operation of the subsection?
§ [Sir ROBERT GRANT-FERRIS in the Chair]
§ 10.45 p.m.
§ Sir Henry d'Avigdor-Goldsmid (Walsall, South)
I know that there are some debates which are considered to be specially reserved for members of the legal profession. This would appear to be one of them. However, just as there is, I think, an assumption in law that any Indian immigrant who enters these shores with a valid passport is in full possession of the entire contents of the Statute Book, so also there is an assumption here that those hon. Members who find themselves engaged in Committee on the Finance Bill become ipso facto, merely by their election to this place, tax lawyers of the highest degree.
I do not want to keep the Committee long, but I have a theory that an ounce of practice may be worth a pound of precept. We have had rather a dose of precept tonight. I want to say a little about what my own practice has taught me. For more years than I can remember I have been engaged in a banking business. I suppose that the sport of taking money from bankers is one that is highly prized by the citizens of Britain and they indulge in it freely. To my knowledge, the fact that action by a director of a company was ultra vires has never been used by his colleagues or by the company as a reason for their not paying their bills.
I suspect that the ultra vires argument does not go quite as far as the hon. Member for Llanelly (Mr. Denzil Davies) has argued, because I also know, on the issue of ultra vires, that my daughter, when she reached the mature age of 21, became a director of a music publishing company of modest scope which included in its articles of association authority to build a canal. This suggested to me that there is no great protection to the public in recourse to memoranda and articles of association.
Having listened to the debate, I believe that overmuch weight has been put on the opinion of members of the judiciary, no doubt of the highest learning, who sometimes seem to have 1585 delivered these opinions more than 100 years ago. The sooner we transfer ourselves to the latter end of the twentieth century rather than staying in the middle of the nineteenth century the more likely we are to come to a proper conclusion on these matters.
§ Mr. John
Apart from the interesting but slightly irrelevant contribution by the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid)—[HON. MEMBERS: "No."] Those who are now shouting loudest might care to reflect that it is precisely lawyers who will have to interpret the Clause, not the hon. Member for Walsall, South with his breezy good humour. If we find it difficult as lawyers, this is merely anticipating difficulties which the courts will find. We as legislators are supposed to make the task of the courts more easy rather than more difficult.
Apart from that, the main argument adduced by the two hon. and learned Gentlemen who spoke previously was the Irishman's defence to assault—"I did not, and what if I did?" What they are saying is "We are not abolishing the doctrine of ultra vires, but even if we are it is a very worthwhile measure, any way". They should be clear as to whether they are abolishing the doctrine or are not.
The hon. and learned Member for Solihull (Mr. Grieve) said that we are not abolishing the doctrine. I think that the hon. Gentleman is right, because there are at least two elements in the doctrine of ultra vires. The first is a company acting ultra vires in the sense that it acts against its memorandum and articles of association. The other is acting ultra vires in that the company contravenes the Companies Act by so acting.
As I understand the Clause, it still permits of an action for ultra vires if what the company does is against the Companies Act or is in contravention of a proposal of the Companies Act. I am not entirely clear whether that is so and whether, if it is so, it is carrying into effect what are our obligations under Article 9 of EEC Directive No. 68/151. Article 9(1) states: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. 1586 However, Member States may provide that the company shall not be bound where such acts are outside the objects of the company if it proves that the third party knew…".I take it that that is intended to be provided for in Clause 9(1) by a specific reference to the memorandum or articles, otherwise it would have to be put more at large. Therefore, I presume that a Statute outside the Companies Act in Britain still remains ultra vires the company. But, if that is so, we then look at Clause 9(2), and I think that the Minister must be called upon to explain this, because what it says is that the limits on the powers of the company arising under the Statutes or under a decision by the competent bodies may never be relied upon as against third parties even if they have been disclosed.
So what we are saying is that according to this directive our law should be that even if it is disclosed to the third party that the company is acting outside the scope of its articles and memorandum, that should never be relied on by the company against the third party. But that is not what subsection (1) says in its present form. So we have either got it completely wrong in subsection (2), or subsection (1) is not fulfilling the whole of the requirements needed to bring our law into line with the Community law, or it is saying what it is a saying by reference to the Statutes. I do not know whether it says statutes of the company or articles or memorandum of the company or Acts of Parliament, but in any case it is going beyond what Clause 9(1) now lays down.
The Minister must clear up not just subsection (1) but subsection (2), which is a much more difficult and loosely phrased subsection. Like my hon. Friend the Member for Cardigan (Mr. Elystan Morgan), I am not so sure that we can be asserting that the doctrine of ultra vires is as evil as it was made out to be. Certainly, the Cohen Report was unequivocal, but the Jenkins Report of 1962 was by no means so unequivocal, and, as I shall show by some quotations from the Jenkins Report a little later, it came down in many examples as thinking that a profound change in the ultra vires rule would be undesirable for the English law.
At the risk of rousing the ire of the hon. Member for Walsall, South I will quote a case which he will be happy to 1587 know was in this century, and which illustrates the point about the ultra vires rule. It is the case of Cotman v. Brougham, where it is stated:The truth is that the statement of a company's objects in its Memorandum is to serve a double purpose. In the first place it gives protection to subscribers who learn from it the purposes for which their money can be applied. Secondly, it gives protection to persons who deal with the company and who can infer from it the extent of the company's powers.Subsection (1) certainly seeks to protect the third party but it does not, it seems to me, give protection to the shareholder himself. I mention that because there is, as hon. and right hon. Gentlemen will know, a widening gap between the directors and management of a company and the shareholding.
§ Mr. Fletcher-Cooke
This subsection has been much disputed, but one thing it does not do is to alter the contract between the shareholder and the company, and it only affects third parties dealing with the company. I think that that is crystal clear.
§ Mr. John
This is what I am now presuming to argue, and if the hon. and learned Gentleman will let me develop my argument further he will find that it has precisely the same effect, although it is a distinction without a difference.
I argue not that there is too much control in the hands of management—that position is probably irredeemable in current society—but that information is never available to shareholders in the modern company. But it seems to me that if the Clause does anything, it widens that gap and makes it less likely that the necessary knowledge will be available to the shareholder.
The right hon. and learned Gentleman mentioned the question of not affecting the position between the company and its shareholder; but the shareholder will be bound by the act of the directors. That is the whole position. He will be dragged along at the coat tails of the director or directors, and we are not sure whether they are individuals or just parts. The shareholder will be dragged along at the coat tails, and his relationship within the company is affected precisely by the Clause. The right hon. and learned Gentleman, in making this distinction, is making a distinction without a difference.
I come back to the point made by my right hon. and learned Friend about the position and personality of the company, but I make a different point. Because a company is an artificial personality, it gets advantages as was found in Saloman v. Saloman, where 95 per cent. of the shares were owned by one man and the company was found to be a different person from that one man. It gets a different advantage, and that advantage is its liability.
By Clause 9(1), which we are seeking to delete, the company also gets the advantage of individual personality, certainly for its directors, who can now do anything vis-à-vis a third party unless he acts in bad faith—and he is not, incidentally, bound to inquire of the company whether it is acting within its own capacity. If it does that, the company is provided with the advantage of an individual personality so that one has the company getting the advantage, on the one hand, of being an artificial personality and, on the other, of being an individual personality, but getting the disadvantage of neither. That is an unhealthy state of affairs where advantage is conferred in both ways without any disadvantage.
If the individual personality is conferred on a company, we should have some modification of the doctrine of limited liability and the ability to pursue, in certain companies, the directors and their liability into their personal fortunes. But this is not touched in this Clause.
The hon. and learned Member for Solihull asked: Why was there a worry? What was surprising about amending the whole of English company law in one Clause of the European Communities Bill? It is no more unnatural than amending the whole law of divorce in a Factories Act. But this is not a limited measure, but one which covers the doctrine of ultra vires within the totality of the company law of Britain. That is why it is so ill-advised and ill-judged that I cannot help feeling it is another example of the Solicitor-General and those who advise him having their cleverness getting the better of open and frank discussion and amendment of company law.
1589 This is an opportunity to slip into the Bill, for fear it will give us too many loopholes, a measure which should have been produced as a separate Statute. This is a recasting of the whole company law.
In conclusion, I would refer to the Jenkins Committee and the consideration which it gave to the doctrine of ultra vires, since this has been under attack by hon. Gentlemen opposite, who have seemed to castigate that very high-powered Committee—
§ It being Eleven o'clock, The Chairman left the Chair to report Progress and ask leave to sit again, pursuant to the Order of 2nd May.
§ Committee report Progress; to sit again tomorrow.