HC Deb 19 May 1976 vol 911 cc1633-84

10.30 a.m.

Resolved, That if the proceedings on the Companies (No. 2) Bill [Lords] are not completed at this day's sitting the Committee do meet on Wednesday next at half-past Ten o'clock.—[Mr. Clinton Davis.]

The Under-Secretary of State for Trade (Mr. Clinton Davis)

I beg to move, That the Chairman do now report to the House that the Committee recommend that the Companies (No. 2) Bill [Lords] ought to be read a Second time. I do not intend to speak at unnecessary length—at length but not unnecessary length. I do not think that I am required to devote a great deal of time to the technical details of the Bill, because it was considered in detail in another place on Second Reading and then during its Committee and Report stages just a few weeks ago. Furthermore, I remember, also just a few weeks ago, only too well the rebuke directed at me by the hon. Member for Worthing (Mr. Higgins) when we were considering the Second Reading of the Insolvency Bill, when I made the unforgivable assumption that some members on the Committee might not have read the record of the proceedings in their Lordships' House. I must not repeat that error. However, I want to say something about some of the points—mainly of a technical nature—which have given rise to comment during discussions on the Bill so far. But we shall have more time to explore these in Committee.

I do not believe that the Bill can possibly be regarded as politically contentious. It is going through a Second Reading Committee procedure, which gives some indication of that fact. But, since it is largely a technical Bill, it is right that I should say that, if it is felt that the Bill requires some improvement in this technical sense, the Government would be happy to listen carefully to any observations made in that respect and to seek to improve the Bill. We are involved in further discussions with some of the professional organisations, which are designed to achieve that objective, although those that have taken place already have been of a detailed character.

Before I turn to the Bill itself, I think it would be appropriate if I were to outline the Government's approach to the reform of company law as a whole. [HON. MEMBERS: "Hear, hear."] I am delighted that I carry the whole of the Committee with me on that. Hon. Members must not object, therefore, if I take a little time on it.

As hon. Members will be aware, we inherited from our predecessors a Companies Bill which had been introduced shortly before the election in February 1974. While the clauses of that Bill, containing provisions tidying up the administration of companies, were broadly acceptable to all parties, those dealing with fundamental areas of company law, such as the rôle and responsibility of directors, reflected attitudes which the Government felt were no longer in keeping with contemporary developments and requirements.

The basic principles underlying British company law were established more than 100 years ago. At that time the emphasis was entirely on the protection of the providers of capital—the shareholders and creditors. There have been enormous social and economic changes over the past century, but, in the Act of 1948, still in force today, that emphasis remains: the interests of employees and of the wider public are in no way recognised in that Act. Of course, in practice, most companies should take account of their responsibilities towards employees, consumers and the public interest, and many do, but company law does not require them to do so.

Mr. Tim Renton

I am somewhat surprised at what the Under-Secretary has said—that the 1973 Companies Bill did not reflect contemporary attitudes. He will doubtless remember that Clause 53 of that Bill specifically and for the first time laid on the directors the duty to have regard to the interests of the company's employees generally as well as of its members. Surely that was a recognition of the change in contemporary altitudes.

Mr. Davis

There was some recognition of it, but it was wholly inadequate. It still reflected a view which was traditional and not in keeping with modern requirements. The substantial review of worker participation in industry on which we have embarked through the Bullock Committee will substantiate the charge that I have made about the 1973 Bill. I do not expect to carry the hon. Member for Mid-Sussex (Mr. Renton) with me on that, because he is still antediluvian in his thinking, but I hope to carry my hon. Friends with me.

The Companies Act 1967 took a few tentative steps in the direction of acknowledging companies' wider responsibilities by requiring companies to disclose a wider range of information. But this is no longer sufficient. Company law is by now long overdue for fundamental reform and, indeed, for a fundamental change in emphasis. That is why the 1973 Companies Bill—concerned, as I still assert that it was, almost exclusively with the interests of shareholders and creditors —was inadequate. The provision to which the hon. Gentleman referred was in itself insufficient to have regard to the fundamental changes which are required. I am surprised that he should have made that rather glib assertion.

Mr. Renton

I do not know whether the Under-Secretary is trying to stir up controversy on what I thought and hoped would be a non-controversial Bill, but it would be helpful if he could be more specific. I take it from what he is saying that he has not read Clause 53 of the 1973 Bill, or has not read it for a long time. It explicitly provides that the matters to which directors of the company are entitled to have regard, in exercising their powers shall include the interests of the company's employees". That cannot be said in any way to base the duties of directors solely towards shareholders or creditors. It was regarded at the time as a substantial step forward in the drafting of company law, and it is a matter of great regret to us that there is no such provision in this Bill.

The Chairman

It is extremely dangerous to intervene in conflict between hon. Members, but I wonder whether we might spend more time discussing the 1976 Bill than the 1973 Bill. The hon. Gentleman should not be provoked too easily or quickly.

Mr. Davis

I am very much obliged for your intervention, Sir Tom, although I was about to say—and I shall say, if you will permit me—that the 1973 Bill was permissive. The hon. Gentleman has underlined that. "Are entitled to have regard" does not mean that they are required to have regard. That is the essential point. It was a tepid and tentative approach.

Be that as it may, it is abundantly plain that we are in need of fundamental reform. That is the point I was seeking to assert before I unintentionally provoked the hon. Member for Mid-Sussex who has a very low boiling point. It is for this reason that we decided that we would embark, very shortly after coming into office, on a wide-ranging review of the complete area of company law. It was inevitable that a major exercise of this depth would take a considerable amount of time. It is clearly essential that we should not embark upon reforms affecting the basic legal framework, within which the whole of the private sector operates, without the most profound and thorough examination of all the issues.

As I have already said, the manner in which companies are run has changed considerably in recent years. At long last, there is a growing recognition that the contribution made by employees is at least as important as that made by the providers of capital. After all, employees invest their most precious asset —their working lives. By ensuring that employees are fully informed about the company's affairs, by consulting them and by involving them in decision-making, companies can benefit not only employees, but themselves. The Government are committed to a radical extension of industrial democracy in both the public and private sectors because we believe that this is one of the most significant ways in which this country's full potential can be achieved and, indeed that it will represent a buttress to parliamentary democracy.

The first steps have already been taken. The next stage is the introduction of employee representation on company boards. An extension of industrial democracy along these lines must have pro- found implications for company law. It brings into question such basic principles as the responsibilities and duties of directors, the need for wider and more meaningful disclosure of information without which effective participation and consultation can be negated, as indeed can the objectives of companies themselves. It must inevitably lead to major changes in the law and in the way industry is managed.

The task of recommending the best means of bringing about such an extension has, therefore, been given to an independent Committee of Inquiry under the Chairmanship of Lord Bullock. The Committee has been asked to report by the end of this year, and the Government will introduce legislation as soon as possible thereafter. This legislation will impinge on so much of company law that there is only a limited range of matters which it is reasonable to deal with in advance of it.

The other major area, in which the Government could not adopt the views of our predecessors without further study, was the arrangements for supervision of the securities market. The Government have consulted interested organisations in the City and elsewhere and are still considering the views they have expressed. They have not yet come to a final decision as to the extent to which there is a need for tighter statutory control of City activities. Those favouring a self-regulatory system argue its advantages, its flexibility and speed of response. Others argue for some form of independent supervisory authority, perhaps on the lines of the Securities and Exchange Commission in the United States. There are still others, even in the City, who feel that there is room for some new combination of statutory and self-regulatory supervision. Suffice it to say, at this stage, that the Government are concerned about the absence of public accountability in the existing system of supervision and we shall consult fully and consider with care all the options which have been advanced.

More specifically it is now generally agreed that insider dealing should be made a criminal offence. The 1973 Companies Bill attempted to deal with this question, but the Government and a wide body of professional opinion did not consider that the provisions of that Bill were adequate. We have therefore been studying insider dealing, together with warehousing and other abuses arising from the use of nominees. We intend to include methods to deal with these matters in legislation on the securities market.

Since 1973, there have been several developments which need to be taken into account in any major new companies legislation. Recent inspectors' reports have revealed abuses which must be dealt with. One of the most serious problems concerns directors who, by various dubious means, line their own pockets at the expense of the shareholders. We are giving particular attention to measures to prevent such malpractices in the course of our review by company law. Inspectors' reports have also revealed widespread breaches of Section 54 of the Companies Act 1948 which makes it illegal for a company to provide financial assistance for the purchase of its own shares. We accept that the section needs strengthening and that, in particular, the derisory fine of £100 must be increased. Consideration is being given to this.

Similarly, a number of other lessons from inspectors' reports are being studied, and proposals to meet them will be brought forward in due course.

We are involved, too, in the negotiations for harmonisation of company law in the EEC. I do not think it is necessary for me to pursue this further now. It is likely that the House will be given an opportunity in the not too distant future to consider the second, third, fourth, fifth and sixth directives. But, obviously, having just mentioned them, it goes without saying that these are matters which are bound to have considerable effect on companies legislation.

For all these reasons, I see the next few years as being the greatest period of radical reform in company law in the history of this country. [Laughter.] The hon. Member for Mid-Sussex seems to be highly amused by that. Does he not consider that legislation on industrial democracy will have a profound and radical effect on our thinking in company law? Does he not consider that the harmonisation proposals of the EEC will have a radical effect? The hon. Gentleman is entitled to be amused. But I think that the contribution that has been made by the Conservative Party as far as this thinking is concerned has been —I used the word "tentative" before, and I think that is perhaps a modest way to put it.

Mr. Terence Higgins

I think it is not quite as tentative as the Government announcing that they are to make a statement on industrial democracy at 2.30 in the afternoon and failing to make it at

3.30 p.m.

Mr. Davis

The fact is that the Bullock Committee has been set up. The Bullock Committee is hard at work considering evidence from a widespread area of both sides of industry, and we hope that it will be in a position to makes its report by the end of this year. That is significant and important progress, and I would have hoped that the hon. Gentleman would not have approached the matter as pedantically as he has done.

There are, however, a number of urgent matters, mainly of a technical nature, which should not be left until the various other inquiries have been completed. It is these matters, none of which impinges upon the subject matter of those inquiries, with which this Bill is concerned. I do not deny that the aim of the Bill is limited. It is not a major reforming measure. It is, intentionally, only an interim measure dealing with a number of particular problems and abuses which all parties are agreed should be tackled as rapidly as possible.

The provisions have been the subject of intensive consultation and have been widely welcomed as a useful first step towards the improvement of company law.

I turn now from the heights of future policy to the more mundane provisions of the Bill. I should like first to summarise briefly its objectives.

Mr. Tim Renton

Before the hon. Gentleman turns from the heights of future policy, could he tell us about the future course of legislation? Does he envisage that, once the Bullock Committee has reported, there will then be a Green Paper or a White Paper about the shape of the new major Companies Bill that he proposes should be introduced and, if this is the case—and it would seem to be necessary that there must be a Green or a White Paper following the Bullock Committee—does he really believe that he will be able to introduce a major companies Bill in the 1976–77 Session.

Mr. Davis

I think we shall be able to introduce the Bill. It is important that there should be the widest consultation. We have not decided yet whether we shall introduce a Green Paper or a White Paper. We must look at the conclusions of the Bullock Committee first and arrive at a decision about that. I undertake that the Government will provide every reasonable opportunity for full consultation about the provisions of this most important measure. It may be that the publication of the Bill is an option that the Government would choose, so that there might be discussions about the drafting of the terms of the Bill, as has happened to a number of other Bills in Parliament.

I should have thought that the course that we will follow will be as I have outlined. A securities Bill is likely to be a separate measure. As a third measure, I should like to see a traditional Companies Bill embracing a number of the issues that I have mentioned this morning, and dealing with the residue in the light of the substantial changes that will have been brought about primarily as a result of the Bullock Committee's considerations of industrial democracy.

I turn to the provisions of this Bill, perhaps net before time. I want briefly to summarise its objectives. First, we want to tighten up the requirements about the filing of companies' accounts and the keeping of accounting records. The second objective is to strengthen the position of auditors. The third objective is to give the Secretary of State power to prevent a foreign company with a place of business in Great Britain from trading here under a misleading name. Fourthly, the objective of the Bill is to deal with certain other matters concerning Companies House.

This Government, and its predecessor, have been concerned for several years by the failure of very large numbers of companies to file on time their annual returns and the accounts which should accompany them. Out of some 643,000 companies on the register, 186,000 are known to be in default to some degree in filing annual returns. This situation cannot be attributed to any lack of diligence by the Registrar of Companies and his staff, who make strenuous efforts to pursue companies in default. Reminders are currently sent out at a rate of some 10,000 per week and last year summonses were served on 2,440 directors of 989 companies in default. In addition, 28,000 companies were struck off the register in 1975 because they failed to respond to reminders and were presumed to be no longer in business. Despite these efforts, it is virtually impossible for the Registrar to ensure the prompt filing of accounts because of defects in the present law.

There are two main problems. First, the obligation to file accounts arises only after the accounts have been laid before the company. As the Registrar does not know whether accounts have been so laid, he does not know when accounts should have been filed with him. Second, the present provisions allow the latest accounts on file with the Registrar in extreme cases to relate to events over three years old. I think that the Committee would agree that that is quite unacceptable. Public disclosure of accounts is the price which companies are required to pay in exchange for the privilege of limited liability. Those dealing with companies are entitled to up-to-date information about their financial state. This has been the underlying principle of the limited liability concept from the beginning, and the system cannot be regarded as functioning properly if reasonably up-to-date accounts are so often not available.

The Bill will remedy this situation by creating a specific obligation to file a copy of the accounts within a fixed period after the end of the company's accounting reference period, or financial year. In future the Registrar will be notified of each company's accounting reference period and companies will have to file accounts within 10 months of the end of their financial year, in the case of private companies, or within seven months for public companies.

So as to underline the importance of prompt filing of accounts and to provide an incentive to companies and their directors to comply with their obligations, the penalties are substantially increased. Every director who fails to take all reasonable steps to ensure that accounts are filed on time will be liable to a fine of £400 plus £40 for each day of default, and the company will be liable to a civil penalty which will increase with the length of default up to a maximum of £450. Clauses 1 to 8 apply these provisions to companies registered in this country and Clauses 9 to 11 apply similar provisions to foreign companies having a place of business here.

Perhaps I might mention one aspect of the new provisions in a little more detail. Clause 3 provides for the alteration of a company's accounting reference period. The drafting of this clause has been criticised for being unduly restrictive, especially in relation to a company which needed to bring its financial year into line with that of other companies in the same group. We have accepted this view and the clause has now been amended so as to facilitate the alignment of the financial years of a holding company and a subsidiary by permitting the retrospective alteration of a previous accounting reference period for this purpose, and by allowing an extension of a reference period to be made even though this would not normally be permitted as there has already been an extension within the preceding five years. This gives an indication of the fact that we are prepared to listen to representations of this kind which may be made to us and take action upon them.

The new provisions as to the filing of accounts will enable the Registrar to pursue defaulting companies much more promptly and more effectively, but I must tell the Committee that some additional staff will be required to administer these matters. It is estimated that there will be a net increase of about 60 staff at a cost of about £150,000 per year. This increase has been rigorously examined in the light of the need to make cuts in public expenditure and manpower, but we have concluded that prompt disclosure of accounts is of such importance as to justify the staff increase.

As the introduction of the new arrangements will involve a great deal of work for the Registrar and his staff, it cannot be undertaken until next year when the move to Cardiff has been completed. The first stage of the move has already been successfully accomplished, but it will be some months before the new office will be in full operation and the staff concerned will be able to concentrate on the new filing arrangements.

It is, of course, essential that companies should keep adequate records to enable the directors to ascertain the financial position of the company at any time and to show the transactions in which it has engaged. It is from these records that accounts are derived. The unforeseen financial difficulties, which many companies have run into, partly as a result of inadequate internal accounting systems, underline the need for companies to maintain proper records.

Clause 12 of the Bill clarifies and strengthens the requirements as to the keeping of accounting records and provides that such records must be preserved for at least six years. Some doubts have been expressed about whether the wording of the clause makes it clear that accounting records must be kept up to date. That is certainly the Government's intention and we believe that this intention is achieved by the clause. We are considering whether the requirement should be made more explicit.

Clauses 13 to 17 of the Bill are concerned with auditors and in many ways represent the most important feature of the Bill. It is naturally important to ensure not only that accounts are available promptly to shareholders and the public but that they give an accurate picture of the state of the company's affairs. The Bill strengthens the position of the auditors and ensures that they have the necessary rights and powers to carry out their functions effectively in all situations.

Clause 13 deals with the qualifications of those who audit companies' accounts. The normal qualification is membership of one of the four recognised accounting bodies. The 1948 Act also allows the Secretary of State to authorise individuals on the basis of adequate knowledge and experience. The Government consider that it is no longer appropriate that a person should become an auditor without having first passed the stringent examinations set by the recognised professional bodies. In view of the importance of maintaining high professional standards the Bill provides that, one year after Clause 13 comes into effect, no further authorisations shall be granted on the basis of adequate knowledge and experience. The one-year delay will allow a reasonably extended last chance for those seeking authorisation on that basis. At present, auditors are normally reappointed automatically every year. With an appointment of this importance, this is not acceptable. Clause 14, therefore provides that in future auditors will have to be appointed every year by the company at its annual general meeting.

Clauses 15 and 16 are particularly important. They represent a major strengthening of the position of auditors who find evidence of malpractice or may be in dispute with the directors about the propriety of particular transactions. Clause 15 provides that if an auditor resigns at any time, he must make a statement, either setting out any circumstances connected with his resignation, which he considers should be brought to the attention of shareholders and creditors, or stating positively that there are no such circumstances.

It has been suggested that an auditor who does not seek re-appointment at an annual general meeting, or who is voted out of office by the shareholders, should be required to make a similar statement. There is, of course, much less need for a statement in these circumstances, as the auditor will normally have completed his audit and his audit report will disclose whether there is anything wrong. Nevertheless, in principle, we have some sympathy with the suggestion. There are, however, considerable practical problems. It would not be simply a question of applying the procedures in Clause 15. The different circumstances would require different procedures.

For example, Clause 15 is self-enforcing. An auditor can resign only if he makes the required statement. In the case of an auditor whose appointment has expired, it would be necessary to provide some means of enforcing a requirement to make a statement, perhaps a criminal penalty, which has not been widely welcomed by the accountants, or some form of recourse to the civil courts, which may be a more appropriate way of approaching the matter.

Overall, somewhat elaborate provisions would be necessary for what might be considered only a marginal additional safeguard. The Department is discussing this issue with the accounting bodies and we can return to it in Committee. Clause 16 enables an auditor who has resigned to requisition a meeting of the company at which he can explain his reasons for resignation. These provisions will give the strong auditor a very effective threat in the event of a dispute with the directors and should force the weak auditor to face up to his responsibilities. No longer will an auditor be able to avoid a difficult situation by resigning silently. Simply to opt out and keep mum is clearly an unsatisfactory state of affairs for an auditor in that position.

Lastly, Clause 17 assists the auditors of holding companies to reach a properly informed view about the accounts of the holding company, by giving them the right to require the directors and auditors of subsidiaries to supply information about the accounts of those subsidiaries.

Although the Bill was published at a time when the affairs of London and County Securities were receiving considerable Press coverage, its provisions were not drafted specifically to deal with any of the accounting and auditing problems which came to light as a result of that investigation, although they are, of course relevant to several of the problems which arose in that case. The English and Scottish Institutes of Chartered Accountants have set up a committee to investigate the lessons to be learnt and the Government are keeping in close touch with the accounting bodies on this subject.

The provisions which I have described in some detail are the most important in the Bill. The rest I can, I hope, deal with rather more briefly. Clauses 18 to 20 make minor amendments to the law concerning notification to the Registrar of the names of a company's directors and secretary and the whereabouts of its registered office.

These provisions are a little more important than they at first appear. At present many companies, in particular "shelf" companies, fail to comply with the requirement to notify the Registrar of the names of their directors and the location of their registered office. In consequence there is no responsible person whom the Registrar can contact if, for example, the company fails subsequently to meet its obligations under the Companies Acts.

Clauses 18 and 20 are intended to prevent this situation occurring by providing that a company shall deliver to the Registrar a statement of the first directors and secretary of the company and the address of its registered office when it applies for incorporation. Clause 19 deals with the all too common abuse of appointing somebody as a director or secretary without obtaining his agreement or even letting him know. Perhaps some Committees are sometimes subjected to the same sort of procedure. In future a signed agreement to act as director or secretary will have to be contained in any notice of appointment given to the Registrar.

Clause 21 provides that a person who has, through persistent default, demonstrated his complete disregard for the law may be disqualified by the court from acting as a director or taking part in the management of a company for a period of up to five years. This supplements the existing disqualification provisions in the 1948 Act, which are rarely used, and those proposed in the Insolvency Bill, which a Standing Committee has been considering and will consider again after one or two weeks. This will provide a valuable additional sanction against those who regularly fail to file their accounts. It has been suggested that there should be a public register of all disqualified persons. I am not sure whether it was the hon. Member for Worthing who made that suggestion or one of his hon. Friends. We are considering this possibility and I hope to propose an appropriate amendment at the Committee stage.

Mr. Higgins

On this Bill?

Mr. Davis

On this Bill. Clauses 22 and 23 enable the Secretary of State to prevent a foreign company, which has a place of business in this country, from doing business here under a name which he considers to be undesirable. Although the names of British companies are at present subject to control, there is nothing to prevent a foreign company using any name it likes. This can sometimes seriously mislead those dealing with it. The worst examples have been small foreign companies which, by trading under grandiose names, have suggested that they are reputable banks when in fact they are not. For example, the Grand Central Bank of Ruritania may have its head office in a side street, perhaps off Mare Street, Hackney. I have not noticed it, but it might be there. The world does turn around Hackney. I want the Committee to know that. The clause will enable us to deal with this sort of abuse—I hope effectively.

Clauses 24 to 26 deal with minor administrative matters affecting the work of Companies House, and Clause 27 widens the Secretary of State's powers to prescribe by regulation the fees to be paid to the Registrar. The clause makes two changes: first, it enables the Registrar to charge a fee for services not statutorily prescribed but which he provides as a convenience to users, and second, it removes the existing limits on the fees payable for the inspection of documents kept by the Registrar. The latter fees were fixed at a maximum of the equivalent of 5p in 1844 and have never been raised. I hope that even the hon. Member for Mid-Sussex might consider that clearly the time has come to review them. Any new fees or increases in existing fees will, however, be subject to affirmative resolution. The remaining clauses deal with supplementary matters which I do not think I need go into.

To conclude, I repeat that, although it may appear to be a purely technical Bill, the Bill makes significant improvements in a number of important areas. The provisions have been welcomed by all those whom we have consulted. Detailed comments have been made by a number of interested organisations, in particular the accountancy bodies and the Law Society. As a result of that, as I have already indicated to the Committee, I shall propose amendments in Committee to meet some of their points.

I believe that the Bill represents a long overdue measure of reform and I commend it to the Committee.

11.10 a.m.

Mr. Terence Higgins

The Second Reading of a Bill is an occasion for discussing the principle on which it is based. That presents a problem in this case, as is clear from the speech of the Under-Secretary a few moments ago. The first part of his speech was devoted to a general discussion of the reform of company law with virtually no reference to this Bill, and the second to a detailed analysis of the clauses. The fact is that we have a Bill which is in effect a Committee stage Bill but without a Second Reading, because it is a rather odd assortment of a number of clauses on particular points which seem to have been selected on a rather arbitrary basis.

The Under-Secretary referred to the Insolvency Bill, which I think it would not be unfair to describe as being "in limbo" while further consideration is, quite rightly, given to it. Obviously that Bill and this Bill will require consideration together, and we have something of a timing problem. There might be a case for having the Second Reading after the recess and then moving fairly rapidly to the Committee stage because, as I think is now entirely accepted by the Government, it would be wrong to run both the Committee stage of this Bill and the Committee stage of the Insolvency Bill in the same weeks.

That having been said, I think we can give a general welcome to the provisions of this Bill. My hon. Friend the Member for Mid-Sussex (Mr. Renton), if he is fortunate enough to catch your eye, Sir Tom, will have more detailed points to raise on some of the content of the Bill.

I should like to follow the Under-Secretary in making some general comments on the situation as we see it as regards the reform of company law. The problem for the Under-Secretary is that he keeps introducing "non-controversial" Bills which immediately turn out to be far more controversial than either he, or, I must confess, I had expected. He was to some extent, I thought, stirring up matters this morning when in his reference to the Bullock Committee he said that our attitude on this question of employee participation had been tentative. He even prompted me to make an intervention, which I thought was a fair one in the circumstances, that it was scarcely as tentative as the Secretary of State for Trade putting up on the annunciator that he would make a statement at half-past three and then failing to do so because, quite clearly, there had been such a tentative approach by the Government that the whole matter had to be delayed for some weeks while ministerial colleagues sorted out what was to be said on the subject.

The matters being considered by Bullock are extremely complex and extremely controversial, and there is no doubt that there is very considerable disagreement on them among Members of the House. So we welcome the fact that the report is to be given careful consideration. However, I doubt whether that is a reason for justifying the dropping or delaying of a number of measures which appeared in the previous Government's 1973 Bill.

You have suggested, Sir Tom, that we should concentrate on this Bill rather than on that Bill. It may be that at the end of the day there is no great difference between them, because we might wish to consider some new clauses in the 1973 Bill which we feel ought to be added to this Bill. That is a matter for the later Committee and Report stages if the Bill obtains a Second Reading this morning.

We recognise that there are large areas of company law to be considered; employee participation and Bullock is one. I suspect that the Under-Secretary did not mention it because he may be assuming that no legislation will be required, but there may be another area concerned with inflation accounting. I think that perhaps in the end we will find we need some legislation on that.

There are various other matters to which the Under-Secretary referred regarding the financial structure of corn-panics. My own feeling is that the right course of action is to have a series of separate Bills dealing with each matter, drafted with the intention of eventually interlocking and being consolidated in a single measure. But I do not think that it is possible for the House to consider the whole lot in one Bill, because I do not think we would ever get it through in the course of the normal parliamentary timetable between the beginning of the parliamentary Session and its end. It would be too big to deal with. I think therefore that it is right and proper that there should be a series of separate Bills. What worries me is that the Government appear to be delaying action on a number of matters on the grounds that they will subsequently be introducing legislation on, say, the Bullock questions, when delay is really not necessary, provided that the Bill is originally drafted in a form which will enable it to be interlocked. After all, any Bill consists of a number of clauses, and how they are split up—providing that they are all drafted with the ultimate consolidation question in mind—is to some extent arbitrary.

The Under-Secretary said that the part of the memorandum dealing with the financial and manpower implications reads: Overall, when fully in force, the Bill is expected to result in a net increase in staff of about 60 at a cost of approximately £150,000 a year. That provides an interesting comparison with the financial and manpower implications of the 1973 Bill: The Bill will result in a temporary increase in staff of about 55 at a maximum of approximately £100,000 a year. It is some indication of the inflation in Civil Service salaries in that period that apparently an extra five men will cost another £50,000. In the 1973 Bill it was ultimately expected to have no net increase in manpower, whereas in this Bill it is expected that there will be a permanent increase in manpower. The savings in the 1973 Bill will not be implemented for some time.

I turn to two points which were in the 1973 Bill and which the Government have omitted from this Bill, but which I understand the Government intend to include in their ultimate proposals for company law reform. I do not at the moment understand why the Government feel that they cannot introduce in this Bill measures to deal with insider trading. That would not in any way be incompatible with any proposals that may emerge or any legislation which will eventually be drafted as a result of the Bullock Committee report or based on Sandilands or anything else.

Mr. Clinton Davis

This is one of the things that we should want to have included in the securities legislation. I thought that I had made that clear. Before I sit down, I ask the hon. Gentleman to address his mind to one other matter. He has commented on what could be included in this Bill and extrapolated from the 1973 Bill. Does that include the provisions for disclosure?

Mr. Higgins

No. There are a number of questions on which it is right to look carefully at what is proposed. The Under-Secretary will know that that question is one on which there is a difference of view as to at what stage and in what form these measures should be introduced. I do not understand why he feels it essential that measures to deal with insider trading should not be included in this Bill rather than the subsequent securities Bill. If the drafting is sensible there is no reason why that should not form another part of the ultimate jigsaw. All it means is that a particular segment of the jigsaw is protruding and will eventually interlock with the latter Bill. But he has not really convinced me of that.

The Opposition are concerned about these matters. The expression "the unacceptable face of capitalism" was, after all, coined on this side of the House, albeit somewhat controversially, and there are certain matters on which it seems to us that one could improve the existing legislation without delay. I hope that the Minister will give careful consideration to that. It need not wreck any subsequent securities Bill which he has in mind.

Clauses 12 to 17 of the 1973 Bill provided a basis, though the Under-Secretary might like to modify it somewhat, for dealing with that problem. The problem of warehousing, dealt with in Clause 18 of the 1973 Bill, is more difficult and may require further consideration. We should have to look at that. But although the economic environment has changed since 1973—we can certainly agree on that—we are, after all, legislating for all phases of the economic cycle both up and down. I should have thought that the insider dealing points were relevant in both stages of the cycle. and I hope we can persuade the Government to take action on this matter without waiting a considerable time before dealing with the problem.

That having been said, I want to make one or two more specific points on the matters which have been raised by the Under-Secretary. The first point—and I think that my hon. Friend the Member for Mid-Sussex may wish to enlarge on this in greater detail—is the question of small companies. There has been a tendency, in drafting this measure, to ignore too much the difficulties faced by small companies. In particular, and at the risk of being pedantic—though it is not unimportant to the individual small company—there is the question in subsections (1), (4) and (6) of Clause 1 whether the accounts have to be printed, and, if so, to whom those printed accounts shall be given.

For a small company printing may be quite an expensive process. It seems an odd piece of drafting that the Government should have insisted that these accounts should be printed, when so many other cheaper methods of reproducing perfectly legible accounts are now available. Whether it is at the instigation of the printers' union I am not entirely certain, but it seems to be an unnecessary restriction which could be a problem for small companies. It could put up their costs. There are a number of points which need to be considered in the light of the position of small companies, and we shall hope to return to those in the course of the Committee stage.

The other point relates to the delay in filing accounts. I find myself in sympathy with what the Under-Secretary said. He quoted a figure of 186,000 firms in default on their accounts last year. I know only too well, because I tried to chase it up when I was in the Treasury, the very real mechanical problem there is in contacting people. Their addresses change; they are never available, and so on. There is a case for tightening this up as much as we can.

Perhaps we ought to consider whether there is a case for some abbreviated form of accounts, if the company has been completely moribund for a year, and perhaps no transactions have taken place within that period. I should have thought that some statement to that effect might be a way of speeding up the companies' own reaction to the duties laid upon them. I should like to consider that at a later stage.

The other point concerns the penalties which appear in Clause 4. Again, particularly in the context of small companies, which may have difficulties in producing accounts for various reasons, the penalties seem to be heavy.

Mr. Clinton Davis

They are maxima.

Mr. Higgins

They may be maxima, but £400 and £40 per day is a hefty penalty. Although they are the maximum, perhaps we should consider whether they should be varied a little, to take into consideration whether the company concerned has a vast staff doing nothing else but preparing these accounts, or only two or three individuals who obviously have problems, particularly if sickness arises.

.The other main points about which we need to be concerned are the auditors' qualifications. I am worried about what the Under-Secretary said on that. It would appear that the Bill, as drafted, is restrictive on those who can now become auditors. We understand the reason for that, but I have received representations from members of the British Association of Accountants and Auditors, who, apparently, are not to be included in this. We shall need to look at that point with some care. The report of the inspector in the case of the London and Counties Securities Group, this massive document which I have here, is extremely relevant to many of the points which have been raised.

What worried me was that the Under-Secretary said that the accountancy bodies would set up a committee to look into this, and obviously there are a number of lessons to be learned. They almost jump out from the printed page of this massive document. Are these Committees expected to report before consideration of the Bill is completed? It would seem an odd situation if the Minister were to say that this whole thing is tremendously urgent and that we must make speedy progress. I understand that this may be so with auditors.

There are other lessons to be learned from the London and Counties Securities Group report, but those lessons are not to be spelled out by the accountancy bodies, if they are undertaking that study, until after this legislation is enacted. That is surely a very stupid arrangement. We should either wait until we have the comments of the experts on all those bodies, or we should make arrangements for their views to be known before the Bill becomes an Act. The Minister does not seem to have considered this, but I do not think that we can let the matter rest there.

As has been spelled out, for example, in an article by Mr. Kenneth Fleet in the Daily Telegraph on 4th February 1976 headed "A true and fair view of Caplan's auditors?", a number of very serious questions arise in the case of this report as far as auditors are concerned, which ought to be taken into account in this legislation. Otherwise we shall simply not learn from the most recent and relevant case which appears to exist. Clearly, we shall wish to go into this at a later stage.

Another point I should like to make concerns the question of resignation, and the definition of what constitutes resignation. The Minister did something to clarify this position, but it seems a little curious that apparently an auditor does not actually resign in present circumstances unless he specifically gives notice of his intention to do so; otherwise he continues on from year to year. I think that, on balance, the measures which the Government now propose on this are very much to be welcomed.

However, in the light of the London and Counties question, there arises the definition of who is actually the auditor. One of the persons concerned in carrying out the audit, as I understand it, resigned. But I presume that he was not the auditor as far as the actual proceedings were concerned. Therefore, I am not sure that we should not consider—there may be strong arguments the other way—whether something ought to he done about that. At all events, I think the proposed changes are an improvement, but I am not clear whether they will cover all the points which recent experience has suggested ought to be covered.

The final point I should like to make is on the question of the future legislation, particularly the position in Europe. Perhaps my hon. Friend who sits in the European Parliament might wish to comment on that.

The Minister said that the questions of the second, third, fourth and fifth directives were likely to be debated—I think he said soon. I hope that when his hon. Friend comes to reply he will be a little more explicit about that. I realise that it is a matter for the Leader of the House, but are we to understand that he expects that there will be a debate within the next few weeks, or before we rise for the Summer Recess? It would be helpful to us in carrying out consultations if he could make the Government's initial intentions clear.

Important questions arise on the classification of companies, and these might well arise in the course of debate on the Bill. I think it is very important, when we come to consider the major reforms, that this should be done in the form of a Green Paper. I believe the Green Paper approach has a tremendous amount to recommend it. When the previous Government introduced value added tax, for example, and a number of other measures, the advantage of carrying out the Green Paper consultation was very great. The disadvantages of not doing so are amply demonstrated by the capital transfer tax introduced with absolutely no consultation or Green Paper approach whatsover.

Mr. Clinton Davis

Like the Industrial Relations Act.

Mr. Higgins

On the contrary, we published one before the Election. One cannot publish a Green Paper in opposition, except nominally.

As to the company law side and the Department of Trade, the case for a Green Paper approach is every bit as strong as in the case of Treasury matters. I hope, therefore, that we may have a clear statement from the Minister before the end of the Committee and Report stages that it is the Government's intention, when they receive these various reports which will affect their overall review, to publish them as a Green Paper before introducing legislation.

We note the point he makes about the possibility of introducing the Bill for Second Reading. I do not know that that is exactly the right approach. Perhaps I might commend to him the procedure which we adopted on some of the previous Government's Finance Bill proposals of publishing in a Green Paper the proposed clauses as a draft. It would be clumsy to do what I understood him to be suggesting—namely, to publish the Bill as such, give it a Second Reading and then try to reconsider it. It gets too set at that point. At that stage one is lumbered with it and one loses face if it is withdrawn. To do what we did, to publish in the Green Paper the draft clauses showing what we had in mind but without commitment and without the danger of losing face if they were subsequently changed, is the most sensible approach to the long-term review to which the Minister referred.

Obviously this is a temporary measure. Our main concern is that, on the one hand, it may not include things which could at this stage quite sensibly be included and that, on the other hand, it may to some extent be premature, because the views on the lessons to be learned from recent events, particularly in auditing matters, have not yet become available.

In general, we would not wish to oppose the Bill. It is, on the whole, for reasons which I have outlined, non-controversial. If it turns out to be as "non-controversial" as the Insolvency Bill, we shall be in trouble, but I hope that that will not be the case and that we shall make progress. I certainly do not wish to oppose its passage this morning.

11.31 a.m.

Mr. Ben Ford

I well remember discussing these matters on the Second Reading of the 1973 Bill and I was very interested to hear my hon. Friend refer to industrial democracy legislation, the implementation of which may have some effect on company legislation in this country. During the passage of the 1973 Bill—I am sorry to refer to it again and hope that it will be for the last time—I was prepared to submit a series of amendments on these matters, but I note that we are awaiting the report of Bullock and also a larger review of company legislation, so I am content to leave the matter in that setting.

I was interested to hear my hon. Friend refer to the large number of companies which failed to file their accounts on time. It seems to me that, apart from anything else, one of the major factors in this is the shortage of accountancy capacity in this country. I know from experience that it is often extremely difficult to find practising and properly qualified accountants, at any sort of notice almost, to carry out audits on time. It provides real difficulties for those companies involved, and particularly for smaller companies, because large companies can afford to employ internal auditors, who considerably assist the external auditors.

I believe that the position might well be helped by the recognition of a professional body under Section 161 of the 1948 Act, an application under which is before the Secretary of State. This was also discussed in 1967 and in 1973. The application has been outstanding for over 20 years, and I believe that the association concerned has made exceptional efforts to meet the criteria of the Department, which have been changed from time to time. I am satisfied that those criteria are now met. All I want to say now is that I hope that my hon. Friend will give careful and personal consideration to the application before the Department.

As it is proposed to withdraw the opportunity of qualifying according to adequate knowledge and experience on an individual basis, it seems to me more necessary than ever that the Secretary of State should be seen to be giving proper and exhaustive consideration to any applications for recognition by professional bodies which might come before him. I believe that, as a complementary provision to the withdrawal of individual authorisation, the Department should consider giving a quid pro quo providing for an appeal procedure should the Secretary of State refuse an application for recognition by a professional body, possibly an appeal to the Privy Council.

I should be quite happy to discuss a suitable amendment with my hon. Friend if he considered that that was a reasonable proposition. In fact, I could offer him a draft as a basis for discussion in Committee. It is unsatisfactory that in these days the Department should be both judge and jury in these matters. Therefore, I urge my hon. Friend to give due consideration to my remarks.

11.36 a.m.

Sir Brandon Rhys Williams

As the Committee will soon detect, I am in the process of losing my voice, but, in any event, I should have wished to speak briefly if only to explain why I intend to vote against the Bill.

It seems to me that the Department, while waiting for Bullock, is unable to move. It seems paralysed with fright by the subject of company law, performing a miracle of indecision. The Bill fails to rise to the well-established needs in areas which have nothing to do with the terms of reference of the Bullock Committee. Apart from the very important questions of workers' rights and representation, there is an urgent need for more effective supervision, particularly of companies which are too large for shareholders to watch at close quarters but which are outside the regular supervision of the investing institutions, the Press and the Government. At this juncture a Government Bill dealing with accounting practice and the appointment and responsibilities of the auditors ought not be a purely routine and insignificant measure. The Bill represents an opportunity wasted.

The British joint stock company is the most fruitful invention for combining human and material resources for the creation of wealth, but the version of the joint stock company which is standard in this country can often be a very sick organism. There is all too much evidence of that in the newspapers every week. The British joint stock company needs a built-in corrective mechanism, which our present company law does not provide.

We need not think in terms of a great leap forward in company law reform. A Bill as short as this one could well have made useful advances in the direction of improving the supervisory forces going beyond the audit but not as far as the appointment of inspectors.

The question of limited liability and its significance and what followed from it was touched on by the Minister in his opening remarks. What flowed from it in the nineteeth century was the practice of the audit, which has been brought to a fine pitch of efficiency in this country. On the Continent, for all sorts of reasons, the idea of the audit did not develop in the same way as it did in this country. Instead, particularly in Germany, over the last 100 years there has been the development of the supervisory board, whose functions, to a great extent, embrace the functions of British auditors but go far wider. We have seen since the war the notable leap forward in German company practice that the supervisory board includes representatives of the employees, who are recognised as stakeholders in the company just as much as the shareholders.

That is the direction in which, quite rightly, British company law is now tardily moving. One regrets that the change has taken so long. Though two-tier boards on the Dutch model or one of the continental models may be the logical solution to the major problems of the British Company, though we are now learning much from the writings of the Commission and of continental thinkers on company law reform, we cannot contemplate such a sudden move in one Act of Parliament. We must build on what we have and take our time, even though we can clearly see the direction in which we are heading. If we are to build on what we have, we must build on the practice of the audit. In this country it is now highly professional and skilful and is carried out with exemplary integrity.

The public has learnt to rely fully on the integrity and competence of the auditors, and the very rare occasions when they fall down become headline news. However the practice of the audit has two major deficiencies. First, it concerns only the past. It is an historic investigation. Secondly, it is too narrow in scope to exercise an effective supervisory function over top management's efficiency and integrity. The responsibility of management to the employees is totally outside the scope of the audit.

The Bill contains many necessary—perhaps urgently necessary—measures, and I would not wish to oppose their becoming law as quickly as possible. However, it seems to me that the Bill makes two mistakes. First, it enshrines the historic principle where the audit is concerned—that is the point of Clause 12, but it is present throughout the Bill—and, secondly, it lays down restrictions on the qualifications of the auditors which, though possibly justified in the professional practice of traditional accountancy, show that the Government are making no moves to widen the scope of the audit. This is a serious lapse.

I was eager to be a member of this Committee mainly because I have introduced a series of Bills on company law reform in each Session since 1969, the object being to strengthen the non-executive directors and lead them to carry out more effective supervisory functions. The same result could also be achieved by adopting the practice of appointing non-executive directors to an audit committee, as I believe is increasingly standard practice in North America, and by giving it specific responsibilities to supplement and extend the audit function.

I would like to see in the Bill some move in that direction, or at any rate to hear the Department's views on this idea. To serve the audit panel, the company must be prepared to provide to the non-executive directors who serve on it the information and estimates to enable them to satisfy themselves about the company's continuing profitability and its ability to pay its debts as they fall due. In other words, statutory company data should look to the future, not only to the past. The Bill could easily have made such provision for widening the scope of the audit, thereby strengthening the forces able to exercise the supervision of top-level management. In so doing, it would not have cut across the line of direction of the Bullock Committee. I think that the Minister nodded assent when my hon. Friend suggested that we could not reform the whole body of company law in one Bill, but that we should need a series of Bills. The Bill could have been the first of such a series and a notable and useful step forward. As it stands, the Bill falls below the crying needs of the moment. I shall vote against its Second Reading in an effort to bring the Department to a sense of its responsibility or, at least, to gain a hearing for some minor but useful and significant amendments at Committee stage.

11.44 a.m.

Mr. Brian Sedgemore

When I arrived at the House at five minutes past 10 this morning, I had no idea what the Companies (No. 2) Bill was about. I did not know its Long Title, let alone any of its clauses. I assumed that I was coming to an uncontentious Committee which would soothe the nerves—a substitute for gardening or home decorating. My surprise and delight, when I saw what the Bill was about and when I heard the Minister introduce it in that contentious and pleasingly aggressive fashion of his, may be imagined.

I am disappointed that the Bill does not go wider. The joint stock company may or may not have been a fine invention in its day, but its day is past. It was set up to bring together the concepts of ownership and control. The link between ownership and control has long since broken in most private companies because of the managerial revolution, which itself, however, is now seen to have been inadequate for the control of a modern company. The managerial revo- lution is on the way out and we must now create democratic industrial organisations. Instead of managerial control, perhaps we shall hear more about worker' control in the future, although the phrase is much misunderstood and disliked.

I was delighted when the Minister said that the subjects of warehousing and insider dealing will be dealt with, because these are major issues which affect not only small companies but large companies and significant figures. It has been said that unless one has been heavily involved in insider dealing, one will not these days be promoted to the House of Lords. Insider dealing is a concept which the Chancellor of the Exchequer must have had in mind when he spoke about men in the City "fainting with greed". It is a pity that there were not more criticisms of insider dealing from the City, the CBI and the Conservative Party, as it is well known that it has been a main feature of our speculative industrial and commercial life for many years.

I shall say a few words and ask the Minister a few questions about the measures in the Bill, because we may have to insert several amendments in the coming months. First, although it is easy to talk about increasing penalties, the Minister almost gives the game away. He states that 186,000 companies are not keeping to the law as it stands. In which other branch of British public life are the directors of 186,000 companies committing criminal acts and going unscathed?

We will not bring companies into line merely by increasing penalties. There must by a better enforcement procedure. The Minister should say much more about that enforcement procedure. I have been writing to him about a particular company over the matters at the heart of the Bill. The company— Chrysler—has been given mililons of pounds of public money. I have written to the Miunister about one of its overseas marketing subsidiaries—Chrysler International SA. I wished to ascertain if we can find out whether Chrysler is indulging in transfer pricing. There is plenty of prima facie evidence, but we cannot pin the company down without details of the company's subsidiaries and the subsidiaries of the main subsidiaries. Chrysler International SA has an office at Bowater House and is obliged to file certain returns at Companies House, but it failed to do so in each year from 1969 to 1974. It did not comply with the law in each and every year from 1969 until 14th September 1975. It only complied with the law then because pressure was being brought by people outside and by people like myself.

Until Chrysler International SA cares to comply with the law and file the accounts in a proper form we cannot find out whether the overseas marketing subsidiaries are making considerable profits and whether those profits are being siphoned off from this country to its headquarters in Switzerland. This is a classic example of the kind of problem we want to solve with this Bill. I do not believe that there has been nearly enough "clout" on the part of the Registrar of Companies over these issues.

What has happened on this issue is that the Ministers and the Registrar of Companies have woken up to the fact that the law is being broken. Chrysler International SA, despite the fact that up to £162 million of public money has been guaranteed or given in loan to the company, is now trying to claim exemption and is looking at ancient legal Acts and trying not to file the accounts of these subsidiaries, despite the fact that public money is being poured in to save not only the British company but the Chrysler Corporation itself. As the Minister knows, this needs looking into. There is a serious need to adopt a far more stringent and rigid approach to the whole question of filing returns.

There is one other point I want to make concerning the question of auditors. It has concerned me for some time. I make it in relation to two specific examples. The first concerns the collapse of the secondary banks with mellifluous names such as London and Counties Securities, Moorgate Mercantile, Western Credit, Cannon Street Investments and Keyser Ullman Limited. The names lick easily and comfortably round the tongue. What did we see in relation to the secondary banks? On 30th November 1973 London and Counties went bust and subsequently about 30 banks fell into various degrees of difficulty and had to be bailed out in a rescue operation brought about, clearly, by the Deputy Governor of the Bank of England, Sir Jasper Hollom. What is serious about that systematic collapse of secondary banks is that any auditor looking at the books of most of those companies could not apparently understand the balance sheet or the asset structure of a bank and the implications of the ludicrous asset structures which those secondary banks had built up. Either these men of integrity could not do that, or they were behaving in a wholly irresponsible fashion. I do not believe that the law dealing with auditors is satisfactory or that they always behave with great integrity. The collapse could have been foreseen well before those companies got into serious difficulties. We need to tighten up the law in relation to what auditors do and do not put in the signed statements. Some of them got away with ludicrous statements about the nature of the secondary banks which they puported to audit; I have quoted them in articles.

Mr. Ford


Mr. Sedgemore

My hon. Friend says "Rolls-Royce", and he is quite right.

I do not want to delay proceedings this morning because clearly we shall have plenty of time in Committee, but the last point I wish to make refers to transfer pricing. We need something written into the law which says that the auditors must, when they give their statement, either say that they think that a practice is transfer pricing, might be transfer pricing or that a given commercial activity would have the same effect as transfer pricing. I could set out for this Committee innumerable kinds of commercial activity which, on the face of it, do not look like transfer pricing, but which have that effect. It is time that auditors faced up to their responsibilities in this sphere more than they have done. We shall probably be discussing amendments on that point, if you call them, Sir Tom, at a later stage. On the whole I shall be in there battling with the Minister over this Bill and supporting it. I am surprised that Conservative Members are not giving us support also.

11.54 a.m.

Mr. Dafydd Wigley

I do not intend to speak for long, but I certainly join with the hon. Member for Luton, West (Mr. Sedgemore) in some of his comments. In this Bill there is more opportunity lost than opportunity secured. There is a possibility of doing very much more that needs to be done. The Bill is pretty thin. It covers some points that are important, but it omits a number of points which were in the 1973 Bill that never got off the ground to which reference has been made, and other points to which hon. Members have referred. I look forward to joining the hon. Member for Luton, West over the coming weeks and months in pursuing some of these points and, I hope, writing in certain clauses that could be contained in the Bill and need to be there.

Reference has been made to the question of auditing by the hon. Member for Kensington (Sir B. Rhys Williams) and others. I am certain that there is a need to encourage much more positive auditing. Historically, auditing tended merely to look back on figures, whether correct or otherwise. The function of positive auditing that is an aid to running the company, securing genuine control of it and providing better information for all those who take decisions, has developed in some auditing companies but it is certainly not universal. We should be looking for means of helping in that direction.

Mention was made of the rôle of supervisory boards in this context. I am not certain that I agree that supervisory boards and the auditing functions overlap. There is room for changing the structure of companies. If the Bill does not do this, I very much hope that next year we shall see a Bill that will come forward with a much stronger degree of industrial democracy. I agree with the hon. Member for Luton, West in terms of worker control, although there may be questions of definition, and we look forward to Bullock's comments and recommendations in that context.

The supervisory board is an insufficient tool for securing the type of development that many people are seeking. The supervisory board may be all right in the German industrial context. I am not certain that it will bring results here. It may only cause another tier of problems. We must set up a group of people who are in control and are genuinely answerable to more than simply those who have been the owners of capital. The joint stock companies Acts of the last century may have been all right in their day, but they need changing now. We need a Companies Act that is as substantial as the 1948 Act to reflect the change in thinking in these matters.

There is one specific item that was in the 1973 Bill but is not contained in the present Bill. I hope to table amendments later to cover it. Hon. Members may not be surprised to know that I refer to the old Section 103 and Schedule 6 to the 1973 Bill which dealt with allowing the Welsh language to be used for companies in Wales. A certain number of companies already use it. Technically they may he outside the law in so doing, and problems exist. I am surprised it has not been included because it is not a contentious party point but something that a number of solicitors in Wales have been considering. It was put forward by the then Conservative Government and I would have thought they would support amendments to write it into this Bill.

There are other matters that I should have liked to have seen covered by the Bill. Perhaps there will he an opportunity to table amendments concerning those too. First, I believe there should be a greater requirement for accounting to show plant level profitability, particularly in multi-plant companies. Where plants are small this may not be possible. Where there is a plant employing between 5,000 and 10,000 people, however, there should be available to the employees in that plant accounts and figures that show its performance. This is part of the question of disclosure. Disclosure has been covered to some extent in the Industry Act. Those provisions are not wide enough, however. They apply only in certain manufacturing concerns and not to all commercial activities. We shall have to face the question of disclosure in later Bills. Having information is fundamental to any negotiation.

We have seen so often in the past that the only bullets in the armoury of management in negotiation has been the possession of information that the other side did not have. That is not a genuine or correct basis for meaningful negotiation in industry. There should be a fundamental tenet that information is freely available unless there is a very good reason to the contrary. There should be provision in this and similar Bills to bring this about.

Another matter that I should like to see strengthened in company law is the movement of assets. Over the past 10 years grants have been available in development areas for the purchasing of assets. There is grave suspicion that in certain companies there have been transfers of assets from within development areas to other areas, and perhaps there is not enough control over this. Clearly, it is the type of fiddle that should not be condoned in any way and we should pay greater attention to that.

On the question of regional grants, I should like company law to be strengthened in order to ensure that company accounting makes certain that regional grants are treated in a positive way. Often grants are treated as miscellaneous income, and the whole point of the grant is missed. It should be to make the cost of an asset less—or, in the case of regional employment, the cost of labour—so that investment decisions will be more favourable in those locations. But many companies do not account for these moneys in a way that permits those decisions to be any different from decisions taken in a non-development area. A Bill such as this should be making that sort of provision as well.

I, too, look forward to the opportunity of tabling amendments at later stages and co-operating with other hon. Members in that direction.

12.1 p.m.

Mr. John Loveridge

The Minister will be pleased at the general welcome which has been given to the principles behind the Bill, though some of us will feel considerable sympathy with the criticisms voiced by my hon. Friend the Member for Kensington (Sir B. Rhys Williams).

Although the principles are welcome, it should be placed on record that it is a pity that we have to have another bit of what might be termed itsy-bitsy legislation. The Bill is very limited in its scope. On perhaps half the Committees of the House of which I have been a member, at some time an hon. Member must have asked, "Cannot we have more codification of law? Must we continually write in references to Acts going back to archaic times?" Here we have an additional measure on a matter on which, as soon as the Bullock report has been considered, the Government will bring in new legislation. Surely it should be covered by a single codified Act so that the public can understand it readily and easily.

I especially have in mind the smaller businessman who has not the time continually to refer to cross-references in different pieces of legislation. I plead with the Government to bring their legislation forward, as far as possible, in a way that is codified and simpler. The Minister will sympathise with this view, because Ministers are always sympathising with it. But the constraints of life, I understand, make it difficult for him.

However, in spite of this confusion for the pubic, no doubt there will be a great easing when the suggestion of the hon. Member for Caernarvon (Mr. Wigley), that the whole thing should be in the Welsh language, is adopted. Unfortunately, that will be not very helpful to me.

There is something about the principle behind the Bill that worries me. Has enough consideration really been given to the number of people who are likely to have hanging over them the possibility of these substantial fines? The Minister has told us that there are 186,000 cases in default. That is a tremendous number. Twenty-eight thousand have been struck off the register as being presumed defunct. That is a simple way of getting rid of them. Would it not have been possible for the Government to bring in a simple requirement that the auditor should notify the registrar if a company is not trading, so that after an appropriate time it could be stuck off without there being any possibility of a fine hanging over the heads of tens of thousands? Too many people are now living in fear. Why add an unnecessary fear when simpler methods of administration could remove that fear and have the same effect?

On the question of the time, seven months is allowed for public and other than pivate companies and 10 months for private companies, to get their accounts in after the appropriate period. I can understand that nine months might be considered a natural period in human affairs, but why seven and 10 months? Why not a simple period such as one year, that everyone can understand? Many who start small companies are simple people. They may be small builders with not much educational background. Why not make life easier for them so that they do not have to think of periods that are unnatural to them, when they are busy and hard working? Perhaps it is the wife who keeps the accounts and perhaps she has children as well. Why not make it something like a year? It would be much simpler for these small people about whom I feel concerned.

On the question of the smaller companies, surely we need some way of helping the smaller person to get off the ground. I know that there are many companies. But we know from what the Minister has told us that a large proportion are in difficulties. They are in default; they are in arrears with their paperwork. Is it not possible for the Government to consider, when they consider the Bullock proposals, bringing forward some simpler form of company structure for the very small company just starting up, with simpler records to be registered? This is important, because a small man in charge of a business has to do eveything. He cannot afford to consult solicitors and expert accountants other than those necessary to keep his books and make the necessary registrations and tax returns required by the Government. He has not the facilities of a large company, of departments with expert heads to consult.

We all sympathise with the criticisms made of large companies which are in arrears. They ought not to be in arrears. The hon. Member for Luton, West complains about this. But when one wants something that affects a small number of companies, why make life difficult for hundred of thousands who are trying hard to build up something not only for their families but for the whole nation?

One other matters seems to cause anxiety—the time for serving notice under Clause 21 where someone in default may be called before a court with the possibility that he will be prevented from serving as a director. Ten days' notice seems very little. He will be entitled to call witnesses. That is proper. But will he be able to find those witnesses readily in 10 days? Will he be able to get them over here if they are situated overseas? I do not think 10 days is anything like adequate.

Nor is there any specified way in which the notice should be served. The post is not good enough. Any of us who have served as magistrates know how the postal service often goes astray and leaves distress and misery. Convictions are entered in lieu of any defence because the people have not known that they should be in court. I had a rather tragic case of a woman who had been awarded a court order for the custody of her child when her husband went away to Scotland. She lost the custody of the child because a Scottish court overruled the English court. So she lost the child. The reason was that she had no notice and could not be represented in the Scottish court. That was a case of conflict of laws between Scotland and ourselves. But it is an example of how the ordinary person is now beset by the magnitude of the problem of trying to deal practically with the laws that we in this House introduce on such a massive scale.

Therefore, I ask the Minister to consider lengthening the 10 days' requirement for notice to allow witnesses to attend, and also to introduce a provision to ensure that there should be personal service of the notice under Clause 21.

I conclude by making a plea for these small people. Many cases of default over the filing of accounts arise not from wilfulness but from sheer incompetence or sheer exhaustion from overwork, or from illness in the family where there is no one except perhaps the husband or the wife to help. In those cases it is not right that people who, in the main, are fundamentally honest, anxious to obey the requirements of Government, all doing their best, should have hanging over their heads a £450 fine and very substantial daily fines thereafter, except in those cases where that is absolutely an essential requirement. Administrative means could be found, I think, to eliminate possibly tens of thousands from this sphere if only the Government would reflect on the machinery of this administration.

12.11 p.m.

Mr. Tim Renton

This has been a useful debate, uncontroversial except in the remarks of the Under-Secretary when he tried to stir up controversy by some unnecessarily unflattering comments about the 1973 Companies Bill of the last Conservative Government —not only uncontroversial, but in a large degree unanimous in that again, apart from some of the opening remarks of the Under-Secretary, there has been concern and surprise on both sides of the Committee at the fact that more is not in the Bill, rather than less. This was echoed by the hon. Members for Bradford, North (Mr Ford) and Luton, West (Mr. Sedge-more), and I concur with that feeling. The Bill is more remarkable for what it omits than for what it contains.

We are led to wonder why it was necessary to bring forward this very small truncated Bill. We all agree with the necessity to give more power in the immediate future to auditors. This is well covered by a number of clauses in the Bill. But we all feel that it could have contained more. When the Under-Secretary in his opening remarks assured us that we would be given a major Corn-panics Bill in the 1976–77 session, and that was the reason why this measure contained so little, some of us on this side of the Committee were prompted to laugh, and he objected. But I think it is only necessary to go back a little in history to see why we laughed.

The Jenkins Committee reported in 1962. The first Companies Bill following on Jenkins did not become law until 1967. There was a gap of five years. Many matters were covered by Jenkins which were not included in the 1967 Bill, and a number of these were in turn covered by the Conservative Companies Bill printed in December 1973, a gap again of six years. Now another three years have passed and we are given this modest little measure.

I find it hard to believe that the Bullock Committee will be able to report in time in 1977 for there to be a Green Paper and legislation in that session. It is more likely that a major Bill will be held over for the simple reason that company law legislation is the Cinderella of legislation. It is not popular with either party. It tends to be delayed. Therefore, I think it more likely that a major review will be held over for at least another year and a half.

Mr. Clinton Davis

When I adverted to Bullock I said that we expected that it would complete its report by the end of the year and that a Bill might be introduced. It is bound to be a controversial matter, and the way in which public discussion can be undertaken is a matter which we shall have to consider when Bullock has reported. But one of the options open was the introduction of the Bill. This is simply an option available which we shall have to consider very thoroughly. The hon. Gentleman should not have suggested that, because Jenkins was not the subject of legislation for so long, the present Government will necessarily follow the pattern of their predecessors, both Conseravative and Labour.

Mr. Renton

It would seem that the only chance of the Government altering the pattern is for them to introduce very much less controversial and nationalising legislation than they have shown an inclination to do in the last few years. If they were willing to do that. I would be more optimistic about the chances of having a major Companies Bill. As it is, Bill until about 1982, by which time on past pattern it seems more likely that we shall not have a major Companies the next Conservative Government will be preparing for a General Election. It is likely, therefore, that that Bill would, in turn, languish on the shelves and would not become law. It is against that background that the Committee has echoed this morning the feeling of regret that more non-controversial matters could not have been included in this measure. The hon. Member for Caernarvon (Mr. Wigley) used the phrase "opportunity lost", and I agree with him. It is an opportunity which could have been seized without any great difficulty.

Before moving on, I should like to refer to the comments made by my hon. Friend the Member for Kensington (Sir B. Rhys Williams). He told us that he was not prepared to support the Bill, and that he would vote against it. In that I would not encourage my hon. Friends to join him, but I think it is worth putting on record the very great contribution to the study of company law that my hon. Friend has made. He has made it something of a speciality of his own, and by persistence he has constantly repeated the theme that the rôle of non-executive directors on boards should be strengthened, a theme with which I personally have some sympathy. We must congratulate him on the fact that, by virtue of getting his Private Member's Companies Bill printed on 25th February, he has actually forced the Government to call their Bill "Companies (No. 2) Bill", which in itself makes some change to the statute book.

Mr. Clinton Davis

It is not on the statute book.

Mr. Renton

I take it that the Government's Bill will be described as the "Companies (No. 2) Act" on the statute book. The Under-Secretary corrects me. At least we have the opportunity of referring to it as the "No. 2 Bill" at the moment, thanks to the work of the hon. Member for Kensington.

The Under-Secretary, in opening the Second Reading debate, regularly referred to waiting for Bullock as being the major reason why we could not have a more substantial Companies Bill at the present time. I hope that waiting for Bullock will not become like waiting for Godot and that there will not be constant delays. But I feel that there may be, for two reasons: first the weight of evidence that has been submitted to Bullock, which is obviously right. This is a major matter that the Bullock Committee is studying. but there is the further fact that the Bullock Committee will only fulfil the expectations that arc hoped for from it if it goes beyond its own terms of reference. This point was made in the debate in another place, and I am sure it is right.

The terms of reference of the Bullock Committee require it particularly to take into account the proposals of the Trades Union Congress report on industrial democracy, but, as many of the submissions to the Bullock Committee have shown, unless it goes well beyond those proposals, it will not consider in depth the question of employee participation in management in the way that we should like. The trades union proposals concentrate specifically on the question of trade union dominance of company boards, and thus of companies themselves, rather than on the question of employee participation. This was particularly so when they made their comments about supervisory boards. Paragraph 106 of the TUC report on industrial democracy states: … Provisions about Supervisory Boards in the new Companies Act would only become operative where there is trade union recognition; and representation of workers could only be through bona fide trade unions choosing to exercise this right. This appears to show a far greater concern with trade union participation than with employee participation. It is necessary for Bullock to consider this matter more fully than the trades union proposals seem to have done.

The trades union proposals anticipated a major change in the responsibility and structure of boards. Paragraph 91 of their submission reads: … The Supervisory Board would be the supreme body of the Company and while it would take into account the interests and views expressed at the AGMs of shareholders, it would not be bound by them. If that were to happen, it would require a substantial change in company law.

Bullock must look more deeply at this matter than the trades union proposals suggest. It is a separate matter. We have all felt—and this has been echoed this morning—that it would have been possible, without waiting for Bullock, to have had a Companies Bill which dealt with those aspects of company law, particularly on securities, that were covered in the Jenkins Report and that were outlined in our 1973 Companies Bill and are themselves not tangential with what is being looked into by Bullock. It is on this point that our disappointment particularly lies.

The hon. Member for Luton, West touched on some of those matters: insider dealing, non-voting shares, the difficult problems outlined in Clause 45 of the 1973 Bill concerning the private interests of directors and the interests of directors in associated companies, the prohibition of loans to connected persons and provisions on minimum issued share capital. All of them could have found favour on both sides of the Committee.

We know that the accountancy bodies are in favour of such proposals being brought forward in a new Companies Bill and one wonders, therefore, why they have not found their place in this Bill. It is a matter of regret that they have not. The Under-Secretary appeared to imply that I was Victorian and archaic in my approach to company law, and that I would resist change of any sort. How wrong he is. I would welcome change. I believe changes are necessary, and I repeat that I regret tat he has not found a place for them in this Bill.

I have found Clause 2, dealing with the accounting reference period, and Clause 3, on the alteration of the accounting reference period, extraordinarly difficult to understand. It may be that I read them late at night when I was feeling tired, but I tried to read them several times and found the wording poor. I hope that if there is an opportunity to tidy it up in Committee the Government will seize it.

Clause 6 falls into much the same trap, and it is clear that there has been a problem. Perhaps the Parliamentary Secretary will say whether he feels this has been dealt with fully. There has been a problem, which was raised by the Committee of London Clearing Banks in the inter-action between this clause, and its provisions, and those of Sections 126 and 131 of the 1948 Act which have not been repealed. The problem hinges around the time for filing returns and company accounts which now appear to be out of step with each other.

One of the basic features of the new system is that the filing of accounts is separated from the filing of the annual returns. Sections 126 and 131 of the 1948 Act continue to apply to the holding of the annual general meeting and the filing of the annual return, but do not affect the period allowed for the laying and filing of accounts which is determined by Clause 6. This is not clear from Clause 6 as drafted. It is a matter which should be tidied up and clarified in Committee. If it is not clear to those of us who should have some experience in this matter, it will not be clear to people running small businesses who will be affected by the new Bill.

On the question of Clause 12, I should like to call the Government's attention to what is known as the Romalpa judgment. For those members of the Committee who have not had the chance to study the Romalpa judgment, may I say that it refers to the question of when a vendor sends goods on consignment to a purchaser and attaches credit terms to them but the title to the stock remains with the vendor. If a bank, or anyone advancing money to the purchaser, takes a mortgage and general charge on his stocks, he will find, if he ever has to exercise that mortgage, that the vendor, which is often an overseas company, says" Pay. These goods, which it might have been thought were covered by the mortgage and general charge, are not. They beloong to us."

In the Romalpa case, when exactly this situation had arisen, the judgment went in favour of the vendor. There is no doubt that the banks. and some members of the accountancy profession, believe that the law may require change, otherwise floating charges will give little security in such instances. It has been said that this is a matter for an accounting standards of practice rather than a change in the law, but I am not certain that that is correct. It is a matter which the Government should look into with a view to making a necessary change in the law, which I believe could be fairly easily incorporated in Clause 12. We shall be able to return to that point in Committee.

I should like to turn to the question of small companies. The 1973 Bill made a distinction between public and private companies. EEC practice has tended to underline that distinction. Unfortunately, that is entirely lost in this Bill.

In my personal opinion, the time is coming when, with the amount of legislation that affects all employers—employment protection legislation, safety-at-work legislation and now disclosure legislation—there will be a case for a separate form of incorporation for the smaller company that would lie somewhere between the limited company and partnership or sole trading bodies.

Let us look specifically at the Bill and consider how it will affect the small company. First, there is the point about the time for filing accounts. I know that many are late at the moment. What about a small company which has to file its accounts within 10 months under this Bill. but has 18 months in which to argue with the tax inspector about whether there will be a surtax direction from the point of view of distribution of dividends? Many profitable small companies hold up the filing of their accounts, not for any discreditable reason, but in order to finish their discussions with the tax inspector and to clarify whether they will be made to distribute dividends before they file the accounts. That point needs to be cleared up.

We need to look at the level of penalties in Clause 4. It may well be said that 10 months is long enough for anyone, but it is by no means impossible for a small company to have one accountant only. The one accountant may fall ill and have to go to hospital. He may return after a period of months but still be ill. He may continue to try to do his job, his boss may look after him, but he may do his work slowly and not very well.

A case has been quoted to me, where the accountant came back from a period of sick leave. He had disseminated scelerosis and he went on with his job but got worse and worse at it. Finally, the company decided that it must call in the auditor, because the accounts were getting so far behind and and it did not want to sack the accountant, but it could not rely on him any longer. It called in the auditor, who promptly died.

That company, with no malice, no fraud in mind, no ill thought, would now face under the Bill penalties, at the rate stated, of £12,000. This is a matter for review. I know that the Secretary of State can use his discretion, but that is an imponderable matter for a small company. It sees itself getting into this jam and does not know whether it will be socked with an enormous fine. It brings me back to the point of whether there should be some exclusion from all these new provisions for the small company—perhaps a company with a turnover of under £¼ million a year.

Again on this point of small businesses, Clause 12(3) requires that copies of all stocktakings should be submitted. This is totally unnecessary and will lead to a great deal of wasteful paper moving out to the civil servants. As the Under-Secretary will know, grocery businesses or public houses do at least a monthly stocktaking. Often these records are thrown away when they have been taken. Surely it cannot be necessary for all these interim stocktakings to be passed on. I should have thought that the annual statement of stock was quite enough.

Clause 19 requires notification of a new director within 14 days. Again. for the smaller business this could lead to trouble. It is not a sufficient time. Let us assume that a wife and husband are in partnership, running a small business which is a grocery. Let us assume that the husband dies, and that the wife is left with the business to run, and that she asks her son to come and join her in the business and makes him a director of the company. It is highly unlikely in those circumstances, when she has all the problems of her husband's estate and keeping the business going, that she would remember to inform the Registrar of Companies that she has just appointed her son as a director of the business.

Therefore, all these minor details will lead to more paper work and a larger burden for the small businesses, which are already over-taxed in this respect, and we should seek some exceptions. That leads me to the point from which I started of a separate form of incorporation so that they are excluded. The Bill seems to have been drafted with major companies—ICI, GEC, Unilever—in mind. They can meet these provisions without any difficulty, but I doubt that the smaller business can. I think it will add to its burdens.

I turn now to the question of conformity with the EEC. The Under. Secretary touched on this, but I wonder whether the Parliamentary Secretary could be a little more explicit.

The Parliamentary Secretary to the Law Officers' Department (Mr. Arthur Davidson)

I doubt it.

Mr. Renton

The hon. Gentleman is being very modest, but I am sure that some notes will be passed to him over the next minute. Since our 1973 Bill, there have been major developments within the EEC in its approach to company law. Even regarding this No. 2 Bill as a temporary and modest measure, we should all like to know whether it conforms to the fourth and fifth directives on company law and whether it appears to fit in with the EEC draft regulations on company law which will lead eventually to the formation of the Euro company.

There is a further point on this that I should like to make to the Under-Secretary and to the Parliamentary Secretary to the Law Officers' Department. I do not believe that it is necessary for all EEC companies to make the type of disclosure that is required in this country and that will be enforced by the Bill. If this is not so, it gives EEC companies an advantage over the single-product companies in the United Kingdom. The EEC competitor can look at the costs of the United Kingdom company and find out just what its profit margin is but the same information is not available to the United Kingdom manufacturer about his EEC competitor. It is most important to keep in line with the EEC on this, not just from the point of view of conformity with its statutes, but in order to see that we are not putting burdens on United Kingdom companies that do not apply to their EEC competitors.

All of us, with the exception of my hon. Friend the Member for Kensington, feel that this is a Bill that we would not wish to vote against, but which nevertheless could have been more substantial. At the risk of incurring the wrath of the Under-Secretary, I must remind him of the Latin tag —"Parturiunt montes; nascetur ridiculus mus". No one would call this a ridiculus mus in view of the requirements on auditors and the added powers that it gives to them. But it is a parvulus mus—too small a little mouse. This I regret, because I do not believe that the Under-Secretary and his colleagues will have time to bring forward a more substantial Bill before the next election. Other matters could have been logically included which would have made it a better and more useful Bill.

12.37 p.m.

The Parliamentary Secretary to the Law Officers' Department (Mr. Arthur Davidson)

The hon. Member for Worthing (Mr. Higgins) in his opening remarks said that this was a Committee stage without a Second Reading. I am not one to look a gift horse in the mouth, particularly if it is offered by hon. Gentlemen. Therefore, I do not think that the Committee will expect me to deliver a lengthy winding-up speech. At one stage I hoped that it would not want a winding-up speech at all, but many points have been raised. Many of them were Committee points, as I think hon. Members themselves acknowledge, and would be better dealt with in Committee. Perhaps I may deal with one or two of the more general points that were raised. If I do not deal with all of them, I am sure that the Committee will realise that, as the hon. Member for Caernarvon (Mr. Wigley) and my right hon. Friend the Member for Luton, West (Mr. Sedgemore) seem to expect that we shall be closeted here for several months, there will be ample time to discuss all these points. As the hon. Member for Caernarvon is an accountant and my hon. Friend is a lawyer, I do not doubt that that is a reasonable assumption.

The hon. Member for Worthing mentioned inflation accounting. The Government must await the detailed proposals of the group set up by the Accounting Standards Committee to implement the Sandilands Report. The hon. Member suggested that legislation was not necessary, but the Government are not yet in a position to decide whether legislation is necessary.

The hon. Member for Worthing also suggested—and the point was taken up by the hon. Member for Mid-Sussex (Mr. Renton)—that insider dealing should be dealt with in the Bill. My hon. Friend has given a detailed and uncontroversial explanation of why that is not thought necessary by the Government.

The principal ground on which the Government considered that the insider dealing provisions in the 1973 Bill were inadequate was that the provisions for civil liability would be difficult and in some cases impossible to enforce. As my hon. Friend has said, the whole question of insider dealing is being looked at and considered in the context of the inquiry into the securities market. I hope, trust and believe that legislation will be brought before the House before long.

My hon. Friend the Member for Bradford, North (Mr. Ford) suggested that there was a shortage of auditors. There is no evidence of any such shortage. With regard to his other point, which was also made by the hon. Member for Worthing (Mr. Higgins), my right hon. Friend the Secretary of State is not satisfied that the criteria required are met by anyone other than those listed in Clause 13. He will consider very carefully any application.

It was suggested by my hon. Friend that an appeal procedure was necessary. I do not think it is, and that is also the view of my right hon. Friend, who, I can tell my hon. Friend, does read Hansard. If my hon. Friend has any documents that he wishes to send to him, my right hon. Friend will consider them with his usual uncontroversial care and very promptly.

My hon. Friend the Member for Bradford, North, has entered the room at exactly the wrong moment, because I have just dealt, very adequately, I think, with the points he raised. If I have not done so, I assure the Committee that I am prepared to report back at Committee stage.

A question was raised on the printing of accounts. The hon. Member for Worthing (Mr. Higgins) suggested that this could raise unnecessary difficulties, particularly for small companies; it would be unduly onerous to require small companies 10 print accounts. This point was raised when the Bill was debated in another place. Since the provision appears to have caused some confusion, the Government will be tabling an amendment in Committee to delete the requirement from Clause 1 and will rely instead on the powers in Clause 25 to make regulations specifying the reproduction processes which will be acceptable. I am sure the Committee will agree that this will help small companies considerably.

The hon. Member for Worthing also twitted my hon. Friend, which is a very dangerous thing to do, about staff savings and suggested that the 1973 Bill would have saved far more in staff and money than does the Bill. The 1973 Companies Bill included certain clauses streamlining the administration of the insolvency service which would have resulted in substantial staff savings. The relevant clauses are now in the Insolvency Bill—I regret that I have not had the privilege of serving on the Committee considering that Bill. It will produce substantial staff savings, so the hon. Gentleman's point was not perhaps relevant.

The hon. Gentleman also raised the point of the London and Counties Committee of Inquiry. The inquiry is proceeding, but I cannot give an assurance that it will report before this Bill completes all its stages. Most of the problems, as he will appreciate, concern the conduct of auditors and are properly matters for the profession and not for legislation. It would not be right to delay the Bill for this reason. There have been enormous developments in accountancy practice over recent years. These will continue, and the Government will seek to include in legislation the best available method.

Hon. Members opposite criticised the criminal penalties in Clause 4 on the grounds that they were too severe.

Mr. Loveridge

It was not the general severity but the fact that they applied to tens of thousands of people to whom they need not apply and who could be eliminated from the fear by simple administrative measures.

Mr. Davidson

Certainly the hon. Member for Worthing (Mr. Higgins) criticised them on the ground that they were too severe. They are considerably more severe than the present penalties and, as I am sure the Committee would agree, rightly so. The present penalties are inadequate. But, as my hon. Friend pointed out, the criminal penalties are the maximum and courts seldom impose maximum penalties. They have considerable discretion and only in the most severe case would the courts fine up to the maximum.

In addition, it will be a defence if a person shows that he took reasonable measures to ensure that the requirements were complied with. If. therefore, a director were ill and in those circumstances he would take such steps, it would be very unlikely that proceedings would be taken. If he established such a defence, the court would listen to it sympathetically.

My hon. Friend the Member for Luton, West made some interesting points, as he always does. I do not want to intervene in the correspondence which he is having with my hon. Friend the Under-Secretary of State for Trade, who is looking at those points as a matter of urgency. I am sure my hon. Friend would accept that it would be better to deal with it in that way, but if he wants to raise the matter again during the Committee stage, I am sure that my hon. Friend the Under-Secretary of State will deal with it more fully than I could.

The hon. Gentleman mentioned the need for enforcement in filing accounts I am sure he realises that the purpose of Clauses 1 to 11 is to make the filing of accounts requirement enforceable.

The hon. Member for Caernarvon made a very interesting speech. He has considerable knowledge of the points raised about the Welsh language, which is not entirely unexpected. I accept that the position of the Welsh language under the Companies Act remains obscure in a number of areas. As he will appreciate, the Bill is of a strictly limited nature; its dimensions are limited for the reasons that have been repeated, perhaps ad nauseam. It has not been found possible to deal with the Welsh language problems in the Companies Act in the context of this Bill. However, I can assure him that it is likely that the next major Companies Bill will contain a Welsh language clause. No doubt the hon. Gentleman will return to the subject in Committee, arid perhaps I could better deal with it then. The hon. Gentleman also raised other points of a technical nature, which I think he will agree could also be better dealt with in Committee.

It is always interesting to listen to the hon. Member for Kensington (Sir B. Rhys Williams) on these occasions. I have heard him speak in the House, and what he says is always very interesting. I know that he has been persistent in moving his own Bill, and in speaking, on these matters. He spoke about widening the scope of the audit. He will not be surprised to know that, in our view, this matter is related to the Bullock Committee. If it recommends two-tier boards on continental lines, this would introduce a new concept for the supervision of management. Therefore, any changes in the scope of audit would have to be

Williams, Sir Thomas (Chairman) Loveridge, Mr.
Berry, Mr. Renton, Mr. Tim
Davidson, Mr. Arthur Rhys Williams, Sir Brandon
Davis, Mr. Clinton Sedgemore, Mr.
Ford, Mr. White, Mr. Frank R.
Higgins, Mr. Wigley, Mr.
Lamond, Mr. James Woodall, Mr.

looked at on this basis. Some of the EEC directives to which my hon. Friend the Under-Secretary of State for Trade referred contained proposals on this subject, but again I think that is a matter which could best be dealt with in more detail in Committee.

I think I have dealt with most of the points that were raised. Contrary to what the hon. Gentleman considered is the nature of my hon. Friend the Under-Secretary, I am endeavouring to make relatively controversial matters uncontroversial. I shall not rise to the bait of the hon. Member for Mid-Sussex (Mr. Renton) and debate at great length the question of the need for the Bullock Committee and whether the important matters it is considering ought to be dealt with in the Bill. No doubt he will refer to it over and over again in the months ahead.

It has been acknowledged that the Bill is of strictly limited nature. It deals with technical matters. However, it introduces some important and much-needed reforms and safeguards in company law, and, despite the fact that the hon. Member for Kensington seems to be mildly against it, and although the Committee would have wished more to have been included in it, I think that it has received a general welcome.

Question put and agreed to

Ordered, That the Chairman do now report to the House that the Committee recommend that the Companies (No. 2) Bill [Lords] ought to be read a Second time.

Committee rose at eight minutes to One o'clock.