HC Deb 26 October 1976 vol 918 cc320-32
Mr. Clinton Davis

I beg to move Amendment No. 8, in page 7, leave out lines 24 to 29 and insert— '(i) is or has been a director of a company which has at any time gone into liquidation (whether while he was a director or subsequently) and was insolvent at that time; and (ii) is or has been a director of another such company which has gone into liquidation within five years of the date on which the first-mentioned company went into liquidation; and'.

Mr. Deputy Speaker

With this we may take Government Amendments Nos. 10, 11 and 13.

5.45 p.m.

Mr. Davis

The purpose of these amendments is to clarify the original intention of the clause in certain respects, namely, for the conditions of Clause 9(1)(a) to be met. First, the person concerned must be or have at some time been a director of at least two companies. Secondly, the companies must have gone into liquidation within five years of each other as a result of either a winding-up order made by the court or of a resolution for voluntary winding up. Thirdly, the companies must be insolvent at the date of the order for winding up or of the resolution for voluntary winding up.

This clause was very difficult, but the whole Committee agreed when we debated the matter that it was wholly desirable. However, a number of points made in the course of those debates gave rise to the need for clarification of our intentions. Therefore, it is incumbent upon me, because it is one of the most important provisions of the Bill, to deal with these matters more fully than I have dealt with previous amendments.

The persons coming within the provisions of Clause (9)(1)(a) include not only directors of the relevant company at the time or shortly before it goes into liquidation, but those who have been directors at any time, perhaps many years previously. It must be stressed, however, that a disqualification order may be made against a director or a former director only if his conduct as a director of any company referred to in subsection (1)(a) has been such as to make him unfit to be concerned in the management of a company. If the director's conduct did not contribute to the failure of the relevant company it is likely to be because that director had resigned many years before the company went into liquidation. Thus, he cannot be made a subject of a disqualification order.

Relevant companies must be at least two in number and the winding-up order or the resolution for voluntary winding-up in respect of one company must fall within five years of the winding-up order or voluntary winding-up resolution in respect of the other. Amendment No. 14 provides that at least one of these companies must have gone into liquidation after the dates of the coming into force of the provision.

It has been suggested by professional bodies advising us that by using the date of the winding-up order for this purpose we are making substantive rights or disability dependent on a vagary, such as the state of court lists or the exigencies of litigation. The petition to wind up a company may be set down within five years of the failure of another company, but, because of the congestion in court lists, the winding-up order may be delayed and fall outside the five-year period. This would allow the director to escape the consequences of the clause.

The alternative was to use the commencement of the winding up, as defined in Section 229 of the Companies Act 1948, instead of the date of the order, but this solution was no less arbitrary and would create more problems than it would solve. It might he thought that the clause referred only to persons who had been directors prior to that date. In any event, it cannot operate until the second company goes into liquidation, for example, until a Winding-up Order is made by the court. Therefore, it seems more logical to use that event as the criterion.

We have had correspondence on this matter and have considered it very carefully. We have come to the view that the balance we have struck, while not perfect, is about right. It is not likely to be more than a marginal problem in any event, and it is the most logical of the solutions available.

It is not a requirement of the Clause that a relevant company must be insolvent when the person concerned was a director. It is only necessary for it to be insolvent when it goes into liquidation. This provision has been made because it is intended that the clause should catch a person who, although his conduct as a director has driven the company to the point of insolvency, has resigned before the company actually became insolvent. For this reason we consider it necessary for the clause to require that a company be insolvent at the date of winding up. I hope this will satisfy my hon. Friend the Member for St. Helens (Mr. Spriggs).

Mr. Spriggs

I am grateful for my hon. Friend's comments and his guidance. Would it not be in line with proper justice if people who forced their own companies into liquidation were treated as criminals? Should they not be treated as people who are creating unnecessary unemployment by their adventures in the industrial world and dealt with in the courts as such?

Mr. Davis

If their action were in fact criminal, as frequently happens, prosecutions would follow. But the mere fact that insolvency has occurred through the negligence of an individual should not necessarily justify the institution of criminal proceedings. One must look at each case on its merits.

Amendment No. 10 is to make clear the original intention that an application for a disqualification order against the director of a company under subparagraph (i) and (ii) of subsection (1)(a) which is being wound up by the court has to be made by the official receiver, or in Scotland by the Secretary of State. The court which made the winding-up order has power to make the disqualification order on such an application. But the main burden of the argument relies on Amendments Nos. 8, 11 and 13.

Mr. Tim Renton

I have considerable misgivings over the wording that the Under-Secretary wishes to insert. As he rightly said, this is one of the most important clauses. I am sure that there is a strong wish on both sides of the House not only that directors should be held responsible to employees, shareholders and other interests in the company, but that they should be fully aware of their responsibilities.

However, it is most important to get the balance right. If too great a burden is placed on the director by way of the penalties to which he may be liable in future years, there is the danger, particularly with non-executive directors, that they will refuse invitations to join boards of companies simply because they see the potential perils and traps as being too great, and certainly not commensurate with the reward they might receive for their directorships.

I do not say that in an attempt to protect directors regardless of all else. I wish only to stress that the balance must be right if the right people are still to be tempted to lead companies to growth.

Mr. Spriggs

Surely with his experience the hon. Member must be aware that any director who has a difficulty in understanding his responsibilities to the company can refer to the company secretary. The company secretary's information is always available to every director in the company from the chairman down.

Mr. Renton

Perhaps the hon. Member has misunderstood me. I was not talking about a director not being able to understand his responsibilities or of not having them made fully clear to him by the company secretary. I was referring to the potential dangers and pitfalls for the director who regards them as so great that he will decline an invitation to join a board.

Under the amendments as proposed by the Under-Secretary the potential penalty applies to someone who is or has been a director of a company which has at any time gone into liquidation whether while he was a director or subsequently. The position therefore arises that someone could have been a director of a company in his youth. He could have left the company and four years and 11 months later the company could go into liquidation for no reason connected with the director's performance on its board. I take the Under-Secretary's point that it is still up to the courts to decide that his conduct was inappropriate and did not lead to good management of the company.

The director, through inexperience or misjudgment, might have encouraged the company to engage in or might have been a party to poor commercial decisions. These decisions, however, might have had nothing to do with the subsequent insolvency of the company.

I am trying to paint a picture in which people are encouraged to go into companies and on to boards and to take risks that encourage companies to grow. The director might have taken one or two wrong commercial decisions which the company could survive. His conduct could be regarded as poor and prejudicial to his reputation. Because of a subsequent liquidation that has nothing to do with his conduct, a black mark is entered against him. If another company of which he is a director goes insolvent within five years, he risks this heavy penalty of being prohibited from concerning himself with or taking part in the management of a company for another five years.

By inserting the words "or subsequently" the Under-Secretary may have gone too far and may have erred into causing people to decline invitations to join boards as non-executive directors because of the fear of what might happen to the company four or five years after they have left those boards.

As I read the amendment, it would be possible for the court to judge that directors ought not to be involved any further in the management of a company on the basis of companies which went insolvent before the Bill became law. Is there not a retrospective power there? I believe the clause should apply only if both the companies become insolvent after the Bill has become law.

We are debating this Bill at a time when, clue to unhappy economic circumstances, the number of insolvencies is very high. A director could find himself in an alarming position immediately the Bill becomes law, whereby he was a director of a company which went insolvent four years ago and is now a director of a company which looks like going insolvent in the next 12 months. It would be a pity if the Bill were to stifle the initiative of directors and limit their decisions to join boards. I am thinking particularly of non-executive directors.

6.0 p.m.

Mr. Spriggs

I am concerned about whether the amendments will allow people who have indulged in dishonest business methods to creep back into directorships and once again to commit the same kind of behaviour against other firms. I wrote to the Department about St. Helens Auto Electrics, a firm which provides a service to haulage contractors by rewiring whole circuits of vehicles, including ominibuses. For many years the company sold its services to one of the larger haulage contractors. That contractor paid good wages but when the company sent in its account for between £3,000 and £4,000 the contractor did not pay—could not pay. I was told that the directors of the firm had been helping themselves to fat directors' fees at a time when the firm was apparently running down.

The official receiver was brought in and his fees amounted to about £34,000, but my constituent who runs St. Helens Auto Electrics—a good, healthy but small firm—received about £1,000. He lost the rest because someone else took advantage of the situation. Will taking out the suggested words allow people such as the directors of that haulage firm to creep back into the business which they previously conducted or into another similar business?

Mr. Higgins

It is common ground that action should be effectively taken against those who abuse the position of limited liability. That is why the clause has been supported by both sides. The question is one of structure and the right balance. When the law is changed, a problem could be created for people who have been involved in an insolvency years before. It is possible that the balance is not correct, but the Government are pretty close to the fulcrum.

I am concerned about the argument put by my hon. Friend the Member for Mid-Sussex (Mr. Renton). If a man was a director of a company which goes into liquidation years after he has left that company, he would still notch up one black mark which would count against him in the future. I question whether the period involved should be open ended. I doubt whether a court could decide whether a director was responsible to a greater or lesser extent for an insolvency which took place 25 years before. It is a minor issue but perhaps a time limit should be introduced.

Mr. Clinton Davis

In Committee we all set out to mitigate the difficulties to which hon. Members have constantly referred. It is virtually impossible to deal with the director who is involved in an insolvency for which he is clearly responsible and who then sets up in another business somewhere else and becomes involved in another insolvency. The powers restraining such an individual from embarking on that course of conduct are limited.

My hon. Friend the Member for St. Helens (Mr. Spriggs) is right to express anxiety about the situation. We welcome him to the debate as he was not a member of the Committee. Naturally he is worried about the situation in his constituency but he will forgive me if I do not give him an answer to his specific problem. I recall seeing his letter, but it has not been dealt with yet. I shall look into the situation further and see what relevance it has to the matters that we are debating today.

Mr. Spriggs

I must correct my hon. Friend because the case was dealt with but not completed.

Mr. Davis

My hon. Friend is worried about the situation and he is entitled to ask me to look at it again. I shall do so.

The clause will not have the deterrent effect on the good person who is invited to join a board of directors. I disagree with the hon. Member for Mid-Sussex (Mr. Renton) about that matter. We are seeking to give—additional to the provisions of Section 188 of the Companies Act which deals with the fraudulent director who may be disqualified by the court—with the director whose conduct under the definition of the clause makes him unfit to be concerned in the management of a company.

The court will determine the action to be taken. Common sense will not permit the court to act if the only complaint about somebody is that he was a director of an insolvent company 25 years ago. The court is bound to take a long gap into account, and that will be a powerful protection. The provision will not operate as a deterrent.

The hon. Member for Worthing (Mr. Higgins) put his finger on the spot when he said that the country demands high qualities of judgment and, more importantly, of integrity, from those engaged in the business of running limited liability companies. It is therefore important that the court should take into account substantial lack of integrity and manifest lack of judgment in determining whether a person should undertake such important duties in future.

The hon. Gentleman asked me whether it was possible for a situation to arise in which both companies went insolvent before the Act came into effect. The answer is "No". There has to be a situation where at least one of the companies went into a state of insolvency after the Act comes into operation.

Mr. Tim Renton

The Minister has told me that one of the companies must go insolvent after the Bill comes into effect. Could he say in what part of the clause that arises?

Mr. Davis

I said in my introductory remarks that I would be proposing Amendment No. 14, which deals with this point. The hon. Member is right to say at this moment that the issue is not dealt with.

The hon. Member for Worthing invited me to say that I should make the provision less open ended. This must be a matter for the courts. Once we begin to embark on that course, we shall get into difficulties. I hope that he will not insist that we should pursue that line.

Amendment agreed to.

Mr. Clinton Davis

I beg to move Amendment No. 9, in page 7, line 36, after 'period', insert 'beginning with the date of the order and'. The purpose of this amendment is to remove any doubt concerning the date of the commencement of a disqualification order. The amendment will have the effect of ensuring that the period of disqualification commences on the date of the disqualification order.

At present the clause is worded in the same way as Section 188 of the Companies Act 1948. It was laid down in the case of Regina v Bradley in 1961 that a disqualification order under that section could not start from a date other than the date of the order. The decision in that case may not necessarily apply in the context of a power not depending on a criminal conviction. The amendment will put the matter beyond reasonable doubt.

Amendment agreed to.

Amendments made: No. 10, in page 7, line 38, leave out from '(2)' to 'is' in line 39 and insert 'In the case of a person who is or has been a director of a company which has gone into liquidation as aforesaid and'.

No. 11, in page 8, line 19, leave out 'this section' and insert 'subsection (1) above'.—[Mr. Clinton Davis.]

Mr. Clinton Davis

I beg to move Amendment No. 12, in page 8, line 39, after second 'company', insert '(wherever incorporated)'.

The purpose of this amendment is to clarify the original intention of the clause, namely, that it also applies to foreign companies capable of being wound up in Great Britain, whether or not they are overseas companies within the meaning of Part X of the Companies Act 1948.

The effect of the amendment is to ensure, first, that foreign companies that are insolvent and that are wound up under the provisions of the Companies Act 1948 will count for the purposes of subsection (1)(a)—that is, they will trigger off the clause; secondly, a disqualification order will prohibit the subject of it from being a director of a foreign company as well as of companies registered in Great Britain. It will, of course, be effective only in so far as such a person acts as a director in Great Britain.

Mr. Higgins

I am not quite clear why this amendment has been introduced at this stage. I do not recall the provision being discussed in Committee. Was there some reason why it was not in the Bill originally? Perhaps the Minister could tell us how it is one winds up a company in this country which is incorporated somewhere else. I was not aware that that could be done.

Mr. Davis

This arises as a result of further consideration of the matter after the Committee stage. I do not recall this being discussed in Committee. I can tell the hon. Gentleman what the position is as I understand it.

A foreign company, whether an overseas company or other foreign company, which has carried on business in Great Britain or has assets here is an unregistered company within the meaning of Section 398 of the 1948 Act and can be wound up as such. Subsection (7) of the clause already provides that such companies are to be included for the purpose of the clause. The amendment removes any possible doubt. We were concerned that there might be some small area of doubt and felt it best to deal with it now rather than allow the situation to drift.

Mr. Higgins

I am grateful to the hon. Gentleman but I am still a little puzzled. What is the situation about the incorporation of a company overseas? Is it regarded as being wound up within that jurisdiction? It seems a complete oddity. I am not clear how it can be done. Or is it that the company is simply wound up in terms of its operations in this country?

Mr. Davis

The hon. Gentleman is right in the second part of what he had to say. We can have no determining effect on what may happen in another jurisdiction.

Amendment agreed to.

Amendment made: No. 13, in page 8, line 44, leave out from 'of' to 'if' in line 45 and insert: 'this section a company goes into liquidation'.—[Mr. Clinton Davis.]

6.15 p.m.

Mr. Clinton Davis

I beg to move Amendment No. 14, in page 9, line 6, at end insert— '(9) Subsection (1) above does not apply unless at least one of the companies there mentioned has gone into liquidation after the date of the coming into force of this section; and the conduct to which regard may be had under paragraph (b) of that subsection does not include conduct as director of a company that has gone into liquidation before that date.'. This amendment seeks to specify the extent to which the clause has retrospective effect. This was an issue which gave rise to considerable debate in Committee. The amendment will have the effect of ensuring, with regard to retrospection, first that the clause will operate only in cases where at least one of the relevant companies has had a winding-up order made against it by the court or has passed a resolution for a voluntary winding-up after the date of the coming into force of this clause. The hon. Member for Mid-Sussex (Mr. Renton) is not present at the moment. That deals with the concern which he expressed.

Secondly, the amendment will have the effect of ensuring that a person's conduct as director of a relevant company can be used as a ground for a disqualification order only if the winding-up order against the company—or resolution for winding-up—is made or passed, as the case may be, after the date when the clause comes into force. The conduct may relate to a period prior to the date of the coming into force of the clause.

Perhaps I should spend a moment or two in explaining the situation about the triggering off of this clause. Where one of the relevant companies went into liquidation before the coming into force of the clause, provided that the other relevant company goes into liquidation after the coming into force of the clause, the clause may be triggered off. It is the person's conduct as director of the second company only which can afford the grounds for a disqualification order.

The clause can also be triggered off where both the relevant companies go into liquidation after the clause comes into force and the person's conduct as director of either or both of the companies may then afford the grounds for a disqualification order. The clause will not be triggered off if both or all of the relevant companies had gone into liquidation—that is, if a winding-up order has been made or a resolution for voluntary winding-up passed—before the coming into force of the clause. That meets the point advanced earlier by the hon. Member for Mid-Sussex.

This limited retrospective effect is an equitable situation to reach because, although a person would not know that his conduct as director of a company—where it occurred before the clause came into force—could lead eventually to his disqualification from being a director, it is nevertheless not unreasonable to assume that he might have known that his conduct was such as to contribute to the company's insolvency. Obviously, the greater the time lapse between his acting as director and the company going into liquidation, the less weight will be attached to the effect of his conduct on the company by the courts. I hope that with this explanation the House will approve the amendment.

Mr. Higgins

The House is always concerned about legislation that is retrospective, although the term "retrospective" means a number of different things. At one time, the Solicitor-General discoursed on the various definitions. It appears, however, that in this case, although we stressed its importance in Committee, the Government have not gone the whole way to meet the points that were made. Is that so? If it is, why do they not feel able to meet the case completely? I understand the position under the amendment to be that someone will be liable to be included on the register of disqualified directors if the court so decides and if at least one of the companies has gone into liquidation after the date when the Bill comes into force. But it will mean that someone who was the director of a company which was insolvent before the Bill came into force will retrospectively have a black mark put against his name.

I am not sure why the Government do not feel able, when we are changing the law as we are, to go all the way and say that the total score shall be after the coming into force of the Bill. This is a matter of balance, and I do not feel that it would be appropriate to divide the House on it. Nevertheless, it is curious that the Government should have been determined to include an element of retrospection, even though it is admittedly rather less than that contained in the Bill as originally drafted.

Mr. Clinton Davis

It is necessary to have two companies which have gone into a state of insolvency for the position to be triggered off. We felt that it would be wrong, in effect, to postpone the situation which we seek to encompass in this provision, that the public are entitled to a degree of protection which should be afforded as rapidly as possible, and that a director who was a director of the first company that went into a state of insolvency before the Bill came into operation might fairly be taken to have known that his conduct was such as to contribute to the company's insolvency. I do not think that that is an inequitable solution.

In Committee, we were urged to delete the provision altogether in relation to any company which went into insolvency before the commencement of the Act. As the hon. Gentleman has said, it is a matter of balance. As I think he recognises, we considered the matter very carefully in relation to all the debates in Committee, and we concluded that the most equitable way of proceeding for the protection of the public was to adopt this course. I hope that, even if I have not convinced the hon. Gentleman, he will not decide to divide the House on this issue.

Amendment agreed to.

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