PROFITS AVAILABLE FOR DISTRIBUTION (Hansard, 27 February 1980)

§ Mr. Eyre
I beg to move amendment No. 325, in page 47, line 18 leave out '41(3)' and insert '41(1)'.

Mr. Deputy Speaker
With this it will be convenient to discuss Government amendments Nos. 338, 326, 327, 328, 429, 330, 331, 332 and 333.

§ Mr. Eyre
Clause 41 takes advantage of a derogation in the European Community's second directive, obtained by the United Kingdom on behalf of the investment trust companies. It deals with the problem that could arise if the rules in clause 40, dealing with capital maintenance, were applied to investment trust companies. The articles of investment trust companies prevent them from distributing capital profits. If such a company invested substantial sums in shares whose market value had subsequently fallen, the net asset shown in its accounts could fall below the aggregate of the called-up share capital and the undistributable reserves.
The company would therefore be unable to make a distribution out of current income. Furthermore, an investment company which failed to distribute its current income would lose its special position under tax legislation regarding capital gains tax. Clause 41 applies different rules to investment companies in order to overcome that problem. However, as drafted, the clause envisages a continuing role for my Department in issuing certificates and in monitoring companies to which certificates had been given.
In Committee we announced that this group of amendments would be put down on Report. They will achieve a simpler administrative solution. They will provide greater flexibility of distribution for investment companies. They will secure the derogation for, and provide a clear definition of, the investment trust company for which the derogation was sought. Finally, they will provide means whereby other companies—within the scope of the directive's derogation—may obtain investment company status if there are sound reasons for that.
Amendments Nos. 325, 326 and 328 are merely consequential to the following amendments.
1523 Amendment No. 327 maintains the same definition of distributable profit for investment companies as contained in clause 41(3) but, as allowed by the directive, gives a relaxation by providing that a company which falls within the revised definition of investment company, and meets the criteria, will have the option of making a distribution on the basis of the asset ratio test in clause 41 or the capital maintenance test in clause 40. The conditions in paragraph (a) and (b) of clause 41(5), which are required by the directive, are not affected by this amendment and must be met if a distribution is made under clause 41.
Amendment No. 332 relates subsections (8) to (12), and thereby does away with the certification procedure envisaged in those subsections which, as I explained, are replaced by a simpler administrative solution.
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Because no certification procedure is required, it will fall to the directors, in conjunction with their professional advisers, to decide whether the company meets the definition and criteria for an investment company and to ensure that it complies with those requirements. As a safeguard, amendment No. 329 provides that the company meeting the requirements shall give notice to the registrar of its intentions to carry on business as an investment company and has, since the date of the notice, continued to comply with the requirements.
Amendment No. 330 changes the definition of an investment company. The reference to "land or other assets" is deleted, thus restricting the definition to investment trust companies whose business it is to invest in shares and securities with the aim of spreading investment risk, which is the specific class of company for which the derogation in article 15 of the European Communities second directive was sought and obtained by the United Kingdom.
Amendment No. 331 deletes the power envisaged in clause 41(7)(b) for the Secretary of State to prescribe conditions by regulations. The conditions are now set out in the primary legislation by these amendments. They are similar to certain of the criteria in section 359, as amended, of the Income and Corporation Taxes Act 1970, which defines an investment trust 1524 and are designed to ensure that, subject to later provisions in this amendment, companies which are not recognised by the Inland Revenue as investment trusts will not be able to take advantage of investment company status under the Bill. The amendment also provides that necessary consequential provisions of the Income and Corporation Taxes Act will have effect for the purpose of this clause as they have effect for that Act.
The amendment continues by providing that an investment company may not make a distribution unless its shares are listed on a recognised stock exchange. That is a minor change to the clause, which, as drafted, makes the listing requirement a condition for investment company status.
The process of obtaining a listing by a newly incorporataed company will usually take some time and the amendment will allow such a company, provided that it complies with the requirements, to achieve investment company status before being listed. When listed, it would be able to distribute on the basis of clause 41 if it so wished.
Two further restrictions are placed on an investment company before it can make a distribution. These require that, during the period from the start of the accounting reference period preceding that in which the distribution is made to the time of the distribution, the company must not have distributed any capital profits and not have applied the profits specified in cluase 41(4) in the manner prohibited by that subsection.
The period is necessary to prevent the possibility of companies adopting investment company status merely for the purpose of a particular distribution, and then revoking that status and adopting it again for the purpose of the next distribution.
The prohibition on the distribution of capital profits parallels the earlier condition in the amendment—that the company must have such a restriction in its memorandum or articles of association—and is designed to ensure that the breach by the company of such a restriction will also disentitle the company from making a distribution.
The second prohibition concerning the application of unrealised or capital profits has the same effect as clause 41(4), which is a corollary to clause 41(3), and is designed to prevent amounts not directly 1525 available for distribution under that subsection to be distributed indirectly.
Furthermore, the amendment provides that an investment company may not make a distribution under clause 41 unless the company gives the requisite notice before the period commencing with the start of the preceding reference period. As I explained earlier, this is designed to stop companies moving in and out of investment company status at will. Appropriate provision is made for those particular cases where that period began before the appointed day and where the company was incorporated on or after the appointed day.
The amendment also contains a provision that the notice by a company to the registrar of its intention to carry on business as an investment company may be revoked by the company giving notice to the registrar.
Finally, the amendment contains a power whereby the Secretary of State may, by statutory instrument, subject to affirmative resolution, extend the status of investment company to other companies. This power enables different classes or categories of company to be specified as investment companies and allows different rules to be made for the conduct of business, the direction of affairs, and the making of clause 41 distributions by those companies. But, as I stated earlier, the Secretary of State will need to be convinced that there are sound reasons for extending the definition and scope of investment companies under this power.
Amendment No. 333 to schedule 3, which embodies the directive's requirement as to publicity, is merely consequential on the new procedures contained in this group of amendments.
As I indicated earlier, this group of amendments will provide a simpler administrative scheme, give greater flexibility of dividend regime, express a clear and comprehensive definition of investment trust company and provide means whereby the class of investment company may be extended with modifications to the requirements.
These new proposals have been circulated to the Association of Investment Trust Companies, which agrees that they are an improvement to the clause as presently drafted, and to other interested 1526 parties, who have not raised any objections. The Government believe that the amendments provide for a practical scheme which complies with the second directive and contain the appropriate safeguards. For these reasons I recommend to the House that they should be adopted.

§ Mr. Clinton Davis
I shall make a suggestion for the reform of government. When the hon. Gentleman comes to move non-contentious clauses, those advising him should put on his brief "Resist". He will then say nothing.

§ Sir Graham Page
I want to ask my hon. Friend a question on this admirable new amendment. I should be precluded from doing so if the suggestion of the hon. Member for Hackney, Central (Mr. Davis) were adopted. Have the Government in mind any particular companies, or class of companies, to which this amendment would be extended by order? Power has been taken in the amendment to extend the list. The Minister must have something in mind. I wonder whether he will let the House into the secret. Will some companies come within this amendment soon?

§ Mr. Eyre
Not to my special knowledge, but it may be for the convenience of some companies to come within this investment company status. Means will be provided for them to do so in proper circumstances.