HC Deb 19 October 1981 vol 10 cc84-94 '.—(1) Section 200 of the 1948 Act (register of directors and secretaries) shall have effect subject to the following modifications. (2) In subsection (2)—

  1. in paragraph (a) (particulars of directorships to be kept on the register) after the words "particulars of any other directorships held by him" there shall be inserted the words "or which have been held by him";
  2. in the proviso (particulars not required to be kept on register) for all the words preceding the words "and for the purposes of" there shall be substituted the words—

"Provided that it shall not be necessary for the register to contain on any day particulars of any directorship—

  1. which has not been held by a director at any time during the five years preceding that day;
  2. which is held by a director in any company which—

  1. is dormant or, in relation to the company keeping the register, is a relevant company; and
  2. if he also held that directorship for any period during the five years immediately preceding that day, was for the whole of that period either dormant or such a relevant company;
  3. (c) which was held by a director for any period during the five years preceding that day in a company which for the whole of that period was either dormant or, in relation to the company keeping the register, a relevant company;";
  4. and at the end of that subsection there shall be added the words "and
  5. a company shall be treated as being or as having been dormant during any period during which no transaction occurs which is or was a significant accounting transaction (within the meaning of section 12(6) of the Companies Act 1981) for that company; and
  6. (iv) a company shall be treated as being or as having been at any time a relevant company in relation to any other company if at that time it is or was a company of which that other company is or was a wholly owned subsidiary or if it is or was a wholly owned subsidiary of that other company or of another company of which that other company is or was a wholly owned subsidiary.".

(3) The following subsection shall be substituted for subsection (7)— "(7) If any inspection required under this section is refused or if default is made in complying with subsection (1), (2), (3) or (4) of this section, the company and every officer of the company who is in default shall be liable on summary conviction to a fine not exceeding the statutory maximum or on conviction after continued contravention to a default fine not exceeding one-tenth of the statutory maximum.". This subsection shall not have effect in relation to any offence committed before the appointed day. (4) Subsection (4) of section 200 (notification to registrar of changes in register) shall not apply in relation to any change in the particulars contained in a company's register of directors and secretaries made solely by reason of the coming into force of subsection (2) above but if, after any such change has occurred and before the company makes its next annual return, any other change in those particulars occurs, the company shall send to the registrar a notification in the prescribed form of any such earlier changes and the date on which they occured at the same time as it notifies the registrar of the later changes in accordance with section 200(4).'.—[Mr. Eyre.]

Brought up, and read the First time.

7.45 pm
Mr. Eyre

I beg to move, That the clause be read a Second time.

Mr. Deputy Speaker

With this it will be convenient to take the following:

New clause 4—Disclosure of former directorships.

New clause 17—Duty of court to consider disqualification of directors.

New clause 18—Disqualification of directors etc.

New clause 19—Duty to consider disqualification.

New clause 33—Prohibition on directors of insolvent companies from acting as liquidators, etc.

Government amendments Nos. 1, 110, 114, 139, 146 and 166.

Mr. Eyre

One of the most important issues which we discussed in Committee concerned the effectiveness of the powers to disqualify persons from managing companies. As a result, we have looked carefully at the provisions concerned and brought forward a number of amendments, of which new clause 23 on the disclosure of past directorships is one. We are thus also proposing further improvements to clause 87 on the disqualification of directors and a tightening up of section 187 of the Companies Act 1948 on the disqualification of undischarged bankrupts. The Opposition have proposed a measure to improve the effectiveness of section 9 of the Insolvency Act 1976.

However, we continue to hold the view that clause 87, taken with these other measures, will constitute an effective reform of the power to disqualify. It will permit magistrates' courts to disqualify for up to five years a person convicted of an indictable offence in connection with the promotion, formation, management, receivership or liquidation of the company or who has been in default at least three times in making returns to the registrar. These changes will improve the effectiveness of the Department and the police, since they will avoid the need for the present time-consuming and costly procedures involving application to courts of higher jurisdiction. The deterrent effect of disqualification will also be improved, partly by widening the coverage of the disqualification order—it will include all stages of involvement in the life of a company—and partly by extending the maximum period for which a person can be disqualified from five to 15 years—although this power will be exercisable only by courts of higher jurisdiction.

There is a further point. Some of the concern which has been expressed has been over the ability of some of those who ride roughshod over their customers or suppliers—whether out of unscrupulousness or extreme carelessness—to avoid winding up. One difficulty which has hindered the Department in pursuing such cases is the effect of the judgment in the case of the Director of Public Prosecutions v. Schildkamp in 1971. That judgment held that the criminal remedy for fraudulent trading applied only in circumstances in which the company was being wound up.

Therefore, I draw the attention of the House to clause 88, which would enable a case of fraudulent trading to be brought whether or not the company was being wound up. Furthermore, as fraudulent trading is an offence which can be tried either summarily or on indictment, clause 87 would enable an application for disqualification to be made in a case tried before the magistrates.

Our conclusion, therefore, is that the improvements already proposed in clause 87, together with our further proposals to which I shall come shortly, and the reform embodied in clause 88, will go a considerable way to meet the concern which has been expressed on this sensitive subject.

I turn first, however, to the Opposition's proposals. I do not believe that it is practicable to contemplate introducing a procedure for automatic disqualification, because the courts would undoubtedly entertain applications for leave to act from such so-called automatic disqualifications because of the serious consequences to the individuals concerned of such disqualification. The courts could not accommodate the resulting increase in work; nor has the Department the staff available to give evidence on such applications for leave to act. That latter point is very important. The courts will not be able to decide whether a person should be given leave to act as a director unless it hears evidence from the Department.

This argument applies with particular force to the attempt by the Opposition in new clause 18 to render automatic the provisions of section 9 of the Insolvency Act 1976. They suggest the deletion of the test of a director's lack of fitness in that section—which is required before a disqualification order can be made—thereby making disqualification an automatic consequence of involvement in two insolvencies in five years. Those so disqualified would be able to apply for relief and, as I said, could be expected to try to clear their name and apply for relief with the quite impracticable results with regard to the demand on resources which I described.

I also point out that new clause 18 takes no account of the improvements that we are making in clause 87 which I have already described in outline. I believe these improvements meet the need for stricter and more effective means of disqualifying directors without the impracticable staffing consequences of the automatic disqualification proposal put forward by the Opposition.

I am, however, grateful to the Opposition for bringing forward new clause 33. We believe that it will most usefully strengthen the provisions of section 9 of the Insolvency Act 1976, particularly as regards the extension of the maximum period of disqualification for involvement in two or more insolvencies where the court considers that a director's conduct makes him unfit to be concerned in the management of a company. The widening of the coverage of such a disqualification order to include promotion, formation, receivership and liquidation will bring the section into line with the improvements we are making to section 188 of the Companies Act 1948.

Before turning to the Government's new clause 23, I should like to comment on new clauses 17 and 19 which have also been selected for debate. New clause 17 would place a duty on the court, in the course of the winding up of a company, to consider whether a disqualification order should be made. New clause 19 is similar, except that it would require the court to consider disqualification when entertaining a petition to wind up a company on the grounds of insolvency or fraud.

The intention of the proposal is no doubt to avoid the need for an application to be made to the court so that orders can be made without action by the Secretary of State. We believe that the proper way for such matters to be handled is to require an application to be made to the court for a disqualification order, which is what the law provides for at present in section 188 of the Companies Act 1948 and section 9 of the Insolvency Act 1976. In the circumstances of winding up, section 188 enables an application to be made to the court by the Secretary of State, the official receiver, or by the liquidator or by any person who is or has been a member or creditor of the company.

Section 9 of the Insolvency Act 1976, which enables application to be made where a director has been involved in at least two insolvencies within five years and where his conduct suggests that he is unfit to be concerned in the management of a company, enables the official receiver, who is the person who will have access to the facts of the case, to make an application. I would recommend to the House that these rights of application are entirely adequate and proper to ensure that disqualification orders are sought.

I also observe that, if the court were to have the power given to it by this proposal, it would need to call for evidence, particularly from the Department, to determine whether there are grounds for disqualification. This would represent an unnecessary duplication of obligation, since the Department would already in such cases be considering whether to apply for a disqualification order under the existing statutory powers.

To the extent that the proposal is intended to underline the need to disqualify persons where their conduct or convictions suggest that disqualification is an appropriate penalty, I am happy to confirm that it is the Department's policy to seek a disqualification order wherever it appears to be merited. I wish to emphasise the forthrightness of that declaration of policy. I do not therefore believe that there is any need to place a duty on the court as such to consider whether to disqualify a person. In the circumstances—I apologise for the length of time I have taken going through these complex matters—I therefore invite the Opposition to consider withdrawing this proposal on the basis of the considerable improvements that I have summarised and also taking account of the contribution made by Opposition Members to the tightening of the provision of disqualification in regard to section 9.

The same criticisms also attach to new clause 19. I do not, therefore, believe it to be necessary. There would also be a further difficulty in that the power of the court would apply before a winding up order was made. In those circumstances, no liquidator would have been appointed and thus there would be very little evidence on which the court could come to a view as to whether disqualification was appropriate. I would therefore stress that the present procedure—that of enabling applications to be made by those who are likely to be in possession of the facts and the importance of this will be appreciated by the Opposition—is best suited to the seeking of a disqualification order.

I turn now to the Government's proposal in clause 23. That clause will require companies to keep details of past directorships held by their directors in addition to the details of other current directorships which they are at present required to keep by virtue of section 200 of the Companies Act 1948. These details will be available for inspection in two ways. First, any member of a company or any other person—I am thinking here particularly of creditors or potential creditors or members—will be able to see such details on the register of directors that the company is required to keep at its registered office. Section 200(6) specifically provides for such inspection. Secondly, they will be able to examine such details on the company's file which is held in Companies House.

The purpose of the clause is to enable interested parties whether conducting business with a company or considering investment in it to be able to ascertain details of the record of any of its directors. It will in future be possible to obtain a list of all companies of which a person has been a director in the past five years and to inquire as to the success or otherwise of these concerns. I believe that our proposal more than meets the substance of the changes advocated by the Opposition in new clause 4 which would require a director who is involved in an insolvency to disclose to the Registrar of Companies his former directorship of any other insolvent company, unless the court grants him relief from so doing.

Although, as I said in Committee, such a proposal is subject to two fundamental criticisms—I shall be mentioning them briefly—which our proposal is designed to avoid, I wish to record our debt to the hon. Members for Norwood (Mr. Fraser) and Hackney, Central (Mr. Davis) for the idea embodied in their proposal, which we have adopted and I believe made practicable. The first defect of new clause 4 is that it would apply to any former directorship irrespective of how long ago the company concerned became insolvent. I doubt the relevance of information about a person's career going back, say, 30 years. The second defect is that the flow of applications for relief would be considerable, because any director who felt that the insolvency was not caused by his actions, or who wished to suggest that it was not, would apply for relief from disclosure. Such applications for relief could lead to an unmanageable load of work for the courts and the Department of Trade which would be expected to take a view as to whether they should be contested in the public interest.

New clause 23, on the other hand, avoids the crucial manpower problems to which the Opposition's proposal would be prone. It also covers all directorships within a period of five years, irrespective of whether the companies concerned have become insolvent, thereby leaving the inquirer free to look at the business record of any such companies and not simply at those that were insolvent.

I wish to conclude with a few words about the detail of new clause 23. Subsection (2)(a) introduces the requirement that details of past directorships must be kept, while subsection (2)(b) relieves companies from keeping details of past or present directorships of a "relevant" company—that is, of any other company in the same group—or of a dormant company.

These two provisos are intended to avoid requiring companies to disclose unnecessary detail. Thus, one person may be director of a number of companies in a group, thereby leading to overlapping disclosure by each such company, yet the identity of the other members of the group can be readily found in the group's annual report and accounts and it is therefore unnecessary to require disclosure of directorships of other group companies. 8 pm

On the other hand, a "dormant company" is defined in subsection (2)(c) as one in which no "significant accounting transaction" has taken place—that is, any transaction that is required to be entered in a company's accounting records—other than one arising from the taking of shares in the company by a subscriber to its memorandum in pursuance of an undertaking of his in the memorandum. This exemption will, therefore, relieve shelf companies—for example, those promoted by specialist firms—from having to disclose the inevitably numerous but purely nominal past directorships of those persons who act as their directors until they are sold and begin to trade.

Subsection (3) increases the penalty for refusal to permit inspection of the register, for default in keeping it, or for failing to send details of it to the Registrar of Companies, to the statutory maximum, which is currently £1,000. At present, the fine on summary convictions under section 200(7) of the Companies Act 1948 is one-fifth of the statutory maximum—that is, £200. Similar increases are to be made in the case of conviction for continued contravention, and they represent the importance we attach to full disclosure of past directorships.

Finally, subsection (4) permits companies to send the new information on past directorships to the registrar when their next annual return is made, unless they have occasion to make a return of changes in the register of directors before that time rather than immediately after making the change in the register. This will avoid burdening companies with the need to make an extra return and avoid the risk of burying the registrar's staff under an immense mountain of paper.

Whilst I am dealing with technical details, I shall also speak on those Government amendments which have been selected for debate with new clause 23 since they are consequential upon it.

Amendments Nos. 139 and 166 increase the penalty and repeal the existing one for failure to make an annual return to the Registrar of Companies.

Amendment No. 146 introduces a definition of "the statutory maximum" into the Companies Act 1948 to apply to section 200 of that Act, as amended by new clause 23. Amendment No. 114 therefore deletes the definition in the Bill of "the statutory maximum", which is no longer needed. Amendments Nos. 1 and 110 will delete definitions to "the statutory maximum" in the Bill which also become superfluous.

I apologise again for having had to go into detail on these new clauses and amendments. I have spoken so fully, first, because it was necessary to establish the detail of an important matter such as this and, secondly, because I wanted to emphasise the great progress that has been made as a result of these changes. I refer to the tightening of procedure in an area about which I know Opposition Members were as concerned as we were. Certainly improvements were desired. I am glad that those improvements have been brought about. Further, I wanted to explain to the Opposition the difficulties about automatic disqualification. In the interest of tightening the system as much as possible, we have made what I believe are practical proposals which improve the situation. In the circumstances, therefore, I hope that the Opposition will consider withdrawing their new clauses.

Mr. John Fraser

I am grateful for the Under-Secretary of State's acknowledgment to the Opposition, and we, in turn, acknowledge our debt to organisations such as the Consumers Association and programmes such as "Checkpoint", which have highlighted what has been an abuse of company law.

I am grateful for the new clause that the Government have put forward and for the fact that they accept our new clause 33, on which I hope we shall have the opportunity to vote since the Government have indicated that they are willing to accept it.

Limited liability is a privilege that enables people to have no liability for a company's debts, provided that their shares are paid up. It is a necessary privilege. Without it, commercial investment would be impossible. But, like all privileges, it is open to abuse, and to some people limited liability has proved to be a racketeer's charter. The racket—or abuse—with which the Opposition clauses try to deal is the practice of companies bleeding the public of their money and escaping from liability by going into liquidation and then, much worse, the persons involved forming another company and repeating the exercise a second, third, or fourth time and sometimes, even using the name of earlier failed companies. It is an abuse by people who bleed the company's money like leeches and have a statutory reincarnation. Having sucked enough blood and dropped off the body, they have gone into demise and have been able to re-form themselves and carry out the same practice time and again. Perhaps the best known example is that which has been outlined in Money Which?—that of the Lylybet case. I shall describe to the House the number of times that Lylybet has undergone a statutory reincarnation.

Lylybet Dishwashers Ltd. was formed in 1972 and dissolved in 1973 because it was not trading. Lylybet Dishwashers (Southern) Ltd. was formed in 1972 and the latest accounts show that the company is insolvent. That was followed by Lylybet Dishwashers (North West) Ltd. which was formed in 1974 but has been in compulsory liquidation since 1977. But the company had a charmed life because next came Lylybet Dishwashers (East Midlands) Ltd. which was formed in 1974 but dissolved in 1978 because it was not trading. Then there was a slight change of name to Lylybet Regulators and Controls Ltd. which was formed in 1977 but so far no accounts have been filed. We do not know what has happened to it. Then there was another slight change of name, to Dishmaster Ltd., which was formed in 1971 but was in voluntary liquidation in 1973 due to insolvency. Almost the same promoters then formed a company called Bridgedec Limited in 1970, but it was dissolved in 1979. They did not give up entirely. They gave up the name that they had got used to and started a company called Loftrooms Ltd. in 1978. The 1979 accounts showed a loss of over £65,000. To finish the whole thing off, Loftrooms (London) Ltd. was formed in 1969 but it stopped trading in 1978. Almost the same group of people was involved in every company.

If I drove through a red traffic light on three different occasions I would probably be disqualified from driving, but far too often a person can metaphorically run down his creditors, be reckless towards consumers, and disregard all the commercial signals and nothing seems to happen. He can go on from one corporate form to another, continuing to take money from the general public without necessarily committing a criminal offence. It is to that abuse that our set of new clauses is directed. The courts have been too lax in the exercise of their powers to disqualify people who are involved with insolvent companies and who abuse the privilege of corporate identity. The law that gives the dog two bites—it says that if a person has been involved in two or more insolvencies he may be disqualified—has not been tightened. The object of the new clause is to try to deal with those problems a little more forcefully in order to protect consumers and the general public.

A person can form a company and sell a product from door to door, take a considerable sum in deposits and pay such excessive salaries to directors or favourite members of the staff that the deposits are exhausted. If the company does not have enough money to continue trading it must go into liquidation, but no criminal offence has been committed and the persons involved can conduct the same operation time and again.

Another example of malpractice is the selling of goods with a guarantee. For example, someone may guarantee to protect a car from rust for 20 years—a somewhat exaggerated claim, but one such company is mentioned in "Money Which?"—or guarantee that a mended roof will be rainproof for 20 years. The problem is that people sell those guarantees knowing that they intend to put their company into liquidation within two or three years and will subsequently engage in the same operations using a company with a similar name. That racket must be stopped.

I acknowledge the improvement that will result from the Government's new clause 23, which accepts the idea that I put forward in Committee of making directors disclose their former associations. I should like the clause to have gone further so that an asterisk was put against all former directorships that ended in the winding-up of a company on the grounds of insolvency. It is not good enough to leave the public to try to distinguish between successful and unsuccessful companies.

I believe that it would be right to put a duty on the courts to consider disqualification, so that a judge or magistrate would at least have to think about it and ask himself whether the conduct of a director had been so antipathetic to the interests of the general public that he ought to be disqualified. That approach is outlined in one set of new clauses.

Our other approach is even more far-reaching. It is that there should be automatic disqualification of all those involved in an insolvency unless they prove to the satisfaction of the court that the insolvency and the loss of money by creditors and consumers were not due to their mismanagement. That would be the ideal position. If a company goes bust and consumers and creditors lose money should the burden of proof be on the creditors or on those who took part in the management and conduct of the company?

I believe that if we are to tip the scales they must be tipped against those who have abused the privilege of limited liability. That is why the Opposition new clauses provide for automatic disqualification, subject to the persons involved being able to ask the court whether they may be absolved.

The Government's new clause is not enough, but it is a distinct improvement, and taken with our new clause 33, which the Government are willing to accept, it will begin to remove some of the difficulties. I welcome the fact that we have been able to make some progress.

We should prefer not to withdraw our new clauses, which we still support, but perhaps it will not be necessary to press them to a Division.

8.15 pm
Mr. Trotter

I welcome new clause 33. It is a matter of continuing concern to those who provide credit to companies that there are cases—not as frequent as is sometimes made out, considering the vast volume of trade which takes place every day without fraud—in which a number of people are active in defrauding creditors of a limited company and using the privilege of limited liability to do so.

There is concern on both sides of the House that such people should be dealt with adequately, and I am concerned that we are not dealing with them adequately. The onus is too much on those associated with the liquidation, whether the liquidator, shareholder or creditor, to originate action. That is difficult for those people. My hon. Friend the Under-Secretary referred to section 188 of the 1948 Act which provides that the court, on application by the official receiver, the liquidator, a shareholder or a creditor, may make an order to prevent someone from being a director of a company. I suspect that few such orders have ever been made and I have certainly not been involved in any cases where that has happened.

I am not convinced that section 9 of the Insolvency Act 1976 is yet being used to the degree that I wish or with the speed that I should like to see. The gentlemen with whom we are concerned can operate with remarkable speed and can build and leave the shells of two or three companies in the time it takes for their activities to receive due attention.

It is the duty of the authorities to take the lead in dealing with such people. It cannot be left to those associated with a company, the victims or the liquidator. Often a company has hardly any money left in it and no funds are available for an investigation. I am pleased that the Government are prepared to accept new clause 33, which is an improvement on the present position, though I am not sure that we shall not have to have a second bite at the cherry, perhaps when an insolvency Bill is presented in a future Session.

New clause 33 provides that prohibition will apply also to someone acting as liquidator of a company. That is to be commended. I have in my hands a report about a liquidator who is apparently handling about 300 liquidations. He has a criminal record. He was convicted of two offences of dishonesty early in 1970, was adjudicated bankrupt some years before and, while bankrupt, he pleaded guilty to handling stolen goods. He has also been convicted of contravention of the Companies Act and has been in prison.

Yet that man has been able under the present law to act as the liquidator of companies. That is wholly wrong and I hope that new clause 33 will provide the power to deal with that sort of person as well as with directors. Clearly such people should not be allowed to act as liquidators, and I was delighted to read that he was removed by the court when a creditor engaged counsel and went to court. However, most creditors are not prepared to do that, whether with a director or one of those happily rare black sheep who act as liquidators.

I am delighted that the Government are prepared to accept new clause 33 and I hope that it will be applied with vigour. The clause will be of no use unless it is vigorously applied by the Department of Trade.

Mr. Eyre

I appreciate the remarks of my hon. Friend the Member for Tynemouth (Mr. Trotter) and also the good points that were made by the hon. Member for Norwood (Mr. Fraser). All hon. Members will appreciate the significance of Sir Kenneth Cork's committee and the study which is going on which will provide a basis for advance in this commplex area.

Question put and agreed to.

Clause read a Second time, and added to the Bill.

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