HL Deb 04 May 1896 vol 40 cc409-18

Order of the Day for the House to be put into Committee, read.

THE SECRETARY TO THE BOARD OF TRADE (The Earl of DUDLEY) Moved—"That the House do now resolve itself into Committee."


, in moving that the Bill be referred to a Select Committee, said that it had undoubtedly been drafted on the Report of an exceptionally strong Committee. But the subject with which the Bill dealt was of the gravest and widest importance to the commercial prosperity of this country. It touched the whole of the country's joint-stock enterprise, the paid-up capital of which was estimated by the Committee at 1,035 millions sterling. The object of the Bill was to discourage and prevent the formation of rotten companies, and to punish reckless directors and promoters, and to that purpose no one would object. But in carrying it out there was one great danger which must not be lost sight of—namely, the discouragement of good and honest directors. The Committee reported that the majority of companies were honestly formed to carry out legitimate enterprises, and that the business was conducted honestly and with reasonable ability and judgment. It would be a serious matter if these satisfactory results were interfered with in an attempt to protect a minority of uninquiring shareholders from the consequences of their own inaction. Clause 10 of the Bill laid it down that the directors should be personally liable to make good any loss resulting from their not using reasonable care and prudence in the exercise of their duties. Now these duties were nowhere closely defined, and there was an uncertainty which, under the existing law, deterred many first-rate men from taking directorships. On that ground he specially asked that this Bill should be referred to a Select Committee. It was after the event that a director's action was judged; and that fact itself conveyed an uncertainty and risk which very few prudent men would take. An ordinary sound business company might have to spend money liberally in buying up opposition, and if it did not succeed after all there might be a grave question as to whether its directors had employed reasonable prudence. The loss of good directors would be a very serious thing to the joint-stock enterprise of the country; and while these risks and penalties might deter good directors they would have very little effect on the reckless and impecunious men, who had nothing to lose. The late Mr. W. H. Smith told the story of a person of small possessions and large family, whom he warned against the imprudence of risking his all in a company of unlimited liability. The man's answer was that, because of the risk, he earned a much better income than he otherwise could, and that if he were ruined, he had nothing to lose. He hoped his Motion would be accepted by the House, and he believed that the reference to a Select Committee would in no way delay the Bill, as it was out of the question that it could pass this Session.


said that he had no intention of opposing the Motion, which, he thought, would commend itself to the House. He heartily approved of the Bill as a whole, but he had been asked to represent to the House the views of the Belfast Chamber of Commerce, of which he had the honour to be president. That Chamber represented about 100 limited liability companies, including three local banks with a capital representing not less than £15,000,000; and was composed of some of the ablest business men in the United Kingdom; and it was, therefore, a body entitled to some consideration. Within the last few hours he had received communications from the City of Cork Chamber of Commerce, who associated themselves with the representations of the Belfast Chamber, and asked him to express them to the House of Lords. He need not say that he appreciated sincerely the honour which the Cork Chamber had done him in asking him to be their spokesman. Both Chambers heartily approved of the object of the Bill; but they thought it eminently unwise in attempting to place impassable barriers in the way of fraud to damage and restrict the beneficial operation of the Companies Acts. The vast majority of companies were honest, and the Belfast Chamber hoped that the most extreme care would be taken not to hamper honest companies by so penalising the management as to place them at a disadvantage with private traders. Over regulation would make the difficulty of procuring solvent directors of character and capability so great that the companies would fall under the direction of men who might be insolvent and incapable, but who would certainly be reckless as to the consequences to themselves. The Belfast Chamber objected to Clause 10 of the Bill, and to the words "reasonable care and prudence" to which the noble Lord had called attention. He had put down an Amendment providing that a director should be liable to make good any loss arising from culpable negligence or wilful default, but a director keeping within the limits of his authority and acting bonâ fide to the best of his judgment should not be liable for losses arising from any act done in that capacity. The Belfast Chamber pointed out many instances in which the Bill as it stood would be detrimental. For instance, a bank director might sanction an overdraft to a client who was perfectly solvent, but whom unforseen circumstances suddenly rendered insolvent, and the director would, under the Bill, be held responsible. Clause 10 would prevent private concerns from taking advantage of the Companies Act, and it might possibly induce public companies to go into liquidation in order to revert to the old system of trading as private companies. The Amendment which he should have moved if the Bill had gone into Committee provided a safeguard for shareholders in the case of culpable negligence or of wilful default on the part of directors, and of a safeguard for bonâ fide directors in the case of acts outside their control, and contrary to their expectations. Mr. Harold Brown laid great stress on this point in a recent article. He said:— That a prospectus ought to be a fair and bonâ fide statement, according to the best judgment of the directors, of the main facts relating to the Company, and of its general prospects, everyone will agree, also that it ought not to mislead either by statement or concealment; but to make directors responsible for anything save fraudulent misstatement, or concealment, reckless or gross negligence, or misstatements not covered by the Directors' Liability Act of 1890 would go far to render the position of a director untenable, except by the fraudulent, impecunious and reckless. The remarks of Mr. Brown are endorsed by the Belfast Chamber of Commerce, and they desired to adopt the language of the Chamber of Commerce of London that— The main protection to shareholders and creditors must always be the securing of honest and capable directors, and that provisions which appeared to require directors to expose themselves to indefinite risks and to invite attacks upon them seemed most unwise. He would also propose to omit from Clause 14—which provides specific requirements as to particulars stated in a prospectus—the words "every material fact known to a director" and the words "which would influence the judgment of a prudent investor." To his mind, and to the minds of the Chamber of Commerce over which he presided, the words "which would influence the judgment of a prudent investor" were incomprehensible. Mr. Harold Brown wrote on that point:— It is with something akin to dismay that I see embodied in a proposed Act of Parliament a provision that every prospectus is to set forth not, only the dates and the names of the parties to every material fact, but also the short purpose and effect of every contract, and every fact which might influence the judgment of a prudent investor. Those words were so vague and indefinite that they were certain to lead to serious litigation; and he thought some definition of them should be made in order that they might be thoroughly understood. He would also move the elimination of Clause 14, as he considered it was included in Clause 13, and as questions of a delicate and difficult character might arise under it, owing to its indefinite character. In the opinion of the Belfast Chamber of Commerce, questions might arise on this clause between A and B, as between two promoters or directors. 1. Was A known to B? 2. Was some particular fact within the knowledge of B? 3. Was the fact one that should have been disclosed in the prospectus. 4. Was the fact a material fact? Again—all those questions having been answered affirmatively—5. Was there any loss or damage to A? 6. Or to the company. And if there was—7. How much was the damage? Seven absolutely indefinable issues might arise out of seven lines, with costs and litigation without limit. The Belfast Chamber of Commerce rightly hold that the necessary contents of the prospectus ought to be clearly defined or definable, and no encouragement or basis whatever should be left to litigation on the "off-chances" with men of straw on one side and directors of substance on the other. In Clause 19, he also proposed to leave out, "the holders of not less than one-tenth," in order to insert "one-tenth in number of the shareholders on the register holding not less than one-fifth." He did not think it fair that any one shareholder who might hold one-tenth of the shares should be able to call, when he chose, an extraordinary meeting of the company. He hoped, in conclusion, that the objections raised by the Chambers of Commerce would be attended to before the Bill left the House.


said he did not oppose the Motion to refer the Bill to a Select Committee. It was perfectly natural that Parliament, in the case of a Bill of this kind—intimately connected as it was with the interests of the commercial community—should wish to proceed with caution and care. It should be remembered that the Bill was the outcome of a very able body of gentlemen, representing the legal and commercial interests of the country; but still, if the House considered it would be of advantage to hear, through the medium of a Select Committee, the views of those who were daily engaged in promoting and administering public companies, the Government had no objection to that course being adopted. As, however, their Lordships had, by assenting to the Second Beading of the Bill, practically approved of the main principles on which it was drawn, and having regard also to the great public interest which existed in the Bill, he hoped he would before long be in a position to ask the House to pass the Measure through its final stages. He thought that the Committee stage of the Bill was the proper time for dealing with the points of detail raised in the speeches of his noble Friends.


feared that referring the Bill to a Select Committee would probably delay its passing into law. But he could not deny the justice of the appeal that the delicate and difficult questions in the Bill would be better considered by a Select Committee than, possibly, by a Committee of the whole House.


said he did not complain of the conclusion at which the Government had arrived, because every body would agree that the subject was not only of great importance, but of very considerable difficulty. Nobody was more convinced than he was of the necessity for some legislation of this description, but some remarks he had made on the Second Reading of the Bill were very strangely misunderstood to indicate a lukewarmness on the subject. All he had intended to do was to point to the fact that no legislation of this kind could take the place of that prudence and care which people ought to exercise, and that the more they could drive it into the minds of the public that a high rate of interest necessarily involved a risk to the capital the better. Of course it was quite consistent with that view that one should have the strongest desire to prevent any thing that would be dishonest, or even unfair, or calculated to do wrong. The difficulty in legislation of this kind always was to hit the right medium. They wanted to prevent what was unfair and injurious; they did not want to prevent what was legitimate; and it was not an easy matter so to draw the line as to secure the one without sometimes running some risk in regard to the other. It was the bounden duty of Parliament when grave evils had been made manifest, as they had in regard to some companies, to use their utmost endeavour to put such legislation on the Statute-book as would in the highest possible degree minimise them in the future. He rose to make a practical suggestion. The reference of the Bill to a Select Committee might render it impossible to pass in its entirety this year a Measure of this description. He was not sure, even apart from that, it was by any means certain that there was a prospect of such a Bill being passed, because it necessarily involved many topics giving rise to considerable controversy, and touching deeply so many interests that the provisions of the Bill were sure to be thoroughly threshed out in the other House. The committal of the time of the other House was already considerable; and it could only be at a late period of the Session this Bill could receive attention there. Therefore, he could not help suggesting to the Government, to consider whether it would not be desirable to attempt to pass at least only provisions which were urgently called for, and would not give rise to substantial controversy. Among these were the conditions of allotment, the requirements as to what should be in a prospectus, the provisions for the winding-up of illegal companies, and others. These might be framed so as to stop the growth of present evils, and at the same time not to give rise to considerable controversy. That would leave over the more controversial matters for a subsequent Session. It was desirable to pass the provisions he had named as soon as possible for the additional reason that, as they had been suggested, there would be a risk of even greater evils than some of those which had occurred if it were known that in the meantime companies were formed of a kind and under circumstances which would soon become impossible. This was a reason, in addition to the desirability of the legislation itself, why it should take place as soon as possible. He therefore suggested that it should be an Instruuction to the Committee that they have powers to divide the Bill into two parts and report the less contentious part, so that it might be satisfactorily completed and passed.


I do not think it necessary to take a pessimistic view of the result of referring the Bill to a Select Committee. I do not mean to say that the prospects of passing the Bill through Parliament, in view of the enormous amount of work which lies before the other House are very great, but I do not think they will be seriously damaged by the consideration of the Bill by a Committee of this House. The Bill cannot possibly be considered by the other House till late in the summer, when I confess, I hope our deliberations will be over. But I confess I think the suggestion of the noble and learned Lord seems to me to be open to some objection. It is not necessary to give the proposed Instruction to the Committee, because it is always open to the House on the Third Reading of a Bill to cut out all clauses which are necessarily contentious, and to send the Bill in its more restricted form to the other House. On the other hand, the dividing of the Bill into two parts involves, as I understand the noble Lord, the retention of that part which you are to pass of those very provisions which my noble Friend behind me referred to with respect to the judgment of a prudent investor:— For the purposes of this section every contract and fact is material which would influence the judgment of a prudent investor determining whether he would subscribe for the shares or debentures offered by the prospectus. Another matter in this Bill which has alarmed many in the commercial world is the tremendous penalty which is to be inflicted for a sin that is comparatively light. If a director makes any mistake, however small, or if he takes part with his brother directors in a mistake, however small, he runs the risk, if he meets with the adverse opinion of a Judge, of being condemned to make good all the losses that shareholders may show to have resulted from that error. Now, the matters with which these companies deal are so large that this probably means to an errant director not only great disgrace, but the utter destruction of his fortune. That is a very heavy penalty to inflict for a very slight mistake, and I can quite understand that there is some feeling of alarm on that point. I have no doubt noble Lords will feel, and probably all legal Members of the House will feel that the Judges will be so careful and judicious in determining the meaning of the words "reasonable and prudent" that no danger will come to an innocent man from that enactment. But we have to deal, not so much with actual danger as with the effect the apprehension of that danger may have on the minds of those who have to face it, and the fear is that there will be a panic in this matter, and that men will not, for the mere remuneration they obtain as directors run these tremendous risks, and you will find yourselves driven to men of straw as directors. I do not say this is a justified fear, but it is a fear which exists in many minds, and which we must deal with as a fact. We have not only to prevent evil, but to prevent the apprehension of evil, because the apprehension of evil will injure the working of our company system. We have hitherto relied on the maxtim caveat emptor; but this would be changed to caveat, director; and persons might not see that directors would have sufficient interest to warrant them in exercising the extraordinary degree of caution that would be called for. For these reasons, I should not like to accept at once the view that this clause about the prudent investor is one of the non-contentious and accepted portions of the Bill; I should much rather that the matter were investigated by a Committee. I hope it will take the evidence and hear the views of those thoroughly acquainted with such affairs, and we have some in this House who occupy that position. Of course they can call to their aid officers of the Government who have a certain knowledge of these matters. When we are dealing with interests of the highest importance, I think we ought to hear what are the views of those who have a practical acquaintance with the working of the commerce of this country. I should, therefore, rather counsel the House to refer the matter to a Select Committee without imposing any conditions upon the action of that Committee. I believe that the labours of the Committee will be over in quite sufficient time to enable us to take advantage of any chance there may be of the Bill's passing through the other House, and we had better not restrain in any manner the freedom of their deliberations on a question that is of so much importance.


said that what the noble Marquess had suggested would entirely meet his view, which was that before the Bill left this House—[The PRIME MINISTER: "Hear, hear!"]—they would be able to consider what the chances of the Bill would be in the other House, and if expedient to send down the non-contentious part, in the hope that it would pass this Session. In making the suggestion he did not mean to imply that certain groups of clauses should be taken en bloc. In stating the objection to that course, the noble Marquess had assumed the answer he might give; but he was not sure he should have given that answer.

On the Question, that "now" stand part of the Motion, resolved in the negative; and Bill referred to a Select Committee.