§ [Second Reading.]
§ Order of the day for the Second Reading read.
§ THE EARL OF GRANARD
My Lords, the Bill to which I have the honour to call your Lordships' attention to-day is based on the Report of the Departmental Committee called together by Mr. Gerald Balfour in the year 1905, and I do not think it would be out of place if I were here to mention the composition of the Committee in order to show your Lordships what a very representative body it was. It included names which stand foremost in this country in the departments of law, of commerce, and of finance. The Chairman of the Committee was the present Lord Chancellor, and on his being translated to this House his place was taken by Mr. Warmington. Among the other members were Mr. Hichens (Chairman of the Stock Exchange), Sir W. Holland (Chairman of the Associated Chambers of Commerce), Lord Faber, Sir Felix Schuster, and Sir Edgar Speyer. These gentlemen were all busy men, and I think that they deserve a word of thanks from the Government for giving up so much of their valuable time unreservedly to the purposes of the inquiry, which was conducted with so much ability, and which has enabled the Government to bring in the present Bill.
I should like to bring to your Lordships' notice the great importance to trade of the limited liability system, and the very great interests involved. Since this system was first inaugurated, in 1862, it has made the most wonderful progress; in fact it has increased by leaps and bounds until a very large proportion of the trade of this country is 165 carried on by corporate bodies formed under the Companies Act of 1862. It may interest your Lordships to know that the number of companies now carrying on business under the Acts is 40,000, and the capital embarked in them reaches the huge total of £2,000,000,000 sterling. Your Lordships will fully understand with what a deep sense of responsibility the Government have approached any amendment of the Companies Acts, and, in order that no change should be proposed which could in any way be considered ill-advised or unnecessary, they have sought the advice and assistance of the Committee I have already mentioned.
The reference to the Committee was framed in wide terms—namely, to inquire into what amendments were necessary in the Acts relating to Joint Stock Companies; and afterwards the Board of Trade expressed a hope to the Committee that they would consider generally by what means Joint Stock Companies could best be fostered and encouraged, as well as the means to be taken by which illegitimate or fraudulent practices might be put an end to. I may now tell your Lordships that the policy of the Bill, so far as it deals with fraud, is by insisting on publicity, and it is hoped that by making information accessible to all who may seek it the best protection to investor and creditor may be created. This policy was included in the 1900 Bill, but is carried a good deal further in the present measure.
Now, as regards the Act of 1900, one of the requirements was that certain information should be given in every prospectus issued by a company; but, like most Acts of Parliament, this provision was immediately got round, and companies, in order to avoid complying with this requirement, simply did not issue a prospectus at all, but put the shares on the Stock Exchange and sold them there, instead of issuing them by means of a prospectus. Consequently the buyer had no knowledge of the circumstances of the company, and had no redress whatever, no matter how fraudulent the circumstances of the formation of the company might have been.
In the present Bill, my Lords, by the first Clause, it is hoped to stop this state of affairs by compelling every public company which does not issue a prospectus 166 to deposit with the Registrar of Joint Stock Companies a statement containing the same information as would have been contained in a prospectus had one been issued. It is only proposed to apply this section so far as public companies are concerned, and in this respect it is important to note that a distinction is made for the first time between public and private companies. The definition in the Bill of a private company is—a company which limits the number of its members to thirty and restricts the right to transfer its shares, and is prohibited by its regulations from issuing any invitation to the public to subscribe for its shares or debentures. All such companies are not to be required to file a statement in lieu of prospectus. Although the distinction between public and private companies is introduced for the first time, the Act of 1900 divided companies into two classes, those which issued a prospectus and those which did not; and this provision, your Lordships will not be surprised to hear, has proved quite useless, for a large number of companies have been launched on the Stock Exchange and shares sold to the public without any information being available to the purchasers of the shares as to the enterprises in which they had become partners. Surely, my Lords, this is a most unsatisfactory state of affairs.
I will now turn to Clauses 7, 8, and 10, which deal with the questions of issuing new capital at a discount and of the payment of interest out of capital during construction. As the law at present stands, companies formed under a special Act of Parliament usually have power to issue new capital at a discount and sometimes to pay interest during construction, but this does not apply to companies established under the Companies Acts. It is proposed by the Bill before your Lordships to remove these disabilities, subject to certain restrictions. Your Lordships will probably agree that it would be dangerous to give companies unrestricted power in these respects, and the Bill proposes, therefore, to limit the power of issuing new capital at a discount to companies which have carried on business continuously for more than two years; and, further, to insist that full information as to any capital issued at a discount shall be filed with the Registrar of Joint Stock Companies, and that the 167 amount of the discount shall be stated in any balance-sheet of the company until the whole amount has been written off. In the same way, no payment of interest out of capital can be made unless the payment has been authorised by the regulations of the company and has received the sanction of the Board of Trade.
The Bill proposes, in Clause 11, to extend the particulars of mortgages and charges affecting a company's property which it is now necessary to register. This is a very important provision, and carries out what I think is the main principle of the Bill—namely, the affording of effective information regarding companies to those who have business dealings with them. We all know that the Legislature cannot make a man prudent or wise. But this Bill, in my opinion, certainly safeguards the fool from the knave as much as is possible; and this is, I think, best arrived at by giving ready facilities by which the public can inform themselves with regard to any material facts affecting the company which may be in question.
Another step in the same direction is the provision that every company is required to forward to the Registrar a statement of its assets and liabilities in the form of a balance-sheet. This change has long been demanded by a large section of the mercantile world, but has been opposed by a minority for fear that the giving of such information would disclose trade secrets. In order to meet this point the clause provides that the balance-sheet filed need not include a statement of profit and loss. It may interest your Lordships to know that balance-sheets have been required to be filed by the Law of India since 1882, and by the Law of Victoria since 1896.
Clauses 15, 16, and 17 deal with the same matter as was raised by my noble friend Lord Avebury in his Bill. These clauses are of great importance to bankers, and Clause 17 restores what had been believed to be the law for many years until a recent decision of the Court declared the contrary. Stated very briefly, the intention of Clause 17 is to enable companies to re-issue debentures which have been paid off, and care has been taken to insert in the clause words which it is hoped will effectually safe- 168 guard the rights of third parties. As the law stands at present, since the recent decision of the Court, to which I have just referred your Lordships, a debenture once paid off is dead and cannot be re-issued. An important result of this decision of the Court is that it is now impossible effectually to secure a current account by deposit of debentures, for directly the balance of the account is in credit the debentures are thereby in law repaid and the security is destroyed. Your Lordships will at once appreciate of what great importance this matter is to the commercial commuuity, and that the present state of the law has a tendency to operate in restraint of trade.
I will now pass on. The next clause to which I think it necessary to draw your Lordships' attention is Clause 25. Under the Act of 1862 it was provided that every company should call a meeting once in every year, but, unfortunately, no penalty was imposed in case of a company not acting in accordance with the law. The result has been that in the case of some companies, whose directors, perhaps, were not anxious to meet the shareholders, no meeting has been called sometimes for many years in succession. We propose to remedy this deficiency and to provide for a penalty. We propose also to afford the shareholder an additional resource by giving the Court power at any time to order a meeting to be called on due cause shown. The next clause to which I would call attention is Clause 33. As your Lordships are aware, the present law acts in some ways very harshly on directors, and by Clause 33 the Court is given power to relieve directors and promoters when the Court is satisfied that they have acted honestly and reasonably.
There is now, my Lords, only one more clause which requires a few words, and that is Clause 36, which deals with companies registered outside the United Kingdom. It is proposed to require from every such company a certified copy of the Memorandum and Articles of Association, a list of the directors of the company, and the name and address of one or more persons resident in this country authorised to accept service of any notices required to be served on the company. Companies registered outside 169 the United Kingdom will be further required to conform to the same requirements as regards filing of annual statements of assets and liabilities as are required from companies registered in this country. Further, any company using the word "Limited" must state in every prospectus and at every place of business the country in which the company was registered.
In the event of your Lordships giving favourable consideration to this Bill, it is proposed to introduce a Consolidation Bill with the object of consolidating into one Statute all the Companies Acts, which at present number seventeen. I have, my Lords, now outlined, I fear at some length, the main provisions of the Bill, and I should like to be allowed to say before I sit down that the Bill is in no way a Party one, and that the Government will welcome any suggestion which noble Lords may consider will strengthen the Bill on any point.
§ Moved, "That the Bill be now read 2a."—(The Earl of Granard.)
§ LORD AVEBURY
My Lords, the noble Earl who has just sat down spoke in high terms, but not in too high terms, of the Departmental Committee of the Board of Trade whose recommendations it is proposed to adopt in this Bill, and I am sure that not only the Government, but the commercial community also, are indebted to that very able Committee for the careful consideration they gave to this important subject. We are also indebted to His Majesty's Government for introducing a Bill which will, I think, on the whole give general satisfaction.
Not only bankers but the companies themselves who issue debentures are very anxious that the provisions removing doubts as to the validity of perpetual debentures and debenture stock should become law. There is a third class of persons who are also very much interested in the matter—namely, the general public. Misapprehension as to the real state of the law has led companies in perfect good faith to re-issue a number of debentures which, under the law as it at present stands, must be regarded as cancelled. That has introduced considerable doubt as to the status of debentures, and investors gener- 170 ally are very much interested in seeing the matter put on a sound footing.
There will, I think, be general agreement in regard to the main provisions of the Bill; but it is not quite easy, at the first glance, to see what the full effect of the detailed provisions will be, and accoringly I am sure my noble friend will not think I am asking anything unreasonable in venturing to express the hope that he will allow a fair time to elapse before he asks the House to take the Committee stage, so that lawyers and those affected by the Bill may have time to consider, not merely the general provisions, but the exact wording in which they are embodied. Many persons will be glad to hear that His Majesty's Government propose to introduce a Bill with the object of consolidating into one Statute all the Companies Acts. At present the law relating to companies is to be found in a variety of Acts, and it will be of great convenience to have the law combined in one single measure. I beg to thank my noble friend for the introduction of this Bill, and for the very clear statement he has made in regard to it.
§ *LORD FABER
My Lords, I should like, if I may, to congratulate the noble Earl upon the speech in which he moved the Second Reading of this Bill, and I do so because I happen to know from my own experience that this is a very difficult and complicated question. I had the advantage of sitting on the Departmental Committee which was appointed in 1905 to consider the Companies Acts. There were several experts on that Committee. We sat very frequently, and gave long and careful consideration to this difficult matter. We also had the great advantage of sitting under the Chairmanship of the Lord Chancellor, whose clear guidance was of incalculable value to us. This Bill embodies the conclusions arrived at by the Departmental Committee. Its chief objects are to protect shareholders in limited companies and those traders who trade with limited companies.
The Bill proposes to enlarge the requirements of the Companies Act, 1900, so as to provide that no material fact which would be calculated to influence the minds of intending investors 171 should be omitted from the prospectus. We on the Committee thought that a man who was applying for shares in a limited company should know everything that it was material for him to know, otherwise he would be unable to form a true and accurate judgment of the company and its standing. That provision is for the protection of shareholders. The next provision in the Bill is to render necessary the registration with the Registrar of Joint Stock Companies of all mortgages and charges, including those relating to landed property and book debts. We thought—and I think rightly thought—that mortgages were very often danger signals, and that if a limited company created a mortgage it should be registered so that any shareholder in the company or any one dealing with the company should know of its existence.
This Bill removes doubts as to the validity of perpetual debentures and debenture stock, and enables a company to keep alive and re-issue debentures which have been redeemed. It has been lately held that debentures re-issued in the manner explained by the noble Earl in charge of the Bill are no better than waste paper, and the provision in the Bill is therefore for the protection of the public at large. The next provision requires every company to file annually with the Registrar a statement of its affairs in the form of a balance-sheet and containing a summary of its capital, liabilities, and assets.
When I first had to do with business what obtained was this. If you traded with a man who called himself John Smith and anything happened to him, you knew that all John Smith possessed was liable for his debts. Time went on and John Smith turned himself into John Smith, Limited, and the man who traded with him then was in a very different position. A certain amount of capital was put into John Smith, Limited, and when the concern did badly and the capital vanished John Smith walked out of the concern. He had no liability whatever, and the poor creditor had to do the best he could. A limited company shelters itself behind its limit, and if a man turns his business into a limited company he should be called upon to file a balance-sheet every year at Somerset House, so that persons trading with the 172 company can ascertain how it stands. I cannot think for a moment that there is any hardship in this. It is asked, Why should a private limited company be obliged to file a balance-sheet? Simply for the reason that it has become a limited company. If a private company places itself within the category of limited companies, then we believe it is for the good of trade generally that a balance-sheet should be published.
Another important provision in the Bill is to give power to the Court to grant relief to directors in cases where a breach of duty has been caused by honest oversight, inadvertence, or error of judgment. If a director commits himself in this way at the present time the penalty is far too severe for the offence. Clause 33 of the Bill will give absolution to directors who have acted honestly and in good faith. The point is that if you punish directors too severely for this kind of error you will not get directors of the sort you desire. Good men will be driven away and their places will be taken by directors of an inferior class.
The Committee felt that the question of foreign companies was one that should be dealt with, and I am glad to note that by this Bill every foreign company which, after the commencement of the Act, establishes a place of business within the United Kingdom, will be required to file with the Registrar a copy of its charter or statutes and a list of the directors of the company, together with the names and addresses of some one or more persons resident in the United Kingdom authorised to accept on behalf of the company service of any notices required to be served on the company, and to file annually with the Registrar such a statement of its affairs in the form of a balance sheet as is required of companies established in the United Kingdom. These are particulars to which we think we are entitled, and they are the sort required in foreign countries from English companies trading there. We thing it is a fair demand to make and that general advantage will result. Other opportunities will occur for discussing the details of the Bill; but I desire to say that, having sat for eighteen months on the Departmental Committee which inquired thoroughly into the whole question, I think the Bill is, on the whole, a very good one, and I hope your Lordships 173 will see no objection to giving it a Second Reading.
My Lords, I congratulate the noble Earl in charge of the Bill on the able way in which he has put this important measure before your Lordships. Although the Bill may not be perfect in all its clauses and may possibly need amendment as we have experience of its working, I think that on the whole the Bill meets present requirements so far as we can understand them. I quite agree with what was said by my noble friend Lord Avebury with regard to the question of debentures. The necessity for legislative action on that matter has been felt in commercial circles, especially by bankers, for a long time. Generally speaking, I think the Bill fairly meets the necessities of the day, and I congratulate His Majesty's Government on having brought it forward.
§ LORD ASHBOURNE
My Lords, the noble Earl who has presented this Bill to the House has done so with singular clearness, and I think there were very few of your Lordships who do not realise the great importance of the measure and the complexity and interest of the topics with which it deals. It affects very large interests, and is obviously a Bill which must attract a great deal of attention. The principle underlying its main provisions is that as wide a publicity should be given as every person interested in companies has a right to expect. That is the keynote of the measure. It will be necessary at a later stage to consider whether the machinery could be improved, but I think an honest effort has been made to secure by adequate penalties that the provisions of the Bill shall be carried out. It will be necessary in Committee to see whether that has been done uniformly, and whether all the clauses have adequate penalties to secure the publicity that is needed.
The noble Earl mentioned one clause which it is obvious will attract a good deal of attention both in the later stages of the Bill here and also elsewhere—the clause requiring an annual statement to be filed and the fullest information given. It is obvious that that is a clause of the very highest importance, but I do not find any 174 adequate penalties annexed to it. I have no doubt that the clause is put down in perfect good faith and with the earnest desire that it should be efficacious, but it is obvious that there should be some penalty. It is obvious likewise that the clause relating to foreign companies will require some consideration from the same point of view. A point to be considered is how you are to make a foreign company liable in the event of its not carrying out the provisions of the Bill, and how you are to get at its officers, who may be living abroad and not amenable to our legislation, for the purpose of enforcing the penalties to which they are in theory liable. I merely indicate that as a point to which we shall have to direct some attention when the Bill reaches a further stage.
The provision in regard to private companies is one of the very highest importance. That clause must necessarily be approached from a different standpoint, and great care will need to be taken to ensure that it leaves this House in a form capable of being carried out in a useful and effective way. I am extremely glad to hear from the noble Earl that a Consolidation Bill is intended. The noble Earl was quite right in emphasising the fact that it would be a strictly consolidating Bill, because I know from my experience of another place that if any attempt is made in a Consolidation Bill to introduce anything by way of an amendment of the law you have the philosophers in the House—sometimes a numerous but not always an agreeable class—getting up and saying that as you are amending one matter why not amend another; and, in the end, your Consolidation Bill becomes almost hopeless of passing. I have no doubt your Lordships will readily accord a Second Reading to the measure now before you.
§ LORD COURTNEY OF PENWITH
My Lords, I do not wish to prolong the debate on this measure, which is eminently one of detail and will have to be considered in Committee. But I rise to make this practical suggestion, that it might be useful, with the view of economising labour in Committee, if the Report of the Departmental Committee and possibly the Minutes of Evidence on which that Report was 175 founded could be again circulated for the information of your Lordships.
*The LORD CHANCELLOR (Lord LOREBURN)
My Lords, the substance and purport of this Bill were so clearly stated by my noble friend who moved the Second Reading that it is quite unnecessary for me to elaborate his statement. As to the proposed Consolidation Bill, I agree that it ought to be purely consolidating. It is very desirable that what we did last year for marine insurance we should do this year for the company law, and in future years for other branches of the law. If the consolidated law on a particular subject is put down plainly in black and white in an Act of Parliament, then people know how to act. The Colonies and Dependencies of the Crown have often wished to have a code of our Criminal Law in order that they might make use of it as the foundation of their own legislation, but unfortunately no such code was available, and they have been obliged to have recourse to the Indian penal code. With regard to Clause 22, to which the noble and learned Lord referred, I would call attention to the fact that Section 26 of the Companies Act of 1862 does provide under penalties for a certain summary to be forwarded to the Registrar of Companies. Section 22 of this Bill merely has the effect of adding further duties to those already created by the Act of 1862. If in the course of considering this Bill, which, like all human productions, may be capable of improvement, any Lord thinks further provisions ought to be inserted we shall raise no objection, but, on the contrary, shall be very grateful for any suggestion.
§ THE MARQUESS OF SALISBURY
Perhaps the noble Earl will tell us when he proposes to take the Committee stage. I suppose it will not be taken until after Easter.
§ THE EARL OF GRANARD
The Government had thought of taking the Committee stage on Wednesday, if there is no objection to that course.
§ THE MARQUESS OF SALISBURY
Considering that the measure is very complicated and intricate and affects a great many interests, I think time ought 176 to be allowed for private study of the Bill before it is considered in Committee. I would point out that a similar appeal was made by Lord Avebury, who is a great authority on this subject.
*The LORD PRESIDENT of the COUNCIL (The Earl of CREWE)
We are in the hands of the House in this matter. There is a desire to get the Bill down to the other House as soon as possible, but, as the noble Marquess has made this appeal to us, we will not proceed with the Committee stage until after Easter.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.