§ 2.37 p.m.
§ Order of the Day for the Second Reading read.
§ THE LORD CHANCELLOR (LORD JOWITT)
My Lords. I beg to move that this Bill be now read a second time. It is odd to reflect that it was only in the 1860's that the principle of limited liability was firmly incorporated. It was said by the cynics to be the one invention the lawyers had ever made. Whether it was in fact a good invention or not I am not sure, but the object of this Bill is to try to make it a better invention. In the year 1907 there was a general revision of the Company Law. Some twenty years later the Greene Committee, under the chairmanship of Mr. Wilfrid Greene, the present Master of the Rolls, was appointed. As a result the Companies Bill was introduced in the year 1928, and, as we all know, there was the Consolidated Act the next year, the Act of 1929. May I say here that it is my intention to follow this Bill, when it becomes an Act, with the necessary Consolidation 1000 Act. You cannot of course combine the principle of consolidation and amendment of the law. You must amend your law and, having got your law amended, you may then consolidate it. Although I am much too old a hand in this game to promise any date for legislation—it is more than my place is worth—I certainly hope that I shall be able to follow it very soon with the Consolidation Bill.
Two years after the Act of 1929 it was realized that the law was in need of further amendment. I think if I were asked why, I would say this. Company Law proceeds on the democratic principle of control of the company by its members. But capital has become so dispersed amongst numbers of small shareholders that their control over the company has, as we all know, very often become illusory. Secondly, I think it was realized in the early 1930's that the company was being replaced by the group or chain of companies, and the existing Company Law recognized the company and, to a very large extent, ignored the larger entity which was often the real unit in modern enterprise. Naturally enough, it was easy to form subsidiary companies where in other days branches would have been set up. There is nothing wrong with that natural development so long as the law takes full account of it, and there is proper provision for the necessary accountancy.
The problem therefore has been how to reconcile the law with to-day's requirements without, at the same time, placing irksome fetters on legitimate business. It was in those circumstances that Mr. Justice Cohen, as he then was—Lord Justice Cohen to-day—was asked to preside in the year 1943, when the war was still on, over a committee to advise us on this matter. I should like to take this opportunity—and I am sure I am speaking for all in this House—of expressing to Lord Justice Cohen and his collaborators our very real thanks for the work which they undertook. It was not a very easy time to undertake that sort of work. The work went on from, I think, 1943 until 1945, and the Committee presented a unanimous Report. It was a very powerful Committee, altogether apart from the learned Judge who has shown himself a master in this branch of the law. We had the Deputy Governor of 1001 the Bank of England, we had very distinguished lawyers from both branches of the profession, we had business represented, officials of the Board of Trade, the senior partner of the very famous firm of Deloitte, Plender, Griffiths & Co., who helped in the preparation of the Bill, representatives of business drawn from both sides of the House, of Scotland, of the T.U.C. and the deputy chairman of the Stock Exchange, as Sir Robert Wilkinson then was.
It was a very powerful Committee, and the members were unanimous on all major matters. It is a matter which is, therefore, completely free from controversy in the ordinary Party sense, and a matter on which I very much hope I shall receive from all quarters of the House suggestions as to how we can improve the Bill which we now put before you.
I considered very carefully what we had better do with regard to the Committee stage of the Bill. For some time I played with the idea of appointing a Select Committee, but I came to the conclusion that all your Lordships ought to have a chance of making observations on the Committee stage of the Bill. I am sure that will accord with the general feeling of the House. I came to the conclusion that a Select Committee would not work. But I do think it is desirable to allow a considerable time to elapse between now and the Committee stage. What I am proposing, if it meets your Lordships' approval, is that we should not have the Committee stage until early in February. I think the date suggested is February 4. In the meantime, if I can be of assistance to any of your Lordships, I shall be very pleased to discuss any of the matters, and to bring any of your Lordships who desire it, face to face with the Parliamentary draftsmen to help in putting into the appropriate formal language any Amendments you may think it desirable to move.
Broadly speaking, this Bill is founded upon the Report of the Cohen Committee. That Committee were only asked to consider major amendments of the law, but, as I think they said in paragraph 2 of their Report, they anticipated there would be a number of minor amendments which the experiences of the Board of Trade have shown to be necessary. I hope it is convenient to have set out in the Explanatory Memorandum the clauses and the parallel paragraphs in the Cohen Report. 1002 By looking at these you will see there are some clauses—take for instance, Clause 7—that has no counterpart in the Cohen Report. That will indicate to you, quite plainly, what are the minor provisions in the Bill which are not to be found in the Cohen Report. They really are quite minor matters.
I might, perhaps, just call attention to those clauses which are not to be found in the Cohen Recommendations. There is Clause 102, which brings the Registration of Business Names Act, 1916, into line with the Companies Act with regard to the power to refuse trade names. Clause 47 is consequential and corrects an omission in the Registration of Business Names Act. Clause 103 is a provision relating to unit trusts under the Prevention of Fraud (Investments) Act, 1939. It gives a power to the Board of Trade to appoint an inspector to investigate their affairs. Then there are a large number of other clauses, all of which deal with quite minor matters, and your Lordships can easily spot them by comparing the clauses of the Bill with the paragraphs in the Cohen Report as set out in the Memorandum. I might, however, mention Clause 87, which was suggested by the Treasury Solicitor to deal with the situation which arises where a company is wound up, and automatically under the existing Acts its assets vest in the Crown. The assets may be what used to be called in the old days, damnosa hæreditas, such, for instance, as a lease with a heavy repairing obligation, the lease having almost reached its end It is considered desirable that there should be some right of disclaimer but I am a little doubtful whether we have got it quite right in the clause, and I would like your Lordships to look at it.
There are three respects in which we have not carried out the recommendation of the Cohen Report. The first is the recommendation in paragraph 12 about the doctrine of ultra vires. The distinction between the Memorandum and the Articles is rather a fundamental distinction in Company Law, and to allow the Memorandum to be dealt with as is suggested, would, I think, involve very far-reaching amendments. I do not think much trouble has arisen in practice in this respect from the existing state of the Company Law, but I mention it because it is a matter on which I should be very ready to receive guidance and help from 1003 your Lordships. Then we have omitted the recommendation referred to in paragraph 81 regarding nominees. They suggested that every registered holder of shares should be required to state whether or not he is a beneficial owner. That would involve a very great deal of labour, and I am not quite certain what the phrase "beneficial owner" means. I can imagine various views being held about that, and, frankly, we are rather doubtful whether all that labour would produce very tangible results. Then we have omitted the recommendation at the end of paragraph 139 regarding the liability of companies in connexion with the certification of transfers.
Finally, with some regret, we have omitted the recommendation in paragraph 163; that is thatas regards offences involving fraud in connexion with the formation or the conduct of the affairs of companies it should be open, on application of the prosecuting authority, to the High Court, if satisfied that the interests of justice so require, to direct that the case be tried at a place designated by the Court by a Judge of the High Court and a City of London Special Jury.That, in a sense, is class legislation, because we always have the same jury to try all sorts of criminal offenders. I should find it rather difficult to justify having a special type of jury to try a special type of criminal offence. Moreover, we remember not so very long ago a Committee considering the whole question of the abolition of special juries, and there was a very strong minority report suggesting that the time had come when the distinction between the special and the other jury ought to be abolished. The distinction is based on a qualification which is hard to support.
I have mentioned these small matters that we have inserted which were not in the Cohen Report, and I have mentioned the major matters which were in the Cohen Report which we have not dealt with. Subject to that, the rest of the Bill presents, in legal language, the recommendations of the Cohen Report. It is not a branch of the law of which I pretend to be a master. Many of your Lordships know very much more about it than I do. But if I am challenged about any matter I shall frankly fall back on this very good defence: If I uphold recommendations made by such a powerful Committee as that, I think that I 1004 cannot be very far wrong in relying upon them.
In order to secure what I may call financial democracy, which we want to-day, we desire to make it easier for shareholders to influence and control their managements, and the Bill, in accordance with the Committee's recommendations, provides for increasing the length of notice of meetings (that is in Clause 2), for allowing members to circulate notices and submit resolutions (Clause 3), for extending the right to demand a poll (Clause 4) and for facilitating voting by proxy (Clause 5). But under modern conditions, I think that the best safeguard is to ensure that the fullest possible information is given to shareholders through the statements of accounts, and even although the individual shareholder may not always realize what is involved in these accounts, it should be revealed to the skillful reader. I do feel that if adequate information is forthcoming, informed opinion will be brought to bear upon the managements. This is the principle of freedom with publicity which, on the whole, has worked well, and to which we attach the greatest importance. Consequently—and this is an important provision—the Bill provides that:Every balance sheet of a company shall give a true and fair view of the state of affairs of the company, and every profit and loss account of a company shall give a true and fair view of the profit or loss of a company for the financial year.I should like to say that in drafting this Bill the Board of Trade have had the greatest assistance from the accountancy profession.
I pass to consider the matter of holding and subsidiary companies. These expressions, your Lordships will find carefully defined in Clause 13, which is intended to replace provisions of the 1929 Act which experience has shown to be insufficient. In future, all holding companies will, subject to certain exceptions, be required to furnish consolidated accounts for themselves and their subsidiaries so as to disclose a true and fair view of the position of the group as a whole. They are thus brought fully within the provisions of the Bill relating to publicity and the auditing of accounts by properly qualified auditors.
The requirements imposed in the First Schedule are, we hope, neither unduly elaborate, nor unduly onerous. They are based on common sense, and apply to all 1005 companies the standards now being followed by the best. Thanks are due to those companies which, in accordance with the hope expressed by the Government, have already given effect to the Committee's recommendations, even in advance of legislation. I think that the fact that they have been able to do this is, in itself, proof that the requirements are neither onerous nor unreasonable. But in one important respect the requirements go beyond the practices of many companies in the disclosure, so far as is practicable, of what have been termed inner or secret reserves. This matter is fully discussed in paragraph 101 of the Committee's Report, and we have decided to follow their recommendation in this respect. Under the existing law, every company has to lay a balance sheet and profit and loss account before its shareholders, and a public company has to file its balance sheet with the Registrar of Companies. It is not, however, required to file its profit and loss account, though the practice has been to do so. In future, both will have to be filed as also will consolidated accounts where the case is one which calls for consolidated accounts. The Bill, in Clause 15, extends the powers and duties of auditors, and, in Clause 16, provides that only a properly qualified person shall in future act as auditor of a company. It is on the auditor, backed by public opinion, that reliance must chiefly be placed for the observance of these important provisions.
I come to the next topic—that of private companies. It was, I think, in the Act of 1907 that distinction was first drawn between public and private companies, and under that Act and the Act of 1929 private companies are under no obligation to file their balance sheets with the Registrar of Companies. That facility has become very popular. Indeed, I am told that there are now on the Register nearly 180,000 private companies as compared with only about 17,000 public companies—that is more than ten times as many. The main reason for the privileged position of private companies was undoubtedly to enable family and other purely private concerns to enjoy the benefit of limited liability without having to publish their financial position to the world at large. I do not think it was ever contemplated that the privilege should be enjoyed by concerns which are not private in the sense of being owned by 1006 a limited number of private individuals, but are often owned by other companies which are themselves public companies. It is possible for public companies to form subsidiaries as private companies which are in reality their own branches, and so to mask their real financial position. So serious has this abuse become that many people have held that the privilege of limited liability ought in all cases to be accompanied by the obligation to disclose. The Committee, however, did not go as far as that, but they sought to restrict the privilege to the concern which is really private. Without some such amendment, the main provisions of the present Bill would be defeated. Effect is given to the Committee's Recommendations by Clause 43.
Now I come to directors. Of course, it is desirable that the highest standard of conduct should be observed by the managements, and nowhere is this more important than in the case of large public companies. Directors are in a position of trust, and their personal conduct in regard to the affairs of their companies must not only be above reproach in fact, but must be seen to be above reproach. Only so will they inspire the confidence which is necessary to their leadership. All the recommendations of the Cohen Committee on this subject are made with that end in view. In the accounts there will, consequently, have to be shown, in future, the aggregate amount of the director's emoluments, the aggregate amount of the directors' or past directors' pensions and the aggregate amount of any compensation paid to them for loss of office. This will apply to managing directors as well as to other directors. That applies not only to public companies. It is just as important that the shareholders of private companies should know how much of the company's earnings are going to the directors: for where there has been abuse in the past it has been, I think, largely in this respect.
As for dealings in the shares of a company of which they are directors, and in its subsidiary companies, it is clearly right to remove any suspicion that directors may profit in advance of the members from any inside knowledge which they get as directors. The register of dealings provided for in Clause 29 should be beneficial for this purpose. Although I did not specialize in Company Law I do not pretend that between the 1007 wars I did not have a very large experience of it; and I am bound to tell your Lordships that in my belief a certain laxity was beginning to creep in between the wars. Conduct which had been most exceptional in 1919, had become by no means exceptional in 1939. At the same time, I do not want it to be thought that I am making any attack on the great body of directors as a whole. I am not. I believe, thank goodness, that a very high standard of honour does prevail; but unfortunately there are black sheep, who fail to realize that any knowledge they possess as directors is not their knowledge but the company's knowledge, and who frequently fail to understand, until I have pointed it out to them, how utterly wrong it is that a director should be speculative—and I stress the word "speculative"—in the shares of his own company. These provisions will not interfere in the least with the good and honest director, who is in the majority, but they will be useful in the case of those directors who do not carry out the standards which all of your Lordships would desire should be carried out.
I come now to a more debatable question—the age of directors. The Bill lays dawn a retiring age of seventy in the case of all public companies, but any company can, if it wishes, alter its Articles to provide for any retiring age, be it sixty or eighty, and any director past the age of seventy may be continued in his office by special resolution. You will see, therefore, that the object of the provision is rather to draw the attention of shareholders to the position than to seek in any way to interfere with their discretion. This provision follows the recommendations of the Committee in paragraph 131 of their Report.
I pass to another topic—powers of investigation. For years, the Board of Trade have had power to appoint inspectors on request by shareholders. The complaint has been, not that the power has been exercised too frequently or too arbitrarily, but that it has not been used enough. If we are to have this power, it is desirable that departmental action should be swift and effective, and as all your Lordships who have followed this matter know, the existing powers have been too weak and too restricted. It has been difficult to get the requisite shareholding to initiate 1008 an inquiry, and the existing provisions do not take into account the subsidiary companies, so that the Board's powers could too easily be challenged in those very cases where action was most necessary in the public interest.
These defects are remedied by Clauses 34 to 37 of the Bill, and in future it will be possible for two hundred members of a company, even though they do not hold one-tenth of the issued shares, to apply for an investigation. Moreover, an investigation can in any case be ordered by the Court, and the Board of Trade can themselves initiate an investigation if it appears to them that the matter is one of public concern, subject, however, to there being circumstances of maladministration or of oppression of the members.
Clauses 48 to 60 deal with prospectuses, allotments and offers for sale. These clauses will strengthen the law in various matters. The provision in Clause 48 that no allotment may be made until the third day after the issue of the prospectus gives longer time for the public to digest the information. Where a prospectus states that application has been, or will be, made for permission to deal on any Stock Exchange, then unless such permission has been applied for before the third day after the first issue of the prospectus, or if permission has been definitely refused within three weeks, the allotment is void and their money has to be returned to the applicants. This is to prevent the public from being led to think that they will receive a marketable security when in fact they will not.
The position of experts in relation to prospectuses is also made plain, and a definite liability is now placed on the experts by Clause 62. This clause, I hope, will induce the experts to exercise proper care in making statements on the strength of which the public are to be asked to part with their money. There is another modification in regard to so-called placings. The line between these and what are technically known as offers for sale is often narrow. Every offer to the public is subject to the prospectus provisions of the Act, but shares may be placed with a broker or issuing house and the broker or issuing house then offer them to clients. Clause 56 remedies this defect by defining more precisely to the public the meaning of "offer." I am sure your Lordships will not mind that the gentlemen called "Stags" will have their horns cut by this 1009 Bill. I think it is quite time that that particular abuse was dealt with.
Now we come to what I think is a much more debatable question; that is, the question of nominees. Ever since the Act of 1862, every company has had to keep a register of its members and to include a copy of the register in its annual return to the Registrar of Companies. The registered member is the only person legally entitled to take, any part in the proceedings of the company and to vote at its meetings. But the registered member may be only a nominee of the real owner of the shares. The practice of placing shares in the names of nominees has grown to such an extent in recent times that the register of membership has tended to lose its significance as a register of the real owners of the shares. It is said that the practice is one of great convenience, and in some cases one of necessity, and there is no suggestion that it has led to any widespread abuse. On the other hand—although I tended perhaps to see only the seamy side of these things—I must say that from my own experience I should be delighted to think that these nominee shares could be got rid of altogether, so that everything could be perfectly open and perfectly above board. I am assured that that is impracticable. The Committee did not recommend it, and we have not sought to go as far as that; and I very much doubt whether the President of the Board of Trade would agree with me.
The Committee, who did not go as far as that, did make certain recommendations. First, they recommended that every shareholder should be required to state whether he is the beneficial owner of the shares. As I have told your Lordships previously, we have not carried that out in the Bill. Secondly, the Committee recommended that every person who is directly or indirectly the beneficial owner of one per cent. or more of the issued capital of the company, or of the issued shares of any class, shall be required to make a declaration to that effect to the company, that a register of such beneficial ownership shall be maintained, and that the Board of Trade shall have power to investigate the ownership of shares of any company where they think public interest so demands.
The second recommendation, that the beneficial owner of one per cent. or more of the company's share capital should declare 1010 himself, is embodied in Clauses 57 to 62. I will be quite frank with your Lordships; the drafting of these clauses has proved very difficult. My anxiety about these clauses is as to whether they are not easy to evade. One may say that the great majority of our citizens, thank goodness, are law-abiding people, who do not desire to do these things. It is always dangerous to pass a law which cannot really be enforced, because, when you do that, you find a number of law abiders gradually going over to the other camp. That is a bad principle, as is illustrated by the law of the United States preventing the sale of intoxicating liquor, which has had a most disastrous effect on the observance of law and order in that country and in other countries as well ever since it was passed. Therefore, I invite the special attention of your Lordships to these clauses. I say quite frankly, from my own experience, I would very much like to see these clauses there if we can make them reasonably watertight. If we cannot, perhaps it is better not to have them at all. This being a completely non-Party Bill, I can discuss these matters quite frankly with your Lordships.
The remaining provisions of the Bill embody amendments mostly of a minor character. I have dealt with the matters dealing with names. I come now to declaration of solvency, that is to say, where directors and shareholders wish to retain control of the liquidation, the directors should make a statutory declaration of solvency. We deal with chartered and other companies because we think the provisions of the Act should be extended to companies whether incorporated by Royal Charter, by Statute, or otherwise. I do not want your Lordships to think that our determination to proceed with legislation at this stage in any way casts doubt on the high quality and character of British enterprise. It is just because in the great majority of cases that is satisfactory and sound that we are determined to do what we can to stop the small number of cases where it is neither satisfactory nor sound. I admit that the subject is one of great complexity, and I believe it to be of high national importance.
I shall welcome from your Lordships any suggestions to improve the proposals which we put before the House. I shall myself take the Committee stage of this Bill, and I shall be very ready to consider 1011 suggestions. I hope that your Lordships will help me by letting me have the suggestions beforehand, if your Lordships can, so that I may inform my mind about them. I think that all quarters of the House will wish this Bill well, as being a real attempt by a very powerful Committee to fill the gaps which experience has shown to exist in our Company Law, and to introduce what I describe as the principle of financial democracy, so that whenever possible the shareholders shall know the details about what, after all, is their concern, and, at the same time, business men in running their concerns shall not be unduly hampered by unnecessary restrictions. I beg to move.
Moved, That the Bill be now read 2a.—(The Lord Chancellor.)
§ 3.15 p.m.
§ VISCOUNT SWINTON
My Lords, I am sure that all your Lordships will feel indebted to the noble and learned Lord, the Lord Chancellor, not only for his very clear exposition of this complicated measure, but still more for the very fair spirit and way in which he has introduced it. And let me say at once—I am sure I speak for all your Lordships (certainly on this side of the House, and I am sure in all quarters of the House)—that we shall respond most readily in the same spirit in our consideration of this Bill.
I should also like to join with the Lord Chancellor at once in the tribute he has paid to Lord Justice Cohen and his Committee for their very comprehensive and careful Report. I cannot pay them a higher tribute than to say that I think the Cohen Committee are worthy successors of the Greene Committee. It fell to me, more than twenty years ago, when I was President of the Board of Trade, to undertake reform of Company Law. I was determined that that reform should be based on the most authoritative opinion that could be obtained. I wanted particularly two men. There were others like Lord Brand, who gave the greatest possible help, but there were two men I felt who probably knew between them more about Company Law in every sense of the word than any others. These men were Wilfrid Greene, as he then was, and Harold Brown. I said to my officials at the Board of Trade: "We must have them both."
1012 They said: "You will get Harold Brown all right, because he has plenty of able partners, but it is a very big thing to ask Wilfrid Greene. He has no partners." He was making, deservedly, a vast income at the Bar; and these were the days in which when you made an income, you kept a reasonable proportion of it to yourself; you did not hand it all over to the Chancellor of the Exchequer. It was asking a great sacrifice of Wilfrid Greene to ask him to undertake this task. I knew that, if he did undertake it, he would do it with that thoroughness with which he has done everything all his life. He said to me: "I will do it on one condition. You cannot pledge yourself to accept my Report if you do not like it, but, if you think it is a good Report, I do not want it to be pigeonholed. Will you undertake to introduce legislation?" I said: "Provided we are still a Government, and I am still in that Government, I will give you that undertaking." Well, he did for a very long period of time give up a very large proportion of his highly-lucrative practice to this inquiry, and he wrote practically the whole of the Report himself. We did remain a Government; I was still in it, and we introduced legislation. I think that reform is again necessary, as it always is with the passage of time and with changed circumstances. But that legislation which we introduced was a very good piece of legislation.
Now we have this Bill founded on the Cohen Report. It is of very great importance that we should do in this Bill what is fair, right, and practicable. The Companies Act not only becomes a charter for protecting the investor (which is enormously important of course), but it affects the conduct of nearly all the industry and commerce of the country. These are the two considerations which have to be borne in mind—and both of them have to be borne in mind together, and weighed together—in framing a charter. The shareholder deserves all the information and protection which it is practicable to afford him. But no Act of Parliament can turn a foolish investor into a wise investor, any more than it can turn a bad and unprofitable business into a good business. Both the Greene Committee and now the Cohen Committee have testified that the vast majority of businesses are fairly conducted. They both also point out that the ingenuity of the 1013 occasional determined rogue will find a way round or through the most intricate maze that you can establish.
I am sure your Lordships will agree, and the noble and learned Lord, the Lord Chancellor, has already indicated his concurrence with this, that we do want to be very careful that in trying to trap the occasional marauder we do not erect so many hurdles that the conduct of ordinary, honest business is frustrated or unduly handicapped; and, above all, we should be careful that we do not create so many offences and penalties for inadvertence that the ordinary, competent, decent man will hesitate to embark on new enterprises or to develop old ones. We are getting so used to Acts of Parliament being highly seasoned with new offences—and this Bill is generously peppered with penalties—that I am really surprised that so many of us are still at large. I am sure we shall all bear this in mind.
As the noble and learned Lord, the Lord Chancellor, has said, the Bill does not lend itself very readily to Second Reading debate, although he himself made a first-class Second Reading speech. The Bill deals with many important topics but connected only in the sense that all of them affect, in one way or another, the conduct of company business, and also that all of them involve very close examination of detail, which they can only receive in Committee, and which they will certainly receive in Committee. I am sure we shall all want to give this Bill a Second Reading, and we shall all want to give it a close consideration in Committee of the House. I do not think that there is any better body that could undertake that consideration.
I entirely agree with the noble and learned Lord, if I may say so, that this is not a case for a Select Committee. After all, the primary object of a Select Committee is that Parliament requires that witnesses should be examined before it proceeds with the general consideration of the Bill. It is for Parliament to give that consideration to the Bill and of its general knowledge and experience to decide what is in the general interest. We have had all the witnesses examined by the Cohen Committee and, whether we agree in all respects or not with their recommendations, not only have the witnesses been examined but the Report presents fairly and clearly the evidence given before them. I think we certainly should 1014 consider the Bill here in the full House in Committee, for here, after all, among our members, we have all the experience and knowledge which you really want in a case like this—legal, industrial, commercial, financial and administrative. All those qualities will be found in noble Lords who will take part in this debate and on the Committee stage, and who could not, of course, take part in a Select Committee.
I am very glad that the noble and learned Lord, the Lord Chancellor, said what he did about not rushing the Committee stage. I know it has been thought in some quarters that we have come rather hurriedly to the Second Reading. I say at once that I take my share of responsibility for that. I thought that, provided we had ten days or so to look at the Bill—we had all seen the Cohen Report—it was not unreasonable that we should take the Second Reading this side of Christmas. That, however, makes it all the more important that there should be an ample interval before we come to the Committee stage. This is essentially a case where before we go into Committee your Lordships will welcome the offer of the noble and learned Lord that he and experts should discuss matters with us. But many of your Lordships would want to take counsel also with those very representative bodies which have taken a great part in giving evidence before the Greene Committee. That cannot be done, of course, when we are all dispersed and, therefore, we ought to have ample time—I think at least two weeks—after we reassemble before we proceed to the Committee stage.
Having said that, may I for a moment or two deal with one or two of the larger matters of principle in the Bill? Let me take first that chain of clauses dealing with the prospectus and offer for sale, and the like. I am sure it is right that there should be in a prospectus or offer for sale the fullest disclosure of relevant information. I am sure it is right that those who issue the prospectus should do it with full responsibility, and should not be able to evade the responsibility for what they represent. I entirely agree that there should be a reasonable time for the public to be able to appreciate the prospectus. You cannot have too long, otherwise dealings might begin before allotment. On the other hand, it is not a sensible arrangement that a prospectus should suddenly 1015 appear and nobody should have time to comment upon it—that the list should open at nine o'clock and close at 9.5. As I understand it, the proposal is that there should be, at any rate, 48 hours after the issue of the prospectus and before the list is opened. That seems to me to be very good sense. I also agree that there should be adequate notice of company meetings.
Then there are the questions of accounts. Those clauses your Lordships will want to consider in detail but, broad and large, I am sure your Lordships will agree that both the balance sheet and the profit and loss account should be fully informative and—and this a reform which is long overdue—that the auditors should have to accept the same responsibility for a profit and loss account as they accept for a balance sheet; indeed, you cannot in any decently conducted business separate the two. What goes into the balance sheet from the profit and loss account depends on whether the profit and loss account is properly made out. Obviously the two ought to go together, and the auditors and directors ought to accept responsibilty for both. I also agree in principle—and I think all of your Lordships will agree with this; most of us have carried it out for years—that where there are subsidiary companies the shareholders should see the whole picture by means of consolidated accounts.
Upon those broad principles, and upon many of the recommendations, I think we shall probably all be in agreement, but it is the application of those principles that we want to consider. The noble and learned Lord, the Lord Chancellor, has put some of these very fairly to us. I take one of which he spoke—namely, hidden or undisclosed reserves. There, I think, the arguments are very nicely balanced. On the one hand, the shareholder should be entitled to know or be able to assess the strength and value of his investment, but, on the other hand, it is very important that companies should be encouraged to build up their financial strength. What are called "undisclosed reserves" have in the past in reputable companies been a very good way of increasing the financial strength of the companies. The Cohen Report itself emphasizes how important this is, and says that in the case of banks, assurance companies and, I think, discount 1016 companies, special provision must be made; they ought to be encouraged to build up their financial strength and they should not have to disclose their undisclosed reserves.
All I would say at this stage is that it is not only those great companies which need to have financial strength; all companies require it for development and for tiding themselves, their shareholders and their employees through difficult times. It would be a very unfortunate thing for industry and for employment if a directorate were deterred from creating strong reserves. I do not want to be too controversial on such a non-controversial occasion, but when the trend of Government measures is to reduce the income which shareholders receive from their investments, whether by a legitimate policy of cheap money or by a less legitimate policy (which we may be discussing here in some months' time) concerning the rate at which people are bought out, undoubtedly, particularly with small shareholders—and, after all, the great bulk of shareholders in companies are the small shareholders; we are not dealing with large aggregations of capital here—there will be a tendency to get all they can out of the business. This is the kind of thing at which I think we want to look entirely without bias in this House; we should consider whether it would be wise to put the temptation in the way of the shareholder always to be pressing the directorate to distribute profits or reserves up to the hilt.
Incidentally, may I put to the noble Lord who is going to reply one question relating to Government undertakings in this connexion? The noble and learned Lord Chancellor paid an agreeable and well-deserved compliment to those companies which had anticipated the Report by presenting their accounts in a large and informative manner. May I ask whether the nationalized undertakings and the municipal authorities are going to make the same disclosures as public companies? Is that going to be done, for instance, in the case of the National Coal Board and the London County Council? I wish the noble Lord, Lord Latham, were in his place. I read the other day—and I believe it was a truthful account—that the London County Council had been, I will not say forced, but encouraged and induced by its auditors to disclose the 1017 fact that it had a very large undisclosed reserve and that it had been levying upon the ratepayers of London a rate of five shillings in the pound in excess of what was really required. We ought all to be on a parity in this matter. If these disclosures are going to be required of private undertakings, then at least as high a standard should be set in the case of local authorities and nationalized undertakings.
I pass now to the provisions relating to directors, with which do not think any of us will quarrel. As to loans to directors, it is quite right that directors should not borrow from their own companies, unless of course the company is a bank whose business it is to lend. I personally take no exception to the provisions relating to the disclosure of directors' emoluments. As a director, I have not the least hesitation in going frankly to my shareholders and saying: "If you want my services, you have got to pay for them." I speak here for myself—I have not consulted my friends—but I do not object to that. I certainly do not object to the disclosure of the compensation paid for loss of office, particularly where a particular company is bought. I do not think that is at all unreasonable. I should, however, like to know whether the nationalized undertakings are going to be in the same position. I am not making a debating point here at all; it is a very real point. If the clauses of this Bill are passed in the form in which they now are, a company will have to disclose on its accounts and to all its shareholders the whole of the emoluments which its directors receive, whether they are received from the main company or from subsidiary companies, and I personally think that is right. But why on earth should the Minister of Fuel and Power say that he will not disclose the emoluments which are to be paid to the members of the Regional Coal Boards? It really is not sensible. If the coal industry was going to continue to be conducted by private companies, I should be all in favour of the emoluments of all the directors of all the companies being disclosed, and if the industry is nationalized, then I think that the emoluments of the members of the Boards ought to be disclosed.
I entirely agree with the provisions relating to directors dealing in shares of their companies. The great majority of directors appreciate fully that they are 1018 trustees, and act in that spirit. I think it will be a help to all good directors that it should be known there is such a register. I am all in favour of a director buying shares in his company. I think it is a very good thing that a man who is directing a company should have a considerable stake in it, and it is right that that should be known.
Now I come to the age limit, over which the noble and learned Lord slid pleasantly. We can debate that in Committee when we come to it. Speaking from my own experience, I have known quite a lot of directors who had not nearly reached the age of seventy but whom I should have been delighted to see removed. On the other hand, I have known a number of directors over the age of seventy who added greatly to the value of their boards. But I do not feel very strongly about this one way or the other, although I am approaching this riper age myself.
At the same time, there is one thing which I do not understand. If we are to have this clause, why do we want a special resolution? Under the Bill, in Clause 21, a company in general meeting is to be entitled to remove any director, whatever his contract or his term of office, by an ordinary resolution—that is, by a majority of those present and voting. If a director can be removed by a bare majority, why should not he also be retained by a bare majority? It seems to me to be an ordinary principle of democracy that if we are to have this at all, then it should be by an ordinary vote. Should I be considered indelicate if I asked why this provision is to be confined only to the directors of public companies? What about Ministers? Present company is, of course, excepted from this statement, but I should be glad to get rid of some of them who are under sixty, and I should be very glad to keep some of them who are over seventy. The Leader of the House would get a special resolution; he would get a three-quarters majority any day because we all like having him here! They might just consider this matter and perhaps the Minister who is to reply will have to consult higher authority that he might do it. We shall be interested to know what his views are.
Now I come to the question—and as the Lord Chancellor said, it is a very difficult one—of nominee shareholdings. The Report, as he has said, comes down quite 1019 solidly in favour of retaining nominee shareholdings. I am very much interested, and indeed a little surprised, although I do not dissent at all, as to how strong the evidence was of the practical importance of nominee shareholding. As your Lordships can see, in paragraph 78 of the Report the Committee take a typical case of a bank nominee company, and out of 72,456 holdings there is only 6 per cent. which they say are unidentified which could embrace concealment. Therefore, they say they ought not to prohibit nominee shareholdings. They go on to say:The figures we have quoted indicate that the practice of nominee registration serves in many cases a useful and legitimate purpose, and the majority of the Committee take the view that registration in the names of nominees should not be prohibited.They go on to say that if you do not prohibit altogether it is extraordinarily difficult to prevent evasion which you want to stop.
It is easy to deal with perfectly legitimate cases, but then nobody is worrying about those. If you look at paragraph 80 you will see this:Even a complete prohibition of registration in the names of nominees would not disclose where the real control lay since shares could be registered in the name of a company registered abroad and it would not necessarily be known who controlled that company. Moreover, the majority of the suggestions would involve a volume of work out of all proportion to the probable benefits to the public.They then go on, with, I must say, a little inconsequence, to say that we must do something, and the Committee recommend really three things. They recommend that the register should distinguish between beneficial and other holdings, and that every shareholder must notify the company whether he is or is not a beneficial owner. As the Lord Chancellor said, that would raise extraordinary legal difficulties in the case of beneficiaries or contingent beneficiaries under trusts. The third provision is that whenever anybody owns 1 per cent. of any class of shares, he must give notice and that must be registered. Obviously, in preparing this Bill the Lord Chancellor and his advisers have come up against these practical difficulties. He has dropped the proposal that every beneficial owner is to notify that he is a beneficial owner, which would have been a great difficulty and would have entailed an enormous amount of work. Now 1020 that has gone by the board, and though it is a little difficult to follow the wording of this clause, as I understand it there will still be two registers. The company will have to register nominees, the proposal is retained that anybody who owns 1 per cent. of any class of share will have to notify that fact and a separate register will be kept. In addition the Board of Trade is to have power of investigation. I want to come to that in a moment.
I am not sure that I see the value in 1 per cent. It is an arbitrary figure, and nobody can suggest that 1 per cent. is any effective measure of control. Therefore I do not know why that figure is taken. Incidentally, as the Committee point out, there is always a way round this, and I am not sure that it will give information of any real value to the mass of the shareholders. What I think we want to consider, as the Lord Chancellor has invited us to do, is whether, without any bias or prejudice, even the modified proposals now in the Bill, involving a good deal of extra work upon companies, is really going to be worth while. If it is not, then I do not think it is worth having the clause in the Bill, because you do not want to put into the Bill something which is, so to speak, camouflage and does not serve a useful purpose. I myself much prefer to rely on the power of the Board of Trade to investigate. That power I regard as of great importance. I am extremely glad that increased powers of investigation and increased general powers are being given to the Board of Trade. We do not want snooping inquiries promoted by mischief makers, but I am quite certain that the Board of Trade ought to have power to go in, and go in quickly, to make an investigation if they have reason to believe it is in the public interest.
I speak on this from some experience. On more than one occasion whilst I was President of the Board of Trade I ordered an inquiry which was undoubtedly ultra vires. I was told by my own solicitor at the Board of Trade and by the Law Officers that I had no possible right to order an inquiry, and that I should have consulted them. I was quite determined to do it and on both occasions—I will not particularize—the result of the illegitimate inquiry I ordered was certainly of considerable benefit to the shareholders, and on one occasion of considerable detriment to those who want some looking after. 1021 Therefore, I am all for the Board of Trade having this power.
I have only touched on a few subjects, but I think they are sufficient to show the variety, the importance, the difficulty, and the need of well-informed consideration. I am sure there will be a common desire to make this Bill the best possible charter, and this House has the ability to do it, and will do it. I am very glad that the Lord Chancellor has said that this will be immediately followed by a Consolidation Act. That is what we did in 1929. I should just like to have from him—and I am sure this is the intention of the Government—that the Consolidating Act will come into force before the appointed day, because it is of great importance, when you are making changes in the whole charter affecting the conduct of companies, that there should be one Act of Parliament to which both lawyers, business men, and the public, can look to see their rights. If that is the understanding, then I welcome it.
§ THE LORD CHANCELLOR
I am not in a position to give that undertaking at the present moment, although it is what I should like.
§ VISCOUNT SWINTON
I appreciate that, but I do most sincerely hope that the Lord Chancellor will do that, because nothing is more difficult than having to read two Acts of Parliament. This is a very difficult Bill to follow, even with the Cohen Report before you. Of course, the drafting of the Consolidating Act can be going on before the Bill is through. We may make Amendments here and there, but it is very easy to include them. It really will be a great handicap, not only to lawyers—indeed, it may be to the benefit of lawyers if this is not codified—but certainly to the business community, and I would make an appeal that before the new law comes into force it may be completely codified. With these words I give a welcome to the Bill, and I am sure I can give an undertaking on behalf of all of us that we will give it the fullest and best consideration that we can.
§ 3.50 p.m.
My Lords, before speaking on the Bill I do not know whether it is necessary for me to state that I have an interest in my association with a firm of merchant bankers who are concerned with most forms of banking and most forms of 1022 banking with the Government by bills. Having said that, I would have wished, first of all, to protest about the very short time which has been given to us to study, this Bill between the date of its publication and to-day, but the venom of my sting has been almost removed by the remarks of the noble and learned Lord on the Woolsack; more especially by his assurance that, an adequate period will be allowed to elapse before the Bill goes to the Committee stage. If I may venture to express a hope in that regard, it would be that the period might be delayed even more beyond the tentative date which the noble and learned Lord suggested.
Since the printing of this Bill we have had only a matter of ten days; two of which were Sundays on which we are enjoined not to work. As a matter of fact, the demands for the Bill were apparently so great that on Thursday last in the more eastern parts of London where I have most of my being it was impossible to procure a copy of the Bill. The supply had run out. Consequently, the time available for people to study the Bill has been cut even shorter in some cases. While on that subject it is perhaps germane to observe in the Bill—although I would never have looked for it in a Bill of this nature—what I presume must be a forecast of the Government's intention in regard to a five-day week. I certainly would not have expected to find it here, but adds point to my remark about the very short period which we have had for the study of the Bill. If you eliminate the two Saturdays as well as the Sundays, only six working days are left. The passage to which I refer is in Clause 48 on page 47. Subsection (5) states, curiously enough, thatIn reckoning for the purposes of this section the third day after another day, any intervening day which is a Saturday or Sunday or which is a bank holiday in any part of Great Britain shall be disregarded….I presume that those of us who are interested in the financial structure of this country are, in future, to be enjoined not to work on Saturdays either—a development which I heartily welcome.
The Bill as a whole is one to which my noble friends and I wish to give the same hearty support that has been given by the noble Lord who has just sat down. It represents, in most respects, a very great move forward in these periodic 1023 consolidations and amendments of Company Law which appear to be required as commerce, industry and finance develop, and as the ingenuity of the human mind develops with it. It seems to me a pity that certain amendments which might have found a place in this Bill have not been included. The noble and learned Lord referred to a number of omissions from and additions to the Bill as compared with the Cohen Committee's Report. I would like to pause for a moment to consider one or two of them. In the first place, I think, with respect, there is one other addition to the Bill which was not in the Cohen Report. It is in Clause 97. I do not know whether it is one of very great importance—I speak as a layman and not as one versed in legal matters—but Clause 97 does incorporate a right which I would have thought would have considerable importance in certain circumstances. It provides that foreign companies or companies incorporated in places that are not British Possessions shall have power to hold land in the United Kingdom in the same way as companies incorporated outside the United Kingdom but in British Possessions. There have been cases in the past where fears, at any rate, have been expressed of foreign companies registered or incorporated in countries with which this country was not, perhaps, on the best of terms prior to the war which might have led to certain abuses or difficulties. I think I am right in mentioning this important addition.
On the subject of omissions there are one or two which are of sufficient importance to be taken up in a debate on the Second Reading, even before we come to the Committee stage, if only to indicate to the noble and learned Lord the sort of amendment that may be brought up for your Lordships' consideration when the Bill is in Committee. If I may, therefore, with the permission of the House, take up these points I do so for that purpose, and in order to facilitate the Committee stage when we come to it. In the first place, there is one difficulty which has arisen in the 1929 Act, which is of a certain importance. In the Fourth Schedule of the 1929 Act in paragraph (13) it is laid down, in reference to the matters that are required to be stated in a prospectus, that contracts entered into are required to be disclosed. Broadly speaking, that is a 1024 principle to which no one can take any objection. Indeed, it is a principle which everybody will support as a very necessary one.
But the injunction in that Schedule is given in such general terms that it may have, and has, given rise to very considerable difficulties in the case of large public companies who are about to issue prospectuses concerning a modification in their capital structure, in that they are not, in fact, in a position, nor would it be worth while to the operation, to disclose and state all their contracts. Take the case of any big industrial company that is running contracts for the supply of raw materials and contracts for the supply of stores. I think I am correct in saying that, under the wording of the Schedule of that Act, technically every one of the contracts, even down to the regular supply of pencils and stationery for the company's use, ought to be disclosed. That is a point that might be taken when we come to the Committee stage, and it would find a place, I imagine, in Clause 50 of the present Bill.
The second and perhaps more important point arises over the issue of redeemable preference shares. This is touched on in Clause 63 of the present Bill where, however, certain difficulties or clarifications are required affecting the provisions of the 1929 Act. To take one or two instances. A provision which would enable a company to convert irredeemable preference shares into redeemable preference shares in certain circumstances is, at any rate, a provision which is open to discussion and which might with advantage be inserted. A second point relates to a clarification which seems to be overdue in connexion with redeemable preference shares having a terminable final date. It is not clear, under the 1929 Act, what a company would have to do in the event of its not earning sufficient profits to redeem its preference shares, and being then not in a position to raise additional capital to fulfil the obligations which it had undertaken. These are matters of detail, but, possibly, they would be worth discussing on the Committee stage.
The third and major point which has been omitted is one to which the noble and learned Lord has referred. That is the recommendations of the Cohen Committee Report at paragraphs 11 and 12 1025 dealing with the Memoranda of Association of companies. I do not wish to weary your Lordships with any technicalities, but this is a rather technical subject, and as the law stands at present a company is required—and companies in practice do this when now formed or re-formed—to insert in the Memorandum of Association powers to do every conceivable thing that it is possible for them to think of at the time. Consequently the Memorandum of Association, if intended as a safeguard, does not in fact safeguard anything, but it does provide a very great deal of entirely unnecessary and unproductive work for all concerned in ascertaining either that a company can or cannot do certain things within the terms of its Memorandum of Association. The matter is very clearly and concisely discussed in the Report of the Cohen Committee which comes down quite flatfootedly—and the noble and learned Lord, the Lord Chancellor, has spoken of this—in favour of making a modification in the present provision. The recommendation, as I say, is quite flat-footed. It appears on page 10, and reads:We recommend that Section 5 be repealed and a new section be inserted in the Act to give effect to our suggestions in paragraph 12.I regard this particular omission as of very considerable importance because we are all, in our various ways, concerned with man-power and the wastage involved in doing useless things. The general trend of legislation, as the noble Viscount who has just sat down has said, is to make life, on the whole, more restricted. We do not quarrel with the provisions of this Bill, though they do tend to make the administration of companies and financial administration generally, more burdensome. And that is quite right. But of all the recommendations made by the Cohen Committee, this is one which would have had precisely the opposite effect. If it had been adopted it would have made things less burdensome. It is the only salient omission and I submit that it is a pity, after that clear recommendation has been made, that it should not have been adopted either in the form indicated or in one of several different for ms which may possibly be suggested in the Committee stage. I do not think it is beyond the powers of those who are concerned with the task of drafting to find a form of words which will make the situation easier 1026 and, at the same time, provide some of the safeguards—if there are any—of the Memoranda of Association.
If I may, I will give an example to illustrate how ridiculous things have become in this connexion. One of the major public companies in this country—the name of which is known to all of your Lordships—contains in its Memorandum of Association, among the provisions setting out the purposes for which the company was formed—the purpose of this particular company is to manufacture and market—a provision that one of the purposes of the company as certified in the Memorandum shall be to pay pensions to widows. The position of Company Law and company lawyers in these cases has really reached a climax of absurdity which now requires attention, as the Committee recognized.
There is only one other general point which I wish to make. I would like to express a hope that when it comes to drafting the Consolidation Bill—which is one of the emollients which the noble and learned Lord has applied to my wounded feelings about the lack of time in which to study this complicated measure—the same draftsmen who were employed in drafting the 1929 Act, if they are still with us, as I hope they are, should be employed to draft the new measure. The 1929 Act, as all of your Lordships who have had any contact with it will agree, appears to be a model of what an Act of that sort should be. The language used is so simple that an ordinary layman, or even an adolescent, can understand it without any training whatsoever. That is very high praise to give to any measure, but it is entirely justified in the case of the 1929 Act. I hope that the same style and the same quality of draftsmanship will be employed in the Consolidation Bill which has been promised. In the drafting of this amending Bill the same clarity of style was not used. I have had it represented to me, by more than one person, that the style used for the drafting of this Bill is very much more that of a Finance Act than of a Company Bill modelled on the 1929 model, and as such has led to a number of rather obscure drafting formulae and drafting methods, notably those dealing with disclosure of beneficial ownership and so forth.
1027 Now I want to come to the one point of what I think may perhaps be regarded as major criticism. In making it I do not in any way wish to be interpreted as criticizing the Bill as a whole. I accept entirely what the noble and learned Lord on the Woolsack said, and what the noble Viscount who has just sat down has reechoed, that this is, politically, a non-controversial Bill. But it is not a non-controversial Bill on technical issues. There are many parts that I have not had time to study. I have no doubt that there are technical difficulties, and there will be technical controversy on some of the latter parts of the measure dealing with such matters as winding up, liquidation, receiverships and, possibly, audits and auditors. But for the ordinary person—and by that I mean not only those of us who may be professionally engaged in these matters, but the ordinary person, all of your Lordships and everybody else—there is one part which is to my mind acutely controversial, and that is the part to which the noble and learned Lord referred in terms of some doubt—namely, disclosure of beneficial ownership.
I am not a lawyer, but I think I am right in what I am about to say; if I am not I feel sure that I shall be corrected very quickly. The Bill imports a new status into our everyday lives; that is, beneficial ownership. The definition of beneficial ownership in the Bill, to my knowledge, is a new one, and has not hitherto existed. It is an arbitrary definition, necessary to secure what those parts which deal with shareholdings in the name of nominees require to make it at all workable—if it is workable. I ask your Lordships to consider for a moment not the case of an outright owner, such as any one of your Lordships, who has a holding of shares in a company and has chosen for reasons of convenience or for any other reason except, of course, that one to which the 6 per cent. mentioned by the noble Viscount, Lord Swinton, refers, to deal with your affairs through a nominee company. Then think for a moment what that means. As the owner of those shares you are the beneficial owner. That is all right as long as you hold them for yourself, but you may not be holding them for yourself. You may be a trustee, holding them for other people. The Bill provides that in case of shares held by joint owners both 1028 names, or all the names, shall be considered to be the names of holders and will be registered in accordance with the proposals made.
As things stand at present, where those holders are trustees we know who is the life tenant; we know by the terms of a trust deed who are the ultimate beneficaries (or who may be the ultimate beneficaries, because they may be persons as yet unborn). But we do not know who is the beneficial owner, except that the Bill says, broadly speaking, a person entitled to vote on those shares. Under the provisions of the Bill, if one of those trustees, by reason of his holding of one trust or more, becomes a holder of more than one per cent. he is required to notify that to the company, under pain of a prosecution, if the Board of Trade permit, and a fine of £500 and six months' imprisonment. That means that all of us who are trustees must look through the holdings of all our trusts at frequent intervals, in order to find out whether as a trustee of half a dozen trusts we aggregate one per cent. of the shareholding of any company in the United Kingdom. Apart from the work which that lays upon a company, or the registrar of a company, that is in itself so burdensome a responsibility that I doubt not that trustees will say: "No, I have many responsibilities as a trustee, and I do not propose to incur that one as well. I will seek to avoid it." The Bill provides that a corporation undertaking a trustee's work is exempt.
What is the significance of these provisions? It is that the whole of our trustee system, which has been built up on the private unremunerative trustee, must inevitably be turned over to trustee companies, who, of course, have to take their remuneration. It therefore follows that if this Bill, and if these provisions, become law, the whole basis of British trusteeship must suffer. The Bill strikes a blow at this basis, and puts what I submit is an entirely unfair responsibility on the trustee to notify a company that he is the owner of one per cent. of that company, where he holds that one per cent. as half a dozen trusts and might, through his conscience or by request, vote shares in one trust one way and shares in another trust another way. That means, in fact, that the information provided is entirely useless and entirely worthless.
Take another case. If any one of your Lordships is a trustee to-day and has in 1029 various trusts an aggregate of 9 of one per cent. of the shareholding of the company but to-morrow becomes a trustee of another trust, so that he gets into the I per cent. category, it may have escaped his attention. As far as I can see, unless he is very conscientious, there is no method by which he can ascertain this. Unless he takes a very active interest in the affairs of the trust, and is in fact a governing trustee or a moving spirit in it, it may be only a long time afterwards that he unwittingly becomes a one per cent, beneficial owner within the terms of the Bill. I do not think that is a practical or a fair responsibility to put on trustees. Even if these elaborate provisions in the Bill come into force, I rather doubt if they will, in fact, produce the information desired. Many of our large industrial and commercial companies in this country have registers of shareholders running into tens of thousands of shareholders—sometimes over 100,000. In addition to that register, one of these companies will in future have to keep a register of beneficial ownership as defined by the Bill. That register may not only be a burden, but may contain a larger number of names than the original register, just because, if the trustees are all to be included separately (and many trusts have three, four or more trustees), every one of these names has to be entered separately in the register of beneficial owners.
I may take a particular instance today, a share register containing 120,000 names, a great many of which are nominee holdings; that is to say, holdings of blocks of shares in the names of nominee companies. In that particular case, there is no doubt at all that the register of beneficial ownership will be vastly larger than the 120,000 names. When you have that register, my Lords, may I ask, flippantly, what do you do with it? You send a return to the Board of Trade. What does the Board of Trade do with it? Looking over a share register of 120,000 names is not child's play, but looking over a share register of, say, 500,000 names is such a ghastly proposition that I do not think even the Board of Trade would contemplate it. There comes a time when the thing has become too big and too complicated, and I submit that these clauses dealing with disclosure of beneficial ownership fall into that category. I am supported in that, 1030 as the noble and learned Lord has himself suggested, by the Report of the Cohen Committee.
May I in order to emphasize my statement, but at the risk of redundancy, read what the Cohen Committee said in one sentence? They say in their Report: "Our doubts are on the question of enforceability." The noble and learned Lord referred to that, and rightly pointed out the dangers of legislation which cannot be enforced. There is nothing between us on the situation created by passing a law which cannot be enforced. We all agree it is the most fatal thing that anyone can do. The Committee say:Our doubts are on the question of enforceability, and on the score of the work which would be imposed to no practical purpose if enforcement is not possible.Then they say:We have examined a variety of schemes intended to secure such disclosure but none of these is watertight.Finally, they make a recommendation or conclusion which in itself is so weak as really to condemn the proposal out of hand. The Cohen Committee themselves say that the suggestion they have made would, however, provide information which would in some cases disclose where the control lay. If that is the best that can be said for the suggestion made, it really stands condemned out of hand.
I have already spoken a great deal longer than is my usual habit, and I apologize for keeping your Lordships. There is a great deal more on the question of nominal holdings that might be said, and I hope that the suggestions which we have been invited by the noble and learned Lord Chancellor to put forward before the Committee stage will include, from as many quarters of this House as possible, suggestions dealing with what I regard as an entirely burdensome and an entirely useless provision. Not only is it not enforceable, but I believe in point of fact that anybody who wishes to conceal his identity can do so as easily if these provisions are there as he could if they were not. Having said that, I do not wish to be interpreted as being opposed in any way to the publicity of real ownership. I believe that is right, but I do not believe that this is the way to set about it. I believe that these suggestions are impracticable and useless and I hope that they will fall out of the Bill before it becomes law.
§ 4.25 p.m.
§ LORD BRAND
My Lords, this is the first occasion on which I have had the honour to address your Lordships, and I hope that your Lordships will receive my remarks with indulgence. My excuse for speaking to your Lordships at all is that I have been a good many years in the City and also that I was a member of the Greene Committee. I should like to state, however, that I am speaking for myself alone. I have not consulted any authorities in the City, but I know them all, and you will no doubt later on hear a lot from them on certain points. I propose to deal quite briefly only with two or three main subjects. While I am a novice in Parliamentary procedure, I assume that is really the course that a speaker takes in a Second Reading debate.
There are certain principles, I think which underlie both the admirable Cohen Committee Report and the Report of the Greene Committee on which I sat. I remember the first discussion of the Greene Committee. My noble friend Lord Swinton really referred to this point. I remember the President, the Master of the Rolls, saying: "Well, now, the first thing we have to do is to decide on what principle we shall proceed. Is our first object to catch a scamp, or is our first object to make business possible for the British business man? We have to catch a scamp if we can, but which do we put first?" Well, as the view of the Committee was that perhaps 99 per cent. of British business men were honest, we decided we would consider their interests first, the interests of the shareholders, the interests of the public, and we would catch the scamp if we could, and that we would follow that principle throughout our proceedings. The Cohen Committee evidently proceeded on the same basis. In fact, I am not sure that on one occasion in the Report they do not say so. Nevertheless, this Bill, following on that Report, inevitably involves serious prohibitions and compulsions on directors, and, therefore, while we ought to follow that principle, while the Cohen Committee Report certainly was in the right direction, I still think it important to consider in each case whether something that makes business perhaps a little more difficult is worth doing or not. Does anything one does facilitate or make harder the task of the business man?
1032 The second principle underlying the Report is very obvious. The noble and learned Lord, the Lord Chancellor, referred to it, and it is clear throughout the whole of the Report. That is that the fullest information and facts should be given wherever possible. This is particularly apparent in the First and Second Schedules of the Bill which relate to the accounts and audit which I think myself is one of the most important parts of the Bill. I personally am heartily in favour of the great bulk of what is contained in these Schedules, and of the general principle of the fullest possible information.
I am in favour of it for three main reasons. The first is that it is a very good way, I do not say to catch a scamp, but to stop a scamp from being a scamp. The second is that it is due to shareholders that they should have the fullest possible information. Nevertheless, even when you have done that, it is not all plain sailing. I do not know whether your Lordships have ever read or looked at prospectuses and company reports produced under the "New Deal" legislation in the United States. They are each more or less a volume. The reports produced in America of the big companies are enormously long. I do not believe myself that a population which I think subscribes up to the amount of 18,000,000 persons towards the Reader's Digest, and which likes all its literature in snippets, is going to read these enormous reports. Therefore, when you have given all this information, you have given it to the expert, and perhaps it will gradually filter through, but very often you have not given it to the shareholder, because it is more than he can stand.
The third reason—and almost the most important—for having full information, in my opinion, is that it is absolutely necessary for a planned economy or a semi-planned economy or a demi-semi-planned economy. You must have the most accurate information if you are to plan at all, and, although this is more important in relation to the Statistical Bill that I am glad to see the Government are going to produce than in relation to this Bill, I put it forward as a matter of the utmost importance. I think that private enterprise—of which I am wholly in favour—will gain a great deal more by the fullest information than by trying to conceal information. I would like to see much more information about profits than 1033 is known at present, and I believe that it would be to the advantage of the private business man that all that information should be available. As the years go on, our views as to what it is dangerous to publish and what it is not dangerous to publish change very much. I remember when I was a member of the Macmillan Currency Committee going to ask a banker in the city for some information. He was very indignant and said: "They will be wanting to know what gold we hold next." That is hardly an answer that would be given in these days.
Nevertheless, I am also against supplying information merely to satisfy somebody's curiosity; I am against giving a lot of useless information about private incomes or private purposes for which there is really no public demand at all and no public utility. Into that kind of information falls this question of inner reserves. I agree entirely with what the noble Viscount, Lord Swinton, said about that. I think that inner reserves are just as important for some companies which deal largely in speculative commodities, where there are great ups and downs, as they are for banks. As regards the banks, I hope that the Bank of England, which certainly kept, quite rightly, large inner reserves when it was a private institution, will equally keep them now that it is a public institution. Therefore there are some cases certainly where you do not want to give the fullest information and where it is in the interests of the public that you should not do so.
I was going to refer to the question of nominee holdings, but your Lordships have heard a great deal about that. I was at one time very much in favour of the sort of thing which the Cohen Committee recommended, for one reason only. The reason was that I thought it was intolerable that there should be, for instance, newspapers in this country instructing, amusing and guiding the people and you could not possibly find out who owned them. Nevertheless, I do not think you would get that information by this means, and you would cause an intolerable lot of trouble. My personal view, therefore, is that those clauses would be better struck out of the Bill.
I come, finally, to a question that has been referred to, and that is the retiring age of directors. I would like to say that I also am a director of two or three 1034 companies and, like my noble friend Viscount Swinton, I am getting near that age and am therefore interested. I agree with the noble Viscount, Lord Swinton, that the noble and learned Lord, the Lord Chancellor, skated very quickly over what I thought was some very thin ice. I think the words he used were that the Bill draws the attention of the shareholders, or that Parliament would draw the attention of the shareholders, to the fact that there is something about the age of seventy which makes it different from other younger ages. As I understand it, in this Bill Parliament will be saying, roughly, if the Bill is passed as it is, that, by and large, at seventy one generally ceases to be fit for important duties, and that it will be the duty of the shareholders to say., when directors have reached that age, whether they shall retire or not. If they do not say anything about that the director will retire, but even so the shareholders can still pass a special resolution excluding any particular director from the ban.
I am uncertain as to how such clauses will work in the infinitely varied circumstances of public companies. I am sure myself that the idea of a special resolution will not get you very far, because I think it will be an extraordinarily invidious task, supposing there are on one board two septuagenarians, for the Chairman to say to one: "We are not going to put a special resolution to the shareholders about you, but we are about your friend." That seems to me very invidious unless you can get accustomed to applying some purely automatic process, like taking their blood pressure beforehand, in determining which ought not to stay and which ought to stay. I personally do not think that power will be used. Certainly I think the clauses as they stand are very powerful to eliminate what are called "elderly directors." I myself would have preferred a more elastic method. I think the present conditions, where on certain boards there are a lot of old directors, are due very largely to the 1914–1918 war when we lost nearly a whole generation of young men. That is one reason why directors have stayed on longer. The other reason, of course, is that taxation is so extreme that a lot of them find that they have to work when they do not want to.
However, I think the difficulty is partly a temporary one, and I believe it is in the course of nature that in a few years, in the City at any rate, there will be a 1035 sort of holocaust. They are all getting to the age when we shall see a lot of them go, and I am not sure that the number of young directors available is going to be as great as those who are going. I think others will confirm me in saying that when you want somebody very competent it is not easy to find him. In that sphere as well as in other spheres there is a certain shortage of labour. I would have preferred to leave this matter largely to time and to the fact that the shareholders are now going to be given more power to make life unattractive to the directors. I would like to make it perfectly clear that I am wholly in favour of no incompetent director being kept on a board, and I am still more in favour of room being made for the young and the near-young. If the present situation is really keeping the young and the near-young off the boards, then for goodness' sake let us change it and let the elders retire so that the young can have their chance.
My last word is this, and I think my noble friend Viscount Swinton said something of this kind. This clause does set a very new precedent. It is a precedent for the compulsory retirement of men in private business. True it is that they are men who have the advantage of the limited liability privilege, but it is not in any way like the Civil Service, where men are compulsorily retired with a pension at a certain period. Parliament really says in this Bill that men of seventy are not much use, even for what might be called sage advice rather than executive action, which is what a great many directors are for. There is a lot of truth in that but it is not the whole truth, as your Lordships can observe by looking around this House where there are so many shining exceptions to that general principle. I started to read the debate on India which took place here yesterday and I thought the speeches were very good and that the position was extraordinarily well stated. It occurs to me that some of those brains, at any rate, would not have been allowed to be used at any directors' meeting. The suggestion that they are of not much use cannot be true of company directors only. Their cells do not disintegrate at a more rapid rate than do other men's. Therefore I think this rule is a rule for all and not simply for company directors; I think it certainly should apply to those who are 1036 going to be in authority over our nationalized industries. Finally, in general I would like to say that I support this Bill, and that I think the Report of the Cohen Committee was an admirable document.
§ 4.40 p.m.
§ LORD LUCAS OF CHILWORTH
My Lords, mine is the privilege of conveying to the noble Lord, Lord Brand, congratulations from every side of your Lordships' House upon a remarkably good maiden speech. It might have been said that, with the noble Lord's reputation outside your Lordships' House, we expected something of very high quality, but as a number of your Lordships know, a reputation outside is no guarantee of a reputation inside. I think the noble Lord can carry away with him the secure knowledge that, whatever his great reputation is in the world of finance and as a letter writer, as a speaker in your Lordships' House it is high.
My intervention in this debate will be very brief, because after the very wide and detailed exposition by the noble and learned Lord upon the Woolsack, and, if I may be allowed to say so with respect, the very helpful contribution by the noble Viscount, Lord Swinton, there remains very little to be said. I do not speak as a lawyer or as a banker; I speak as an ordinary industrialist when I welcome this Bill not only because it is necessary for the information of shareholders but because a full and frank disclosure of the financial make-up of British industry and trade is necessary, as the noble Viscount has said, for increasing the moral standards of British industry. It has to be admitted that the marauders in industry have been few in number, but the number has been sufficient to make great inroads in the confidence in which British industry has been held by the ordinary common people. I know the noble Viscount will agree with me that the purpose and object of this Bill goes still further and that he would subscribe to the policy of the Conservative party which says that the workers must be told where and to whom the fruits of their labours go.
I do not intend to enter into a close argument upon the value of the disclosure of nominee shareholdings, but I join with those noble Lords who have said that the one overriding principle is that the British public should be told who are the financial 1037 holders in our public companies. Whether the provisions of this Bill are the best way to do it is a question which can, I think, safely be left to the noble and learned Lords who, I have no doubt, will argue it with relish. If I could offer one criticism it would be to regret the omission of any provision for the disclosure of gross turnovers and gross costs. I believe that those figures are necessary for the correct assessment of profit values. I would like the noble and learned Lord to consider whether or not those figures should be included with the full disclosure of the profit and loss account.
Now perhaps I come to a slightly controversial aspect. I welcome especially the provision which accepts the general principle that the retiring age of directors should be seventy years. It may be considered to be impertinent for someone of comparative youth to mention declining years in your Lordships' House, but I feel free to do so because, as the noble Lord, Lord Brand, has said, surely your Lordships' House is the unique exception where "age does not weary nor the years condemn." In industry I welcome it because it will go some way towards opening the doors of the board rooms to youth. One of the major causes of the decline of British industry during the inter-war years was that the higher places in industry were denied the invigorating enterprise of youth. There is in British industry a managerial strata, second to none in the world, which has for years, been lying just below the hard capital crust, hammering its head against a ceiling and feeling frustrated because the "glittering prizes "of industry were withheld from it. It must, unfortunately, be admitted to be true that declining years and enterprise do not run together. If youth be a defect, it is one we all outgrow only too soon.
I sincerely welcome this Bill because I believe it will set a code of conduct on the highest levels and increase in industry and trade that commercial integrity which will stand us in exceptionally good stead in the testing years which lie before us.
§ 4.48 p.m.
§ LORD MANCROFT
My Lords, I rise to give my brief welcome to this valuable Bill and to thank the Government for having found time to put it: into their crowded legislative programme. I should like to welcome it from another 1038 point of view as well. There are absent from this Bill, and very pleasantly absent, the wheel-marks of that legislative steam roller which we have seen on so many Bills this Session and which has aroused so much anxiety and suspicion amongst the noble Lords who sit on this side of the House. This Bill has been drafted and produced, as the noble and learned Lord on the Woolsack has described, in the traditional way; that is, public disquiet gave rise to an expert Committee and upon the findings of that Committee this Bill was drafted.
Listening to the admirable speeches which have been made in this debate, two points have struck me. There are obviously two grounds on which misapprehension and misunderstanding of this Bill may arise. The first is that the idea may get abroad that this Bill is designed to protect shareholders from their own apathy. This Bill does nothing of the sort. I think indeed it would be surprising if we found, coming from this Government, any measure designed to protect people from their own apathy. At least so it would seem to those of us who watched the almost embarrassing greed with which the Government were prepared to take profit from people's apathy when they were discussing the question of contracting in and contracting out in the Trades Disputes Act. Having seen that, we could hardly expect them to adopt a different attitude with regard to apathy in this Bill. But I do think that this Bill, if it is not designed to protect shareholders against their own apathy, does give them the chance of improving their knowledge of their own company's affairs. That I consider important, particularly in view of the emphasis which the noble Viscount, Lord Swinton, laid upon the fact that so many shareholders are not the bloated capitalists of cartoon and caricature, but are humble and small shareholders.
Of course, there is still laid upon the shareholder the onus of looking after his own interests, because after all a company is a democracy, and on any member of a democracy there is laid that responsibility and to shirk it would be courting disaster. But I think it is unwise for the impression to be mooted abroad, as I have seen in the Press quite recently, that this Bill—and when this measure has become an Act, this Act—can be regarded as the trustee of the guileless and the protector 1039 of the widows and orphans. It is not so. Anyhow, most of the widows you meet nowadays are fully a match for the average company director.
There is another impression which I think is unfortunate, and to which the noble and learned Lord on the Woolsack also drew attention. There are a large number of penal clauses in this Bill—some people would think too many penal clauses—and the noble Viscount, Lord Swinton, expressed astonishment that so many of your Lordships are still at large. If you were to take the bit between your teeth and decide to commit every new offence enumerated in this Bill, you would run the risk of subjecting yourself to terms of imprisonment totalling seven years and three months and to fines totalling £4,460—it works out £75 cheaper if you do it in Scotland. Nevertheless, I think it most unfortunate if the impression became prevalent that there is anything seriously wrong with the standards of moral conduct displayed by those who have administered the affairs of British companies in the past. The Cohen Report, and indeed the noble and learned Lord on the Woolsack also, were at pains to point out that the evidence before the Cohen Committee showed clearly that the vast majority of British companies are honestly, conscientiously and ably run.
There are a large number of points arising out of this Bill which are more suitable for the Committee stage than for Second Reading, and many of them have already been discussed in some detail. I will not weary your Lordships with many more of them. But I wish to raise one matter, from a general point of view. The Cohen Report expressed the desire that the financial Press should be put in a position to help as much as possible in casting light where light should be cast, and they expressed the doubt whether present conditions, particularly with regard to the law of libel, would enable them to do so. Unfortunately, I do not see in this Report any chance of that situation being improved, although of course the Report of the Committee on the law of libel presided over by Lord Porter, which has yet to be made public, may help us in some respects. Anything that can be done to increase the publicity which can be thrown upon company affairs is, I think, to be encouraged.
1040 I also particularly welcome the revision in the system of accounts, whereby accounts must now be true and fair rather than true and correct as they previously had to be. It will be interesting to see how the accountants are going to tackle their new responsibilities in this respect. I regret one omission from this Bill which was hinted at in the Report, and that was in regard to professional names appearing on the prospectus. The cover of the prospectus shows the names of the solicitors, bankers and accountants who have assisted in the initial launching of the project. Of course, there is no suggestion that those respectable and important people are in any way backing or recommending the product or the venture which they are handling. Certain safeguards are now put forward in this Bill, but I still think that more can be done to protect the public from thinking that the names of those important people guarantee the respectability of the venture.
There are several points, as I said, at which criticism can be levelled. Much has been said already, and I will not go over ground already covered. With regard to the question of directors' ages, the noble Lord, Lord Brand, mentioned thin ice, and it would be improper for me to notice that there even was any ice. I am not a company director, I am not seventy and I am afraid that I have too little of the right sort of experience ever to be a company director and much too much of the wrong experience ever to reach seventy. Therefore I cannot be expected to comment on that, except to say that I think a certain amount of injustice will inevitably be caused by this provision. In the long run, however, it will certainly appear that justice is being done, which is right. I say that only on the understanding that I may be permitted to revise my opinion in 37½ years time.
The noble Viscount, Lord Swinton, raised, if I may say so, a very pertinent point when he asked whether the Government were going to take this Bill as an example in their own affairs, now that they have become directors of some of the most important and largest companies in the country. They have elected, in the view of most people wisely, to manage their national projects in the form of corporate organizations rather than on the basis of departmental administration. There are several points the 1041 noble Viscount, Lord Swinton, has already asked the Government concerning their future conduct as directors, and I would like to add one or two more. Provision is now made in this Bill to prevent legislation being rushed through without the shareholders having an opportunity of studying it carefully and realizing its implications. I hope the Government are going to take that lesson to heart. Provision is also made for further time to study the prospectus and for longer notice of meetings. I trust the Government are going to take that provision to heart also.
Finally, and I think this is the most important point with regard to these clauses of the Bill, will Ministers who are responsible for these companies regard themselves as trustees and realize that they cannot indemnify themselves against failure to show that degree of conscientiousness and diligence which is required of a trustee? If the Government do take that to heart I can only say that this is an even better Bill than I think it it,
§ 4.58 p.m.
§ VISCOUNT MAUGHAM
My Lords, I feel I am bound to make a few remarks on this Bill, if only for the reason that I have spent a large part of any life in connexion with companies and directors and,. I may add, the rogues who make profit out of an improper use of their powers. It would be very easy to gain a certain amount of applause by saying how much I honoured and respected the honesty of directors in this country, but I should be a hypocrite if I used very strong language of that kind. I suppose there is nobody in this House, and very few people connected in any way with the law, who have had as much to do as I have as counsel for a long time and afterwards as a Judge when sitting on the Bench, with the frauds of company directors and others of that kind. It is, of course, a question of proportion—the great proportion of directors are honest. But I should feel ashamed to say anything but this: that there always has been a considerable proportion of people who make their fortune at the expense of the poorer members of the community, as directors and as being in charge of the affairs of companies.
Your Lordships cannot forget such people as Jabez Balfour, Whittaker Wright, Bottomley, the people involved 1042 in the City Equitable frauds, and others I can mention who do not exhaust the list of the ruffians who made money out of companies. They are only those who have been caught, and there have been others who have escaped altogether and who have died in the odour of sanctity with large funds in their banks. Accordingly, for my part, after the long experience I have had, I cannot help welcoming the clauses in this Bill which are devoted if not entirely to stopping, at any rate t3 making more difficult, the frauds which have been committed all the time—amounting to fifty years—that I have been connected with this sort of business.
I would add this, because I think it is rather an important thing to bear in mind: that a clause is not to be struck out of a Bill because it does not do all that you want: it to do. If it goes some part of the way, if it catches a certain proportion of rogues, then it is something which should be put on the Statute Book. I remember quite well a personal experience in connexion with protection against burglary. You may do what you like in your house, and a skilful burglar may avoid it and break in, but you can make it so difficult for him that he would prefer to go elsewhere rather than tackle your house. I had a personal experience of that kind in a house in which I lived. A burglar attempted to get in, but found his difficulties so great because of the bolts that had been pat on the windows that he went to a house 100 yards down the road and did well. The same thing is true with regard to the efforts to make fraud difficult for company directors. I am too old a person engaged in this sort of thing to tell your Lordships what view I shall take on a number of topics when we get to the Committee stage of the Bill. I am afraid your Lordships will then hear too much of me, because I have a great deal to say upon a number of points, so I will touch very briefly now upon only a couple of them.
Believe me, there is an enormous amount of improper dealing by company directors in the shares of their own companies. I have known that again and again. It goes on now in second-rate companies when members of a board are considering the annual accounts which are going to show either a very good year or a very bad state of affairs. It is; I regret to say, not uncommon for them to act accordingly, and to buy or sell 1043 shares on the Stock Exchange. They buy or sell the shares in the name of a bank manager or some other nominee. I am not exaggerating this; I have come across it again and again, and I know it happens now. It ought to be stopped because, of course, the directors who do this are making illicit gains by the use of secret information so far as the public is concerned. They are making use of information of which they are trustees for the shareholders, and which they have no right whatever to use for their own advantage.
This Bill, I believe, will stop this to a very great extent, but I repeat what I said just now—that you must expect that it cannot all be stopped and that there are devices by which some people will manage to evade the Statute. It will go on being done, just as the efforts of the Chancellor of the Exchequer to prevent the evasion of Income Tax are never completely successful. Holes are discovered every year, and some new device for evading the revenue is found. The same thing is true here, but this Bill will go a long way to prevent illicit gains by directors. I refer not only to Clause 29, dealing with the register of directors' share holdings, but also to Clause 59, which deals with the notification of the ownership of shares. I know there are enormous difficulties with regard to that, which do not exist so greatly in the case of the disclosure of directors' interest in shares which are not standing in their names. You can enforce that upon them, and you can provide a stiff penalty if they try to avoid it, but there are enormous difficulties with regard to nominees, and I sympathize very greatly with those who say you cannot make a workable clause. I will only say at this stage that, for my part, if I am here and I have a chance, I will do my best to assist in making Clause 59 work, at any rate in a great number of cases, although, as I say, there will be evasions. I still think that if we make a nominee shareholding a little bit more difficult than it is now, we shall have done something to prevent the sort of fraud which is constantly taking place.
I will add one thing more, and that is on the subject of directors. I myself thought the clause which enabled shareholders to remove a director as soon as he has been appointed, by an ordinary 1044 resolution goes a great deal too far. I do not think that will be for the good of directors. A man who has just joined a company, and who has worked very hard to instruct himself about its affairs, really ought not to be open to removal by an ordinary resolution which may be a got-up or engineered affair. He ought not to be subject to the possibility of being turned out in that way in such a very ignominious manner. That is only one part of the provisions about directors. I think the age of seventy is too low. I can speak with a very clear conscience, because there is no age which anybody will suggest which will allow me to continue being a director without the advantage of a special resolution of shareholders. Therefore, I am completely without any personal feeling in the matter. I feel that seventy is too low, and the doubt I have had in my own mind, with a great deal of experience on this sort of topic, is whether seventy-three or seventy-five is not a better age. At any rate, that is a point on which everyone can have his own opinion. I know that opinions will very greatly differ, and when we pass this measure here, it will go to another place, and other people may perhaps put another age. I may say myself that seventy is too young, and that there are many people who, although older than seventy, ought to be kept on a board if they have really learnt the business of the company and how to conduct it.
I am very much in favour of the Second Reading of this Bill. For my part, I recognize that it deals with a matter with which I have been long familiar, and I am satisfied that it deals with it on the right basis. I am accustomed to be very severe with reference to the drafting of Bills that come up here, but I should like to say—perhaps by way of exception—that knowing the very great difficulty of drafting this Bill and carrying out the recommendations of the Committee, I am glad to testify that the Bill is a good piece of drafting. That does not mean it cannot be amended here and there in slight respects. But I think that it is an example of good drafting, as a whole, and I am satisfied that, with the assistance that can be obtained from your Lordships in Committee, we shall be sending down to another place a measure that will be of great value in the commercial interests of this country. Finally, I would like to remind your Lordships that there are 1045 over £6,000,000,000 worth of stocks and share-holdings in this country, £2,000,000,000 in private companies, £4,000,000,000 in public companies, and there are an unknown number of other companies, such as the unlimited companies, which are subject to the provisions of this Bill and as to the capital of which we know nothing because they are unlimited. I commend this Bill to your Lordships.
§ 5.12 p.m.
§ LORD BROADBRIDGE
My Lords, I desire to offer only a few remarks upon this Bill. The space of time between its introduction and this Second Reading has really not been sufficient for one to read, mark, learn and inwardly digest its 109 clauses and seven Schedules, but I am sure that the most illuminating introduction by the noble and learned Lord who sits on the Woolsack has dissipated to a very large extent difficulties which may have arisen in our minds owing to want of time to devote to the study of the measure. I am confident that your Lordships will agree that not only the City of London, but all the great cities of this country where commerce and trade is carried on under Company Law, will always welcome legislation which will tend not only to help but to keep clean and not to hamper that trade and commerce. The chief aim of this Bill is, obviously, to protect the public and the shareholder—and that is welcome. There is not much in the Bill, so far as I can see, to which exception can be taken. But probably some clarifications and adjustments and several smallish amendments may be required. Therefore—if I may use the term—I do not desire to deal with what may be called "the trimmings" but to confine myself to about two specific items.
In the first place I would like to say a word or two about nominee holdings. That seems to me to raise one of the most contentious issues. I think it has arisen out of suspicion that there is something being hidden, something wrong. My experience—and I have had a great deal with regard to nominee holdings—is that the purpose of them is to expedite delivery of transfers and securities. Another reason for them is that big business men are frequently called away abroad on business. They are away for long periods, and instead of using power of attorney 1046 with regard to their securities they prefer to use their bank. I believe the origin of bank nominees was to be found in that very cause. The system enables quick deliveries or, where there are purchases, quick execution and registration of stock, to be made. Another reason is that in a good many cases bankers have lent money on the security of shares and when these shares are disposed of, obviously the profits go to reduce the bank loan.
But I think that probably this nominee usage may be best explained in other words than mine, and with the permission of your Lordships I would like to read to you an extract from a letter which I have received from a well-known member of the Stock Exchange—a man of very high standing. I asked him to let me have his views in order to fortify what I could say from my own experience. Here are parts of the letter which he has written to me:One of the commonest reasons for putting shares into nominees' names is a very harmless one. It very often happens that the chairman of a company is also a large shareholder, and from time to time he may require ready money necessitating the realization of a certain number of his shares, and with no other motive.May I suggest here what might be some of his interests. He might have a son coming of age, or a daughter going to be married, and either of these happenings might lead to his realizing a good deal of his capital. The letter continues:If a transfer out of his name were to get into general circulation, a buyer seeing that the transferor was the chairman of the company, would think that he, the chairman, was in possession of information not accessible to the buyer. It might, and does happen, that he at once tells his friends, and says the chairman is selling. These rumours travel quickly, and there is an immediate adverse effect: on the market price, prejudicing the whole body of shareholders. For this reason an important official of a company is well advised not to put shares which at some future time he may have to realize, into his own name.It often happens also, that one of the holding companies have very large holdings in a subsidiary company. They may decide for one reason or another, quite apart from any special information which they may possess, to liquidate a certain cumber of their shares (they may have a satisfactory profit they wish to take and which, after all, is their business). Dealers having shares transferred into their names from 'such companies, would give an importance to a sale by them probably 1047 greatly exaggerated, and in fact the sellers might then have great difficulty in realizing at all.Companies such as I have mentioned invariably use nominees' names for their holdings by reason of the largeness of the latter, and so that inquisitive people may not take advantage of the knowledge of whether they are buying or selling.The writer concludes:I see no harm at all in the use of nominees' names for the purposes as suggested above, and which are very common practices.I am quite sure, speaking from my own experience, that the use of a nominee is a great help as well as a time-saver, and is not in any way abused.
The other matter to which I wish to refer is the age limit. The age limit of seventy will, I am sure, be a great shock to trade and industry affected by Company Law. Some of our greatest undertakings to-day are headed and led by men who are well over seventy—some even approaching eighty—and yet they are alert and virile, and still have brilliant brains. To lose their great genius and leadership would be nothing less than a catastrophe to those undertakings. I agree that in some cases men of forty-five or fifty are equivalent to men of eighty or ninety, but on the other hand those of eighty or ninety are very often equivalent to men of forty-five or fifty, so far as their brains and physique are concerned. Why should men of seventy have to submit to the indignity of a resolution as to their continuance in office? Surely it is putting a penalty on old age. While we want to use youth as much as we can, surely if we were to contemplate a football team we should not take out those who know all the tricks of leadership and put in inexperienced men to run the show? I think this question of retirement at seventy and of old age is one of the blots of the Bill, and I sincerely hope that the Government will decide to eliminate it by amending it.
Commerce, industry, banking and insurance are carried on largely, not only in the City of London but in the other great cities, under the limited liability Acts. It can be said, as the noble and learned Lord on the Woolsack has in fact said, that they are carried on with the greatest integrity, honesty and clean dealing, and I would like to thank the noble and learned Lord for the compliment he 1048 has paid them. I am sure he was thinking of the City of London as much as any other great centre, and it is a common thing in the City to hear that some of the biggest transactions are carried out by what is called a "gentleman's agreement." In all walks of life, there will always be black sheep who prefer to go the crooked instead of the straight way. I am glad to say, and to know, that they are what may be called infinitesimal in number, but if this Bill does anything to eliminate even that small number and to keep the whole clean, I readily support it, and I am sure that the House will also.
§ 5.22 p.m.
§ LORD SIMONDS
My Lords, the only excuse that I have for intervening for the first time in your Lordships' debates is that it was my duty for many years to preside at one of His Majesty's Courts to which was confided, among other things, the task of winding up companies. So it is that in me your Lordships will see the man at whose doors, I suppose, may be laid the deaths of more companies than at the doors of any other member of your Lordships' House—apart from my noble and learned friend Viscount Maugham, who recently spoke to your Lordships. I was not only an executioner, however; I was also a doctor. From my court went many companies, reduced it might be, but reconstructed and restored to a new and vigorous life. So it is, my Lords, that I may claim to take an interest in a Bill which so closely touches the life and death of limited companies. Perhaps your Lordships may think it right that, with the long experience which I have had—not indeed so long as that of my septuagenarian friend the noble Viscount, Lord Maugham, but at any rate a long experience—
§ LORD SIMONDS
—that I should give your Lordships the view which I entertain of this Bill. And let me say at once that I welcome it wholeheartedly. The generous labours of Lord Justice Cohen and his colleagues have resulted in a Bill which, in almost every respect, I venture to commend to your Lordships' House. No doubt there are many details which we shall have to consider in Committee, but in almost every respect the Bill follows the broad principles of Company Law under which the commerce and trade and industry of this country have 1049 flourished since 1862, which marked the first great year of Company Law.
I have said "in almost every respect." There is one exception which I must make; and it is just in this exception that the Bill strays from these cardinal principles which have been hitherto observed. Hitherto, it has been the rule of the law that the company and nobody else knows its own shareholders, and the world outside knows the company and nobody else. The exception which I make in my general commendation of this Bill is in that group of clauses called the nominee shareholder clauses. They have already been much discussed, and I have little to add to what has been said about them. Perhaps your Lordships would permit me, however, to make these general observations, which are so trite that it seems to me they may have been forgotten.
The limited company, of course, is an artificial creature—a creature of Statute Law. You may clothe it in what garments you will; you may bind it in what chains you will; but remembering that it is the machinery by which enterprise is carried on in this country I venture to think that you should not make it more difficult to carry on than the necessity of the case demands. In the view which I put before your Lordships, this group of clauses, from that point of view, sins against the light. What are the elementary principles governing legislation of this restricted character—for that is what it is. I think they can be stated in three sentences. First of all, consider what is the evil which you seek to cure, what is its nature, and its magnitude. Secondly, will the remedy by which you hope to cure that evil be effective? And, thirdly—and let this never be forgotten—in seeking by that remedy to cure that evil, what sort of burden are you putting upon a number of very honest and respectable fellow citizens, and in what sort of peril are you placing them? Never forget that this Bill imposes a penalty not only of a fine, but imprisonment. The liberty of the subject is here in peril for an infringement of the provisions of this Bill.
Now may I say just one or two words upon these three points? First of all, what is the magnitude of the evil? I listened to my noble and learned friend Lord Maugham. I know how great is his experience. But I could not help thinking that, as a doctor sometimes thinks of 1050 humanity in the terms of disease, so he, who has seen so many rascals in the witness box, perhaps exaggerates the extent of the evil. I know very well that what the noble and learned Lord referred to in the Cohen Report was one of the matters which moved them. They referred also to the possibility of companies by means of nominee shareholdings being subject to foreign influence. I doubt whether that is a realistic way of looking at it. I should very much doubt whether in any particular trade or industry the fact that John Smith of London, a shareholder, concealed Hans Schmidt of Hamburg was unknown. That sort of thing is surely known in every trade and industry. I venture to think that that is not a reason which would weigh with your Lordships here.. The second was the point to which the noble and learned Lord referred. The third was I think the familiar question of the Press. It may be important to know who are the shareholders of the Daily Mirror or The Times or the Daily Worker. I do not put them in order of public prestige or indeed personal preference, hut, if it is really important to know that, and if the shareholders in these companies nevertheless wish it not to be known, you may be very well sure they will succeed in concealing the fact from the world.
The magnitude of the evil is any man's guess. But I do not think it is any man's guess whether the remedy which this Bill provides will be effective. I am very sure it will not be effective, not only for the reasons which are pointed out in the Cohen Committee Report, but for other reasons which, if necessary, I will confide to the noble and learned Lord on the Woolsack. Let me assure him of this. If I confide to him one way round and he blocks that way, I will be able the next day to tell him of another, and so will many much more astute persons than myself. The magnitude of the evil is any man's guess. The remedy for the evil will surely be ineffective.
But what about a third matter? There are five pages of print dealing with the question of nominee shareholdings. I wonder whether it is possible for the ordinary citizen to discover whether he is subject to the liabilities which are imposed by this Bill. I should like to suggest to the Lord Chancellor (though he has many other perhaps more important 1051 duties) that he should take these five pages to his chamber to-night. If it is not irreverent, I would suggest he takes with him a large jorum, shall we say, of hot coffee! If it is not irreverent to the point of profanity, I would suggest also that he takes a wet towel! I will guarantee that, in spite of all that, I will set him an examination paper in the morning to which he will not be able to answer one question.
That is the nature of this Bill. In all seriousness your Lordships will remember that, as I have already said, it is a Bill which imposes a penalty either of a fine or of imprisonment. I am aware of two things to which it is possible the noble and learned Lord on the Woolsack may refer. In the first place, of course, the penalty is not incurred unless the person committing the offence knowingly commits it. It is a detestable form of legislation. I know this is not unique; there are many Acts of Parliament which contain the expression "knowingly." It is extraordinarily difficult, if objectively the offence is committed, for the man to say, "I did not commit it because I did not know." It is going to be very difficult for him to satisfy any tribunal of that fact, and, therefore, I think that the peril—for it is a peril in which a man is put—is not going to be seriously lessened by the fact that there is that word "knowingly."
Secondly, there is the safeguard that no prosecution is to be instituted except by or with the consent of the Board of Trade. That also is a form of legislation which may be necessary but it is highly objectionable, and for this cardinal reason, that if an offence has been committed, by what standard is the Board to judge whether a prosecution is to take place or not? It is, in effect, confiding to the Board of Trade an arbitrary power, and it has always been my belief that to no man, to no body of men, to no Board, Board of Trade or any other, should arbitrary power be confided. Accordingly I venture to think that this bundle of clauses which offends against the principles which have hitherto governed Company Law is thoroughly bad. I hope that the Government will see their way to eliminate it altogether from the Bill. There are many other matters which will be discussed at a later stage. As I say, to the Bill generally, 1052 if I may do so, I give my welcome, but to that particular group of clauses I am far from giving a welcome.
§ 5.35 p.m.
My Lords, I think this is an occasion unique in your Lordships' House, for by one of those strange concatenations of circumstances which the gods send from time to time to please the hearts of men and also sometimes to confuse the minds of planners, it is my privilege, as a humble member of the flock of St. Mary ad Winton, to congratulate on his maiden speech in your Lordships' House no less a person than our warden. It would be presumptuous on my part to praise the masterly wit, the clarity and eloquence of his speech, for, being our warden and a Lord of Appeal, those are taken for granted.
I will content myself with congratulating him on his happy choice of occasion, for he has driven before him one of the most distinguished members of the flock, the noble Viscount, Lord Swinton, while clustering round him are the more humble sheep, Viscount Buckmaster, Lord Mancroft and myself. Moreover, he is fortified by a strong contingent of speakers from the Sister foundation in the shape of the noble and learned Lord Chancellor, the noble Lords, Lord Brand and Lord Saltoun, while in addition the noble Lord, Lord Rennell, arrived from Great Winchester Street to add a welcome but different light to this Wykehamical occasion. William of Wykeham must surely be watching the proceedings with the liveliest interest, and I only hope he will approve of our respective utterances, for we all of us are aware of the third of his three alternatives (to learn, to depart and to be flogged).
I am no lawyer and I am going to treat this Bill in an extremely simple and common-sense manner. We welcome the Bill in principle as the most painstaking and valuable contribution of the Cohen Report. I feel sure that our institutions have everything to gain and nothing to lose from an occasional inquest conducted by such minds unclouded by doctrinaire prejudices, and the Report, I think, is complete proof that on the whole companies have been conducted in a responsible and upright manner. The changes suggested by the Committee and embodied in this Bill are for the better, and I think that both the Report and 1053 the Bill come at a very opportune time when the financial traditions of our country are in the melting pot. At the moment the investor, who it must be remembered is the man who is denying himself for the present in order to secure a pension or income in the future, is in a very serious dilemma; particularly the small investor. If before the war his aim was to retire upon an income of £500 a year, he could obtain such an income by the saving and investing of about £12,000 in high-class fixed interest securities. He could then, as he fondly hoped, forget about both capital and income.
To-day the position is very different. If he is to have the same standard of living he would have to have an income of £1,000 a year, and to secure that income from the same type of securities he would need to save and invest £30,000. I need not elaborate on the reasons for this. On the one hand is the inflationary effect of Government spending and over taxation, and on the other hand the equally inflationary effect of the artificial depression of the return on capital—policies which many of us regard with great disquiet. Still, there it is. To reach a standard of living of £500 a year obtainable before the war, the investor must now save and invest some £30,000 in first-class fixed interest securities. He may well decide that this is impossible, and he must either moderate his ambition or invest in stocks of a different type from those which he would previously have bought.
It is to this type of individual that the Report and Bill will come as a great relief. He may have heard allegations that companies' directors are rogues, that their companies are traps for the unwary and that the stock exchanges are gambling hells. I do not suppose he believes everything that he hears, yet this lying propaganda may have left some disquiet in his mind. The knowledge from the Report that only minor anomalies exist and are being put right in this legislation should remove any shred of disquiet from his mind. Even with this Bill he knows that he cannot eliminate the risks of investing in the equity stocks of public companies. The Government have promised overall good trade by means of full employment, but he cannot eliminate the risk of his company losing its share of the trade in which it is engaged, or, in fact, of that particular trade being subject to a recession, 1054 though by investing in companies with strong reserves, which they must now reveal, he can guard against that to some extent. He can find out, if he wants to, what shares his directors hold and whether they make sales or purchases. His directors must retire at the age of seventy, although he may well regard this as a two-edged ordinance.
He cannot eliminate the risk of the Government causing him serious prejudice as to income or capital by some perfectly legal and possibly plausible action, but his vote is his only safeguard against such malpractices. As against this, his equity holding may be some safeguard against the continued watering of the currency. In short, the small investor may feel that if he is to maintain the standard of living he hopes for upon retirement, he must invest his savings in the type of security which he would not have bought in the past, and in so doing he may feel that this Bill will give him a greater certainty of a square deal. Everything which creates confidence in saving in these troublous times is to be encouraged, and I feel that the Bill is a helpful instrument to those of us who would like to see the number of persons with an investment stake in industry increased—financial democracy, in fact, as the noble and learned Lord, the Lord Chancellor, has called it.
There is one provision in the Bill about which I share the disquiet of certain other noble Lords, and that is the provision for the retirement of Directors at the age of seventy. The duties of a director, who it must be remembered is not an executive, are perfectly capable of being carried on by many men past this age, and my own knowledge of men who sit on boards at ages past seventy makes me feel that the retirement of nine out of ten of them would mean a real loss to their companies. I fully admit the difficulty of a very few directors being retained past their age of usefulness, bringing discredit upon the whole system, and resulting in this proposed legislation which I feel will be a definite drawback to the efficiency of many companies. However, on the Committee stage we will be able to deal with that at much greater length. I do not think the noble Lord, Lord Broadbridge, is in the House, but he rather startled me, if I heard him aright, by suggesting that many people aged, I think he said, forty-five, which 1055 is precisely my age, apparently had the mental and physical characteristics of those of eighty or ninety. He may be correct, and with that rather depressing thought I sit down.
§ 5.48 p.m.
My Lords, I would very much like to join my noble friend Lord Hawke in congratulating the noble Lord, Lord Simonds, on his extremely able incursion into your Lordships' debates. I am the more grateful to him because he said, a great deal better than I myself can hope to say it, something of what I propose to say upon one point. Like many of your Lordships I must, first of all, confess to an interest. I am a shareholder in a very large number of joint stock companies, one of which happens to be an unlimited company, and I am a director of one company. The noble and learned Lord, the Lord Chancellor, in his admirable and too short introductory address to this debate, spent less time than I could have wished upon the history of limited liability. It is my purpose to remind your Lordships of what that history is.
Limited liability came upon an industrial society composed of a great many companies with considerable capital and very few shareholders and unlimited liability. After the introduction of limited liability the company structure of this country, and the social structure, included many companies with a very large number of shareholders who were quite careless of the affairs of their company so long as they got their regular dividends. One of the effects of that particular structure was the accumulation of enormous capitals; in fact, I think it is fair to say that if it had not been for that admirable or otherwise lawyer's invention, it would not have been possible for Britain and the rest of Europe to accumulate the capitals necessary to wage the last two wars. In addition to that it has had a profound effect upon to accumulate the capital necessary to the breaking up of family businesses. I know of one surviving family business where the most perfect relations obtain between everybody concerned in that business, from the people who are working their way up from the bottom to the people at the top. That business is waiting, and it is waiting for a death. As soon as that death occurs, what happens? The vulture stoops from the hills around Llandudno, 1056 a limited liability company is formed and there is immediately every sort and kind of industrial discord.
The limited liability companies have never really been able to escape from the criticism of them by W. S. Gilbert in that very great failure Utopia Limited. I do not suppose there are many of your Lordships who can quote from that play, but I know many accountants who can. It is from those criticisms that Bills like the one before your Lordships this afternoon are endeavouring to free the limited liability company. This Bill is founded on the Cohen Report, and here I want to register a mild protest. I have found the greatest difficulty in getting hold of a copy of the evidence which was given before the Cohen Committee, and I have succeeded only in borrowing one. I enter a protest against the practice which seems to be growing up of appointing Committees to examine very important subjects and then not printing more than a very small number of copies of the evidence given, so that they are practically inaccessible to people such as Members of Parliament who are interested. Nobody admires and praises more than I do the labours of Lord Justice Cohen and his Committee, but the fact that one cannot get hold of the evidence transforms the whole of their work from one of painstaking labour and wisdom to an ipse dixit, because nobody can know what is behind it. I have managed to get a copy of the evidence but I have not been able yet fully to study it.
The Cohen Report makes perfectly clear what the Committee examined. The Committee examined the ways and practices of limited liability companies in Britain. All over it appears that that was the subject of their study. Clauses 5, 17, 49, 51 and no doubt many others can be quoted to establish that fact. I submit that it is not fair to that Committee to extend their findings to something they had not got under their eyes. This Bill which is now before your Lordships will, if carried into law, affect unlimited companies just as much as limited companies. I have often been told by men of great experience in business that there are no such things as unlimited companies in this country. Your Lordships, of course, know how untrue that is. There is a large number of them, but the reason why that opinion is generally held, even amongst intelligent people, is that they are never heard of. They 1057 are never before the Courts, they give nobody any trouble, their conduct is careful and good, and I do not think anybody has any complaint to make of them.
If there is to be legislation with regard to them, then I submit very humbly that it should take rather a different form. There are possible dangers in other directions but I do not think they are very serious because, as I say, you never get complaints about unlimited companies. I therefore submit to His Majesty's Government that it would be a very good thing to limit this Bill to limited companies, which could easily be done in the definitions. After all, when people go into an undertaking with unlimited liabilities they ought to be given a certain amount of freedom. Unlimited companies are, after all, really extended partnerships and it is as partnerships that they should be viewed.
There is another small point to which I should like to draw your Lordships' attention, and that is that the Bill introduces a new definition of "private company." if the Bill passes into law as it now stands there will, therefore, be three definitions of a private company—namely, the definition in the Companies Act of 1929, the definition in this Bill and the definition in the Finance Act of 1930. If the definition in this Bill is to be preserved, I submit that the definition in the Companies Act: of 1929 should be repealed. Otherwise nobody will know what is meant by the words" private company."
There is one point on which I differ from those noble Lords who have spoken hitherto and which I think is of some importance. I will, therefore, state my opinion. In some respects I think this Bill is too strong. I should say that my general experience of business is amongst smaller companies; I do not know very much about company business in the City of London and that sort of thing. I say the Bill is too strong in the provisions it makes in Clause 27 with regard to loans to directors. Especially in a small business, I think it is often a very useful thing have power to make a loan to a director. May I quote a case which occurred in the course of my own experience and which will, I think, illustrate the kind of thing I have in mind? A company of which I know had a very well-defined and very well-managed business which it did not want to alter. 1058 It learnt that some land next door to its own premises was for sale, but the directors did not want the company to buy it because they did not want to change the character of their business. They said: "This is our line and we do not want to go in for the purchase of land. It is, however, of great importance to us that the land next door should not be held by an unfriendly proprietor." They therefore said to one of their directors "Will you buy this land?" He said "I have not got the money," and thereupon they advanced it to him. He bought the land, the transaction was reported to the company at the next general meeting and the loan was shown in the accounts, so that the whole matter was shipshape and above board. If Clause 27 as now drafted were to become law that would be impossible, or at: any rate very difficult.
The clause might be got round, although I do not see the way to do it, but I submit that it is a bad principle to make honest men, who are only anxious to carry on their business in the best way available to them, consider how they can get round the provisions of an Act of Parliament. I suggest to His Majesty's Government that they should not prohibit loans to directors entirely, but that they should allow a company to ratify such a loan at its next general meeting. If they like to specify that there should be a special resolution with all its attendant difficulties, then let that be the form, but I say it should not be so downright as it is.
There is another point on this clause. In order to see how it may affect a private company, let us consider the 1930 Finance Act. That Act, as your Lordships know, makes the Estate Duty upon shares in a private company primarily a debt against the company. Let us take the case of a private company. The shares descend to a son or a brother, and they are presumably a big holding. The son or the brother becomes entitled to the shares and he ought to be a director. If he has no funds other than those shares, the company is practically going to be forced into the position of making a loan to a director, because otherwise it will be unable to give the biggest shareholder in the company a position as a director. I merely mention that to show how a clause like Clause 27, which is too severe, may affect the normal conduct of business. Here you have an 1059 Act of Parliament prohibiting what an existing Act of Parliament certainly gives the power to do.
I should like to say that I welcome very much the stimulus given to Board of Trade investigation. But I think the number of 200 shareholders is too large. I would very much like to see any shareholder, or group of shareholders, able to go to the Board of Trade and ask for an inquiry, provided they were willing to foot the bill. After all, nobody is likely to undertake malicious prosecution if he has to foot the bill, and I certainly would like to give small groups of shareholders more power in that respect.
With regard to nominee shareholders I would like to put this to His Majesty's Government. I am not an expert at reading Acts of Parliament, but as I read the clause it puts the duty of informing the company that he is the possessor of one per cent. or more of the shares of the company upon the person who is the beneficial owner. It does not lay any duty on that owner to notify the company if he ceases to be the beneficial owner of one per cent. of the shares. Moreover, I submit to His Majesty's Government that if they did lay that duty upon him they could not enforce it, and it is a duty which, even if it is implied in the Bill, will go by default. Therefore, after six or seven years have passed you will find these companies may very well, according to their records, have 120 or 150 holders of one per cent. of the company's shares, and the information to be derived from the company's register will not be worth the paper on which it is written.
Concerning the value of nominee holdings, there is one point which has not been mentioned in your Lordships' House, and that is that you have a great deal better security in some ways, because if you have shares which are invested in the name of a bank's nominee company, they have the numbers of the shares and the certificate, and everything is held there. If there is a fire, or anything occurs, they know what has been lost. They can report it to the company, and you can get a replacement with very much less trouble than if you happen to have a fire in your own bank where the securities are deposited, because it means more staff to keep books with notes of the numbers and all that sort of thing. That is a very great convenience in that way.
1060 I now come to the last point in the Bill to which I want to refer, and that is the question of accounts. With nearly all the provisions in the Schedules I am in whole-hearted agreement. There is one to which I take a little exception, and that is the one which says that you have got to disclose the market value of all your investments. I would like to have seen that out of the Bill for several reasons. One is that it is all very well when you can get Stock Exchange quotations for investments that are always in the market. Market prices are a very good indication of current value, but market quotations of investments on provincial exchanges which do not very often come into the market, is no indication, or very poor indication, and in any case I am one of those heretical people who always look at investments with a very sour eye and never think they are worth half the money at which they are listed. I do not think that is necessarily a very good thing.
The point in the Schedule on which I would like to lay most weight is this. The Schedule shows you how you must set out your balance sheet, and with what it says there I am in complete agreement. I think it is a great thing to have your fixed and floating assets separate. If there is a special lien against any particular asset, that should be mentioned, and if there is any general lien against your whole assets, that should be mentioned. When you come to the liability side, what I want to see first of all are the debts, or what you owe on this or on that. Then presumably comes the capital, and after that I really do not see that it is of any importance to anybody what the rest is. Just consider what that is. You get a lot of reserves which are merely names put in to cover a portion of the whole. So long as you are solvent, the balance of the capital of the company is represented by the difference between your debts and your assets, and if you have already marked those assets against which there is a special lien or any general lien, what does it matter how you divide the rest up? What does it matter to the public, or even to the shareholder? It is only an expression of opinion, as it were, on the part of the directors that they have allotted so much to that reserve and so much to the other I think Parliament is going a little astray in laying very much stress 1061 on reserves. With those few words I wish to say how very much I welcome the Bill. I hope His Majesty's Government will at any rate consider the first three points I have mentioned, apart from which I wish the Bill every possible success.
§ 6.6 p.m.
§ VISCOUNT BUCKMASTER
My Lords, I would at the outset like to join, if I may, tin a most sincere tribute, especially coming from a member of his school, to the noble Lord, Lord Simonds. I thought that my noble friend Lord Hawke was perhaps a little hard on those who, if not with him at school, at least came from the same school, when he said they should be all classed together as sheep, but as he could find no better description for us I must of course accept it. The noble and learned Lord on the Woolsack suggests goats, but I am afraid I must repudiate that very strongly.
I would like also to associate myself with those noble Lords who have spoken in praise of this Bill. I am glad indeed that a measure of this kind should at last be about to find its way on to the Statute Book. The hour is late, and I have no intention of embarking on any general discussion, but I would like to direct your Lordships' attention to Clause 103, which deals with unit trusts. This is a matter to which I have given a great deal of thought on previous occasions, and in regard to which, in conjunction with the late Lord Mancroft, I was fortunate enough to get your Lordships to accept the substance of certain Amendments when the Prevention of Fraud Act was being debated. I must, as shortly as I can, explain for those who do not know, what a unit trust is. It is a means whereby an investor, through a single purchase, acquires a stake in a large number of securities, in each of which the purchase of a unit gives him a fractional interest. If, for example, the portfolio contained fifty securities of equal value, one unit would give a fiftieth interest in each security. When the public buy a given number of units it is the practice of the management company to buy in the market the required amount of the underlying securities. If the public sell units, of course the converse process applies, and the management company then sell the appropriate securities.
1062 In the case of a purchase the certificates are put in the names of trustees who hold the securities on behalf of the unit holders. Now it is a practice of management companies to quote a price at which units may be purchased. The Board of Trade requirements under the Prevention of Fraud Act insist that these prices shall be correct. That is to say, after adding the appropriate charges they shall be strictly related to the value of the underlying securities. In this way the unit holder, or the potential buyer of the unit, is protected against paying too high a price. The present Bill extends that protection to the selling price as well. I feel we should go a little further. I feel that we should make this selling price not only a correct price but an effective price, and that, subject to certain limitations, we should make sure that the unit holder can, in fact, sell at this price. As the law now stands there is no obligation on the management company to repurchase their units at any price at all. They can buy them, as the law now stands, at a price substantially below the correct price. If the Bill becomes law they will still be in a position of being able to refuse absolutely to buy them, but if they do buy them they will be forced to pay the proper price for them.
If we just consider this for a moment we can see that abuse and evasion are both possible. Let us imagine a small holder. He needs the money, and he goes to the management company. They quote the correct price, a price which allows them a profit after the correct value of the underlying security has been considered, but they refuse to buy. What does he do? He sells through outside channels, and sells at a sacrificial price. There is nothing to stop these units, after having been sold at too low a price through outside sources, finding their way back again to those closely associated with the management company. I propose moving an Amendment to the effect that we should compel the management company to repurchase their units. I agree that there must be certain limitations. One cannot expect the management company to rebuy units during hours when it would be impossible to sell the appropriate security; nor could we ask them to repurchase units in such large numbers that the value of the underlying securities would be depressed. In such a case the price of the units would have to be related to the lower price of the securities which they represent. Subject to these 1063 considerations, there can, I suggest, be no reason why the management company should not be compelled to repurchase their units. It is hard indeed for the small man if he is to be denied the free market which is his as of right, and which the very prospectus under which he applied for units led him to anticipate.
My second point is shorter than the first one, although I regret to say it is also of a technical nature. It concerns the yield of the units. Here again the Board of Trade has stipulated that this yield must be correct, and that all items that relate to capital must be ignored. Now it is not a difficult matter to confuse capital and income. Some of your Lordships may have had experience of that fact under present conditions. In the case of a unit trust, even where the law enjoins that capital and income are to be kept separate, it is none the less very easy for there to be confusion, and it is not a difficult thing to mislead the public, as I hope I can show your Lordships. It is very simply done by giving the price of the unit and giving against it, not the yield, which your Lordships will appreciate must be correctly stated, but what you paid out in the preceding year. There is no obligation to state the yield at all, but if you do you must tell the truth. There is nothing to stop you giving the price of the unit and putting against it what you paid out in the preceding year. But what you paid out in the preceding year may include several items of capital which are nonrecurring, and which are improperly credited to income.
I have in my hand—and your Lordships may inspect it—the half-yearly report of one of these unit trusts. It shows the yield correctly stated, but in the offer for sale of these units you get a different picture. You get a price for the unit, and on the other side you get the distribution for the preceding year. In this case there is an appreciable difference in comparison. From the price of the unit one, by inference, calculates the yield, and is misled. I will not labour this point further except to say there are many ways in which the distribution can be inflated, such as by distributing not only the income but the proceeds of the sale of bonus shares, which are properly capital items. You can—and that has been done—buy securities which are about to pay a 1064 dividend. You then sell them at a lower price when the dividend has been paid, and reinvest the proceeds in fresh shares, also about to pay a dividend. By this means, at the expense of capital, you can secure a number of extra dividends during your financial year. If, in addition to that, at the end of the year you repurchase all the securities with which you started, the picture remains exactly the same. No one knows of all the changes that have gone on behind the scenes; you finish with that with which you started the year. Capital of course, has suffered because there can only be one end in such a case. You cannot pay dividends out of capital without seeing your capital security depreciating. I am sorry I have been longer than I intended. I do not suggest that these points are major matters which touch the very heart of this Bill, but I do suggest that they touch very closely many thousands of small investors who look to this Bill for their protection. I hope that on these issues they will not look in vain.
§ 6.16 p.m.
§ LORD CHORLEY
My Lords, it was to be expected that on an occasion of this kind in this House we should have an exceptionally able debate. That is an expectation which, if I may say so, has been entirely justified by the event. So many of the members of your Lordships' House have won distinction in the handling of the very Companies Act which the Bill, to which we are giving a Second Reading this afternoon, seeks to amend; so many of the members of your Lordships' House have handled business and finance within the framework of the Companies Act that I am sure there is no assembly in the world which is more competent to deal with a matter of this kind than this House. To-day we have been privileged to hear a number of exceptionally able speeches from members of this House to whom we have had the pleasure of listening from time to time; also, if I may say so, we have listened to two particularly delightful and cogent speeches from the noble Lord, Lord Brand, and the noble Lord, Lord Simonds. I am sure I express the wishes of all your Lordships when I say that we hope their appearances in this House, and their contributions to our discussions, will be very frequent in the future.
I often wonder whether the ordinary citizen, even the ordinary holder of shares 1065 in limited companies, understands the extent to which the prosperity of this country has been built up within the framework of the limited liability company over the last hundred years. It has been a remarkable development by the use of a commercial institution which was invented, I think, partly by the lawyers and partly by the business men of this country, and which has spread, in different forms, all over the world. Under the aegis of the limited liability company, tremendous industrial and commercial progress has been made, and a standard of living achieved in this country which, taking it by and large, has been fairly good and rapidly developed.
The time has come, no doubt, when, in respect of certain types of industry of a nation-wide character, progress requires a rather different type of organization, a different provision of finance, and so we have the nationalization Bills which are at present being passed through Parliament. I have no doubt that these are not very popular with some of the more conservative members of the community, any more than the invention of limited liability in its day, and the introduction, indeed, of corporate responsibility were popular with many of the more conservative members of the business world and of the community at large. Indeed, if one were to go further back and to take what was, perhaps, the first example of all nationalization, the turning of independent feudal armies into a national force, one would find that that was received with hostility by many of the baronial ancestors of noble Lords sitting opposite, just as, shall we say, the Bill for the nationalization of the transport system of the country—both equally necessary in the national interest—has been received by a later generation.
How far this process has to go depends on the empirical solution of the problems of industry and commerce which confront us, problems which should not be attempted to be solved on any ideological basis but on the basis of a proper scientific attitude towards them. An ideological approach, unfortunately, is only too obvious among those who oppose these methods. We on this side of the House, of course, approach this matter in a spirit of sweet reasonableness. We realize that for a very long period to come, at any rate, there will be a great deal of business and industry carried on on the basis of private 1066 profit, and that the company framework within which that is conducted will remain for many years an essential part of our economy. Therefore, we are determined to see that the Company Law shall be made as efficient and as effective a piece of business-handling machinery as possible. It is, accordingly, not in any sense to be wondered at that it was a Socialist President of the Board of Trade who appointed the Cohen Committee, whose admirable labours have resulted in the birth of the Bill to which we are asking your Lordships to give a second reading this afternoon.
The Bill has had a very gratifying reception at your Lordships' hands. We have listened to a great number of very useful speeches which, so far as the principles of the Bill are concerned, have on the whole given them support. A number of the points which have been made have been rather in the nature of Committee points. It is very difficult on an occasion of this kind and in dealing with a Bill of this type to separate points which are really Committee points from those which are of a Second Reading type. In replying to the discussion, I hope that some of the noble Lords who have raised matters which, in my submission, are Committee points, will forgive me if I do not deal with them, or only deal with them rather rapidly at this late hour of the afternoon.
The noble Viscount, Lord Swinton, in a very admirable speech—if I may say so—bringing to bear on this matter the ripe wisdom which he has acquired by reason of his connexion with, among other Departments, the Board of Trade itself, emphasized that in a Bill relating to the structure and conduct of companies one has always to bear two main matters in mind—the protection of the investor, so that he is not cheated out of his money or that his money is net thrown away, and the provision of a competent framework within which business members of the community can efficiently carry on their work. Naturally, we entirely accept that view, and in this Bill, acting on the advice of the Cohen Committee, we have, in fact, tried to secure that sort of thing.
From the speeches it has appeared that some of your Lordships are of the opinion that in connexion with the conduct of certain companies there are too many rogues. Viscount Maugham gave us the benefit of his experience and Lord 1067 Simonds has already replied to him. I was reminded of the well-known saying of an equally eminent Judge of the last century: "The lawyer is apt to see the pathology rather than the physiology of commerce." That, I think, is a saying which one ought to bear in mind, because too legal an approach to a matter of this kind very frequently means looking at it in terms of protecting the community so much against the rogue that possibly the honest man may be obstructed in the carrying on of his business. That was a point which the noble Viscount, Lord Swinton, made when he said that in trapping the marauders we must not fence off the honest man from getting on with his work. The noble Viscount asked—I am not sure if this was not intended as a dialectical thrust rather than a request because he wanted to get information—
§ LORD CHORLEY
Well, dialectical thrusts are not infrequently made by the noble Viscount. He asked if nationalized undertakings were going to disclose their accounts in the sort of way which is required under this Bill. In particular, he referred to the Coal Board and also to local authorities. Of course, the accounts of the Coal Board are dealt with under the Nationalization Act which was passed through your Lordships' House during last session, and this question of accounts was very closely discussed over a very substantial period in a debate in which the noble Viscount took part. The obligations of local authorities, in the same way, are dealt with by the Statutes under which those local authorities are set up, and we are not concerned with them in the Bill which is now before your Lordships.
§ VISCOUNT SWINTON
Will the noble Lord permit me to interrupt him? I am well aware of what we did in this House when we had the Coal Bill under consideration. We certainly made it a better Bill. I am also aware of the obligations of local authorities. But what I put to the noble Lord was something different. I know what was laid down in the Coal Bill, but here the Government are proposing an entirely different standard for private enterprise. The specific point which I put was with regard to remuneration 1068 of directors. I put to the noble Lord this question: Leaving aside the legislation, if it is right to force every private company—and I think it is—to give the remuneration of its directors, why should not the Minister of Fuel and Power give the remuneration of the Regional Coal Boards? It is not what is in the legislation; it is the practice which the Government are going to follow.
§ LORD CHORLEY
In regard to the accounts, the question of discussing the remuneration of managerial boards is, of course, entirely different in the case of the ordinary private company and that of the type of organization set up.
§ LORD CHORLEY
This is a matter for the Minister of Fuel and Power, and not one which is properly raised—with great respect to the noble Viscount—on the Second Reading discussion of a Bill of this kind.
§ LORD CHORLEY
I think one of the main points on which the noble Viscount was a little doubtful about the Bill—and in this regard a number of your Lordships were even more doubtful than he was—was the proposed retiring age for directors. On that point, we had the advantage of advice from the noble Lords, Lord Brand, Lord Broadbridge and Lord Hawke, who were all opposed to any compulsory retiring age for directors. On the other hand, we had a very forthright and, if I may say so, forward-looking speech from the noble Lord, Lord Lucas. He pointed out—as is undoubtedly the case—that on a number of boards the really energetic, young and middle-aged men have been prevented from coming forward because of the limpet-like clinging tendencies of aged directors. Nobody who has had even the limited experience of companies that I myself have had can fail to have observed that.
Listening to the debate on this question, it seemed to me that noble Lords have overlooked the point that no compulsory retirement age of seventy is laid down. All that the Bill seeks to introduce 1069 is a system by which members of the company shall have it put: to them whether the directors are to carry on or not. The men of outstanding ability, whose worth is known and accepted—referred to by the noble Lord, Lord Broadbridge—will, of course, be not only invited but pressed to go on with the work which they are doing so well. Perhaps this matter of age is one on which many of your Lordships are rather sensitive; and possibly one of my own comparative youth is a little less sensitive than some of the others. I was a little depressed to hear that the noble Lord, Lord Mancroft, to whose witty and forcible speeches we all like to listen, was a little pessimistic about the chances of your Lordships' House having the pleasure of listening to him when he had reached that particular age. This question of age is obviously one for Second Reading but, if I may say so, whether the particular age of seventy is the right age, or whether it should be higher or lower, is a matter which might well be discussed on the Committee stage.
The noble Viscount also discussed this difficult problem of the nominee holder. In introducing this Bill on its Second Reading, the noble and learned Lord on the Woolsack pointed out that this is one of the matters of the greatest difficulty in the Bill. A good deal of criticism of a very weighty character has been advanced against it by a number of your Lordships—the noble Lord, Lord Rennell, opening the attack, and the noble Lord, Lord Simonds, bringing some very heavy artillery to bear upon it at a possibly crucial stage in the debate. On the other hand, this criticism has received very little support, although the noble and learned Viscount, Lord Maugham, speaking with very great experience of this matter, did suggest that on the Committee stage he might be able to bring forward suggestions which would enable it to be dealt with more effectively. I think that the noble Viscount, Lord Swinton, put his finger on the point that the new powers given to the Board of Trade are very much more important than these rather complicated provisions relating to nominee holdings. Those of your Lordships who have studied, even cursorily, the Federal Securities Act of the United States will realize how very powerful a weapon this departmental inquiry can be. With these new teeth in his jaws, I am sure my right honourable 1070 and learned friend the President of the Board of Trade will be able to bite a bit harder at some of the marauders to whom reference has been made.
Returning to the speech of the noble Lord, Lord Rennell, one gathered from his remarks in criticism of the time which he- had been allowed for the study of this Bill, that the practices of the City in regard to the long week-end had been recognized statutorily, or were about to be recognized statutorily, in the Companies and that he objected to working on Sundays. We all share that objection with him, although unfortunately we are seldom able to put it into practice. Apart from that, he made a number of criticisms and suggestions which I am sure he will forgive my saying were really questions for the Committee stage. There, we shall be very glad to have the assistance of his very detailed discussion of these particular points. His major criticism was in regard to nominee holdings, and he put forward a number of points of considerable substance which will receive very careful consideration between now and the Committee stage—as, indeed, will the other points put forward, particularly by the noble Lords, Lord Brand and Lord Simonds.
Lord Brand emphasized the importance of the information in regard to the structure and working of the company, which under this Bill it will become the duties of the company's accountants to put before the public. I was not quite sure whether in his reference to the rather voluminous type of accounts published in the United States he was criticizing them or not. At first it seemed as if he was, but later I think he agreed that one cannot have too much information. It may well be that the reader of Reader's Digest who likes his information in "snippets," is quite incapable of mastering, and will make no attempt even to read, these long accounts. But we have the financial journalist, who is very often an economist of considerable standing and who is trained to explain these accounts to the investing public and to bring a sharp and critical mind to bear on them.. From that point of view it is made quite clear in the Cohen Report that there can hardly be too much material placed before the public in that way. For that reason, I entirely agree with the noble Lord, Lord Brand, when he welcomed this part of the Bill—the part which, in the view of most 1071 people I think, is the most important. The time between the Act of 1929 and the beginning of the last war, when there were a number of cases coming before the courts—sometimes before the criminal courts—made it quite clear that one of the great weaknesses of that Act was the lack of precision given to this question of accounting.
The noble Lord, Lord Lucas, made one or two very useful suggestions with regard to the type of accounts, and those suggestions will receive due consideration. No doubt he will bring the matter up on the Committee stage, when, fortified by the consideration which we shall have had an opportunity of giving to these matters in the meantime, we shall be able to deal with them. I think I have already referred to Lord Mancroft's points and also to those raised by the noble and learned Viscount, Lord Maugham. The noble Lord, Lord Saltoun, made a number of suggestions. He seemed to dislike the limited liability company altogether. I suppose he ought to have moved the rejection of this Bill altogether because it is a Bill dealing with limited liability companies.
§ LORD CHORLEY
I thought he wanted to remove this sort of company from the Statute Book altogether. He did go on to suggest that certain requirements were being placed on the unlimited liability company which he did not want to see. Again I think that is a matter which will be more conveniently dealt with on the Committee stage. He brought up a number of other points relating to such matters as loans to directors. I thought, looking at the exceptions to the clause to which he re-referred, that the cases which he actually instanced could in fact be covered by those exceptions. That, again, is a matter for detailed consideration of the clause, and it would be better to deal with it at a later stage.
Finally, I come to the speech of the noble Viscount, Lord Buckmaster, who is very interested in the question of unit trusts. He gave us such a capable and knowledgeable account of these trusts and of the difficulties in which they were involved 1072 that I quite understood that he felt a little bit aggrieved at being classed among the sheep, although it was very natural that he should be equally averse from being classed among the goats. I have not so far been able to think of any intermediary type of flock in which we might put him. I think your Lordships will agree with me that the points which he made with regard to Section 103, which deals with unit trusts, are points of a detailed character which we could more profitably discuss at the Committee stage.
I have tried to cover the main subjects which have been raised in the discussion this afternoon. On behalf of the Government, I am glad that this Bill which, after all, is a completely non-Party and non-controversial measure, should have received such a gratifyingly warm reception, and that the criticisms should have been limited to such a very few points. I am glad that this Bill will now go to the Committee stage without a Division. I congratulate the House on what I think has been one of the most useful debates we have had in recent months.
§ On Question, Bill read 2a, and committed to a Committee of the Whole House.