§ 5.17 p.m.
§ House again in Committee (according to Order).
§ Clause 14:
§ Signature and copies of accounts.
§ (2) If—
- (a) any copy of a profit and loss account or consolidated accounts not signed as required by this section is issued, circulated or published: or
- (b) if any copy of a balance sheet is issued, circulated, or published without having a copy annexed thereto of the profit and loss account or any consolidated accounts required by this section to be so attached;
§ (3) Any member of a company, whether he is or is not entitled to receive notices of general meetings of the company, shall be entitled under paragraph (a) of subsection (1) of section one hundred and thirty of the principal Act to have sent to him a copy of every balance sheet and of the other documents mentioned in that paragraph, and any holder of debentures of a company shall have the same right under that paragraph as a member of the company:
§ Provided that this subsection shall not require a copy of those documents to be sent to any person of whose address the company is not aware.
§ (5) Subsection (1), and not subsection (2) of the said section one hundred and thirty shall apply in the case of a private company, as of any other company, except in relation to balance sheets laid before the company before the coming into force of this section.
§
LORD COZENS-HARDY moved, at the end of the clause, to add:
Provided that the provisions of paragraph (b) of subsection (2) and of subsections (3) and (5) of this section shall not during the year in question apply to a private company if the following conditions have been complied with:—
In considering such applications for exemption the Board of Trade having made such inquiries as it deems necessary shall within 28 days of the notification of such special resolution inform the company of its grant or refusal of such exemption for the year in question. In making its decision the Board of Trade shall have regard to the circumstances of the case and to the public interest.
§ The noble Lord said: I would remark, in passing, that though the Amendment relates to subsection (5) there is no subsection (4). I sincerely hope that the noble and learned Viscount, the Lord Chancellor, will not be so hardheaded with regard to this Amendment.
§ SEVERAL NOBLE LORDS: Hardhearted you mean!
LORD COZENS-HARDYI hope that the noble and learned Viscount the Lord Chancellor will recognize that this Amendment is drawn to safeguard minority interests, and I trust that he will not feel compelled to refuse it as he has refused earlier Amendments of mine. My aim is simply to preserve a degree of privacy which is allowed to a private company which complies with the stringent conditions of Clause 43. Even in a company limited to fifty shareholders, there are sure to be some members who, by nature, are careless, and who may unintentionally leave copies of the companies' accounts lying about, and so destroy the privacy of the company's affairs. To guard against accidental discovery, the members may prefer not to have private accounts floating about in their hands for twenty-one days before the annual general meeting. My Amendment simply makes provision for putting this relief into effect if, and only if, the Board of Trade certifies that such a waiver is reasonable in the circumstances and not against public interests. I beg to move.
§
Amendment moved—
Page 14, line 36, at end insert the said new words—(Lord Cozens-Hardy.)
§ LORD CHORLEYI am sorry to have to inform the noble Lord, on behalf of my noble and learned friend, that I propose to be hard-headed and hard-hearted about this Amendment. The noble Lord's Amendment would, as he has indicated, relieve a private company from the requirement of attaching a profit and loss account to its balance sheet, and of circulating to its members copies of the balance sheet, profit and loss account and consolidated accounts, and the other obligations which are imposed upon companies under the clause as it now stands. Under the existing law, the situation is very unsatisfactory. No member of a private company is entitled as a right to have the balance sheet circulated to him; he has to pay for it, and he has no right to the profit and loss account at all.
The Cohen Committee considered this matter very carefully, and they recommended that shareholders in private companies should be entitled to these documents in the same way as they are in public companies. No doubt there is something to be said for the noble Lord's argument of the unfortunate private company having the state of its accounts made known to some of its competitors, but a competitor who is really determined and unscrupulous is prepared to use any means to get these accounts. We know that he does, in fact, get them and we do not think that that argument can stand up to the importance of members having the accounts. We are therefore unable to accept this Amendment.
LORD COZENS-HARDYThe Amendment does not keep away from the shareholders of an exempt private company the information which is required. That is to say, they will have before them at the general meeting the balance sheet and the profit and loss account. The only object of the Amendment is to provide that a company which does not wish to have these things delivered twenty-one days before need not have them.
§ LORD CHORLEYThe position is really similar to the one we discussed last week. It would enable the majority which controls a private company to do this by means of a special resolution.
§ LORD CHORLEYSubject to the consent of the Board of Trade, which is a 741 very cumbersome and elaborate piece of machinery. I am afraid that in the circumstances we are unable to accept this Amendment.
§ Amendment, by leave, withdrawn.
§ Clause 14 agreed to.
§ Clause 15 agreed to.
§ Clause 16:
§ Extension of disqualifications for appointment as auditor.
§ 16.—(1) A person shall not be qualified for appointment as auditor of a company unless either—
- (a) he is a member of a body of accountants established in Great Britain and for the time being recognized for the purposes of this provision by the Board of Trade; or
- (b) he is for the time being authorized by the Board of Trade to be so appointed either as having similar qualifications obtained outside Great Britain or as having before the eighteenth day of July, nineteen hundred and forty-five, practised in Great Britain as an accountant.
§ (2) In subsection (1) of section one hundred and thirty-three of the principal Act (which disqualifies, among others, directors and officers of a company and partners and employees of officers of a company from appointment as auditors of the company)—
- (a) references to an officer of the company shall include any servant of the company, but not an auditor; and
- (b) paragraph (b) (which relates to partners and employees of officers of the company) shall apply in like manner to partners and employees of directors of the company; and
- (c) the exception in the said paragraph (b) for private companies shall cease to have effect.
§ 5.25 p.m.
§ LORD DE L'ISLE AND DUDLEY moved, in subsection (1) (b), to leave out "before the eighteenth day of July, nineteen hundred and forty-five." The noble Lord said: I rise to move the Amendment that stands in my name. The object of the Amendment is to delete the words "before the 18th July, 1945." It seems to me that this is an arbitrary date to fix for disqualifying accountants who are not members of the learned bodies. If a man had been serving in the Forces or in affairs of State during the war, he might, on return, find that his livelihood and his profession had departed from him. In order to do justice to such people 742 I think it right that this arbitrary date should be taken from the Bill.
§
Amendment moved—
Page 15, line 40, leave out from "having" to "practised" in line 42.—(Lord De L'Isle and Dudley.)
LORD SALTOUNI would like to support my noble friend's Amendment. The accountants' societies of Scotland would like to insert here "for a period of five years." In view of the very varied qualifications of a large number of people who practise as accountants, and in view of the very privileged position occupied by auditors under the existing law which is going to be very much increased under this law, I cannot but think that that would be a reasonable stipulation to make, especially when one considers the condition of affairs in small country towns. I take the opportunity at this point, in supporting my noble friend's Amendment, to ask the Government if they will consider this matter at a later stage. It is a point to which my attention was drawn only yesterday, so I could not give proper notice.
§ LORD LATHAMI wish to invite your Lordships to reject this Amendment. I speak as a member of one of the recognized associations of accountants, and I have practised as a professional accountant for some thirty years. I wish to submit to your Lordships that, whilst it is eminently desirable and will be accepted by every member of your Lordships' House that special provision should be made so that no substantial injustice is done to ex-Service persons, this is not the way to do it. The Amendment is against the whole weight of evidence submitted to the Cohen Committee, and is in conflict with the recommendations of that Committee. The Amendment, if accepted, would mean that any person at any time could say that, because he had done the audit of a greengrocer at the end of the road, he had a claim to be considered by the Board of Trade as to whether he was not, in fact, in practice as an accountant. I do submit that that very largely vitiates the quite proper provision contained in this Bill, following the recommendations of the Cohen Committee, to tighten up the law both as regards accounts and as regards the qualifications of those who purport to audit accounts, and also to tighten up the requirements of the existing law both as 743 regards public companies and as regards private companies.
Therefore, I invite your Lordships not to accept this Amendment, and I would, with respect, ask the noble and learned Viscount, the Lord Chancellor, to consider whether the clause as it now stands should not be looked at between now and Report stage or the Third Reading, with a view to seeing whether some proper provision could not be made in order not to inflict injustice upon ex-Service people. That is the view of the established and recognized bodies of practising accountants who have, for some time, been associated together in joint consultation as a joint committee with a view to securing the regularization by registration of the accountancy profession, which I think all business people will admit is overdue and is eminently desirable. The proposals which will be ultimately submitted, with, it is to be hoped, the sympathy and support of the present Government, will provide for the registration of qualified and recognized accountants and will provide, as I think reasonably, for the admission to practice of such accountants who may not be members of the recognized bodies but who can show that they have been in practice for a specified time before a specified date.
The effect of the Amendment before your Lordships' House would be to take out the specified date. It is not an arbitrary date in the generally accepted sense: it is related to something. It is related to the date of the publication of the Cohen Report, when it was assumed that the public could be regarded as having been put on notice as to what were the recommendations of that Committee which were to be followed by legislation. Therefore I hope that this Amendment will not be accepted, but that the noble and learned Viscount the Lord Chancellor will see his way clear to consider some protective words to safeguard the position of ex-Service men.
LORD RENNELLI am inclined to support the Amendment. While not disagreeing with what was said by the noble Lord who has just sat down, I should like to draw your Lordships' attention to the practical rather than the theoretical issue on this point. As a matter of fact, there are two points involved in the Amend- 744 ment of the noble Lord, Lord De L'Isle and Dudley. One is that which relates to the exclusion, or the hardship which may be caused by the exclusion, of persons who had been practising as accountants, though not belonging to any of the recognized associations, and who have been demobilized from the Forces. They would be precluded by the operation of this date from resuming or accepting work of this nature. But the Amendment really has a much wider implication, and it is on the purely practical issue that I should like to support it.
The practical issue, as it seems to me, is this. There are in England and Scotland something of the order of 162,000 private companies. A great many of them are very small corporations. They will be familiar to many of your Lordships in any town or maybe village in England. In many cases in practice these small companies have had their accounts audited by persons who are not qualified and who do not belong to any recognized association of auditors or chartered accountants. There is not to-day in this country a sufficient supply of qualified auditors belonging to the associations to undertake the work of auditing the accounts of the 162,000 companies which at present need auditors. From the purely practical aspect, I ask your Lordships to support the Amendment, and I beg the noble and learned Viscount the Lord Chancellor to take it into serious account. Otherwise not only will very grievous hardships be caused to the people who have been practising as auditors (and quite adequately) in auditing the accounts of these small companies to which I have referred, but it will be made practically impossible for many companies to get their accounts audited, because there are not enough auditors to do the work. Your Lordships know as well as I do the delays which are inevitable at the present moment (I refer of course to those of us who may use auditors for the purpose) in getting income tax returns and accounts made up. Very often two of three years' arrears of work have to be done. A situation which would make it impossible for those people who have adequately performed these services in the past to continue to do so in future would be not only an injustice to the persons concerned but a grave hardship to the companies for which they have been working.
VISCOUNT ELIBANKThe noble Lord who has just sat down has made out a very strong case in favour of the Amendment, and I agree with all he has said. Nevertheless, the noble Lord opposite also made a strong case from the point of view of the protection of the public. I think that this clause with the words moved to be omitted by my noble friend, Lord De L'Isle and Dudley, certainly does not protect the public in the way that it should. I believe that if the noble and learned Viscount, the Lord Chancellor, in dealing with this matter, would consider omitting those words and at the same time adding at the end the words, "for a period of not less than five years"—that is to say, having practised in Great Britain as an accountant for a period of not less than five years—that, at least, would be in the direction desired by the chartered accountants. I have in my hand a letter from a chartered accountant who has asked for this consideration. At the same time, I cannot believe that there are many of the companies referred to by my noble friend Lord Rennell whose accounts are audited by individuals who have not practised as auditors for the last five, six or eight years. I think if my suggestion were adopted it might be a way out.
THE LORD CHANCELLORI have a past in this matter, and I had better reveal it. For a good many years now I have been instrumental in trying to get a Bill brought in to put the accountants' profession (when I say "accountants" I am talking of the various bodies which constitute accountants) on a more satisfactory basis. I think it is thoroughly undesirable that wholly unqualified people should act as accountants. It is wrong not merely in the interests and protection of the public, but also I think in the interests of businesses themselves. Just as, if you are wise, you take a child to the doctor for an overhaul and to see that everything is all right, so I think businesses ought periodically to go to their doctor for an overhaul, to see that everything is all right. After all, the doctor of business is the accountant, and I certainly look forward to a time when we have a proper Bill dealing with this question, and depart from what I think is the wrong practice of to-day, when anybody who sets up a plate and calls himself an accountant—whether a turf accountant or anything else—can carry 746 on. I am sure that noble Lords in all quarters of the House would probably agree with that point of view.
On the other hand, I think we all recognize that there is some difficulty to-day in view of the fact that there are not enough accountants, and therefore trouble arises. When Sir Alfred Mond was Minister of Health and had to bring in his Bill dealing with dentists, he found that there were a large number of unqualified practitioners at that time, and he was very anxious to raise the whole status of the profession. He did it in this way. He said: "Very well, I will allow those people who are practising at the date of the passing of this Bill to carry on, but in future I will have only qualified people. In that way, when unqualified people pass out, you will gradually have a higher standard of skill and competence." I think we might do something on those lines.
I have a very open mind on this question and I would like the noble Lord to withdraw his Amendment. I am not making a promise, but I will gladly consider this whole matter between now and the Report stage and discuss it with him to see what we can do about it. At the present time I am disposed to keep these words here, but I am not at all wedded to the date. If we have a wrong date, in order to avoid hardship by all means let us have another date. There is no substance in that at all. I am disposed to keep the words with a date, but as your Lordships will see from my Amendment to page 15, line 42, I am disposed to say that this subsection shall not apply to exempt companies. We might allow the type of company which owns the little butcher's shop or greengrocer's shop (which very often is owned by a private company) and which will be exempt under the meaning of this Act, for the time being to carry on as it does to-day, at any rate until we get our consolidation Act. I think that might be a solution. I would ask the noble Lord to be good enough-to withdraw his Amendment now, on the understanding that I will consider this matter between now and the Report stage, and on the understanding that I am going to move my Amendment, though that also will be subject to discussion and consideration between now and the Report stage.
§ LORD LATHAMThe Amendment of the noble and learned Viscount, the Lord 747 Chancellor, does not refer to this point, if I may say so with respect. It refers to the question whether a partner of a director shall be competent to be an auditor of the company of which his partner is a director.
THE LORD CHANCELLORIt is rather wider than that. It is to insert at the end of page 15, line 42, "Provided) this subsection shall not apply …"
§ LORD LATHAMI beg the noble and learned Viscount's pardon. I have not got that one.
§ LORD DE L'ISLE AND DUDLEYI thank the noble and learned Viscount, the Lord Chancellor, for his comments on this matter, and I certainly am not going to be arbitrary about it. It has, I think, provoked a useful discussion, and particularly useful was the contribution of the noble Lord, Lord Rennell. It may well be that the Amendment put down by the noble and learned Viscount, Lord Chancellor, may meet the point, because in the case of small private companies in provincial towns the unqualified accountant—it may be the articled clerk aspiring to be an accountant—will probably operate. I am a member of the accountancy profession, but I am not sure that they would call themselves the healers of business. I think very often they would more aptly be described as the analyst at the coroner's court. I beg leave to withdraw the Amendment.
§ Amendment, by leave, withdrawn.
§
THE LORD CHANCELLOR moved, at the end of paragraph (b) of subsection (1), to insert:
Provided that this subsection shall not apply in the case of a private company which at the time of the auditor's appointment is an exempt company as defined in the section of this Act relating to the inclusion of a private company's accounts in its annual return.
§ The noble and learned Viscount said: This is the Amendment I have put down, and which I beg to move. We discussed this, broadly speaking, on the last Amendment. I am saying here that subsection (1) is not to apply in the case of an exempt company. I believe that is a fair way out of the difficulty. I may say that I have some misgivings about it, as I expect have all your Lordships, but on the whole I think it is a fair compromise. I beg to move.
748
§
Amendment moved—
Page 15, line 42, at end, insert the said proviso.—(The Lord Chancellor.)
LORD RENNELLMay I express my gratification for the Amendment, which I think goes a long way toward meeting the difficulty.
§ LORD LATHAMI would not in any way wish to be ungrateful to the noble and learned Viscount, the Lord Chancellor, for this Amendment, but I think your Lordships should appreciate that in substance it will mean that the bulk of private companies will be exempt from the obligation to have a qualified auditor. If that be the case, it may happen—indeed it will happen—hat among the companies thus exempt from having a qualified auditor there will be thousands of companies carrying on quite substantial businesses. They will not be limited to the grocer, the candlestick maker, and the small trader whose accounts can be done on Saturday evening by the bank clerk or the bank clerk's junior. There will be very important private companies having obligations to the public, to debenture holders, to creditors, and also to their shareholders, whose accounts will be prepared—and they will be entitled to have them prepared—by unqualified persons. I submit to your Lordships that that is not a desirable state of affairs and that it is against the whole purpose of this Bill.
After all, as I see it, the whole basis of limited liability is in the nature of a bargain made between those who wish to trade under the reliefs and escapes of a limited company, and the community; a kind of social contract by which the persons trading escape personal liability, which they would suffer but for the protection of a limited liability company, in return for which they are asked to comply with certain requirements—to comply, in fact, with requirements as between themselves as shareholders and as between the company and the public. For instance, private companies henceforth are to be required to furnish to their shareholders copies of audited accounts; private companies are to be restricted in their powers to appoint and dismiss auditors; private companies are to be required, save they be exempt, to file the balance sheet and the documents annexed thereto with the annual return. All those steps are, I submit, proper steps for the protection of the 749 public. Yet the accounts which are required to be circulated need not be accounts prepared and audited by a qualified person. Those accounts can be accounts which are of no value at all; they can be accounts which, in fact, are dangerous, in that they mislead as a result of their inaccuracy, and shareholders will probably suffer more from having the opportunity of perusing Inaccurate accounts than from not having day accounts to peruse at all.
Therefore, whilst I appreciate fully the gesture which the noble and learned Viscount, the Lord Chancellor, has made, I more than share his misgivings as to whether the proposed Amendment is wholly satisfactory. It will leave shareholders and others open to the risks—and they are substantial—of not having accounts properly audited by properly qualified persons. I can speak from experience of this. I have had submitted to me, usually when the company was the subject of analysis in the "coroner's court," accounts which had been audited by unqualified persons which have been simply fantastic and which have been largely contributory to the failure of the company, in that those accounts had misled the directors. The average director of a private company is not in less need, but in more need, of qualified advisers in the field of accountancy than directors of public companies, because he himself is often so uninstructed in matters of this kind.
The answer one almost invariably gets from the director is: "I do not know anything about figures; I left it to the auditor." There is no doubt he did leave to the auditor, and the auditor left it to providence, and the company went into liquidation. That may be regarded as the proper concatenation of circumstances. I therefore hope that the acceptance of this way out—and it is no more than a way out—at this stage will not be prayed in aid against the proposals for registration of accountants on a proper basis which may later come before your Lordships' House.
§ VISCOUNT SWINTONI regret that I was not here, and could not be here, to hear the whole of this debate. I do not think this is an easy point. I have considered it a great deal and I should just like to add a word. I think that on the whole the noble and learned Viscount the Lord Chancellor (who has, I know, 750 given a tremendous amount of personal attention to this, for which we are all grateful to him) has really reached the best conclusion that can be reached in this matter. I am not sure that the noble Lord, Lord Latham (who speaks, of course, with a great knowledge of accountancy, because, if I remember rightly, he himself is a member of that greatest of trade unions—or the next greatest to the Bar, perhaps I should say) really was not patting his case a little too high. He talked about the protection of the creditors.
Here we are dealing with the exempt private company, and only with the exempted private company. Of course, the exempted private company does not have to publish its accounts, so that the creditor does not have a chance of seeing them. As for the shareholders, the appointment of the auditor is a matter for them and, I think I am right in saying—the noble and learned Viscount wilt correct me if I am wrong—there is no difference in the rules about the appointment of an auditor as between a public company, a private company, and an exempt private company. The auditor has to be appointed by the shareholders, and each individual shareholder receives a copy of the accounts. Therefore, it is within the right of the shareholders to appoint either an unqualified auditor, if I may so describe him, or a member of one of the recognized trade unions. As we are dealing only with the exempt private company here, as otherwise it would create hardship in the case of a number of small companies, and also, as has been said, because there are really not enough people to do the job, I venture to think that the compromise which the noble and learned Viscount has devised and which he advises us to accept is really the wisest step which, at the present time and having regard to all the circumstances, we can take.
LORD SALTOUNLike the noble Lord, Lord Latham, I am also a member of this great trade union. I would like to say that I think the compromise suggested is, speaking from my knowledge of conditions in Scotland, about the best that could be arrived at. It will affect a great reform quite gently and without doing any harm. I think the corollary of what the noble Lord, Lord Latham, said, would be to force everybody—every private individual—to have his 751 accounts audited by a chartered accountant. That, although it would be a very profitable thing for us all, would be going rather too far, because most of these private companies are quite small affairs.
§ LORD DE L'ISLE AND DUDLEYI do not wish to prolong the debate on this point. In view of what the noble and learned Viscount the Lord Chancellor has said, I do not intend to move the next Amendment which stands in my name. Being a member of this trade union, I naturally do not wish to appear to be saying anything derogatory to my own profession. I think it gained its status in this country by its own worth and reputation. The case of the exempt company is much more close to that of a partnership, because the balance sheet is not available for publication. I think it would meet the practical needs of the situation if unqualified persons were still permitted to carry out the audit, although if the balance sheet is filed, and the creditors and debenture holders place reliance upon it, I think it is right that qualification should be insisted upon.
§ On Question, Amendment agreed to.
§
THE LORD CHANCELLOR moved, in subsection (2), to leave out "cease to have effect" and insert "apply only in the case of a private company which at the time of the auditor's appointment is an exempt company as defined in the section of this Act relating to the inclusion of a private company's accounts in its annual return." The noble and learned Viscount said: The existing law is this. Under Section 133 of the Act of 1929 it is provided that:
None of the following persons shall be qualified for appointment as auditor of a company … (b) except where the company is a private company, a person who is a partner of or in the employment of an officer of the company.
So in the case of a private company one may appoint a person who is a partner, or one who is in the employment of an officer of the company. Paragraph (c) of this clause says:
The exception in the said paragraph (b) for private companies shall cease to have effect.
I am proposing to leave out the words "cease to have effect" and to insert the words "shall apply only in the case of"—I am not reading it all—"the exempted
752
private company." This is intended to deal with the Amendment which is down in the name of the noble Lord, Lord Hawke. I think the substance of the two Amendments is the same, but I got the draftsman to put it into language which he thought was entirely appropriate. I beg to move.
§
Amendment moved—
Page 16, line o, leave out ("cease to have effect") and insert the said new words.—(The Lord Chancellor.)
§ On Question, Amendment agreed to.
§ Clause 16, as amended, agreed to.
§ Clause 17:
§ Appointment and remuneration of auditors.
§ 17.—(1) The auditors of a company, appointed at any annual general meeting shall be appointed to hold office from the conclusion of that, until the conclusion of the next, annual general meeting; and at any annual general meeting a retiring auditor, however appointed, shall be reappointed without any resolution being passed, unless—
- (a) he is not qualified for reappointment; or
- (b) a resolution has been passed at that meeting that he shall not be reappointed (whether or not the resolution appoints some other person instead of him); or
- (c) he has given the company notice in writing of his unwillingness to be reappointed;
§ The Lord Chancellor moved, in subsection (1), to leave out "shall", where that word last occurs, and insert "may". The noble and learned Viscount said: This is a small Amendment. There may be cases in which it is not desirable that the Board of Trade should appoint an auditor. For instance, supposing that just before an annual general meeting the auditor who was the designated auditor dies, and that the annual general meeting takes place the next day, when the members have not got anybody in mind at the moment—the man they were going to have is dead. In such circumstances as that it is obvious that the Board of Trade should hold its hand in order that the shareholders may have an opportunity of dealing with the matter in the way they desire. It allows us greater latitude not to have the word "shall" but to have the word "may" in order to deal with that class of case. I beg to move.
753
§
Amendment moved—
Page 16, Line 30, leave out ("shall") and insert ("may".)—(The Lord Chancellor.)
§ On Question. Amendment agreed to.
§ THE MARQUESS OF READING moved to leave out Clause 17. The noble Marquess said: I have put down this somewhat drastic Amendment in regard to Clause 17 because of the difficulty of seeing what is the precise point of altering the existing state of affairs in regard to the appointment of auditors at an annual general meeting. Under the Act of 1929, as I understand it, the position is that every company at each annual general meeting has to appoint an auditor, who Shall hold office until the next annual general meeting. If the company does not appoint, then the Board of Trade may appoint on the application of a member of the company. That involves a positive process at the annual general meeting of the company. The company has to do something—it has to appoint an auditor at that meeting.
§ The Act of 1929, I think it is fair to say, had in mind a situation which may, to some extent, be behind the clause we are at present discussing. The 1929 Act took over a section from an earlier Act—I think the Act of 1908. Before this particular procedure came into being, there was a time when some anxiety was caused by the fear that if some auditors were, in a phrase which I found in one of the books, "inconveniently faithful in the discharge of their duties", they might be got rid of by the directors. There was a need to guard against that kind of situation. But I suggest that, with the existing law as it stands under the 1929 Act, the possibility of that situation occurring is really guarded against adequately. What is now suggested is that instead of the active process of auditors being elected at the annual general meeting of a company, there shall be a negative process whereby, unless certain action is taken, these auditors are, so to speak, automatically re-elected from year to year. That seems to me open to very considerable criticism, and unless some really substantial case can be made for varying the existing procedure—which so far as I know has worked with sufficient smoothness—I suggest there is no reason for this clause to remain in the Bill, and that it should be deleted. It is on that ground that we have moved for the deletion. I beg to move.
754
§
Amendment moved—
Leave out Clause 17.—(The Marquess of Reading.)
§ LORD DE L'ISLE AND DUDLEYI beg to support the Amendment moved by the noble Marquess. It seems to me that unless very good cause is shown for altering the existing Act, an auditor's appointment should be made subject to a positive process. He is not a member of the company but he is for some purposes an officer, and I think that his appointment should be subject to active resolution.
LORD SALTOUNI would like to support this Amendment very strongly. This clause makes it extremely difficult for the directors of a company to remove an auditor, especially an auditor who does not want to be removed. It forces them to pass a resolution, it gives the auditor the right to circularize the company, and it gives him a very powerful position. He is a man who may not have a single share in the company and has no responsibility for the result of his actions. It seems to me that this clause proceeds upon the idea that all directors are bad and that all auditors are good. I submit, very humbly, to the noble Lords opposite, that Parliament has no right to take up that position. I hope that there are very very few black sheep in the flock to which I belong, but I also think that directors, who are after all responsible to the members of the company, are as a rule doing a very good job in this country.
I want to put a possible case, and I am going to assume a very black sheep as an auditor. Let us suppose there is a small company carrying on a business which is also carried on by many other small companies and some very big companies. Let us suppose there is a company which, like Aaron's rod, is eating up all the small companies. Such cases are not unknown to your Lordships, and I think some companies have a director whose special business it is to look out for small companies that can be absorbed.
Let us suppose there is an auditor of a small company who has some affiliation or some friendly relations with a big company. The directors may suspect it—they cannot know—but they dare not put into resolution and circularize suspicions among the company. The directors, after all, are responsible to the shareholders for the business, and the auditor is not. It appears to me that an auditor could misuse his position to the detriment of the 755 company, entirely under cover of this clause and without anybody being able to say anything to him. That is a possibility which I hope is very remote from the high character of my profession, but the clause does proceed upon the basis that it is impossible for an auditor, and that it is quite impossible for a director to want to remove an auditor on really good grounds. I therefore earnestly hope that His Majesty's Government will consider this matter, because I should be very sorry to see this clause incorporated in the Bill as it at present stands.
LORD RENNELLI do not go quite so far as my noble friend who moved this Amendment, because there are certain parts of the clause which I think we should all like to see remain. Where an auditor is removed, if he thinks he has been treated unjustly he should have an opportunity of explaining to the shareholders why he should not be removed. I would like to move for a compromise on the practical issue rather than the shady side of life to which the noble Lord referred. I would like to take the case of a company which started in a small way and employed a very adequate firm of local auditors to do the work. They grow to a size which has gone beyond the capacity of the local firm to carry out the audit, or their business has grown in directions with which the auditors are not familiar—because auditors have specialities like other professional people. This clause makes it invidious to change the auditor when the company has outgrown his or their work without practically doing so in writing and really damaging the reputation of the firm of auditors in question. That is not fair on anybody concerned. I would personally like to see a compromise between the better parts of this clause with the positive resolution to which the noble Marquess and others have referred.
VISCOUNT ELIBANKI wish to intervene only for a few minutes. I wish to support the noble Marquess who moved the deletion of this clause from the same point of view as he did himself. I want to put the other side of the case, which has not been put this afternoon, and that is the point of view of the shareholder. I am talking of public companies and not private companies. The shareholders of public companies regard their rights to the appointment of the auditor with very, 756 very great respect, so much so that at annual general meetings it is not a director who moves the appointment of the auditors but a shareholder, and the motion is seconded by a shareholder. The actual motion is put to the annual general meeting by the shareholders. As often as not, and in fact generally, they fix the fee of the auditors at the same time. My noble friend Lord Reading suggested in his speech that the present practice was an admirable one, and I feel that if it is departed from, whilst there may be some greater protection against the directors (if that be necessary) the shareholders will feel very aggrieved indeed if that right is taken away from them. Therefore generally I support the noble Marquess, Lord Reading, in his motion.
THE LORD CHANCELLORWhilst I am very anxious to meet your Lordships' wishes, I confess that I regard this matter from a somewhat different angle. My experience, which is experience in the courts and, to a certain extent, of the rather more seamy side of companies, leads me to say this. Auditors are sometimes placed in a very unfair position, and pressure is not infrequently put on auditors—quite unsuccessfully, of course, on auditors of the highest repute—to agree to practices with which they ought not to agree.
Therefore I think it is of the highest importance that the auditor should be completely independent to do what he thinks is right. If I am told that this clause has the effect of making it difficult for a bad company to change its auditor, I say it is for that reason I strongly support it. On the other hand, I do say this: I am fully conscious of the fact that the largest oak comes from a small acorn, and some companies start in a small way, with a little man quite capable of dealing with them in their infancy. But when they grow too big for him you have to go to bigger people to take over. When that happens, I am anxious to make the change so as to inflict the least amount of hardship or discredit on the little man.
My view of the clause is this. Under subsection (1) (b) you say that:
a resolution has been passed at that meeting that he"—as an old auditor—shall not be reappointed (whether or not the resolution appoints another person instead of him).757 I should think you are doing enough if you appoint some other person, without asserting that the old auditor be not reappointed. I should think that if you appoint someone else it follows that he is the person appointed. But I will look at it again from the other point of view, in so far as that may meet your Lordships. I want to do this thing gently in the sort of case I see. I am sure from my experience that it is right and sound to make it rather difficult for a company to change its auditors without adequate reason. After all, I can rely upon the Cohen Committee, for they are people who speak with experience, and that is plainly the view they take. It is for this reason that I am prepared to consider amendment on the lines suggested.
§ VISCOUNT SWINTONI really think that that is the judgment of Solomon, if I may say so. I am quite sure we have to meet the case which the Lord Chancellor has put, where a bad man wants to get rid of a good auditor. But you have also to meet the case of the good company which wants to get rid of, not a bad auditor, but an inadequate auditor. If such is the case you will have to proceed by appointing Mr. A. with Mr. B, and that is not sensible. On the other hand, you certainly do not want to make any difficulty for Mr. B, and in fact in 99 cases out of a zoo it would be a friendly arrangement, and it would be said: "We will find work for Mr. A in a subsidiary or make it up to him in another way." So long as the noble and learned Viscount will put down his own Amendment on the Report stage I believe it will be exactly what we all want to do.
THE LORD CHANCELLORI will not pledge myself definitely, but that is the present trend of my mind. I shall try and get the authority.
§ VISCOUNT SWINTONIt will rest with you then? We do not need to conjure our imaginations.
LORD SALTOUNI entirely agree with the suggestion of the noble and learned Viscount, the Lord Chancellor.
§ VISCOUNT MAUGHAMI am grateful to the noble and learned Viscount, the Lord Chancellor, for his suggestion. It is not easy for a company to get rid of its auditor at the present time, even if it wants to. It is not such an easy thing, and I rather stress what I have said because it 758 is quite clear to me that: both my noble friend Viscount Swinton, and the noble and learned Viscount opposite, are quite prepared to believe that directors are bad, but reluctant to believe that an auditor can be bad or unreasonable. Directors are responsible for the business of the company, and if they fail it is not only to the disadvantage of themselves but to the disadvantage of the company; but the auditor is not responsible for more than his duties under the Act, and I submit very respectfully to the noble and learned Viscount opposite that the Act actually lays on the auditor very much heavier duties and very mach greater powers in the latter part. I do hope that the noble and learned Viscount will consider this before the next stage and go as far as he can to meet us.
THE MARQUESS OF READINGIn putting down the original Amendment I had neither the hope nor the desire that the whole clause would disappear. I thought it was important that a general discussion should be raised on this important matter. So far as I am concerned, I am perfectly prepared to accept the suggestion that the noble and learned Viscount has made but there may be one or two things which might be discussed before his actual Amendment is put down, if he will give us the opportunity. In these circumstances I propose to withdraw my Amendment.
§ Amendment, by leave, withdrawn.
§ Clause 17, as amended, agreed to.
§ LORD CHORLEY moved, after Clause 17, to insert the following new clause:
§ Construction of references to documents annexed to accounts.
§ " . References in the principal Act and this Act to a document annexed or required to be annexed to a company's accounts or any of them shall not include the directors' report or the auditors' report (which are by the principal Act required to be attached to the balance sheet)."
§ The noble Lord said: The object of the proposed new clause is to make it unnecessary for the auditors to comment on the directors' report. Clause 12 (7) (a) provides that for the purpose of the Bill, except where the context shows to the contrary, any reference to a balance sheet, or profit and loss account, or consolidated account, shall include any notes thereon, such as the report of the directors. It is obviously undesirable as it stands. As it stands, it would be arguable that it places on auditors the Obligation to com- 759 ment on the directors' report. It would obviously be undesirable to have obligations of that sort. The object of the new clause is to make that quite clear.
§
Amendment moved—
Page 17, line 45, after Clause 17 insert the said new clause.—(Lord Chorley.)
§ On Question, Amendment agreed to.
§ Clause 18:
§ Director and Secretary.
§ 18.—(1) Every company shall have a director and a secretary, and a sole director shall not also be secretary.
§ (2) For any reference in the principal Act to a company's secretary or other chief officer there shall accordingly be substituted a reference to the company's secretary.
§ LORD BALFOUR OF INCHRYEhad given notice to move, at the end of subsection (2), to insert, "or to such person as may for the time being by the direction of the directors be acting as or in place of the company's secretary." The noble Lord said: In the various sections the secretary is required to do things or to sign documents. The secretary may fall ill, or be absent abroad, or be in other ways incapacitated. As the Bill stands, there is no provision to allow an assistant or deputy secretary to work. The noble and learned Viscount, the Lord Chancellor, however, has put down an Amendment which substantially covers the same point as mine and I am willing to withdraw my Amendment if he will say why it needs a much longer amount of print to say what I have said in two lines. We are really saying the same thing.
§
Amendment moved—
Page 18, line 6, at end insert the said words.—(Lord Balfour of Inchrye.)
THE LORD CHANCELLORI can only reply that I gave this Amendment to the Parliamentary draftsman and he put it into the proper legal language. However, if the noble Lord wishes to move it in the form in which he put it down he may do so, but I can assure him that I derive my Amendment from his ingenuity.
§ LORD BALFOUR OF INCHRYEI am very grateful to the noble and learned Viscount, and I beg leave to withdraw my Amendment.
§ Amendment, by leave, withdrawn.
§
THE LORD CHANCELLOR moved, after subsection (2), to insert the following subsection:
760
(3) Anything required or authorised to be done by or to the secretary may, if the office is vacant or there is for any other reason no secretary capable of acting, be done by or to any assistant or deputy secretary or, if there is no assistant or deputy secretary capable of acting, by or to any officer of the company authorised generally or specially in that behalf by the directors.
The noble and learned Viscount said: This is the matter which we have just been discussing. The effect of this Amendment is the same as that of the Amendment which my noble friend Lord Balfour of Inchrye has withdrawn. I beg to move.
§
Amendment moved—
Page 18, line 6, at end insert the said new subsection.—(The Lord Chancellor.)
§ On Question, Amendment agreed to.
§
LORD BALFOUR OF INCHRYE moved, after subsection (2), to insert the following subsection:
(3) Nothing in this Act or the principal Act shall be deemed to prevent the appointment as secretary of a company of a partnership firm.
The noble Lord said: In many cases, at present, firms or companies act as secretaries for a company or a group of companies. I know that this is especially so in the case of Scottish investment trust companies, and, to a lesser extent, with English investment trust companies. The practice also prevails in both countries with companies other than investment trusts, such as tea, rubber and mining companies. I think that your Lordships will agree that the practice is not a bad one, and that it has not meant any hardship or produced undesirable results. I think, too, that it will be agreed that it does lead to economy and efficiency in administration. I am informed that under Scottish law a firm is a legal entity, and therefore, would presumably come within the provisions of Clause 18. In England, a firm is not recognized as a legal entity, but, on the other hand, there are many cases where firms act as secretaries of companies. I therefore suggest that the clause should make it clear that a firm can act as a secretary. That is the purpose of the Amendment. I beg to move.
§
Amendment moved—
Page 18, line 6, at end insert the said new subsection.—(Lord Balfour of Inchrye.)
THE LORD CHANCELLORWe cannot accept the Amendment in this form, and for this very good reason. If you say "Nothing in this Act or the principal Act 761 shall be deemed to prevent the appointment as secretary of a company of a partnership firm", it might at once be claimed that you are saying in express words that you are allowing firms to act as secretaries and so they cannot act as auditors or in some other capacity. In England, a firm cannot act for the very best of reasons; that is, that a firm does not exist at all. It is simply a sort of shorthand phrase for expressing the individuals who compose the firm. In Scotland the matter is different. There a firm is a legal entity.
I think that I can deal with the point which the noble Lord has in mind. I am quite anxious that in Scotland a firm should be able to act. I think that what we really need is a slight amendment to the next clause. It is there that the requirement with reference to the register of directors makes the only difficulty—if difficulty there be—about a firm acting. As paragraph (a) deals with an individual and paragraph (b) deals with a corporation, probably we ought to deal with a firm at that point. If the noble Lord will withdraw this Amendment, I will look into this and see that the position of a firm in Scotland is safeguarded, and that a firm in Scotland can act as auditor or secretary, or as any other officer of a company. I believe that the right way of doing it is by having some little provision in Clause 19 which is the only clause, at the present time, which could—if indeed it can—prevent a firm acting as secretary.
§ VISCOUNT SWINTONMay I ask a question upon this? As the wording in the Bill stands, a rather tiresome and stupid difficulty arises. You cannot do better than appoint as secretary of a company a well-known firm of accountants. That is a very common practice. Actually, as this stands, if you appoint an eminent firm of accountants who, it may be, have as many as twenty partners, you have got to set out the names of all of them on the notepaper and other documents of your concern. If one partner in the firm of accountants dies, or another is added, you have to amend the rigmarole on your note-paper, and so forth, accordingly. Obviously, that is nonsense, and I take it that that is a matter which will be looked into.
THE LORD CHANCELLORYou might of course, get difficult questions as 762 to who were the members of a firm at a particular time. However, as I have said, I will look into this, with a view to meeting the noble Lord's point.
§ LORD BALFOUR OF INCHRYEI thank the noble and learned Viscount and beg leave to withdraw my Amendment.
§ Amendment, by leave, withdrawn.
§ Clause 18, as amended, agreed to.
§ Clause 19 [Register of directors]:
§
Amendment moved—
Page 18, line 23, leave out ("subsection (3)") and insert ("subsection (4)").—(The Lord Chancellor.)
§ On Question, Amendment agreed to.
§
VISCOUNT BRIDGEMAN moved, after subsection (3), to insert the following subsection:
(4) Paragraph (d) of subsection (1) of section one hundred and forty-five of the principal Act (by which every company to which that section applies is required in all trade catalogues, trade circulars, show cards and business letters to state with respect to every director his nationality of origin, if his nationality is not the nationality of origin) shall cease to have effect.
The noble Viscount said: Your Lordships will remember that, under Section 145 of the principal Act, foreign nationals are obliged to show their nationality on the letter headings, business correspondence and so forth of limited companies. Those who have a nationality which is not the nationality of origin must show their nationality of origin, unless they are specially exempted in special circumstances by the Board of Trade. The Amendment does not seek to make any alteration in regard to the law as to directors who are of foreign nationality. I am not suggesting that we should alter the present arrangements, by which they have to show their nationality. But it does seek to provide that those who have acquired British nationality should no longer be obliged to show their nationality of origin.
§ I think that it is worth while to look back to the origin of the present arrangement. This was in an Act called the Companies (Particulars as to Directors) Act, 1917. It was tied up, I think, with the Registration of Business Names Act in the middle of the last war. It is 763 possible to imagine that this Act was really intended as a security measure in time of war. Between 1917 and 1929 not much notice seems to have been taken of this matter, probably because the movement of foreigners into this country was not very large. Therefore, when the present principal Act passed in 1929, these provisions which came from the Companies (Particulars as to Directors) Act, 1917, were incorporated, as I understand it, in the present Act.
§ Between 1929 and the present time, however, several things have happened. A very large number of persons have emigrated to this country from Central Europe since 1929. They represent, your Lordships may think, the same movement as that of the Huguenots. They are the Huguenots of modern times. They came here, bringing their skill and their wealth, and also their families. In many cases they brought with them young children, babies in arms even, and to this day those children have no knowledge of their country of origin and speak no language but English. These foreigners to whom I refer have prospered here, and in due time they have acquired naturalization, after most searching inquiries by the Board of Trade and after a period, I think, of five years, during which they have had to live here and be of good behaviour. During the late war, I believe, that period was extended to something like ten years. In view of these considerations, I think there can be no doubt of the bona fides or of the fitness to do business of these people who have already acquired a certificate of naturalization.
§ I put it to your Lordships that if it is decided, in this country, to grant British nationality to any foreigner, we should grant that nationality without any reservation at all. This section of the principal Act which I am seeking to amend does imply reservation. It implies that a man is not really British, and that you have to parade his foreign nationality, even though the Home Office have agreed that he shall acquire British nationality. It is not really fair, I think, to do that. It holds back something from the completely British nationality which we have promised to give, and it invites everybody who reads a letter heading to take note that the British citizenship of a man 764 or woman is qualified to some degree. I know that mistakes have been made and that the public have to be protected if the wrong man is naturalized and does business in this country. But may I put it that this is not a matter for the Board of Trade, it is a matter for the Home Office; and it will complicate legislation far too much if we try, in an Act of Parliament which belongs to one Department, to protect the public from the shortcomings of another? I do not think we should do that, therefore I move this Amendment.
§ I have put it in no Party spirit whatsoever, but merely on the grounds of sound administration and of equity and fair dealing with this class of person. I think we should give British citizenship, when we give it, with both hands, and leave security questions to be dealt with in the proper way. I hope this Amendment may find favour in this or some other form on the Benches opposite, and I beg to move.
§
Amendment moved—
Page 18, line 25, at end insert the said new subsection.—(Viscount Bridgeman.)
§ LORD CHORLEYI am very glad to be able to say we accept this Amendment. We are very much obliged to the noble Viscount for having brought up the matter, because the spirit in which he has moved the Amendment is entirely the spirit in which the Government look at this matter. He very properly pointed out that when the great benefit and privilege of British nationality is conferred upon an alien it should be given in no spirit of meanness, an argument with which we entirely agree. Many of these aliens, particularly the Germans and, among these, the German Jews, have very strong feelings about being associated with the country from which they were expelled in such a ruthless manner. That is a feeling with which one can entirely sympathize, so we are much obliged to the noble Lord for moving this Amendment, which we accept with great pleasure. It will involve one or two consequential Amendments to the Bill, and also to the Registration of Business Names Act, but that can be provided for at a later stage.
§ VISCOUNT SWINTONI am entirely for this Amendment—there is no possible argument against it—but can we clear the whole business up and deal with the Registration of Business Names Act under this Bill?
§ LORD CHORLEYWe hope to be able to do so, and I am informed that this is possible. If it is we shall certainly take the opportunity of doing so.
§ VISCOUNT BRIDGEMANI am extremely obliged to the noble Lord for the way in which he has accepted this Amendment, and I thank him very much.
§ On Question, Amendment agreed to.
§ Clause 19, as amended, agreed to.
§ Clause 20:
§ Appointment of directors to be voted on individually.
§ 20.—(1) At a general meeting of a company a motion for the appointment of two or more persons as directors of the company by a single resolution shall not be made, unless a resolution that it shall be so made has first been agreed to by the meeting without any vote being given against it.
§ THE LORD CHANCELLOR moved, in subsection (1), after the first "company" to insert "other than a private company." The noble and learned Viscount said: Clause 20 requires the appointment of directors to be voted on individually, and I have had representations made to me that whilst that provision was proper for public companies it is likely to cause considerable confusion at meetings of private companies, and is likely to be more honoured in the breach than in the observance. That being so, I think we should make it applicable only to public companies, and not to private companies. I beg to move.
§
Amendment moved—
Page 19, line a, after "company" insert "other than a private company."—(The Lord Chancellor.)
§ On Question, Amendment agreed to.
§ Clause 20, as amended, agreed to.
THE LORD CHANCELLORWe have finished Clause 20 and we now start a rather substantial Amendment which needs a good deal of consideration and with which the noble Viscount, Lord Maugham is concerned. I do not know whether it would be convenient to your Lordships, but I think it would not be desirable to embark on that discussion, which must take some time, at this hour. If your Lordships are agreeable I propose to move that the House do now resume.
§ Moved, that the House do now resume.—(The Lord Chancellor.)
§ VISCOUNT SWINTONCould the noble and learned Viscount say when we shall be taking this again? I think it would be to the convenience of the House to know.
§ VISCOUNT MAUGHAMI should be very grateful if the House could adjourn at the present moment. I have a great deal to say on this, and I have been urged to move it by very important bodies.
§ On Question, Motion agreed to and House resumed accordingly.