HL Deb 10 March 1947 vol 146 cc245-56

General Provisions as to Balance Sheet and Profit and Loss Account.

A. Balance Sheet.

The first eight paragraphs of this Part of this Schedule apply to the balance sheet and are subject to exceptions and modifications in the case of a holding company and in the case of public utility companies, banking or discount companies and assurance companies.

1. The reserves, provisions, liabilities and assets shall be classified under headings appropriate to the company's business, and fixed assets shall be distinguished from current assets

2.—(1) The amounts of the fixed assets shall, subject to the next following sub-paragraph, be shown by stating

  1. (a) their cost or, in the case of assets standing in the company's books at a valuation, the amount of the valuation: and
  2. (b) the aggregate amount provided or written off for depreciation since the date of acquisition or valuation, as the case may be.

THE LORD CHANCELLOR

This Amendment is consequential on a Govern- ment Amendment which is coming shortly. The reason is that we are to allow the practice already followed by public utility companies—the practice that instead of showing their fixed assets at cost less depreciation, they can show them at cost and make separate provision for renewal—to be followed by any company. I beg to move.

Amendment moved— Page 96, line 10, leave out ("public utility companies").—(The Lord Chancellor.)

On Question, Amendment agreed to.

VISCOUNT SWINTON moved, in the introduction to the paragraphs on A. Balance Sheet to leave out "and," where that word last occurs, and to insert, after "assurance companies," "and shipping companies." The noble Viscount said: This is an Amendment of considerably more substance. As your Lordships will see, the opening words of the Schedule exempt banking companies, discount companies, and assurance companies from the first eight paragraphs of the Schedule, that is to say, these companies are exempted from disclosing their reserves in the way that other companies are compelled under the Schedule to disclose their reserves. That exemption is given to banks and insurance companies, not in order to confer some special privilege upon them, but entirely because it is in the national interest that they should have reserves which are not disclosed. Of course, that provision does not confer any exemption from the important provisions in the Schedule as to keeping proper accounts, and from a provision to which I myself attach the greatest importance—namely, that if there is any drawing on reserves, whether disclosed reserves or undisclosed reserves, for any current purpose, that shall be made abundantly plain.

But there are, think, very strong notional reasons for treating shipping companies in the same way as banks and insurance companies in regard to reserves. There may be other companies to which analogous reasons of national interest may apply, but in this Amendment I want to deal with shipping companies. I will briefly give your Lordships the reasons which I think apply—and apply to a unique degree—in the case of shipping companies. I base my case entirely on national grounds. First and foremost, I put defence. The Merchant Navy is just as necessary to us in war as the Royal Navy itself. Together they are our lifeline, and two wars have shown us that our very life depends upon both. Another reason is that shipping is, and always has been, regarded in a very special sense as a national service, just as much as banking or insurance. It serves all our import and our export trade. Shipping is in itself the greatest invisible export we have. As the White Paper which we shall be discussing next week has shown, we are thousands of millions of pounds worse off than we were, and our other invisible exports have been largely exhausted to pay for the war. Shipping will be more important than ever as an invisible export. This peculiar position of shipping has always been accepted by all Governments. Before the war, by common consent, the Government of the day were considering special financial measures by which shipping could be aided.

There is another reason. Shipping has more ups and downs than any other industry. It has had longer periods of depression than any other industry, and it has the unique feature, as distinct from all other industries, that you cannot protect shipping by a tariff. For all those reasons, it is absolutely vital that the shipping companies of this country should create and hold large reserves. Shipping has to face harder foreign competition than any other industry. It has to face competition from State-owned lines which are maintained and run regardless of profit and loss, or competition from national companies subsidized at almost unlimited expense and protected by the most extreme and exclusive forms of cabotage. In these circumstances, the disclosure of reserves shows the relative strength or weakness at any particular time of a shipping company's financial position, and that is just the very information a foreign competitor would wish to have. It is just the information which British shipping companies in almost every case do not and cannot get in respect of their foreign competitors.

I think those are very strong reasons, and show that the British Merchant Navy has a unique position and special claims in the national life. I would add that the British Merchant Navy has just established another claim. Your Lordships will have been delighted to see the wide and far-reaching agreement which has just been made between the ship-owners and the officers and men of the Merchant Navy with regard to wages and conditions. It is a fine agreeement, but it will be a costly one. It is an agreement worthy of a great service, and the companies which constitute that Merchant Navy must be as strong financially as the officers and men of that Navy have been strong and valiant in spirit. I beg to move.

Amendment moved— Page 96, line 11, leave out ("and") and after ("assurance companies") insert ("and shipping companies").—(Viscount Swinton.)

LORD RENNELL

Very briefly I want to support the noble Viscount who has just sat down, and for the reasons which he has so eloquently expressed. There was, I think, a remark made by the noble Lord, Lord Chorley, earlier in the Committee stage of this Bill, that shipping companies differ from other companies in this country. They are not industrial companies, but are carriers, and are, in a sense, public utility companies rather than industrial or commercial concerns. That should be sufficient excuse for making special provision. But the main reason for this Amendment and those which follow is that they are designed, as has been said by the noble Viscount, Lord Swinton, to safeguard the strength and position of the shipping companies in this country.

THE LORD CHANCELLOR

Although I do not know that I go all the way with the noble Viscount opposite in regard to all his arguments, yet I must say that I think he has made out a case here. We must look at this matter from the point of view of the national interest, and I am not quite certain that it would be wise to confine this provision to shipping companies. I would, therefore, like to consider between now and the Report stage as to how to give effect to what he desires. Without pledging myself, I think the noble Viscount may rest satisfied that we shall be able to do something which will, in substance, meet his point of view. I ask him to withdraw his Amendment and leave me to deal with this between now and the Report stage.

VISCOUNT SWINTON

I am very much obliged to the noble and learned Viscount, the Lord Chancellor. I will gladly withdraw my Amendment and leave it in his hands. I put it entirely on the grounds of national interest, and know I am going to be met in that view.

Amendment, by leave, withdrawn.

THE LORD CHANCELLOR moved, to leave out paragraphs 1 and 2, and to insert the following new paragraphs:

"1.—(1) The reserves, provisions, liabilities and fixed and current assets shall be classified under headings appropriate to the company's business: Provided that—

  1. (a) where the amount of any class is not material, it may be included under the same heading as some other class; and
  2. (b) where any assets of one class are not separable from assets of another class, those assets may be included under the same heading.

(2) Fixed assets shall also be distinguished from current assets.

(3) The method or methods used to arrive at the amount of the fixed assets under each heading shall be stated.

2.—(1) The method of arriving at the amount of any fixed asset shall, subject to the next following sub-paragraph, be to take the difference between—

  1. (a) its cost or, if it stands in the company's books at a valuation, the amount of the valuation; and
  2. (b) the aggregate amount provided or written off since the date of acquisition or valuation, as the case may be, for depreciation or diminution in value;
or, in the case of assets acquired before the date of the coming into force of this Schedule for which the figures relating to the period before that (late cannot be obtained without unreasonable expense or delay, the difference between-
  1. (i) the net amount at which they stand in the company's books at that date (after deduction of the amounts previously provided or written off for depreciation or diminution in value), and
  2. (ii) the aggregate of the amount of the sales and the amount provided or written off for depreciation or diminution in value since that date.

(2) The foregoing sub-paragraph shall not apply

  1. (a) to assets for which the figures relating to the period beginning with the coming into force of this Schedule cannot be obtained without unreasonable expense or delay; or
  2. (b) to assets the replacement of which is provided for wholly or partly—
    1. (i) by making provision for renewals and charging the cost of replacement against the provision so made; or
    2. (ii) by charging the cost of replacement direct to revenue; or
  3. (c) to any investments of which the market value (or, in the case of investments not having a market value, their value as estimated by the directors) is shown either as
    4. 250
  4. the amount of the investments or by way of note; or
  5. (d) to goodwill, patents or trade marks.

(3) For the assets under each heading whose amount is arrived at by one of the methods mentioned in sub-paragraph (r) of this paragraph, there shall be shown—

  1. (a) the aggregate of the amounts referred to in paragraphs (a) and (i) of that sub-paragraph; and
  2. (b) the aggregate of the amounts referred to in paragraphs (b) and (ii) thereof.

(4) As respects the assets under each heading whose amount is not arrived at by any of the said methods because their replacement is provided for as mentioned in sub-paragraph (2) (b) of this paragraph, there shall be stated

  1. (a) the means by which their replacement is provided for; and
  2. (b) the aggregate amount of the provision (if any) made for renewals and not used."

The noble and learned Viscount said: The object of this Amendment, over which we have taken a very great deal of trouble, is to try to make less rigid the requirements in Part I of the First Schedule. I have no doubt that a lawyer—and I speak as a lawyer—would like the requirements to be as definite and as far-reaching as possible. But, equally, the businessman would realize that however wise that may be in general cases, exceptional cases will arise and it would be most unfortunate if he were put to wholly unnecessary trouble and expense which would benefit nobody. I have endeavoured, in this Amendment, to draw up a fair compromise between those two points of view. I will give your Lordships some illustrations, because I think that is the best way to put the case for the greater latitude which is now allowed.

For instance, if your Lordships will look at Paragraph I (I), you will observe that where the amount of any class of assets is not material it may be lumped together with some other class. If you have a small amount of some asset, to go to the length of a valuation and all the rest of it, which is not really material, would be putting people to great trouble, and therefore we say: "If it is not material, put it in with some other asset ". If your. Lordships will look at Paragraph 2 (I), you will see that that deals with assets acquired before the date of the coming into force of the Schedule, for which the figures relating to the period before that date cannot be obtained without unreasonable expense or delay. Compare those words with the corresponding words in the Schedule as printed. Your Lordships will find them on page 96, line 23 and they are: "are not available". A thing may be available if you can get at it by a tremendous amount of research and all that sort of thing. We do not want that, so we are saying now: "If you cannot get it without unreasonable expense or delay, then treat it as though it is not available". That is another illustration.

Paragraph 2 (2) (a) gives the same effect with regard to assets acquired after the coming into force of the Schedule, and will cover, for instance, such matters as loose tools and things of that sort. Paragraph 2 (2) (b) provides that the foregoing sub-paragraph should not apply to this Schedule for renewals treated on the same basis as repairs. This is reasonable, after all, because you need not write down what is replaced year by year. Paragraph 2 (2) (c) is a further illustration. Under the provisions of the Schedule as originally drawn an investment trust company would have to show its investments at cost, and their diminution in value, if any, whereas under the present dispensation they will have to show investments at book value with a note as to market value and, if there is no market value, the value in the opinion of the directors. These illustrations will show you what I have endeavoured to do.

I have had very eminent advice about this matter and I hope and believe that in this Amendment I have been able to draw a happy compromise and clear up something which I know was troubling some of your Lordships. I beg to move.

Amendment moved— Page 96, line 52, leave out lines 12 to 33 and insert the said new paragraphs.—(The Lord Chancellor.)

VISCOUNT SWINTON

I am sure that in all quarters of the House there will be deep gratitude to the Lord Chancellor and the very experienced persons who have been, working with him, for the great amount of time and trouble which I well know has been given to this matter and for the very practical and successful results which have been achieved. I do not think it is difficult to say what are the general objects at which one wishes to arrive in provisions of this kind, but I do know—because when I set my hand to it I was singularly unsuccessful—how extra- ordinarily difficult it is to put those principles into legislative practice. Frankly, I am most agreeably surprised that it has been found possible to set out so clearly and so well what I believe will be thoroughly sound practice.

After all, as the noble and learned Viscount indicated, we are all after the same thing here. We all want there to be full and fair accounts, clear and individual accounts for a single company and clear consolidated accounts for a number of companies; but we want the form to be flexible and information put in the most convenient form. I had hesitated—and there was considerable support for this view, as your Lordships will remember, on Second Reading—as to whether or not there should be a disclosure of reserves. I have come to the conclusion that, with the exception of exempted companies for which there are very strong national reasons, the balance of convenience lies on the side of disclosure. I know how necessary it is—and it is even more necessary to-day—that strong reserves should be created, but I think it has to be done by the force of public opinion in the company. Shareholders have to realize that it is their interest—not shareholders who are jobbing in and out, but shareholders who have a real stake in the company—as well as the national interest, for the company to create strong reserves, and directors must be firm enough to propose that and to carry it.

Having said that, obviously I go a long way towards saying that you must have requirements laid down for the balance sheet and the profit and loss account. But in doing that I am perfectly certain you cannot have a sealed pattern. It is very attractive to the draftsman, but, like so many things which sound perfectly logical, like so many of the best things in English life, what is logical is not best. You want requirements which are convenient and workable by different classes of companies—engineering companies, trust companies, stores and so on. Some sealed pattern could not possibly be applied effectively to them all. Then, again, you do not want to interfere with the practice which the best companies and the ablest accountants have designed and practised in the past, and which have been found useful in the interests of the company. You do not want to put companies to unnecessary trouble and expense by costly valuations unless they are really necessary.

In passing, I might say that I think practically 'all the Amendments I have on the Order Paper have been met by the far more comprehensive and effective Amendments moved by the Lord Chancellor, except one about provisions being not more than necessary. I now understand that this is covered. Then I am conpletely content that on questions of provisions there is a reasonable discretion. It would be extraordinarily unwise to deter a board or management from making a liberal provision for depreciation of stock at times when the markets are moving like fever charts, when the wise thing is to -make generous provision for contingencies of that kind. You -want, after all, to do the sound, wise thing which a good business man does. He ought not to be deterred in any way from taking a: liberal view, a generous, wide view as to what is prudent. In that case I can only say I -am intensely grateful for the immense amount of work which has been put in.

LORD RENNELL

I rise to express my thanks to the noble Viscount, and particularly for the examples which the noble and learned Viscount quoted as being examples of how the Schedule had been given greater latitude. I think that those of us who have followed this Bill are very much aware of the amount of thought that has gone into the re-drafting of this Schedule, and in expressing my very sincere thanks I hope that the noble and learned Viscount will pass on whatever is necessary to his advisers in this matter. Undoubtedly it has taken weeks of effort to re-draft something which had already taken weeks of work to draft in the first place.

LORD SALTOUN

I should like to say that in common with other noble Lords who have spoken I very much prefer the noble and learned Viscount's new form to the old one. But perhaps because I am alone in your Lordships' House to hold an opinion I will venture to express it at this stage. The object of this Schedule, of this new substitution, is to compel the fullest disclosure of reserves by public companies, and I am not at all sure whether that is really wise. It is extremely useful to people who buy shares with a view to selling them again, but I am not at all sure that it is useful to those shareholders who buy their shares to keep. There is an argument which has been brushed aside more than once in the course of debates on this Bill, as having no material. importance, that disclosure of reserves would be of service to possible rivals. That argument has been brushed aside, but I venture to think that it has some material substance. I also venture to think that many of your Lordships are really in agreement with me about this.

The noble Viscount, Lord Swinton, has just obtained a very valuable concession from the noble and learned Viscount. the Lord Chancellor—one that I think is essential for our national safety. He has obtained the exemption of shipping companies. What are the grounds on which he urged that exemption? The grounds were that these companies must be strong, and that disclosure of their reserves would be of use to possible rivals, foreigners, in this case—but still disclosure is of use to possible rivals. I submit that that is quite true in respect of a very large number of companies—many more kinds of companies than shipping companies. It may be the case that there is one where a Spanish proverb:" Por su mal le nacieron"—"It was an ill day for the ant when she grew wings"—is applicable.

This certainly seems to me to be the appropriate moment to express my doubt, and I therefore beg to do so.

THE LORD CHAIRMAN OR COMMITTEES

May I ask the noble Lord if he is not going to move his Amendment to leave out the word "provisions" from line 12 on page 96?

Perhaps it would be more convenient if the noble Lord spoke on that matter now, otherwise I shall not be able to put the Lord Chancellor's Amendment as a whole.

LORD SALTOUN

I have something of substance to say on this matter of provision. It is rather important and it may take a little time. If your Lordships will turn to page 103 of the Bill, you will see a definition of the word provision. It reads— The expression 'provision' shall mean any amount retained by way of providing for diminution in value of assets or for any known liability of which the amount cannot be determined with substantial accuracy. If you will turn to the next page you will see this: The expression 'reserve' shall not include any amount retained by way of providing for diminution in value of assets or for any known liability. Those phrases are different, but they seem to me to express exactly the same thing. I have always understood that "provision" if it was to be distinguished from "reserve" was for a liability that was known with substantial accuracy. But the expression is very loosely used, and I submit to your Lordships that it is not worth while, in this Bill, to make a distinction between reserves and provisions. It is just as well to let the whole thing go as "reserves," because in any case we shall, I think, have to amend definitions later on. But very often you cannot tell the difference between a "provision" and a "reserve." Under the usual definition, I suppose that a "debenture reserve" is realy a "provision." I do not think it should be a matter of legislation. What does it matter, after all, how a painted curtain covering a hole should be designated? There is a substantial reason for dividing reserves available for dividends from reserves not available for dividends but the rest is immaterial. I submit, nevertheless, that a distinction between "reserves" and "provisions" is hardly worth making in the Bill.

THE LORD CHANCELLOR

The noble Lord will have noticed, no doubt, that there is an Amendment coming on the effect of which will be to leave out the two expressions to which he has referred, "provision" and "reserve", and to substitute other words therefor. I do not know whether he is aware that there is also a manuscript Amendment because the expression "provision" is not quite properly defined. May I read out the first paragraph to which he referred as it will be if the Amendment which I am moving is carried? I am referring to the exact passage which the noble Lord quoted when he read from the bottom of page 103. My Amendment reads: the expression 'provision' shall, subject to sub-paragraph (2) of this paragraph, mean any amount written off or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. The paragraph with regard to "reserve" reads: the expression 'reserve' shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability. I think that in that way I meet, very largely, the point which the noble Lord has in mind. My re-definitions arc really consequential on the new provisions relating to fixed assets which are contained in the Amendment to page 96, line 12. The second Amendment provides, in effect, that if any amount written off for depreciation of fixed assets, after the coming into force of the Schedule, or provided for any known liability, is more than necessary, the excess shall be treated as a reserve. For instance, supposing you have got some liability which it seems quite certain that you will require £100,000 to meat. That is a provision. You fix on that with substantial accuracy. Then suppose the unlikely event happens, and you find that you can get off with only £50,000. Thereafter you have to write £50,000 into your balance sheet, on the left-hand side, as a reserve, because previously it was a provision. I think that the noble Lord will see that I have gone some considerable way to meet the point which he has in mind.

LORD SALTOUN

I am very much obliged to the noble and learned Viscount. I have not the same intelligence to follow him that he had to follow me but I shall not move my Amendment and I am immensely relieved that all the consequential Amendments which litter up your Lordships' Marshalled List of Amendments in my name will now fall away.

On Question, Amendment agreed to.

THE LORD CHANCELLOR

I am very grateful to the noble Lord for the kind things he said about me, but they are more due to those who work for me. It would, perhaps, be best to break off on this happy note.