HL Deb 27 March 1980 vol 407 cc1017-27

193 After Clause 45, insert the following new clause— Directors to have regard to interests of employees .—(1) The matters to which the directors of a company are to have regard in the performance of their functions shall include the interests of the company's employees in general as well as the interests of its members. (2) Accordingly, the duty imposed by subsection (1) above on the directors of a company is owed by them to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors.

LORDS AMENDMENT TO THE

AMENDMENT

193A Leave out subsection (2).

5.30 p.m.

Lord MACKAY of CLASHFERN

My Lords, I beg to move that this House doth agree with the Commons in their Amendment No. 193. Since 1973 Governments of both parties have attempted to introduce such a provision as this one, but I believe that the formula we have now adopted achieves the right balance between the need to recognise in company law the contribution that employees make and the necessity to avoid saddling directors with confusing or conflicting duties as regards the interests of employees and shareholders.

The need for this provision or some such provision has been apparent for some time, not least because the law as it stands is unclear as to the extent to which directors are required to take account of the interests of the company's employees, and that has been the situation since the decision in the case of Parke v. Daily News in 1962. Although, therefore, there is wide acceptance that there should be some statutory expression on the consideration of employees' interests, there is some controversy about how it should be expressed —and no doubt we shall hear something about that—and I should like to explain briefly why we chose to formulate the clause in the way it now stands.

First, we wanted to make sure that the clause stated quite unambiguously that directors have a duty—that is, a mandatory and not a permissive requirement—to consider the interests of employees. Secondly, we consider that this new duty on directors should be seen as part of, not in conflict with, the directors' general fiduciary duties to the company; the new duty is therefore expressed along with the general duty that the directors have to regard the interests of the members. The new duty is provided to be enforceable in the same way as any other fiduciary duty owed to a company by its directors.

The clause therefore serves to emphasise that a company's best interest can properly be served if the directors, in addition to the other factors they consider, do take into account the interests of the company's employees. Although such considerations will not imply any uncritical acceptance by directors of employees' demands, it will mean that the contribution that both employees and members make to the success of each enterprise will now be recognised in company law. It will therefore remove any legal impediment that directors might have felt themselves to be facing in taking employee involvement seriously and, as such, will provide a general encouragement to companies to devise, in ways appropriate to their own circumstances, means of ensuring that the interests of the employees are adequately considered.

I have been pleased to note that the Law Society—whose point of view the noble Lord, Lord Mishcon, has advanced in this House from time to time—concluded in a memorandum they produced on the Bill that this clause should raise the standard of care of directors in the regard which they have to the interests of employees. This conclusion by an independent body such as the Law Society is very much in line with the intentions we had in drafting the clause.

I hope noble Lords will allow me briefly to look at another amendment which would be viewed in conjunction with this one—namely Amendment No. 221, which enables a company on ceasing or transferring all or part of its business to provide for its employees or ex-employees. Both amendments have a common link in that they relate to the subject matter of the case of Parke v. Daily News to which I have already referred. Amendment No. 221, however, expressly reverses the decision in that case, in which it was found that the company was acting ultra vires in seeking to make ex gratia payments to its employees on the cessation of the major part of its business.

Amendment No. 221 therefore enables a company to make provision for its employ- ees in any circumstances, including liquidation. The power so to act, will, however, be subject to the mechanism of approval provided for in the company's articles, or if not so provided for, subject to an ordinary resolution of the company. This is a long overdue measure which, but for the loss on Dissolution of previous Bills, would have been in force some time ago. Perhaps I should add that the position of creditors is not prejudiced in any way by this provision as any payments made under the provision may only be made out of sums which would otherwise be available for distribution.

Moved, That this House doth agree with the Commons in the said amendment —(Lord Mackay of Clashfern.)

Lord MISHCON

My Lords, those who do not have an esoteric interest in the Companies Bill now before this House in regard to the amendments of the Commons may have wondered at the calm which has fallen upon the House so far, interrupted by a few ripples from the noble Lord, Lord Lloyd of Kilgerran, and my noble friend Lord Wedderburn of Charlton. May I immediately say that some of the calm is now going to cease to exist because we are coming to clauses in this Bill which have nothing to do with the EEC Directive requirements as such and which relate to matters which were debated in this House at the Committee stage, when the Opposition had some very definite views which it ventured to place before this House.

It is a matter of gratification that the duties to employees—and there were several speeches made in this House when this matter was being dealt with—now feature in this Bill, and indeed, if my recollection is correct, in the Committee stage in this House an undertaking was wrested from the Government that this matter would be dealt with by an amendment in this Bill, and now it appears before us.

It might be a matter of convenience to the House if, with your Lordships' permission, I were to deal with Amendment No. 193A which stands in my name. I have nothing to say about subsection (1) except praise that this matter is now being incorporated into the Bill and that there will be a clear statement of law that part of the duties of directors is to their em- ployees—that they shall take those duties into account. I could, but I do not intend to, deal with various alternative ways of seeing that directors keep in mind that duty and indeed that they carry it out. I observed that certain amendments were moved in another place which gave rights to associations representing employees to enforce the duties in subsection (1). That in another place was not agreed to, and I do not think that from my point of view any useful purpose would be served by my endeavouring to go over ground already covered elsewhere, whether or not—if I may dare to say this—I personally agreed with some of the stands that were taken in another place.

What I want to do is to clarify the law we are now legislating regarding these duties to employees, and to make sure that when the Bill leaves this House the amendment we are now considering is one which in its wording makes the legal situation positively clear. I am in doubt in regard to subsection (2). The reason for my amendment calling for the deletion of subsection (2) is to seek some clarification, at all events, from the Government in regard to the way in which the Government see the enforceability of subsection (1).

In the 1978 Bill, the Bill of the previous Administration, the matter was, in my submission, made very clear, because in Clause 46(2) of that Bill, having set out the duty to take into account the interests of employees, the Bill said: Where in any proceedings it falls to a court to determine whether a director of a company is in breach of his duty to have regard in the performance of his function to the interests of the company's members the court shall take into account the fact that the director is also required to comply with the duty imposed by this section". I think it was put rather picturesquely by a then member of the Government, I think a Minister then, Mr. Meacher. He said that this was, if I may paraphrase, deemed to be a shield for the directors and not a spear. In other words, what he was saying was that if a director is criticised, indeed is attacked in the courts, for not having fulfilled duties to the members of the company solely in their interests because he has taken into account the interests of employees, which may slightly or substantially derogate in a certain case from the interests of the members, it shall be taken into account that the director had this statutory duty. I repeat that it was a shield, in the language of Mr. Meacher, and was not meant to be a spear.

What creates doubt in my mind is what this subsection (2) of this clause is supposed to do. It says that it is a duty to the company. The precise wording of the subsection is that it shall be a duty owed by the directors to the company (and the company alone) and is enforceable in the same way as any other fiduciary duty owed to a company by its directors ". Does this mean that a member of the company who also, it may be, is an employee is able, as a result of this subsection to petition the court and to bring some sort of derivative action? We all of us who are lawyers are acquainted with the famous case of Foss v. Harbottle and its exceptions. Is the meaning of subsection (2) that it is enforceable in the same way as any other duty of a director? If directors fail to observe, in the opinion of an employee-shareholder, what ought to be the duty of the directors to the company's employees, is it the idea that this can be brought before the court?

In the Committee stage in another place the Minister, if I may be allowed to say so, when trying to deal with this point, which was raised in rather a different way, used the somewhat pedantic phrase of saying that this was a subsumed duty. So far as I know, "subsumed" means that it is put in a particular category, and that phrase, too, led me into confusion. Is this is a particular category of duty which can be enforced? There are many of us who believe—and this is the importance, I believe, of the point I am trying to raise—that industrial relations are best dealt with and industrial disputes best handled in the normal way which has traditionally grown up in this country. Many of us hope they will in the future be rather sweeter than they are at the moment; they are not being helped at the present moment, and possibly will not be in the near future, by Her Majesty's Government. But whatever our views about industrial relations in this country, there are many of us who feel very deeply that the field for argumentation in regard to them is certainly not in our courts. Does this subsection (2) bring it within our courts?

The reason for my amendment calling for the deletion of subsection (2) is not that I want to take any rights away from employees or to derogate from the duty in subsection (1). What I want to do is to see that the law is clear, so that one knows that this is a duty imposed upon directors which directors can partially use as a reason why, for example, they did not recommend a takeover bid—it was because they knew that it would lead to many employees losing their employment if that particular takeover bid succeeded, however attractive in price it might be. There are other ways in which one can see this clause being of use, and there I am referring to subsection (1). In seeking clarification I would hope that we do not leave this Commons amendment in a way which, instead of clarifying the law, clouds it in a most undesirable fashion.

Lord LLOYD of KILGERRAN

My Lords, may I support the noble Lord, Lord Mischon, in his amendment. I am also seeking clarification, but for a totally different reason. I am certainly not going to enter into exemptions to that celebrated case of Foss v.Harbottle, because I have always felt that the exemptions to that case have taken the matter into the realms of near incomprehensibility. The point I have in mind is a specific case of great importance to industry in this technological age, if I may make use of a phrase so often used these days. There may be a conflict between the interests of an employee and the interests of the company. In my view, subsection (1) will, as the noble and learned Lord said, no doubt raise the standard of care with which directors must deal with their employees.

However, I hope that the House will have patience with me as regards one specific matter. These days the Minister of State for Industry is doing a great deal to encourage innovation and the exploitation of inventions by employees. There are sections of the Patents Act which now give rights to employees in relation to inventions. In my view there may arise a case of an employee with a splendid invention which the company does not feel it ought to exploit, but which, if the employee could exploit it or if the company exploited it for him, would bring great advantage to the employee and to the company. Therefore, it is difficult in my view to substantiate the terms of subsection (2). It says: Accordingly, the duty imposed by subsection (1) above on the directors of a company is owed by them to the company"— then come, in parenthesis, the important words— (and the company alone)". That differs entirely from the general principle, as it seems to me, laid down in subsection (1), where the directors have to have regard to: the interests of the company's employees in general". Therefore, as regards the present terms of subsection (2), I can see a conflict arising between the interests of the employees and the interests of the company. Moreover, in those circumstances, what is the duty of the directors both to the company and to the employee who has invented something of consequence to industry, in general, in this country?

Lord MACKAY of CLASHFERN

My Lords, the intention of this amendment has been clearly explained by the noble Lord, Lord Mishcon. I must confess that I doubt whether leaving out subsection (2) would, of itself, produce clarification. I rather suspect that it would go in the opposite direction. Indeed, the amendment which is in the name of the noble and learned Lord, Lord Elwyn-Jones, and others, seems to go in the opposite direction from that presently proposed by the noble Lord, Lord Mishcon.

It is clear that the method by which the duty of directors to have regard to the interests of the members of the company, is the root which has been dealt with in the case of Fossv. Harbottle and the considerable number of cases which have followed it. Perhaps the exceptions to the rule in Foss v. Harbottle are best summed up in the reference to the Master of the Rolls in Foss v. Harbottle which was made by Mr. Justice Vinelott in, I think, the most recent case of the Prudential Assurance Company Limited, in February this year. He said: The words of Sir George Jessel in Foss v. Harbottle indicated that the exception might apply not only where the wrongdoers were a majority, but where it could be shown that, unless the minority were allowed to sue on the company's behalf, the interests of justice would be defeated in that an action which ought to be pursued on behalf of the company could not be pursued". That, in my view, is a very clear and easily understood principle, although it may not always be easy to apply.

The intention in this particular formulation is that the interests of the members are laid alongside the interests of the employees in subsection (1). As the noble Lord, Lord Lloyd of Kilgerran, has pointed out, there is a possibility that these two interests might not always point in the same direction. But we believe that it is the responsibility of the directors of the company to try to resolve any differences that there may be between these and to do their best to ensure that these interests are pursued both in the interests of the members and of the employees. That is really the idea which lies behind the formulation in subsection (1).

Something was said about the present state of industrial relations, although I do not know that it was compared with the situation, say, a year ago. It was said that it might not be wise to bring them into the courts and so on. I do not think that the particular formulation in subsection (2) is meant to bear very directly on that particular problem, but what we have said is that the duty in regard to the company's employees should be regarded in much the same way as the duty in regard to the members, and that accordingly, like the duty to the members, it should be regarded as owed to the company, and to the company alone. That being the basic principle, the method of enforcement will be the same method as is available when a duty is owed to the company, and the company alone, in the general situation with which subsection (1) deals. Accordingly, the intention is that normally it should be only the company, and only in the special circumstances such as illustrated in the exceptions from Foss v. Harbottle, might there be an action by the members or a member of the company.

It seems to us that that is the correct way in which to approach the matter. The result is not very different from that set out in the language of Mr. Meacher, to which the noble Lord referred. The result will be that the interests of the employees will fall to be considered, and the regard which the directors have had to them will fall to be considered, in the context of an action to enforce a duty due to the company, and enforceable in the way in which such a duty is normally enforced, taking account of the special circumstances which may give rise to particular methods of enforcement in particular cases. I hope that, with that explanation, the noble Lord will be able to withdraw this amendment.

Lord MISHCON

My Lords, with the leave of the House, I am not quite sure that I am clearer about the situation. I know that the noble and learned Lord has done his best to help me and for that I am grateful. However, this is so important that I would beg him, unless he thinks that I am merely repeating myself and requiring him to repeat himself, to deal with the specific question that I raised because I thought that it would interest the House. Could he please envisage the situation under subsection (2), of an employee who was also a shareholder in the company? Could he envisage circumstances in which, within the rules or exceptions of Foss v.Harbottle, a derivative action could be brought in the courts on subsection (1)? What arc the circumstances in which he envisages that it might be brought? The House will then be able to consider—if I may say so with humility—as I shall also, what the House is agreeing to in the enforceability—and that is the word that is used in subsection (2) of subsection (1).

Lord MACKAY of CLASHFERN

My Lords, with leave, I would seek to answer that question, by saying that the duty in subsection (1) is placed into the general functions of the directors. Therefore, if the noble Lord can envisage any case in which it will be necessary or desirable to enforce these duties owed by the directors, that is the sort of case to which subsection (2) will apply. In some cases and some circumstances it is possible for that to be done, not by the company itself, but byperhaps a minorityof members of it on the principles that I have sought to explain. As I have said, it is not always easy to apply these principles to particular cases and I do not think that it would be very wise for me to try to do that. However, I think the principles are reasonably plain and I do not believe that to leave out subsection (2) would make the task of the courts, in deciding this matter if it came before them, any easier.

Lord MISHCON

My Lords, again, with the leave of the House, it will be a very short intervention. I must confess still to be in grave doubt, but having regard to what the Minister has said—and I am sure that he and his advisers have given this matter the greatest of consideration—I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.