HL Deb 27 March 1980 vol 407 cc1066-72

201 After Clause 45 insert the following new clause:

Substantial contracts, etc., with directors and others to be disclosed in account.

.—(1) Subject to subsections (5) and (6) and to section (Transactions, etc., excluded from ss. (Substantial contracts, etc., with directors and others to be disclosed in accounts) and (Further provisions relating to recognised banks)) below, group accounts prepared by a holding company in accordance with the requirements of section 1 of the 1976 Act in respect of a financial year (the"relevant period ") ending on or after the appointed day shall contain the particulars specified in section (Particulars required to be included in accounts by s. (Substantial contracts, etc., with directors and others to be disclosed in accounts)) below of—

  1. (a) any transaction or arrangement of a kind described in section (Prohibition of loans, etc., to directors and connected persons) above entered into by the company or by a subsidiary of the company for a person who at any time during the relevant period was a director of the company or was connected with such a director;
  2. (b) an agreement by the company or by a subsidiary of the company to enter into any such transaction or arrangement for a person who at any time during the relevant period was a director of the company or was connected with such a director; and
  3. (c) any other transaction or arrangement with the company or with a subsidiary of the company in which a person who at any time during the relevant period was a director of the company had, directly or indirectly, a material interest.

(2) Subject as aforesaid, accounts so prepared by any company other than a holding company in respect of a financial year (the "relevant period") ending on or after the appointed day shall contain the particulars specified in section (Particulars required to be included in accounts by s. (Substantial contracts, etc., with directors and others to be disclosed in accounts)) below of—

  1. (a) any transaction or arrangement of a kind described in section (prohibition of loans, etc.. to directors and connected persons) above entered into by the company for a person who at any time during the relevant period was a director of the company or of its holding company or was connected with such a director;
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  2. (b) an agreement by the company to enter into any such transaction or arrangement for a person who at any time during the relevant period was a director of the company or of its holding company or was connected with such a director; and
  3. (c) any other transaction or arrangement with the company in which a person who at any time during the relevant period was a director of the company or of its holding company had, directly or indirectly, a material interest.

(3) Where by virtue of section 150(2) of the 1948 Act a company does not produce group accounts in relation to any financial year, subsection (I) above shall have effect in relation to the company and that financial year as if the word - group"were omitted.

(4) For the purposes of subsections (1)(c) and (2)(c) above—

  1. (a) a transaction or arrangement between a company and a director of the company or of its holding company or a person connected with such a director shall (if it would not otherwise be so treated) be treated as a transaction, arrangement or agreement in which that director is interested; and
  2. (b) an interest in such a transaction or arrangement is not material if in the opinion of the majority of the directors (other than that director) of the company which is preparing the accounts in question it is not material (hut without prejudice to the question whether or not such an interest is material in any case where those directors have not considered the matter).

(5) Subsections (1) and (2) above do not apply, for the purposes of any accounts prepared by any company which is or is the holding company of a recognised bank, in relation to a transaction or arrangement of a kind described in section (Prohibition of loans, etc., to directors and connected persons) above, or an agreement to enter into such a transaction or arrangement, to which that recognised bank is a party.

(6) Subsections (1) and (2) above do not apply in relation to the following transactions, arrangements and agreements—

  1. (a) a transaction, arrangement or agreement between one company and another in which a director of the first or of its subsidiary or holding company is interested only by virtue of his being a director of the other;
  2. (b) a contract of service between a company and one of its directors or a director of its holding company;
  3. (c) a transaction, arrangement or agreement which was not entered into during the relevant period for the account in question or which did not subsist at any time during that period;
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  4. (d) a transaction, arrangement or agreement which was made before the appointed day and which does not subsist on or after that day.

(7) Subsections (1) and (2) above apply whether or not—

  1. (a) the transaction or arrangement was prohibited by section (Prohibition of loans, etc., to directors and connected persons) above;
  2. (b) the person for whom it was made was a director of the company or was connected with a director of the company at the time it was made;
  3. (c) in the case of a transaction or arrangement made by a company which at any time during a relevant period is a subsidiary of another company, it was a subsidiary of that other company at the time the transaction or arrangement was made."

7.24 p.m.

Lord LYELL

My Lords, I beg to move that this House doth agree with the Commons in their Amendment No. 201. I have spoken earlier about this amendment when I dealt with Amendments Nos. 194 to 214.

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

Lord WEDDERBURN of CHARLTON moved, as an amendment to Commons Amendment No. 201, Amendment No. 201A: 201A In subsection (6) leave our paragraph (b).

The noble Lord said: My Lords, the amendment standing in the names of my noble friends and myself is directed towards retaining within the scope of the section contracts of service entered into between a director and his company. This amendment is part of a series of amendments which arise from the fact that the Government chose to do something quite extraordinary; that is, to go beyond the provisions even of the 1978 Act and to be daring enough on Report in another place to introduce amendments to Section 26 of the 1967 Companies Act. I applaud the objective, but the route taken by the Government has made Section 26 of the 1967 Act much worse than it is already.

That section requires contracts of service between a director and his company to be registered on a register kept by the company. All lawyers know, as indeed do most people, that there is a distinction between contracts of service and contracts for services. As the right honourable gentleman the Minister for Trade agreed on 4th December in Committee in another place (column 518): The company must disclose in its accounts under this clause contracts in which the director has a material interest directly or indirectly which would include consultancies and other contracts for services; but according to sub-clause (6)(b), it must not include contracts of service.

I shall be returning to that distinction later, in connection with Amendment No. 208. The reason for excluding contracts of service under this clause was given by the Minister for Trade on 4th December at column 505, when he said: Paragraph (b) exempts contracts of service because separate provision is already made for their disclosure in Section 26 of the 1967 Act.

In other words, there is a register of contracts of service, and because of that it need not be mentioned in a note in the accounts.

For that there are three answers. First, there is no inherent reason in nature why a contract of service should not appear in the accounts and on the company's register at the company's office. Secondly, is it not the case—and I would ask the noble Lord to answer this point—that it would fit in much better, as would our later amendments on Section 26 (which originated in the Government's choice to put Section 26 on the agenda) with the Stock Exchange's listing requirements in Schedule 8, paragraph 11 of which deals with service contracts which have to be disclosed beyond a certain period. They do not make this distinction between "service" and "services". Thirdly, the Government cannot be right on this answer if it is right in another way, because the Government themselves go in for double disclosure, quite properly, on contracts for services: for example, consultancies which go on over five years.

A contract for services which extends beyond five years has to be disclosed and approved by the general meeting under the clause in Amendment No. 194, which we have already approved. Also, it has to be disclosed and approved in the accounts under this clause. Therefore a contract for services is subject to double disclosure; and yet the Government say in another place—I am sure they will not be so illogical in this House—that contracts for services are subject to double disclosure, but contracts of service must not be subject to double disclosure. What is sauce for the goose of "services" is sauce for the gander of "service".

The right honourable gentleman Mr. Parkinson said on 4th December in another place, at column 509, in respect of this clause dealing with consultancies: For some time it has seemed to me that shareholders ought to have the right to know what other rights or income the directors are obtaining from the company". I agree with the right honourable gentleman. I hope that the noble Lord will agree with me, and that he will not put contracts of service outside this clause, because shareholders who do not choose to go to the company's office and look at the register still have the right to have contracts of service as much as contracts for services drawn to their attention when they receive the accounts. I hope very much that the Government will seriously consider accepting this amendment.

Moved, That this House doth agree with the amendment to Commons Amendment No. 201.—(Lord Weddederburn of Charlton.)

Lord LYELL

My Lords, the noble Lord, Lord Wedderburn, fired three very quick service balls at me and I shall attempt to answer them. I hope that my answers will be satisfactory, because I believe that two of his questions are already covered. The effect of the noble Lord's amendment seems to be to require double disclosure of these arrangements in respect of contracts for services; the amendment deletes the exemption in the Commons amendment for the disclosure of contracts of service. Therefore, it seems to have the effect of requiring double disclosure of this more conventional type of service contract as well—that is, the contract of service. This seems to be a logical extension of the position, but we are not entirely convinced of the wisdom of extending Section 26 of the 1967 Act in this manner.

This amendment raises the wider question of the most appropriate way of disclosing matters pertaining to a director's interest in his company's contracts. The 1967 Act requires the disclosure of contracts other than those of employment on the directors' report, while it seems that ordinary contracts of service are dis- closed in a special register kept at the company's registered office, or other "appropriate place". What we hope we have done in Amendment No. 201 is to strengthen this provision by widening the notion of "contract" to any "transaction, arrangement or agreement", by requiring the disclosure of their principal terms, and by stipulating that the details must appear in the accounts themselves. We have not therefore made any innovation in the separate treatment of contracts for service, but simply continued a distinction made in Section 26 of the 1967 Act. This amendment, in seeking to end this distinction, raises various important issues to which the noble Lord alluded relating to methods of disclosing matters pertaining to directors' personal benefits.

These matters require very careful study, and I hope that the noble Lord will agree that they need much further consultation. I also consider that, in the absence of any great advantage in putting on the Section 26 register information which will anyway be required to be disclosed in the company's accounts, it would be unnecessary to impose on companies this double burden.

The method of disclosure required in Amendment No. 201 is a much more "open" one than the Section 26 method, as the accounts are distributed automatically to members and are available to members and non-members alike, while the Section 26 register is available to members only at a specified place and time. We believe that there is some merit in the noble Lord's amendment, but we regret that for the moment the obstacles to accepting it as it stands are too great.

Lord WEDDERBURN of CHARLTON

My Lords, while thanking the Minister for his intervention, I find his response little less than extraordinary. Perhaps I might make three points. First, let me point out that the basis of our company law has honourably and traditionally been that of disclosure. Disclosure is breaking down as a basis of our company law. I personally believe that in 10 years' time we shall see it broken down, and it will have to be replaced by greater administrative control. I may be wrong, hut at least the Government should try to use disclosure to the limit rather than illogically.

Secondly, the Minister put his case on the basis of a distinction between service and services; the distinction between having a contract for consultancy and a contract, say, as a managing director or executive who is wholetime with the company. Why should that make a difference as to what is put into the accounts? Why should the lawyer's distinction—which I hope to show to your Lordships on Amendment No. 208 has become somewhat absurb—between contracts of service and for services govern what the shareholders know?

I was disturbed by the Minister's third reason, which was to suggest that the accounts were much more open, were available to members and non-members alike, and that therefore the service contract of employment of a director should remain on a register to he seen only by shareholder members. I cannot believe that directors are that afraid of the non-members seeing what contracts they have with their company—or is that the Government's view? I do not believe it. I find such a suggestion quite extraordinary. I hope that my right honourable and honourable friends in another place will take note of this point. But in view of the circumstances in this House I have no alternative, very reluctantly, to ask leave to withdraw the amendment.

Amendment to the amendment, by leave, withdrawn.

On Question, Motion agreed to.