194 After Clause 45, insert the following new clause:
Contracts of employment of directors
§ .—(1) Subject to subsection (6) below, a company shall not incorporate in any agreement a term to which this section applies unless the term is first approved by a resolution of the company in general meeting and, in the case of a director of a holding company, by a resolution of that company in general meeting.
§ (2) This section applies to any term by which a director's employment with the company of which he is the director or, where he is the director of a holding company, his employment within the group is to continue, or may be continued, otherwise than at the instance of the company (whether under the original agreement or under a new agreement entered into in pursuance of the original agreement), for a period exceeding five years during which the employment—
- (a) cannot be terminated by the company by notice: or
- (b) can be so terminated only in specified circumstances.
§ (3) In any case where—
- (a) a person is or is to be employed with a company under an agreement which cannot be terminated by the company by notice or can be so terminated only in specified circumstances; and
- (b) more than six months before the expiration of the period for which he or is to be so employed, the company enters into a further agreement (otherwise than in pursuance of a right conferred by or by virtue of the original agreement on the other party thereto) under which he is to be employed with the company
1041 or, where he is a director of a holding company, within the group,
§ (4) A resolution of a company approving a term to which this section applies shall not be passed at a general meeting of the company unless a written memorandum setting out the proposed agreement incorporating the term is available for inspection, by members of the company both—
- (a) at the registered office of the company for not less than the period of 15 days ending with the date of the meeting; and
- (b) at the meeting itself.
§ (5) A term incorporated in an agreement in contravention of this section shall to the extent that it contravenes this section be void; and that agreement and in a case where subsection (3) above applies the original agreement shall be deemed to contain a term entitling the company to terminate it at any time by the giving of reasonable notice.
§ (6) No approval is required to be given under this section by any body corporate unless it is a company within the meaning of the 1948 Act or registered under Part VIII of that Act or if it is, for the purposes of section 150 of that Act, a wholly owned subsidiary of any body corporate, wherever incorporated.
§ (7) In this section—
- (a)"employment" includes employment under a contract for services; and
- (b) "group", in relation to a director of a holding company, means the group which consists of that company and its subsidiaries."
195 After Clause 45, insert the following new clause:
Substantial property transactions involving directors, etc.
§ .—(1) A company shall not enter into an arrangement—
- (a) whereby a director of the company or its holding company or a person connected with such a director is to acquire one or more non-cash assets of the requisite value from the company; or
- (b) whereby the company acquires one or more non-cash assets of the requisite value from such a director or a person so connected;
§ (2) For the purposes of this section a non-cash asset is of the requisite value if at the time the arrangement in question is entered into its value is not less than £1,000 but, subject to that, exceeds 1042 £50,000 or ten per cent. of the amount of the company's relevant assets, and for those purposes the amount of a company's relevant assets is—
- (a) except in a case falling within paragraph (b) below, the value of its net assets determined by reference to the accounts prepared and laid under section 1 of the 1976 Act in respect of the last preceding accounting reference period in respect of which such accounts were so laid;
- (b) where no accounts have been prepared and laid under that section before that time, the amount of its called-up share capital.
§ (3) An arrangement entered into by a company in contravention of this section and any transaction entered into in pursuance of the arrangement (whether by the company or any other person) shall be voidable at the instance of the company unless—
- (a) restitution of any money or any other asset which is the subject matter of the arrangement or transaction is no longer possible or the company or the person nominated by it has been indemnified in pursuance of subsection (4)(b) below by any other person for the loss or damage suffered by it; or
- (b) any rights acquired bona fide for value and without actual notice of the contravention by any person who is not a party to the arrangement or transaction would he affected by its avoidance; or
- (c) the arrangement is, within a reasonable period, affirmed by the company in general meeting and, if it is an arrangement for the transfer of an asset to or by a director of its holding company or a person who is connected with such a director, is so affirmed with the approval of the holding company given by a resolution in general meeting.
§ (4) Without prejudice to any liability imposed otherwise than by this subsection but subject to subsection (5) below, where an arrangement is entered into with a company by a director of the company or its holding company or a person connected with him in contravention of this section, that director and the person so connected, and any other director of the company who authorised the arrangement or any transaction entered into in pursuance of such an agreement, shall (whether or not it has been avoided in pursuance of subsection (3) above) be liable—
- (a) to account to the company for any gain which he had made directly or indirectly by the arrangement or transaction; and
- (b) (jointly and severally with any other person liable under this subsection) to indemnify the company for any loss or damage resulting from the arrangement or transaction
§ (5) Where an arrangement is entered into by a company and a person connected with a director of the company or its holding company in contravention of this section, that director shall not be liable under subsection (4) above if he shows that he took all reasonable steps to secure the company's compliance with this section, and, in any case, a person so connected and any such other director as is mentioned in that subsection shall not be so liable if he shows that, at the time the arrangement was entered into, he did not know the relevant circumstances constituting the contravention.
§ (6) No approval is required to be given under this section by any body corporate unless it is a company within the meaning of the 1948 Act or registered under Part VIII of that Act or, if it is, for the purposes of section 150 of that Act, a wholly-owned subsidiary of any body corporate, wherever incorporated."
196 After Clause 45, insert the following new clause:
Prohibition of loans, etc., to directors and connected persons.
§ .—(1) Except as provided by section (Exceptions from s. (Prohibition of loans, etc., to directors and connected persons)) below—
- (a) a company shall not—
- (i) make a loan to a director of the company or of its holding company;
- (ii) enter into any guarantee or provide any security in connection with a loan made by any person to such a director; and
- (b) a relevant company shall not—
- (i) make a quasi-loan to a director of the company or of its holding company;
- (ii) ake a loan or a quasi-loan to a person connected with such a director;
- (iii) enter into a guarantee or provide any security in connection with a loan or quasi-loan made by any other person for such a director or a person so connected.—
§ (2) Except as provided by that section, a relevant company shall not
- (a) enter into a credit transaction as creditor for such a director or a person so connected;
- (b) enter into any guarantee or provide any security in connection with a credit transaction made by any other person for such a director or a person so connected.
§ (3) A company shall not arrange for the assignment to it or the assumption by it of any rights, obligations or liabilities under a transaction which, if it had been entered into by the company. would have contravened subsection (1) or (2) above; but for the purposes of this Part of this Act the transaction shall be treated as having been entered into on the date of the arrangement.1044
§ (4) A company shall not take part in any arrangement whereby—
- (a) another person enters into a transaction which, if it had been entered into by the company, would have contravened subsection (1), (2) or (3) above; and
- (b) that other person, in pursuance of the arrangement, has obtained or is to obtain any benefit from the company or its holding company or a subsidiary of the company or its holding company".
§ 6.37 p.m.
§ Lord LYELL
My Lords, I beg to move that this House doth agree with the Commons in their Amendments Nos. 194 to 196 en bloc. We come now to Part IV of the Bill, the effect of which is to reduce the scope for unscrupulous directors to take undue advantage of their position in the company. Noble Lords will recall that proposals with this intention were put forward by the previous Administration two or three years ago. In a review last summer of the ideas contained in their Bill, which was lost on Dissolution, we concluded that although a good deal of technical work was still then required both on directors' conflicts of interest and on insider dealing, progress was sufficiently well advanced to merit the tabling of proposals on both of those subjects at the Committee stage of the Bill in another place.
These amendments lay down new rules on the length of directors' employment, on property transactions between a director and his company and, among other things, on the provision of loans and other forms of credit by a company to its director. They represent a pretty comprehensive response to the weaknesses in the existing statutory provisions which have been exposed in a number of inspector's reports in recent years. I think I see some approval from the noble Lord, Lord Wedderburn, and I seem to remember that early last year he and I had an interesting dialogue about one particular report. The guiding spirit behind these innovations is to legislate for more power and information to the shareholders, and we have in particular been careful to ensure that the disclosure provisions, which I shall come to later, will require details of all significant transactions, arrangements and agreements involving directors and the company to be shown annually, and breach of these provisions will carry a criminal penalty.
1045 Quite apart from ensuring that shareholders can carry out an effective watchdog role, we have further laid down that the general meeting must affirm positively any property transaction between a company and its director of more than £50,000—your Lordships will find that provided for in Amendment No. 195—and any agreement, or series of agreements, which would enable a director to be employed for more than five years on his own terms. That is the gist of Amendment No. 194.
As regards the provision of credit from the company or others to a director, we propose, in Amendment No. 196, to do two things. The first is to retain the existing provisions of the 1948 Act which prohibit non-moneylending companies, whether public or private, from lending to their directors. The second objective is to tighten up these provisions in a number of ways. The prohibition on such loans is extended to members of the director's immediate family and companies with which he is associated. However, more importantly, the prohibition on loans is extended, for public companies only, to include what we call "quasi-loans", which consist of the provision of credit by an outside creditor who pays, or agrees to pay, on behalf of a borrower who is liable to repay him. In this way we hope that we have put a stop to the sort of deals and machinations which came to light in the Peachey Report. In that report there were examples of how a director can use his company to provide him with a wide range of goods and—dare I say?—services. For other forms of credit transactions, such as hire purchase agreements and leases, we simply require that public companies enter into them for their directors on third party terms and in the ordinary course of business.
I think that I have gone as far as your Lordships would wish me to go in trying to explain Amendments Nos. 194 to 196.
§ Moved, That this House doth agree with the Commons in the said Amendments.—(Lord Lyell.)
§ Lord MISHCON
My Lords, some general observations have been made in introducing this Part of the Bill, and I feel that on behalf of my noble friends and myself I cannot allow them to pass without making our position quite clear. 1046 Obviously we are very pleased to see these provisions in the Bill. We dealt in detail with them when these questions were discussed in the House in July last year. As my noble and learned friend Lord Elwyn-Jones has made apparent, we were then told that in the view of the Government much more investigation had to be undertaken before there could be an enactment on these matters. Let us consider what has in fact happened.
There is nothing new in what is provided in the Bill in this respect; credit transactions and so on, with which the noble Lord, Lord Lyell, has been dealing, were brought before the House by us last July. I recall that in a speech that I had the privilege of making on that occasion I actually mentioned all the matters that the noble Lord has been talking about, and I quoted from the report and said that the Bill would obviously have to provide for such situations. However, following a quite unnecessary interval of time since last July, there now comes before the House some provisions which, with great respect, are half-baked, and which a matter of weeks ago came before another place at the Report stage, in the form of new amendments, in circumstances which did not enable the Opposition, nor indeed members of the Government, properly to consider the points involved.
I feel it only right to make this clear to the House, because in the amendments that my noble friends and I shall move, and in our discussions, we shall say time and time again that some of these provisions are indeed deficient and show a sore lack of thought, deliberation and investigation. We shall also say that it is quite wrong for them to be brought before the legislature in this way, when we are dealing with a Bill—which we hope will become an Act—which is to govern the administration and management of great institutions in our country and is to be binding upon them as a matter of law. I make these observations merely to ensure that the reaction of the Opposition is clear to the House, and I have a feeling that in this we may be joined by the noble Lord, Lord Lloyd of Kilgerran.
§ 6.45 p.m.
§ Lord LLOYD of KILGERRAN
My Lords, I wholly support the objectives of the Government in introducing clauses 1047 that are intended to impose stricter regulations on company directors, especially in situations of potential conflict of interest. Of course I also welcome the Government's change of mind and their thesis—and this is not a party political matter—that company law must be strengthened in the light of the many abuses that have been committed in the past decade and which have been reported upon by inspectors. The public are much concerned about these matters.
However, I must place on record the fact that I am not happy with the scope of these long clauses of great complexity. I had hoped that, with all the facilities available to the Government, it would have been possible to improve both efficiency and control over the conduct of directors in a more simple way than is to be found in these extraordinary clauses. I am also very unhappy about the clauses because of the hardship which they may inflict upon small businesses. Again, these clauses, unhappily, will certainly bring great profit to lawyers, and despite the good intentions of the Government, I doubt whether the clauses will tighten up many of the present loopholes. Therefore I support the noble Lord, Lord Mishcon, in his submissions to your Lordships.
§ Viscount TRENCHARD
My Lords, the noble Lord, Lord Mishcon, forces me to my feet. I do not want to speak for long, nor to make this a political matter. I do not think it fair to describe these clauses and the Bill as half-baked. Nor, as I said earlier in reply to the noble and learned Lord, Lord Elwyn-Jones, do I consider that it is entirely accurate to accuse us of a change of mind. We have always felt these particular areas to be highly important, and it has simply been a question of the order in which to bring them forward.
Bearing in mind what has already been said in speaking to various amendments, I think it is clear that progress has been made since the time of the Bill drafted by the last Administration. A number of learned bodies have commented on various aspects of the Bill being simplified. As a non-lawyer I have learnt that this is an area in which very few people agree completely; lawyers have different views on it. Furthermore, I have learnt to my sorrow, that it is a highly complicated 1048 area. However, I believe that progress towards simplification in a number of areas has been acknowledged by authorities.
This part of the Bill forms what was Part IV as the Bill went through the other place. I understand that the key elements of the Bill were brought before the other place at Committee stage. I have already mentioned that a certain warning about a change of Government tactics went out as early as October. The key elements of this Part of the Bill did not go out at Report stage, I am advised.
With those answers to the noble Lord's rebuke, may I once more suggest that in this complicated area it is a question of steady progress being enshrined in Bills from time to time—
§ Lord LLOYD of KILGERRAN
My Lords, before the noble Viscount sits down may I ask him a question about small businesses? Are the Government really satisfied that small businesses will not suffer as a result of the hardships which will result? Surely small businesses are finding this matter extremely difficult to deal with.
§ Viscount TRENCHARD
My Lords, I do not know whether in this case the noble Lord, in mentioning small businesses is referring to businesses which are private companies—
§ Lord LLOYD of KILGERRAN
My Lords, I am talking about companies which perhaps have fewer than 1,000 employees. That is the category of company with which I am concerned—the type of company which does not have a large legal staff as the multinational companies do. There are large numbers of companies with 500 to 1,000 employees.
§ Viscount TRENCHARD
My Lords, I was about to say that many parts of the Bill do not apply to private companies. With regard to the smaller public company, there obviously is a hardship in this very complicated area; but I say again that I believe that we have managed to get it a little simpler in a number of areas, and I hope that their trade associations and others will be able to help them with it.
§ On Question, Motion agreed to.1049
197 Insert the following new clause—
Exceptions from s.
§ .—(1) Where a director of a relevant company or of its holding company is associated with a subsidiary of either of those companies, subsection (1)(b)(ii) and (iii) of section (Prohibition of loans, etc., to directors and connected persons) above shall not be reason only of that fact prohibit the relevant company from—
- (a) making a loan or quasi-loan to that subsidiary; or
- (b) entering into a guarantee or providing any security in connection with a loan or quasi-loan made by any person to that subsidiary.
§ (2) Subsection (1)(b) of that section shall not prohibit a relevant company ("the creditor") from making a quasi-loan to one of its directors or to a director of its holding company if—
- (a) the quasi-loan contains a term requiring the director or a person on his behalf to reimburse the creditor his expenditure within two months of its being incurred; and
- (b) the aggregate of the amount of that quasi-loan and of the amount outstanding under each relevant quasi-loan does not exceed £1,000.
§ For the purposes of this subsection, a quasi-loan is relevant if it was made to the director by virtue of this subsection by the creditor or by its subsidiary or, where the director is a director of the creditor's holding company, any other subsidiary of that company; and "amount outstanding" has the same meaning as in section (Particulars of amounts outstanding to be included in accounts) (6) below.
§ (3) Subsection (2) of that section shall not prohibit a company's entering into —
- (a) any transaction for any person if the aggregate of the relevant amount does not exceed £5,000; or
- (b) any transaction for any person if—
- (i) the company enters into the transaction in the ordinary course of its business; and
- (ii) the value of the transaction is not greater, and the terms on which it is entered into, are no more favourable in respect of the person for whom the transaction is made than that or those which it is reasonable to expect the company to have offered to or in respect of a person of the same financial standing as that person but unconnected with the company.
§ (4) Subject to the following provisions of this section, each of the following is excepted from the prohibitions in section (Prohibition of loans, etc., to directors and connected persons) above, that is to say—
- (a) a loan or quasi-loan by a company to its holding company or a company's entering into a guarantee or
1050 providing any security in connection with a loan or quasi-loan made by any person to its holding company;
- (b) a company's entering into a credit transaction as creditor for its holding company or entering into a guarantee or providing any security in connection with any credit transaction made by any other person for its holding company;
- (c) a company's doing anything to provide any of its directors with funds to meet expenditure incurred or to be incurred by him for the purposes of the company or for the purpose of enabling him properly to perform his duties as an officer of the company or a company's doing anything to enable any of its directors to avoid incurring such expenditure;
- (d) a loan or quasi-loan made by a money-lending company to any person or a money-lending company's entering into a guarantee in connection with any other loan or quasi-loan.
§ (5) The exception specified in subsection (4)(c) above operates only if one of the following conditions is satisfied, that is to say—
- (a) the thing in question is done with the prior approval of the company given at a general meeting at which the purpose of the expenditure incurred or to be incurred or which would otherwise be incurred by the director and the amount of the funds to be provided by the company and the extent of the company's liability under any transaction which is or is connected with that thing are disclosed;
- (b) that thing is done on condition that, if the approval of the company is not so given at or before the next following annual general meeting, the loans shall be repaid or any other liability arising under any such transaction discharged within six months from the conclusion of that meeting;
§ (6) The exception specified in subsection (4)(d) above operates only if both the following conditions are satisfied, that is to say
- (a) the loan or quasi-loan in question is made by the company or it enters into the guarantee in the ordinary course of the company's business; and
- (b) the amount of the loan or quasi-loan or the amount guaranteed is not greater, and the terms of the loan, quasi-loan or guarantee are not more favourable, in the case of the person to whom the loan or quasi-loan is made or in respect of whom the
1051 guarantee is entered into than that or those which it is reasonable to expect that company to have offered to or in respect of a person of the same financial standing as that person but unconnected with the company;
§ In determining for the purposes of this subsection the aggregate of the relevant amounts, a company which a director does not control shall be deemed not to be connected with him.
§ (7) The condition specified in subsection (6)(b) above shall not of itself prevent a company from making a loan to one of its directors or a director of its holding company—
- (a) for the purpose of facilitating the purchase, for use as that director's only or main residence, of the whole or part of any dwelling-house together with any land to be occupied and enjoyed therewith;
- (b) for the purpose of improving a dwelling-house or part of a dwelling-house so used or any land occupied and enjoyed therewith;
- (c) in substitution for any loan made by any person and falling within paragraph (a) or (b) above,
§ 6.50 p.m.
§ Lord LYELL
My Lords, I beg to move that this [louse do agree with the Commons in their Amendment No. 197. This amendment deals with a clause which was installed in the Bill at Committee stage in another place, and it follows on from some of the comments that I was making earlier and which, indeed, were made by my noble friend Lord Trenchard. It is unfortunate that we live in an age which makes detailed regulations necessary, not least because the drafting required to implement any of the policies that we have been discussing is very complex. It is a matter of some regret that the simpler provisions of the 1948 Act have been so much abused in recent years, albeit by a tiny majority of directors.
Part of this complexity derives from the fact that we have provided in Amendment No. 197 a few exemptions in recognition of special circumstances. Although we 1052 specify that the rules on loans and quasi-loans apply equally to moneylending companies—which is important, because many of the abuses have occurred among these moneylending companies—we enable them to make loans and quasi-loans of up to £50,000 to each director and connected person. But for recognised banks, mainly high street clearing banks, we impose no limit in recognition of the fact that clearing bank directors are typically also involved in the direction of a number of other companies. Indeed, the banks seek out such persons as directors by virtue of their experience in just such positions.
My Lords, we require both that loans and quasi-loans by recognised banks to their directors be made on third party terms and in. the ordinary course of business, and also, as your Lordships will see in Amendment No. 204, that all such credit be disclosed in an annual statement which is available for inspection by shareholders. Then, again, we have accepted the need to provide exemption for house loans of up to £50,000 as part of a company scheme to directors of moneylending companies. Such companies are, after all, in the business of lending money, and we do not consider that such lending within the limit specified will make significant inroads into the shareholders' assets. But the prohibition on house loans by non-moneylending companies dating from 1948 will not be lifted because of the risk of abuse which we find in small and medium-size companies.
It must be remembered that if a director's move of house is in the company's interest, his company may directly pay the interest on, say, a bridging or a supplementary mortgage on the grounds that it is a bona fide company expense. I should like to emphasise here the general point that payments or advances made for the purpose of defraying expenses incurred by directors acting as agents of the company are entirely legitimate, and are not caught by our new provisions, which are aimed at credit which is liable to be reimbursed.
We have also enabled companies to make quasi-loans to directors of up to £1,000 for a period of two months. This limited exemption recognises that many goods and services are provided to companies on account, and also that as a convenience a director may ask his company to arrange for some of his personal requirements (an example would 1053 be an airline ticket for a spouse who may be accompanying him on a trip abroad on company business) at the same time as the company is booking the director's own trip. This sort of thing frequently happens in practice, and entirely innocently, in that the director will subsequently reimburse the money to his company. The exemption will enable companies to continue to enter into such transactions on behalf of their directors, and, therefore, suppliers of goods and services—for instance, credit card companies and travel agencies—would be able to provide their services to client companies. The limit which we have in the Bill of' £1,000 will prevent the director's company from being liable to pay for the director's personal expenditure in excess of that sum, thus meeting the objective of providing protection for shareholders. My Lords, that is all I would wish to say on Amendment No. 197, and I beg to move.
Moved, That this House doth agree with the Commons in their Amendment No. 197.—(Lord Lyell.)