LORDS AMENDMENT TO COMMONS AMENDMENT No. 199 (Hansard, 27 March 1980)

§ Lord LLOYD of KILGERRAN
My Lords, I beg to move as an amendment to Commons Amendment No. 199, Amendment No. 199A. As Lord Lyell indicated, Amendment No. 199 deals with civil remedies for breach of the section on prohibition of loans, et cetera, to directors and connected persons. It is common ground that breaches of statutory provisions must be dealt with in some way in this Bill. I agree that it is difficult to delineate who should have to be punished (if that is the correct word) if there is a contravention. But I find it difficult to follow the effect of a civil remedy as included in Amendment No. 199. It has subsections 2(a) and 2(b), but they do not go far enough. When dealing with civil remedies, I should have thought it would have been helpful to have had a clause in this Part of the Bill which, even if it were merely symbolic, indicated that somebody would have to pay up if there were a contravention of the terms of the Bill. Therefore, my amendment is to add to subsection (2) this declaratory statement: 1060 (jointly and severally with any other person or company liable under this subsection) to indemnify any other person by way of payment, restitution or transfer of any asset for any loss or damage resulting from the arrangement or transaction". I agree that the words may not be perfect, but the general theme of the amendment is to make it clear in this clause dealing with civil remedies that any person or company who contravenes the provisions of this clause will be liable to have to make some payment or to transfer some assets by way of indemnification or restitution for any loss or damage arising. I agree that it is often difficult in such circumstances to decide who should pay up or transfer his assets, but it seems to me that a declaratory statement of this kind would help to reduce litigation in this matter and, more than that, could help to reduce the number of attempts being made by people to get past this clause.

§ Lord WEDDERBURN of CHARLTON
My Lords, I should like to support this amendment. It seems a most important matter to which the hour and the Government's legislative timetable must not necessarily be an obstacle. The proposed provision would be extremely useful. These transactions have been an engine of malpractice in company affairs for many years. I would ask, in support of the amendment: Why should a third party not recover his loss? The Commons amendment already says that the company do so. Using the same words, the noble Lord, Lord Lloyd of Kilgerran, asks: Why not give the third party the same rights? This would lead to a lot of litigation, it may be said. I suspect not, because any adviser to a third party would naturally find it difficult in many cases to prove the chain of causation. The difficulty for a plaintiff in Lord Lloyd's amendment would be the word "resulting". He would have to show loss or damage resulting from the arrangement or transaction. But when he can show that loss why on earth should he not have a remedy as well?

§ Lord LYELL
My Lords, we have heard a clear explanation by the noble Lord, Lord Lloyd of Kilgerran, of his amendment. We believe the purpose is to 1061 give an express remedy to third parties involved in prohibited transactions and arrangements between companies and their directors. We are not clear why the noble Lord has tabled this amendment, since remedies are already available to such third parties—we hope without too much litigation. The Commons Amendment No. 199 already provides remedies for the company against the director who has abused his fiduciary position with respect to the company by misappropriating any of the company's resources. We thought it necessary to spell out these remedies as the common law rules are not at present entirely clear. There may be third parties involved in the prohibited transaction: where a company guarantees a loan between its director and a third party, for example.
In subsection (1) of Commons Amendment No. 199, we have clearly provided that the company cannot avoid the transaction if any person other than the beneficiary to the transaction has acquired bona fide rights for value. Similarly, your Lordships will see subsection (2), which makes the director (or indeed a person connected with that director) liable to account to the company for any gain or to indemnify the company for any loss resulting from the transaction. This expressly preserves any other remedies that would otherwise be available. Hence, if a third party suffered damage in the cases which have been explained by the noble Lords, Lord Lloyd and Lord Wedderburn, as a result of any transaction or arrangement—although it is not easy to think of many likely circumstances in which this would happen, given the restrictions placed on the company's rights to avoid that transaction—the rights of a third party would be in no way diminished by Amendment No. 199. We do not consider that this amendment adds to the powers already in Amendment No. 199. For that reason, we ask the noble Lord whether he will withdraw it.

§ Lord LLOYD of KILGERRAN
My Lords, it is perfectly clear, with great respect, that the noble Lord's brief has missed the point of my amendment. The earlier part of the clause which the noble Lord quoted so accurately deals with indemnifying the company, the director and persons so connected and any other director of the company involved. 1062 It does not introduce the third party who could suffer loss and therefore is entitled to be indemnified. It may be that when we study the reply of the noble Lord in Hansard we may be able to cull from that the indication that the rights of third parties are covered in the way that I anticipated should take place. At this late hour, I am not going to press my amendment to a Division. But I record that the point I have made has—so far as I understand the noble Lord—been completely misunderstood. I beg leave to withdraw the amendment.