HL Deb 06 April 1981 vol 419 cc368-427

3 p.m.

Lord Trefgarne

My Lords, I beg to move the Motion which stands in my name on the Order Paper.

Moved, That the amendments for the Report stage be marshalled and considered in the following order:

On Question, Motion agreed to.

Report received.

Clause 1 [General provisions with respect to the form and content of accounts]:

Lord Lloyd of Kilgerran moved Amendment No. 1: Page 1, line 12, after ("company") insert ("including a job ownership company as defined in section 74 of this Act").

The noble Lord said: My Lords, the first clause of the Bill concerns general provisions with respect to the form and content of accounts and in line 12 on page 1 we find the first mention of "company". To clarify the situation relating to job ownership companies, a subject which has been discussed with your Lordships, my amendment would, after the word "company", insert the words: including a job ownership company as defined in section 74 of this Act". With the leave of the House, I shall speak also to Amendment No. 73, which relates to a new clause enabling a company to purchase its own shares. The object of that amendment is to make it clear that a job ownership company can also purchase its own shares. Your Lordships will remember that clauses regarding the purchase of its own shares by a company were introduced for the first time in Committee. I shall, with the leave of the House, speak also to Amendment No. 97, which deals with the definition of "job ownership company".

On Second Reading I submitted that it was desirable—for reasons I shall not go into now—to establish a new class of company, known as a job ownership company, which, as I said, would be of considerable assistance, for instance, in enabling family firms to enter into worker partnerships and employees with a lot of redundancy money at the present time to form themselves into groups. In Committee, when we considered an amendment in the names of myself and the noble Lord, Lord Seebohm, who is noted for the great work he has done in relation to job ownership companies, the Minister said that the Government would consider our proposals on job ownership companies.

I am happy to say that, following the Committee stage, the Government kindly invited the noble Lord, Lord Seebohm, and myself to a meeting. It was attended by four Ministers and about 12 civil servants and there was thrashed out, as Lord Seebhom and I understand it, an arrangement that today the noble and learned Lord, Lord Mackay of Clashfern, would be making a statement on the subject. If I am right, then I shall not be pressing the amendment. Meanwhile, I beg to move.

The Lord Advocate (Lord Mackay of Clashfern)

My Lords, I am grateful to the noble Lord, Lord Lloyd of Kilgerran, for introducing this matter and for referring to the meeting which he and the noble Lord, Lord Seebohm, attended at the department last week, and perhaps I should mention that the size of the team to which he referred is an illustration of the importance we attach to the issue.

There is a question relating to the provisions of Section 54 of the Companies Act 1948 which we shall be discussing later. Subject to that, it was agreed at the meeting that the Government's own proposals to enable a company to purchase its own shares, which were carried in Committee on 19th March, would facilitate the formation of job ownership companies by providing an alternative to the holding by trustees of shares in such companies between their purchase from a departing worker/shareholder and their subsequent re-sale to a new worker/shareholder. The Government's proposals do not provide for the holding by a company of its own shares—sometimes described, following North American usage, as the holding of shares "in treasury"—because the necessary statutory provisions would add further to the complexity of company law without creating any significant advantages. The cancellation of shares on purchase and the subsequent issue of new shares can be a more straightforward operation.

The Government's proposals for companies to purchase their own shares therefore do all that is necessary to permit a job ownership company to operate in the manner required. The only outstanding issue on these amendments is whether the Companies Act should contain a definition of a job ownership company if no statutory consequences are to flow from it; if, in other words, it will be treated in all respects under company law as any other private company. We took the view—and I understood this view to be accepted—that as no additional statutory provisions are required to facilitate the formation of job ownership companies, there is no requirement for any statutory definition.

While we recognise the apparent attractiveness of the argument that some form of statutory recognition would be helpful in publicising job ownership companies, I am sure the House will appreciate the Government's view that not only would such action be an inappropriate use of a statute but that the Government can offer more useful help in publicising the potentialities of job ownership companies through the extensive network of Government services and agencies concerned with the promotion of industrial and commercial development and employment. We considered in detail at the meeting how this might be done, and we shall of course carry that forward further with noble Lords as the subject develops.

I hope your Lordships will feel that this is the correct solution to this interesting problem. It received support from noble Lords in all parts of the Committee. I am particularly grateful to, and should like to thank on behalf of the Government, the noble Lords, Lord Lloyd and Lord Seebohm, for giving us so much time and for helping us to reach a solution which I believe is in the interest of simplicity, of company law generally and of job ownership companies in particular.

Lord Bruce of Donington

My Lords, we on this side wish to thank the noble Lord, Lord Lloyd of Kilgerran, for having raised this issue again and we wish to express our appreciation for the constructive attitude the Government have shown towards the matter. We shall follow developments with interest and support any kind of publicity the Government propose to give so that the public at large may be made well aware of job company schemes.

Lord Seebohm

My Lords, I do not propose to put forward any of the arguments; I have said quite enough loud and clear already on the subject. Although I am disappointed that the amendment will not be accepted, I am grateful for the way in which the Government have expressed their willingness to help to publicise the matter, with possibly the publication of demonstration memorandum and articles and giving publicity through the Small Businesses Advisory Service, the Scottish Development Agency, the Welsh Development Agency and probably CoSIRA, although we did not mention that at our meeting. The general help that was offered us was, I am sure, genuine and will be of great assistance to my colleagues when they start preparing the demonstration model. I am also grateful to the many noble Lords who supported me in the debate.

Lord Lloyd of Kilgerran

My Lords, I am grateful to the Minister for his kind words about me and to the Government for being so appreciative of what is a real problem. With the noble Lord, Lord Seebohm, I look forward to other meetings with the noble and learned Lord's staff, who have been most helpful in the matter, so as to make the public further aware of this important development. At this time I can see no need for a statutory provision—I agree with the Minister about that—and in those circumstances I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 2 not moved.]

Lord Lyell moved Amendment No. 3: Page 2, line 35, leave out from ("the") to ("and") in line 36 and insert ("Companies Act 1976 (taken with section 150 of this Act);").

The noble Lord said: My Lords, on behalf of my noble friend I beg to move Amendment No. 3 which, as I hope your Lordships will see, is a drafting amendment. We hope that it achieves further clarity in the Bill, and for that purpose I beg to move.

On Question, amendment agreed to.

Schedule 1 [Accounts]:

3.11 p.m.

Lord Bruce of Donington moved Amendment No. 4:

Page 83, line 15, at end insert— ("12A. Profit or loss on ordinary activities before taxation.").

The noble Lord said: My Lords, with the leave of the House I should like to discuss Amendments Nos. 4, 5, 6 and 7 together, since they all relate to the same point. During the debate on this particular matter at the Committee stage the noble Lord opposite saw fit to resist the amendment. In doing so he indicated, as reported at column 672 of the Official Report, that the accountancy profession was entirely happy with the points that he made on that occasion. All that the amendment seeks is the insertion in the formats which have now been laid down for company accounts a particular item that has always featured in accounts that have been prepared and published in the United Kingdom. If the noble Lord has seen published company accounts, in particular those relating to public companies, that have not shown quite clearly and directly what was the profit or loss before taxation, I should very much like to learn the names of those companies. In companies in the United Kingdom it has been the invariable practice to prepare the accounts in such a way that the profit or loss before taxation is always shown.

I put the point to the noble Lord in Committee and he indicated that it would be easy to combine—or subtract, as the case may be—the net profit or loss after taxation and the actual taxation charge and that by the method of combining the two one could achieve a result. Is there any reason at all why, after over 100 years of the presentation of accounts not only to the general public but to the Inland Revenue and everyone else, we should abandon the practice of stating the profit or loss before taxation? The profession to which I have the honour to belong has already reiterated its general misgiving that there should at all be an Act of Parliament laying down a precise format of accounts. Accountancy techniques have developed in this country over a far longer period of time than they have in the countries of the EEC—the directive of which of course lies behind this particular Part of the Bill. Is there any real reason why we should abandon the practice? In this country we have much more experience of accounting than has any other country in Europe. in the United Kingdom we have nearly three times as many qualified accountants—I am speaking now of proper qualifications—as there are in the whole of the EEC. Therefore, is there any particular reason why we should abandon the practice?

It is not as though the directive itself lays down specifically that the formats that are set out should invariably be followed. Article 2.6 of the directive states that: The Member States may authorise or require the disclosure in the annual accounts of other information as well as that which must be disclosed in accordance with this Directive". Furthermore, in Article 4.1, the EEC directive itself states: A more detailed subdivision of the items shall be authorised provided that the layouts are complied with. New items may be added provided that their contents are not covered by any of the items described by the layouts. Such subdivision or new items may be required by the Member States". So why is it necessary to abandon one of the salient features of British accounting methods that is accepted by the Revenue, by the public, by investors, by everybody, in favour of the particular formats that are set out in the Bill itself and in the EEC directive? In asking that question I need refer only to the accounts of GEC, which I believe is quite a reputable company. The accounts state—this is almost universal practice with public companies—that the profit before taxation was so much. There is then stated the amount of taxation, and thereafter the profit after taxation, What is wrong with that?

Following the debate in Committee on 17th March I once more had an opportunity to meet representatives of the consultative committee, and I put it to them that it had been said that they were, in the words of the noble Lord, Lord Lyell, entirely happy with the explanation that had been given to them when they had gone along to the Ministry. There must have been some misunderstanding here because the representatives of the consultative committee informed me that although they acquiesced with what was said to them on that occasion, they certainly were far from happy, and indicated the fact.

We in this House must be capable of coming to our own independent judgment, and certainly the Government are entitled to do likewise. The role that the consultative committee sought to assume was to advise. It was not its function to indicate acceptance or otherwise of the Government's view. It is not up to the consultative committee to argue with the Government. A Government who did not take account of the consultative committee's views would be unwise. But the committee's views were quite clearly stated, and I am given to understand by the committee that its views remain precisely the same.

I consider it would be a retrograde step if it were not made a requirement of the Bill and of this particular schedule, which lays out the formats, that the profit and loss account formats should include the statements which are incorporated in these four amendments. There is no case whatsoever for abandoning the practice that we have had for many years and, if it is necessary to have a format, for not confirming in that format the practice we have had in this country almost since the Industrial Revolution of putting in these figures. I am hopeful that this is not a party matter. Accountancy subjects, particularly those of detail, are not such that acquire the sparkling interest that attends occasions of high drama in this House, but if we are to discharge our functions as I am sure we conceive them to be, then we must pay attention to this kind of matter to make quite sure that all the details are correct before the Bill passes from this House.

I repeat: this is a non-party matter. I am aware that should these amendments go to a Division there will then be, of course, a Division on party lines, and noble Lords will come in from other parts of the House, both on the noble Lord's side and on mine, who have not had the interest in this particular detail to enable them to form an independent view. This is quite normal, and I make no complaint about it; but it does not make it easy to argue through and succeed in this House in the case of amendments which are presented with no party division whatsoever, which do not seek in any way to be destructive and which propose nothing revolutionary, but which merely, certainly in the mind of the professional, are just plain common sense. In that sense, I beg to move.

Lord Morris

My Lords, I believe this series of four amendments to be totally unnecessary. I believe the noble Lord, Lord Bruce of Donington, does this House a disservice to suggest that this Bill in any way diminishes what is recognised to be a very good practice. If he would care to turn to paragraph 3(1) of the Schedule, he can read, just as everyone else can read: Any item required…to be shown in a company's balance sheet or profit and loss account may be shown in greater detail than required by the format adopted". I believe that these amendments are not necessary for the very simple reason that the consultative committee of the accountancy bodies has advised any company that if they wish to have a side heading for a deduction giving the resultant profit and loss before taxation, so be it, but I cannot see that it is necessary to legislate for it. It is purely a matter of personal style and personal choice. If the noble Lord suggests, as he has suggested, that this House should divide on a matter of minutiae, I think I would be a waste of your Lordships' time and very unfortunate.

Lord Lyell

My Lords, perhaps I may take the last speaker first and thank my noble friend for his support. Of course, it is interesting that the first three speakers on this amendment should perhaps have to declare an interest in this matter, since I understand that my noble friend and Lord Bruce and myself are all members of various august bodies which have to do with the specialist presentation of these matters. The main thrust of these four amendments was put forward by the noble Lord, Lord Bruce, as he has pointed out, at an earlier stage. I think he quoted certainly one column number, but if the noble Lord would look at column 670 of our proceedings at an earlier stage I think he will find there the same point moved by himself previously and my reply to him.

In my reply then, and in the reply which I am able to give him today, I have to point out that paragraph 3(6) of Schedule 1 already contains the requirement: Every profit and loss account of a company shall show the amount of the company's profit or loss on ordinary activities before taxation". We on this side of the House, certainly, and I suspect all round the House, agree with the noble Lord that it is a very important item that should appear in every company's profit and loss account, but I should like to impress upon the noble Lord that his Amendments Nos. 4, 5, 6 and 7 would not achieve the purpose that he seeks and that he has proposed. If we were to take the item, "Profit or loss on ordinary activities before taxation" and were to insert it as an additional item in the profit and loss account formats, this would create uncertainty as to whether or not the item was covered by the power which is conferred on companies in paragraph 3(4) of Schedule 1. This little power allows companies to combine items in the profit and loss account and to show the breakdown only in the notes to the accounts. In a case where this happens, the amount would not actually appear separately in the accounts, but the reader or the analyst would have to search through the notes.

I believe that at the earlier stage I also stated that we believe that the profit or loss on ordinary activities before tax is indeed a crucial figure which should always appear in the profit and loss account proper, and should not be capable of being relegated to the notes to the accounts. I would assure the noble Lord that this position is achieved by paragraph 3(6) of the schedule. He will find that on page 75. But the series of amendments which is proposed by the noble Lord would not serve the purpose that he intends. Indeed, we would expect that the power which is granted to companies by paragraph 3(4)(b), which reads, the combination facilitates that assessment", about a third of the way down page 75, would enable companies to combine the items in the profit and loss account format, and this may be used to produce the amount of profit before tax which is called for by paragraph 3(6).

This would allow the present practice of presenting this particular amount as the most prominent amount in the profit and loss account to continue. The detail which would be omitted would be, as now, shown in the notes to the accounts. All of us appreciate that these amendments which have been proposed by the noble Lord have been proposed in the spirit of co-operation, and indeed we thank him for the spirit in which he has spoken today; but, in the light of my explanation, I hope he will accept that his purpose is already achieved in the Bill as it is printed, and that he will be satisfied with that.

Lord Bruce of Donington

My Lords, I am very grateful to the noble Lord for his reply. In answer to the noble Lord, Lord Morris, I would point out that the power to which he refers does not give the power to insert new items; it gives the power to subdivide existing ones. There exists no power, as I see it, to introduce new items. This is what is proposed here. But even if it were so, I can see no reason why it cannot be inserted as part of the normal accounts within the format, in the same way as in the accounts of all public companies. This is done at the present time as part of the normal accounts.

Following the noble Lord's intervention in the Committee stage, I have taken a careful look at paragraph 3 of the schedule and subsection 4(b) and, indeed, (a) which refer to individual amounts which are not material—and by no stretch of the imagination can one regard the net trading results before taxation as being other than material to the whole accounts; and subsection 3(b) refers to the combination that would facilitate the assessment. I do not think that that takes us any further with the indispensibility of having the item stated, as it has always been stated, as a separate figure as part of the accounts. I cannot see why we should follow the French bilan which is more or less what these formats follow. Our colleagues across the Channel have been the predominant influence in the devising of these formats; but there is no reason why we should abandon the principle which has been for the convenience of commerce and industry, of investors and of everybody else for as long as profit and loss accounts and balance sheets have been produced in this country. I regret that I shall have to ask the House to divide on this.

On Question, Whether the said amendment (No. 4) shall be agreed to?

Their Lordships divided: Contents, 56; Not-Contents, 90.

CONTENTS
Airedale, L. Janner, L.
Amulree, L. Leatherland, L.
Ardwick, L. Listowel, E.
Banks, L. Llewelyn-Davies of Hastoe, B.
Barrington, V. Lloyd of Kilgerran, L.
Beaumont of Whitley, L. Northfield, L.
Beswick, L. Paget of Northampton, L.
Blyton, L. Pargiter, L.
Brockway, L. Peart, L.
Bruce of Donington, L. Ponsonby of Shulbrede, L.
Byers, L. Ritchie-Calder, L.
Collison, L. Sainsbury, L.
Cooper of Stockton Heath, L. Seebohm, L.
Crowther-Hunt, L, Shinwell, L.
David, B.—(Teller.) Spens, L.
Davies of Leek, L. Stamp, L.
Davies of Penrhys, L. Stewart of Alvechurch, B.
Denington, B. Stewart of Fulham, L.
Elwyn-Jones, L. Stone, L.
Gaitskell, B. Strabolgi, L.
Goronwy-Roberts, L. Strauss, L.
Gosford, E. Taylor of Mansfield, L.
Greene of Harrow Weald, L. Underhill, L.
Greenwood of Rossendale, L. Wallace of Coslany, L.—(Teller.)
Grey, E.
Hale, L. Wells-Pestell, L.
Hanworth, V. White, B.
Hatch of Lusby, L. Wynne-Jones, L.
Henderson, L.
NOT-CONTENTS
Ailesbury, M. London, Bp.
Alexander of Tunis, E. Long, V.
Alport, L. Loudoun, C.
Atholl, D. Lyell, L.
Auckland, L. McFadzean, L.
Avon, E. Mackay of Clashfern, L.
Balfour of Inchrye, L. Mackintosh of Halifax, V.
Bellwin, L. Macleod of Borve, B.
Buckinghamshire, E. Melville, V.
Campbell of Croy, L. Mersey, V.
Cawley, L. Milne, L.
Chelwood, L. Morris, L.
Clancarty, E. Mowbray and Stourton, L.
Clwyd, L. Noel-Buxton, L.
Cockfield, L. Northchurch, B.
Colwyn, L. Nugent of Guildford, L.
Cromartie, E. O'Brien of Lothbury, L.
Cullen of Ashbourne, L. Orkney, E.
Dacre of Glanton, L. Portland, D.
Davidson, V. Rawlinson of Ewell, L.
De Freyne, L. Reay, L.
Denham, L.—(Teller.) Redcliffe-Maud, L.
Derwent, L. Redmayne, L.
Drumalbyn, L. Roberthall, L.
Dundee, E. Romney, E.
Effingham, E. St. Aldwyn, E.
Ellenborough, L. St. Davids, V.
Elton, L. St. Just, L.
Erroll of Hale, L. Sandford, L.
Fraser of Kilmorack, L. Sandys, L.—(Teller.)
Gainford, L. Selkirk, E.
Gormanston, V. Sharples, B.
Gridley, L. Skelmersdale, L.
Grimston of Westbury, L. Sligo, M.
Hailsham of Saint Marylebone, L. Strathcarron, L.
Strathclyde, L.
Halsbury, E. Strathspey, L.
Home of the Hirsel, L. Sudeley, L.
Hood, V. Swinfen, L.
Hylton-Foster, B. Tenby, V.
Ilchester, E. Trefgarne, L.
Kemsley, V. Trumpington, B.
Kinloss, Ly. Vaux, of Harrowden, L.
Kinnaird, L. Vivian, L.
Knutsford, V. Willoughby de Broke, L.
Lawrence, L.

Resolved in the negative and amendment disagreed to accordingly.

[Amendments Nos. 5, 6 and 7 not moved.]

3.41 p.m.

Lord Bruce of Donington moved Amendment No. 8: Page 88, line 17, leave out ("realised") and insert ("earned").

The noble Lord said: My Lords, this is a somewhat complex question. It may be a little difficult to resolve because it refers to the definition of profits for inclusion in the accounts themselves. In Cmnd. 7654, which was the document put out by the Government, at page 35 the Government discuss what they term "realised profits". I am quoting from the consultative document: The requirement in Article 3.1(c)(aa) that only profits made at the balance sheet date may be included in the accounts is interpreted as meaning that profits should not be anticipated but, in accordance with the purdence concept, only included where earned and ascertained".

Your Lordships will recall that when this was first mooted in the Committee stage I sought to leave out the word "realised" and to put in the word "made", which is in accordance with the directive and in complete concert with the Government's own consultative document. The reason that I gave your Lordships on that occasion was that, in both accounting and in legal terms, the term "realised" has rather a different connotation than is popularly supposed.

In Committee, I ventured to quote one definition which arose in the case of the Oxford Building Society, in which it was said that the word "realised" must have as its ordinary meaning, which if not equivalent to reduced to actual cash in hand, that which must at least be rendered tangible for the purpose of division. The meaning of the word is the direct converse of "estimated".

The problem is this. The term "realised" has become synonymous with a state of affairs where an asset is either in cash itself or is capable of immediate realisation into cash. This concept is out of tune with the whole concept of profits earned and ascertained because, particularly in the case of long term contracts such as a big building business engaged in long term contracts, if they were only able to take profits into account that had been "realised" it would mean they would not able to prepare their accounts on an accruals basis at all. They would only be able to take into account the profit on the completion of the contract. This is in complete conflict with the whole system of accruals accounting which has developed over the past 100 years or more.

It is not a matter on which it is possible to be dogmatic. However, it is something upon which I think your Lordships ought to give some guidance and, if possible, resolve. Whatever the provisions of the new Interpretation of Legislation Bill (which is at the Report stage in your Lordships' House at the moment) its provisions, so far as one can understand, will be of no assistance to those members of the legal profession—particularly those occupying judicial office—when they come to interpret this term "realised" when used in conjunction with "realised profits"

It is quite clear that already there has grown up in the courts the practice of treating "realised profits" in precisely the terms to which I have referred to them this afternoon. There have been several cases and I shall provide the references because they may be of assistance at a later stage. In the Inland Revenue Commissioners v. Old Bush Mills Distillery Company Limited, which is a 1928 case in 12 Tax Cases at page 1,148, it was held that the liquidator was merely realising the assets of the company and was not engaging in any trading operation.

I am aware that this particular case is a tax case; but, nevertheless, still implicit here is that the realisation of the assets of the company is something, when referred to in those terms, meaning realising them for cash and getting the money in, as distinct from engaging in a normal trading operation which itself includes the realisation of the stock in the form of sales and the collection of such debts that arise from sales.

When we are applying it within the trading context, we call them "sales"; but when it is a realisation in this particular sense, we call it "realised". Exactly similar sentiments are expressed in other cases: Cohan's Executors v. Inland Revenue Commissioners, a 1927 case, in Appeal Court Reports at page 327. And we see exactly the same again in Haig's (Earl) Trustees v. the Inland Revenue Commissioners, a 1939 case at 725, 22 Tax Cases, where the Trustees were not trading but merely realising capital assets. There are other cases as well. There is a further case where it was held that a company was trading and not merely realising its capital assets. It is the intrusion of the word "realised' into the whole question of profit that is causing the profession, and not merely the accountancy profession, some misgiving since at some time or other these matters are likely to come before the courts. They may not necessarily be tax cases, although the bench are very prone to refer to any case which will help them in making any kind of definition.

I am quite sure that the intention of the Government, which we entirely support, is to bring the definition within the whole intent of the directive itself and within the whole sense in which they have interpreted it in the quotation from the consultative document to which I have referred. The real intention is that it should be profit, whether realised or not, that should be taken into account and what we are really concerned with is that profits that are earned, whether realised or not, should be brought into account. If it were otherwise, and if the courts ultimately interpreted it otherwise, it would be the complete end of accruals accounting in this country as we know it. It would mean, if the decision went that way, that no longer could we determine profits earned within a particular accounting period.

I put this forward with some diffidence. There is certainly nothing in it on which one could dogmatise, but I would have thought on the basis of the implied definitions of "realised" that emerge from the cases which I have cited that it would be far safer to use the word "earned" rather than "realised". Such is the view of my profession and I think that most businessmen and most company directors would probably take the same view. I am therefore very hopeful that the Government will agree to this amendment, which is put forward constructively, so that there can be no further doubt about this matter. I beg to move.

Lord Strathclyde

My Lords, could the noble Lord tell us whether what he has been saying is in line with the advice given by the various institutes of chartered accountants throughout Great Britain?

Lord Bruce of Donington

Yes, my Lords; I am happy to say that the amendment has the complete support of the consultative committee, comprising all the leading organisations belonging to it, including the Institute of Chartered Accountants, the Institute of Certified Accountants and the remainder.

Lord Morris

My Lords, I am astonished to hear that, for the very simple reason that the cases cited by the noble Lord and from which he sought to draw comfort were all examples of companies which were not carrying on business as a going concern but were companies on break-up. In addition to that, I believe he is seriously confusing income with profit. I cannot see that the word "earned" will be of any help whatsoever. On the contrary, I think it would cause more harm than the term "realised". There is a problem with the latter word, as I think everybody appreciates, but it is a well-established term and, as I understand it, has been in English jurisprudence for a very long time in this context. I cannot see that this amendment is going to assist this Bill in any way.

Lord Mackay of Clashfern

My Lords, I am grateful to the noble Lord, Lord Bruce of Donington, for the constructive way in which he approaches this particular problem and I am grateful also to my noble friends who have displayed an interest in it. As the noble Lord has said, it is a complex matter and it is not easy to be sure that one has it correct. But the Government's intention—and there is not much doubt about this from what the noble Lord, Lord Bruce, said—is that we should try to get a concept here which is in accordance with the understanding of the professions so as to introduce reasonable flexibility into the matter.

When this was suggested before, the noble Lord, Lord Bruce, as he has told us, used the word "made". He is now suggesting the word "earned" instead of the word "realised". I believe that "earned" is more closely equated with "realised" and therefore I see in this alteration that the noble Lord is moving a little closer to accepting the term "realised". It seems to us that the use of the word "made" would not have made any difference to the application of the prudence concept of accountancy practice, as stated in SSAP 2, which is embodied in paragraph 12(a) and we cannot see that the term "earned" would assist in this either.

Paragraph 12, in which this amendment seeks to substitute the word "realised" for the word "earned", starts with a preamble which refers to the prudent basis and that is intended to set the scene in which this matter is to be considered. In our view, the use of the word "earned" would create the same sort of confusion as the use of the word "made" by implying that different principles applied in connection with Part III of the 1980 Act relating to distributable profits and also in paragraph 34 of this schedule where the word is used in dealing with the transfer of revaluation surpluses to the profit and loss account.

As I said at the Committee stage, the terms "realised" and "unrealised" are exhaustive of the whole classes of profits, and paragraph 34 of Schedule 1 makes it clear that unrealised profits must be carried to a revaluation reserve and profits may only be carried to profit and loss account if they are realised. As with the word "made", if "earned" is intended to mean more than "realised" in this sense it would include unrealised profits which may not, in accordance with that paragraph, be carried to profit and loss account. If so, it is inconsistent with the policy of the Bill and with Article 33.2(c) of the directive.

The noble Lord has referred to the danger to the accruals accounting system from the use of the word "realised". I would really put the matter the other way. Paragraph 13 of this schedule makes it clear that the accruals basis is to be used and on a construction by the court of the word "realised" in this context one would expect the court to take account of that fact and thus support an argument in favour of a wider construction of the word "realised" than might be appropriate in tax cases.

It is true, as the noble Lord has said, citing from a number of tax cases, that in some contexts in relation to tax the word "realised" may be given a fairly restricted and narrow interpretation. But it is well established, I suggest, in tax cases that the principles to be used in determining a matter of this kind for tax purposes are different from the principles to be used in determining a matter for accounting purposes. I can cite a good number of authorities in support of that, if need be. It has usually been, I must say, the other way round, that the accountants have sought to rely on the accounts as showing what is profit, and the courts have said: "When we are looking at this for tax purposes, we have to make a distinction." But whichever way it goes, it emphasises the distinction between accounts for purposes such as these and accounts for tax purposes. Accordingly, while we acknowledge the importance, the complexity and the difficulty of the point, we take the view that in this context the word "realised" is the most appropriate to give effect to what we believe the accountants and the Government think is the correct result in this area.

4.2 p.m.

Lord Lloyd of Kilgerran

My Lords, I have been trying to follow this technical matter, but I could not see how the noble and learned Lord relied upon Article 33.2(c) to justify his feeling that the word "earned" is not better than the word "realised". It may be that I have misunderstood his argument, but he cited that article. It may be that he was citing it about a different point, in which case I apologise to him for not having understood his argument. But the reference to Article 33.2(c) seemed to me to be irrelevant to the basic issue which the noble Lord, Lord Bruce of Donington, was submitting to the House.

Lord Mackay of Clashfern

My Lords, I feel sure that it is entirely my fault, but the basic requirement, which this paragraph is trying to mirror in our legislation, arises from the provision in the directive. The translation that has been adapted there is the word "made", which is why I think, on the last occasion, the noble Lord tended to go for that as his preferred substitution for the word which we have used, which is "realised". I understand that in other texts of the directive the equivalent word for "realised" is what has been used, but I was not making that point earlier. The point that I was trying to make earlier was that when one looks at the directive as a whole, and at what we have done here as a whole, the word "realised" in its context is the best word to mirror the concept at which the directive was aiming. That is what I have been trying to say.

Lord Bruce of Donington

My Lords, I am greatly obliged to the noble and learned Lord for his reply. For the avoidance of doubt, the question was raised as to whether this amendment had the support of the Consultative Committee of Accountancy Bodies. With your Lordships' permission, I should therefore like to read out precisely what they had to say about it, in order to clear up that part of the matter. They said: Paragraph 12(a) in Part II of Schedule 1 provides that, only profits realised at the balance sheet date shall be included in the profit and loss account'. We have strong reservations about the use of the word 'realised' in this context. The fourth directive, Article 31.1(c)(aa), uses the word 'made', which has a broader and, in our view, more acceptable meaning. The problem, as we see it, is that the restriction of profits to those realised confuses the recognition of profit with its distributability and would conflict with important and generally accepted principles for the measurement of profit". Those are the precise words that were used by the Consultative Committee of Accountancy Bodies.

I am, of course, well aware that in tax cases it is mainly taxation matters that are under consideration and, certainly, I would not wish to extend the appropriateness of tax law to other sections of the British statutes. I referred to them only to indicate that there is this doubt, and that wherever realisations are referred to they are within the context of turning something into cash for the purpose of getting money, as distinct from the purpose of trading.

It is not true that all the cases that I have cited today consist of cases where there is something terminal; where something is being wound up and assets are being realised. There has been a genuine distinction that the court has had to make as to what constituted a realisation of an asset, in the cash sense of the term, and what constituted normal trading activities. I should just like to clear that up for the benefit of the noble Lord, Lord Morris.

I am well aware of the provisions to which the noble and learned Lord has drawn the attention of the House, in connection with the Statement of Standard Accounting Practice No. 2, in which this question of realisation was first raised on the profession's own responsibility. I am bound to say that, if the noble and learned Lord had been constrained to make a stricture on the profession for having caused the ambiguity in the first place, the profession would have been disposed to agree with him. In fact, I learn unofficially that it is already under consideration whether it is now time to make a drastic revision of SSAP2.

But I should like to refer the noble and learned Lord to the other part of the conflict, which essentially arises in the case of long-term contracts and work in progress, which, of course, is very apposite to this whole question of realisation. With the noble and learned Lord's permission, and with the indulgence of the House, since we are, after all, concerned in correcting these matters of detail—it is one of the basic functions of your Lordships' House to pay particular attention to details of this kind, so that Bills which go down are as near as possible, perfect—I should like to quote, as follows: Separate consideration needs to be given to work in progress arising from long term contracts. Owing to the length of time taken to complete such contracts, to defer taking profit into account until completion may result in the profit and loss account reflecting not so much a fair view of the activities of the company during the year, but rather results related to contracts which have been completed by the year end. It is therefore appropriate to take credit for ascertainable profit"— and here the word "ascertainable" crops up again, as it did in the Government's consultative document— while contracts are in progress, subject to the limitations of paragraph 8 below". The limitations in paragraph 8 below are: The profit, if any, taken up needs to reflect the proportion of the work carried out at the accounting date and to take into account any known inequalities of profitability in the various stages of the contract". This is a statement of current accounting practice, where it is not at all a question of realisation. It is a question of what profit is earned in a particular period, which may differ from the term "realised".

The noble and learned Lord can doubtless say that this particular statement of Standard Accounting Practice No. 9 is in conflict with No. 2. In certain respects it is, and I have already explained that SSAP2 may have to be revised. But the broad normal practice of the profession and of business generally over the years has been on this accruals basis, although there are cases where for taxation purposes one can use what is termed the conventional account which takes account only of receipts and payments, an indulgence permitted by long-suffering inspectors of taxes to an equally long-suffering tax-paying community. But the normal way is on an accruals basis.

Our fear is that the insertion of this term "realisation", particularly when allied to the question of distribution which was raised by its inclusion in the Companies' Act 1980, may give rise to misunderstanding. It is unfortunate, as your Lordships probably know, that the courts are not permitted to take account of interpretations of Hansard proceedings in order to obtain guidance as to how they should interpret statutes. The Government's intention behind the particular wording of a particular Act may be quite clear when one reads Hansard or, more particularly, when one hears the intonation of a voice or the emphasis and timing when an announcement is made either in the other place or in your Lordships' House. But the courts are not permitted to take account of that. They are permitted to take account only of the statute itself. If the new Interpretation of Legislation Bill finally becomes an Act, they will also be able to take into account the titles, the sub-titles and the indents.

But this is not a case where the courts can pay any attention at all to the very wise and sensible remarks which have fallen from the lips of the noble and learned Lord opposite. Were they permitted to do so they could so construe the statute, but they are not permitted to do so. They can rely only on the precedents. I ventured during the Committee stage to quote one precedent which had a bearing on the non-taxation aspect of the matter. Today I have ventured, purely for guidance and in the full knowledge of all the limitations, to quote some cases to your Lordships which have taxation connotations but which illustrate the broad general principle which is applied in matters of this kind.

I am still hopeful that the noble and learned Lord may see fit to have yet further thoughts upon it. I cannot understand why there should be this abandonment of the word that was used in the consultative document. The document said "ascertainable". I presume the Government did not insert that word frivolously. I assume that the consultative document was prepared with due care—nay, was examined even by the lawyers and, who knows, perhaps by the accountants themselves. If this wording was good enough for inclusion in the consultative document, if it was good enough and appropriate enough to win the support of most of the accountancy profession who are vitally concerned in the matter as well as lawyers, I should have thought it was good enough to incorporate in the Bill.

Nevertheless, I have no wish to drive the Government too hard. I have tried to be as non-controversial as my somewhat explosive temperament permits. Indeed, I had hoped to persuade the Government that I was right and that the accountancy profession were right. I have not succeeded and I express considerable regret that it has not been possible to do so. I venture to predict that much difficulty will come from the Government's decision not to accept this amendment, which I beg leave to withdraw.

Amendment, by leave, withdrawn.

4.15 p.m.

Lord Bruce of Donington moved Amendment No. 9: Page 89, line 9, after ("asset") insert ("to which a purchase price on production cost is ascribable and").

The noble Lord said: My Lords, the amendment is an endeavour to be of assistance to the Government in clarifying this particular paragraph. With the leave of the House I shall move it in conjunction with Amendment No. 14, which raises precisely the same point. It is entirely non-controversial. If the Government see fit to accept it, naturally I shall be pleased, but if they decide not to do so then I shall view their decision with equal equanimity. I beg to move.

Lord Morris

My Lords, I believe that the noble Lord, Lord Bruce of Donington, would be unhappy if Amendment No. 9 were to go through in the form in which it appears on the Marshalled List. I believe that the word "on" in the second line of the amendment should read "or". It should read "or production costs" rather than "on production costs".

Lord Bruce of Donington

My Lords, yes. There has been a typographical error for which my disreputable calligraphy is entirely responsible. If, with the leave of the House, the word "on" could be altered to "or", I should be greatly obliged. If that alteration makes the amendment even more acceptable to the Government, I shall be highly delighted. I am most grateful to the noble Lord for having corrected me.

Lord Lyell

My Lords, I await with eagerness the intimation of the noble Lord, Lord Bruce of Donington, as to whether an amendment should be accepted or rejected by the Government. It seems that the noble Lord is going to be pleased, whichever way this amendment is treated. I look forward to keeping him in suspense until the close of my brief comments.

We are happy that the noble Lord, Lord Bruce of Donington, has dealt with Amendments Nos. 9 and 14 together. As he will appreciate, they deal with the same point. The words "purchase price or production cost" are not appropriate to all fixed assets. We accept that these amendments have been moved by the noble Lord, Lord Bruce of Donington, in an attempt to resolve a somewhat technical problem. The problem in my view is created by the text of the directive which, as your Lordships will see at Articles 35 and 39, requires that all fixed and current assets shall be valued at the purchase price or at production cost. In the real world of business and accountancy, there are a number of assets where the words "purchase price or production cost" are not entirely appropriate.

The Bill uses the wording of the directive because the Government took the view that this approach would enable any areas of uncertainty to be resolved by accounting practice. This approach, in the Government's opinion, would be preferable to any attempts to deal with the matter in a detailed code in the statute, where in any case it would be virtually impossible to provide an exhaustive coverage of all the areas of uncertainty.

Amendments Nos. 9 and 14 seek to resolve this difficulty in a general way without referring to any specific areas of uncertainty. We recognise that the amendments are intended to be helpful to the Government. However, we believe that, by limiting the general rule for the amount to be included for assets to those assets to which a purchase price or production cost is ascribable the question of what amount is to be included for other assets is still left open. We believe that this highlights rather than resolves this particular problem.

In addition, if the problem is to be resolved in any way in the legislation, it might be more appropriate to try to do so by amending paragraph 17 of Schedule 1 rather than paragraph 18, as proposed by the amendments. I am afraid the Government cannot accept these amendments as they are, but certainly we recognise that there is a technical problem and we give an undertaking that we shall consult further with the accountancy body in our attempt—and we hope a general attempt—to achieve a solution which is mutually acceptable. We are not entirely convinced that we can improve the drafting of the Bill in this particular area, but certainly we shall make every endeavour to resolve the doubts of the profession.

Lord Bruce of Donington

My Lords, I am most grateful to the noble Lord, Lord Lyell, for that encouraging response, but, for the sake of the record, I should like to point out that Amendment No. 9 does refer to paragraph 17. In what he said he seemed to imply that it did not. Nevertheless, I am most grateful that the noble Lord has undertaken to have further consultations with the profession on this, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lyell moved Amendments Nos. 10 to 13:

Page 89, line 24, at end insert ("; and any such provisions which are not shown in the profit and loss account shall be disclosed (either separately or in aggregate) in a note to the accounts.")

Page 89, line 29, at end insert ("; and any such provisions which are not shown in the profit and loss account shall be disclosed (either separately or in aggregate) in a note to the accounts.")

Page 89, line 33, at end insert ("and any amounts written back in accordance with this sub-paragraph which are not shown in the profit and loss account shall be disclosed (either separately or in aggregate) in a note to the accounts.")

Page 89, line 34, leave out sub-paragraph (4).

The noble Lord said: My Lords, I hope it may be for the convenience of the House if I move these amendments en bloc. As a group the amendments cover the same point. They are minor amendments which are necessary because reference is made on page 89 of the Bill, at line 37, to the disclosure of provisions for what are called "write backs" and then your Lordships will see in brackets the words "(either separately or in aggregate)". In the view of the Government, it is not entirely clear whether these words mean: first, the individual provisions or write backs which fall under paragraphs 19(1), 19(2) and 19(3) with no aggregation; or possibly to these words applied to the aggregation of individual provisions or write backs under (a) into separate totals for paragraphs 19(1), (2) and (3); or, thirdly, do the words refer to the aggregation of all the individual provisions and write backs into one net total for paragraphs 19(1), (2) and (3) combined?

The amendments make it clear that if, for example, any individual provision made under paragraph 19(1) is not shown in the profit and loss account then it must be shown either separately in the notes to the accounts or aggregated with other provisions made under paragraph 19(1) similarly not shown in the profit and loss account. An identical position arises in the case of provisions made under 9(2) and write backs under 19(3). Aggregation of write backs under paragraph 19(3) with provisions under paragraphs 19(1) and 19(2) would be contrary to Article 35.1(c) (cc) as this article only deals with provisions and not with write backs. The amendments bring the provisions of paragraph 19 fully into accordance with Article 35.1(c)(cc) of the Fourth Directive. I beg to move.

Lord Bruce of Donington

My Lords, we are grateful to the noble Lord for having given an explanation of these four amendments. He has explained the position quite adequately and we entirely support the Government in their amendments.

Lord Morris

My Lords, I am a little puzzled as to why the Government saw fit to use in the Bill the term "write back" when a perfectly adequate term has been in use for many years, namely "provisions no longer required", which I think is understood by everybody and which describes the position more elegantly than the Bill does at present. If the noble Lord would consider that point, I should be much obliged.

Lord Milne

My Lords, may I ask whether the question of materiality comes up in these matters, because they might be very small items.

Lord Lyell

My Lords, if I may assist with the point raised by my noble friend Lord Morris, I am sure that there are terms which have been in use for many years and which explain the position very clearly. These four amendments are very much in accord with the Fourth Directive, which of course is what we are implementing in this Bill. Perhaps I may take further advice on the points raised by my noble friend, and if I find that there is a major point I will communicate with him in writing before the next stage of the Bill.

The noble Lord, Lord Milne, raised the question of materiality. I understand that materiality is dealt with in paragraph 84 of this schedule, and I think the noble Lord will find that at page 110. I hope that will cover the point raised by the noble Lord, Lord Milne, who we are very pleased to see here today.

On Question, amendments agreed to.

[Amendment No. 14 not moved.]

4.28 p.m.

Lord Bruce of Donington moved Amendment No. 15:

Page 91, line 45, at end insert— ("Provided that such method is appropriate in all the circumstances").

The noble Lord said: My Lords, this is another effort to try to clarify the position and I hope the House will give it their consideration. Paragraph 27 of the Schedule provides as follows: (1) The purchase price or production cost of—

  1. (a) any assets which fall to be included under any item shown in a company's balance sheet under the general item 'stocks'; and
  2. (b) any assets which are fungible assets (including investments);
may be determined by the application of any of the methods mentioned in sub-paragraph (2) below in relation to any such assets of the same class". to which the amendment seeks to add the words: provided that such method is appropriate in all the circumstances".

This point arose at the Committee stage, in column 687, in an endeavour to help to resolve the situation where some of the methods, including those which are prescribed in the statement of standard accounting practice, are not always appropriate and this is designed to make the clause fully comprehensive to cover that particular point; that one lays down no particular method but that such a method as is appropriate in all the circumstances is the best way of putting it. I beg to move.

Lord Lyell

My Lords, as always, we are grateful to the noble Lord, Lord Bruce, for moving this amendment, which we recognise is intended to shed a little light on quite a thorny problem that has afflicted the accountancy profession and indeed the presentation of accounts in this particular area. The purpose of this amendment seems to be to alleviate the alleged inconsistency between an accounting standard that deals with the accounting treatment of stock and work in progress and what is found in paragraph 27 of Schedule 1 to the Bill.

The Government must declare at the outset that we do not accept that there is any inconsistency between that accounting standard and the provisions in the Bill. The purpose of SSAP 9 has been to indicate which methods of a variety which are available were considered to best fulfil the true and fair view required, and in doing this it states that the use of last in first out—commonly referred to as LIFO—would not normally be appropriate. But the standard does say that in selecting methods for calculating the cost management must exercise its judgment.

The position hitherto has been that the law did not impose any limits upon methods of stock valuation other than the general requirement that the accounts should give a true and fair view, but implementation of the Fourth Directive by this Bill requires the methods of stock valuation permitted by law to be made explicit instead of being merely implicit. However, the specific reference to LIFO in paragraph 27 of Schedule 1, which reflects its specific reference in the directive, does not call into question the validity or indeed the authority of SSAP 9.

The Government recognise that the accountancy bodies have expressed very considerable concern in this area which the amendment is designed to resolve. However, in the Government's view this amendment adds nothing to what is already contained in the Bill, because the true and fair view which is required will require that only methods appropriate in all the circumstances of the company can be used. We therefore would be very reluctant to agree to any addition which is superfluous. I hope the noble Lord, Lord Bruce, and indeed the noble Lord, Lord Milne, will accept our undertaking that we will consult further with the accountancy bodies and the profession on this particular point. If indeed the accountancy bodies can persuade the Government that the principle of this amendment does provide an acceptable and proper and meaningful addition to the Bill, or if some other form of words can be agreed mutually which will allay the concern of the accountancy bodies, then the Government would be prepared to come forward with their own amendment. But I would stress that we are not entirely convinced that the Bill is unsatisfactory in this area. I hope, having given that undertaking, the noble Lord will be satisfied with what I have had to say.

Lord Bruce of Donington

My Lords, I am getting a little disappointed with the noble Lord this afternoon. He is showing a far lower degree of accommodation than I sincerely hoped would be forthcoming from him. Indeed, it has been I who have tried to accommodate the noble Lord. If the noble Lord will refer to the Committee debate that took place on 17th March at col. 688, the noble and learned Lord, Lord Mackay of Clashfern, said this: The noble Lord —that is me— read from Accounting Standards … What that says about this particular matter is: 'It is not usually appropriate'". Then the noble and learned Lord continued: That suggests that there may be circumstances in which it might be appropriate. We have sought to make it available where it is appropriate". It was precisely those words uttered by the noble and learned Lord that prompted me to put down the amendment, which precisely encapsulates what he said. I did that in the hope that there would be consistency and that the noble and learned Lord, having enunciated the principle in such clear terms, would permit me to enshrine it in an amendment for the approval of the House.

Lord Lyell

My Lords, I hope that there is consistency between my noble and learned friend and myself on this point. I think I have been most accommodating; at least I trust so. In dealing with Amendment No. 15 we look forward to consulting further with the accountancy bodies. I have said that it is the true and fair view that must predominate, and I hope that the noble Lord will accept that this particular method of valuing stock, which may or may not be appropriate, should be included. As I said, the Fourth Directive requires that methods of valuing stock should be explicit and not implicit. I think everything I have said is consistent. I think I have been accommodating and I hope the noble Lord will accept the concept that we have held this afternoon.

Lord Bruce of Donington

My Lords, with the leave of the House, I should just like to emphasise one point arising from the noble Lord's use of the words "true and fair view". I think it highly dangerous, and I think on reflection the noble Lord will agree, that to call in aid the expression "true and fair view" every time a matter of detail is referred to is probably not the most appropriate way of using the term "true and fair view", which is designed specifically to reflect the situation of the accounts as a whole, so that the totality is presented as a true and fair view of the state of the company's affairs. I do not think we ought to call in aid "true and fair view" every time we get into a difficulty about specific wording relating to very specific and limited circumstances.

On Question, amendment negatived.

4.38 p.m.

Lord Bruce of Donington moved Amendment No. 16: Page 93, line 6, leave out]"(Those")and insert ("The historical cost accounting").

The noble Lord said: My Lords, this is a purely drafting amendment on which I do not desire to pass any comment. It may be regarded as a simple suggestion for clarification. I beg to move.

Lord Lyell

My Lords, I hope the noble Lord, Lord Bruce, would accept that the Government believe that this amendment does not add anything to the present meaning of paragraph 29(2). Paragraph 29(1) refers to "the historical cost accounting rules", and sub-paragraph (2) follows immediately with the words "Those rules". Clearly to everybody, accountants and non-accountants, this is a reference to the historical cost accounting rules. Therefore, I hope the noble Lord will accept that the proposed change is unnecessary.

On Question, amendment negatived.

Lord Lyell moved Amendment No. 17: Page 93, line 19, leave out ("Fixed asset").

The noble Lord said. My Lords, in moving Amendment No. 17 I hope it will be for the convenience of the House if I speak also to Amendments Nos. 18, 28, 29, 30 and 31. Your Lordships may recall that in Committee the Government accepted in principle the amendment of the noble Lord, Lord Bruce, to allow current asset investments to be included at current cost. As I seem to recall, I stated that the Government supported the objective of providing scope for the future development of current cost accounting. The amendments to which I am speaking at the moment give effect to that undertaking by allowing current asset investments falling under item C.III in the balance sheet formats as well as fixed asset investments to be included on either of the bases mentioned in paragraph 31(3)(a) or (b) of the schedule. The following amendments are consequential to Amendment No. 17. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 18: Page 93, line 20, leave out ("item B.III") and insert ("either item B.III or item C.III").

The noble Lord said: My Lords, I have already spoken to this amendment. I beg to move.

On Question, amendment agreed to.

Lord Bruce of Donington moved Amendment No. 19:

Page 93, line 30, at end insert— ("(5) Current asset investments may be included at their current cost").

The noble Lord said: My Lords, I beg to move Amendment No. 19. This amendment is proposed for inclusion at the end of paragraph 31. It follows from the debate that we had in Committee when the Government undertook to have a look at the whole business. It is intended to be helpful. I do not know whether it is appropriate to the paragraph as now amended, but if it is, then I offer it to the Government as a contribution towards their own efforts in this respect. I beg to move.

Lord Lyell

My Lords, we are very grateful for the kindness shown by the noble Lord, Lord Bruce, and indeed I am instructed that this amendment which he has put forward has been met by Amendments Nos. 17 and 18 to which I have spoken. Nevertheless, we thank the noble Lord, Lord Bruce.

On Question, amendment negatived.

4.43 p.m.

Lord Bruce of Donington moved Amendment No. 20:

Page 94, line 48, at end insert— ("33A. Where a profit and loss account for any period has been prepared in accordance with any or all of paragraphs 29, 30, 31 and 32 of this Schedule the amount of the profit or loss on ordinary activities as determined by the application of Historical Cost Accounting Rules set out in section B of this Schedule shall be stated separately on the account as in a note to the accounts.").

The noble Lord said: My Lords, I beg to move Amendment No. 20. This amendment raises an important question of principle. Your Lordships will recall that when we were debating the whole question of current cost accounting at the Committee stage I asked the noble Lord that if the alternative that was proposed in Section C of the schedule were adopted, which gives the option of adopting current cost accounting, then the amount of the company's profit or loss determined on an historic cost accounting basis should, in fact, be shown. So the new amendment proposes: 33A. Where a profit and loss account for any period has been prepared in accordance with any or all of paragraphs 29, 30, 31 and 32 of this Schedule the amount of the profit or loss on ordinary activities as determined by the application of Historical Cost Accounting Rules set out in section B of this Schedule shall be stated separately"— and there is then a manuscript correction because the next word should be "in" and not "on", so that it reads: in the accounts or in a note to the accounts".

We had a long argument about that in which I ventured to express some misgivings that a method should be adopted which resulted in no obligation being laid on a company who decided to adopt the current cost accounting rules to disclose the profit determined on an historic cost account basis. The Government did not seem to think that this was at all necessary. Indeed, the noble and learned Lord, Lord Mackay of Clashfern, said at column 683 of the Official Report: As I said, the overriding necessity is to give a true and fair view of the position of the company. If the auditor has taken the view in one case that the historic cost method is the right method and in another case that it should be the current cost method, that must be because of a fundamental difference between the situations of the two companies.". I am amazed that such an observation could be made. The decision of an accountant or of a company to adopt either the historic cost accounting method of presenting its accounts or of presenting its accounts on a current cost accounting basis has nothing whatever to do with the situation within the company; it is merely two different ways, two different perspectives, of the company's affairs according to what assumptions one uses.

I sought to explain—and your Lordships were most indulgent in listening to me on the last occasion—that the historic cost accounting method is the one that has been used in this country since accounts began to take the form which they have taken for the past 100 years. It is universally accepted as being a photograph of a business at a given moment of time, reflecting the development of the company's affairs based on the actual transactions that have taken place from one accounting period to the end of the accounting period for which the accounts are prepared.

The whole reason for the adoption and, indeed, the putting forward of suggestions for current cost accounting arises because, immediately following the end of the accounting period, the management anticipates and, indeed, anticipates continuously, that the asset values stated in the accounts do not bear any relationship to their replacement cost when ultimately they have to be replaced. It is an endeavour to allow for inflation. If your Lordships will bear with me, I said on that occasion that of course it is very proper for management purposes that some endeavour to assess the impact of inflation on the future of a business should be made. It is very necessary for managerial purposes.

The question which we then discussed was whether it was wise that accounts which incorporated an element of far greater conjecture than ever arises on the drawing up of historic cost accounts, ought, in fact, to be adopted as the firm's official accounting base, which is really what happens with the adoption of current cost accounting. I am well aware that your Lordships defeated this proposition when I ventured to carry it to the Division Lobbies. In my view it remains as true now as when I ventured to enunciate it in Committee in your Lordships' House. Nor am I alone in this. It might be held that I speak on this subject purely professionally and that, therefore, perhaps in some academic fashion—and I shudder at the term when applied to myself—I was pursuing a matter of pure pedantry.

So, with your Lordships' permission, I should like to cite what the noble Lord, Lord Weinstock, observed in his maiden speech in this place on 27th November at column 235 of the Official Report. The noble Lord is one of this country's leading industrialists. His company appears to enjoy some considerable success. Without praising him unduly, or more than he would wish, I venture to suggest that his observations on this subject bear some air of authority; indeed, possibly far more authority than my own. This is what he said: We are all concerned about the impact of inflation on our businesses. We know that the cost of replacing our assets is greater than the depreciation allowed at the usual rates based on historical values. The fact is that no one has yet been able to produce a generally acceptable system which objectively and universally presents the consequences of inflation on business accounts. Every attempt at such a system has been subjective, and neither universally applicable nor universally true". Then he goes on to say, in some lament, to which I draw your Lordships' attention: No longer, my Lords! Now we have not only to record our transactions in the old meticulous manner in order to know what is happening, but to run another set of accounts calculated according to arbitrary criteria called 'current cost accounting'.". He goes on to discuss the preoccupation of an industrial manager and executive, of whom he says: He struggles to find the means to a condition of happy understanding with his employees, often in the face of obsolete and destructive attitudes; and accumulating social pressures lay ever-increasing burdens on him. It is not clear to him, nor indeed can I think it will be at all clear to your Lordships' House, how, faced with all this, statistical juggling can help reduce his costs or improve the quality and reliability of his products—for these are the things that really matter. It complicates his already over-complicated life". Then he goes on in somewhat disrespectful terms about my profession, with which I cannot be expected to agree. He says: Our managers are being brainwashed by academics and the high priests of the accounting profession into believing that the mumbo-jumbo of current cost accounting contains remedies to the problems caused by inflation". That is an observation by an industrialist who, from the more controversial sections of the noble Lord's maiden speech, one would gather was not exactly a friend of the Labour Party. But those sections were certainly incisive.

I do not want to rehash the whole argument concerning the misgivings that I have—and I might say that they are shared quite widely in the profession—about the adoption of current cost accounting as an alternative, official way of presenting accounts. However, I insist, and I invite your Lordships to insist, that, where the alternative is selected and where the company is given the option of presenting its accounts on the basis of current cost accounting, at least the result that would have been provided for on the old historic cost accounting basis ought, in fact, to be shown. This is exactly what this amendment is designed to do.

It is perhaps apposite that I should present, once again, the accounts of GEC, which I repeat is a very reputable company which enjoys considerable esteem in various sections of industry. Here we have accounts that are presented in two ways: on the current cost accounting basis by way of a note on the right hand side of the consolidated profit and loss account (and I am now talking for the year ended 31st March 1980, the latest accounts available) and on the other side accounts based on the historic cost accounting basis are set out. That is the traditional method on which the accounting profession has always operated until recent times of high inflation and until this cost accounting hiatus that has resulted from it.

Will the noble and learned Lord say that the accounts as presented by GEC are misleading because that company has presented both methods? I should like to point out to noble Lords that the practice followed by the General Electric Company is one that is sanctioned in the Statements of Standard Accounting Practice No. 16, which, once again, is supported by the Consultative Committee of Accountancy Bodies.

I have abandoned my efforts in this House to ensure that, whenever accounts are prepared on the current cost accounting basis, the historic cost accounting figure should be shown alongside, which is almost exactly the same as has already been done in the accounts of GEC. My observations did not find favour with the House, and therefore, the House decided, in my view very mistakenly, that this ought not to be done. But at least the House ought to insist—and this is what Amendment No. 20 is designed to do; even though, for reasons that are obscure to me, the Government want to bury historic cost accounting wherever possible—that at any rate one comparative figure ought to be included: the net profit achieved on the historic cost accounting basis. What is wrong with that? What commercial confidentiality is violated? What expectations of shareholders for more dividends, on the one hand, or employees for more wages, on the other, are suddenly brought alive by the insertion of that one small figure?—which, as I say, is available in extenso in the accounts of GEC, in the accounts of most public companies and, indeed, in the accounts of most other companies which, within the SSAP 16 rules, have elected to go for one of the options that are put out as standard accounting practice.

I hope that the noble and learned Lord will not persist in this suggestion that if the auditor has taken the view in one case that the historic cost method is the right method, and in another case that it should be the current cost accounting method, that must be because of a fundamental difference between the situations of the two companies—because the situations of the two companies have no relevance to it at all. It is merely two different ways of looking at the accounts, and the presentation of them both gives rise to no conflict at all. In fact, it makes the accounts even more informative. Nobody is likely to think the companies more or less prosperous by the presentation of the two together or by the presentation of the two sets of figures together. I hope that on this occasion I may command the support of your Lordships in seeing that at least this minimum residual connection with reality as distinct from accounting astrology is retained in company accounts in the United Kingdom. I beg to move.

The Deputy Chairman of Committees (Lord Drumalbyn)

Amendment proposed, page 94, line 48, at end insert the words on the Marshalled List with the substitution of the word "in" for the word "on" and the word "or" for the word "as" in the last line but one.

5.1 p.m.

Lord Mackay of Clashfern

My Lords, before I speak to the detail of this amendment I should like to take up a quotation from what I said on Committee to which the noble Lord has referred. The context has to be brought into mind, because I agree with him generally speaking, that there is available to an accountant a discretion as to which particular form of accounts he should adopt, and that it by no means follows that a true and fair view could only be given in relation to a particular company by one method of laying out these accounts. On the other hand, as I think I made reasonably plain in the passage which followed that to which the noble Lord drew attention, the purpose of developing accounting standards in this area is to give uniformity so far as the primary set of accounts is concerned. I should have thought that SSAP 16 was very relevant to that particular development.

I certainly want to make it clear that so far as concerns both our own legislation and the directive, the requirement is that the accounts should show a true and fair view and not the true and fair view. Accordingly, so far as the legislation is concerned, there is no single or exclusive view of a company's affairs, and thus no single set of accounts embodying that view, which must be given to comply with the law. A set of accounts dealing with those affairs and which meets the standards I have outlined before would, in my view, be accounts complying with the law.

This is recognised in the Bill by which accounts drawn up under the historical cost convention, or under the alternative methods specified in section C of Part II of Schedule 1, are both regarded as normally capable of giving a true and fair view, and there is no question whatever of the Government seeking to bury the historic accounting method in this way. The possibility of laying out accounts in that way is perfectly well preserved by the Bill.

The requirements of the schedule as to the disclosure of accounting policies and as to the information to be disclosed where the alternative accounting rules are used to determine the amount of assets, will give the reader of the accounts full details of the basis on which the accounts have been prepared and on the accounting conventions adopted. With this information the reader will be able to assess the manner in which the particular set of accounts seeks to give a true and fair view of a company's affairs.

I should emphasise, therefore, that though there may be more than one way in which a true and fair view can be given, in many, perhaps most, circumstances the requirements to give such a view are, and must remain, overriding both under present law, which already permits a choice to be made between different accounting policies—for example, historic cost or current cost—and under the directive and under the Bill. Before choosing any particular accounting policy the directors of a company must satisfy themselves that it is appropriate to give a true and fair view. It will not be sufficient for directors to present such a view in accordance with any policy they choose. The true and fair view requirement is, and must remain, overriding.

The point I was seeking to deal with on the previous occasion was really the point that this is going to depend, so my noble friend Lord Hawke was inclined to think, on the whim of the particular accountant. Well, for myself I certainly do not believe that that is correct. I believe that it will depend, as accounting practice develops, on rules which are generally accepted in the accounting profession, as to which is the preferable method in particular circumstances. That is what I was seeking to get at or to state on the previous occasion.

So far as the present amendment is concerned, it is, as the noble Lord explained, not going back to the fundamental question but is dealing with what would be required assuming the current cost accounting rules, or some other alternative, were adopted. The amendment would require any company drawing up its statutory accounts under the alternative accounting rules of this Bill to disclose in a note to those accounts its profit or loss on its ordinary activities calculated on the basis of the historical cost accounting rules. The Fourth Directive requires that in such a case when a departure is made from the historical cost accounting rules certain historical cost information must be disclosed in respect of each balance sheet item, except stocks. This requirement is implemented by paragraph 33 of the schedule. However, the amendment goes further than the directive, and the Bill, by requiring certain profit and loss account information to be disclosed in historical cost form.

The Government believe that this is unnecessary. We do not wish to impose legal burdens upon companies over and above the changes that they will have to adopt as a result of the implementation of the Fourth Directive by this Bill. Whever possible we believe it is right that, where the directive permits, detailed accounting matters should be left to accounting standards and the accountancy profession to deal with. I should have thought that that was in accordance with the general principle that the noble Lord, Lord Bruce of Donington, spoke for at the beginning of our discussion of this Bill in Committee.

Such self-regulation has the ability and great advantage of adapting itself to changes in practice and events in a way that the law, as set down in legislation, never can. The subject of this amendment is a good example of this principle in action. When a company has adopted current cost accounting in its statutory accounts, compliance with SSAP 16 will result in the company showing separately in its profit and loss account its profit or loss on the historical cost basis, followed by the individual adjustments necessary to that profit or loss and the current cost accounting operating profit resulting. The directive and the schedule have been deliberately designed to permit this form of profit and loss account to be adopted. For example, para- graph 32(3) of Schedule 1 enables the total depreciation charged to be split between historical cost and current cost elements. Therefore, because of the requirements of SSAP 16, it is unnecessary to include this particular requirement in the law. So that in our view all that the noble Lord has praised, for example, from the GEC accounts will be perfectly permissible under our proposals.

Furthermore, if a company has not adopted a full current cost accounting approach in its accounts but only revalued its assets on a selective basis, perhaps only in respect of a single asset, it seems unduly burdensome to require, as proposed by this amendment, special information in such restricted circumstances. This would be a departure from the present position whereby many companies have revalued certain of their assets without having to state what their profits would have been had they not done so. I therefore would invite your Lordships not to give support to this amendment. In our view, the full flexibility which the noble Lord has prayed for is safeguarded by our proposals, and to accept this amendment would be to impose an additional statutorily unnecessary burden on the community.

Lord Milne

My Lords, the Minister made out that companies are burdened with information, which is not so, but nevertheless the Inland Revenue is still relying on historic cost; all the figures exist and I believe there will be an even greater division between shareholders and their companies if historical accounts are abandoned completely. At present it is a new concept; nobody understands CCA and if we are to have CCA accounts only, without the amendment which the noble Lord, Lord Bruce of Donington, has proposed, nobody will look at accounts at all, bar the accountants, because people will not understand them. They do not understand much now, but they will not understand them at all in future and for that reason the amendment is reasonable and I shall support it.

Lord Mackay of Clashfern

As I said, my Lords, standard accounting practice will require substantially that information to be given in the cases to which it applies; and our view is that it is not necessary, to achieve the sort of good result the noble Lord mentioned, for it to be imposed as a statutory burden.

Lord Bruce of Donington

My Lords, I am rather mystified by the Minister's reply. Am I to understand that all the principles in SSAP 16—I refer to page 246, paragraph 48, of the Accounting Standards for 1980—are to be overridden by what is in the Bill? If SSAP 16 is still valid, notwithstanding anything in these provisions, then, to quote from SSAP 16, any company has three alternatives: This requirement to include current cost accounts in addition to historical cost accounts or historical cost information can be complied with by:

  1. (a) presenting historical cost accounts as the main accounts with supplementary current cost accounts which are prominently displayed; or
  2. (b) presenting current cost accounts as the main accounts with supplementary historical cost accounts",
and either of those two methods is immediately acceptable to me and, were they made alternatives in the Bill, I should unhesitatingly give them my support, but they are not. The options in the Bill are set out in paragraph (b), which is made specifically subject to (c), and (c) gives the current cost accounting alternative, which is the third alternative set out in SSAP 16: (c) presenting current cost accounts as the only accounts accompanied by adequate historical cost information". That is the option on the basis of the EEC directive which the Government have adopted in the Bill. It continues: The historical cost disclosure requirements will be clarified when the EEC Fourth Directive is enacted in UK/Irish law". They can say that again! Meanwhile, an entity preparing current cost accounts as its only accounts should provide at least sufficient information to enable the user to ascertain the historical cost profit of the period under existing conventions". It is that last paragraph behind which the Minister is sheltering. He says it will be mandatory to provide at least sufficient information to enable the user to ascertain (presumably for himself) the historical cost profit for the period under existing conventions, but if it is all that simple, why can it not be stated? If the Government accept the position that the information to be published under (c), which is the alternative the Government have laid before us, must disclose sufficient information to enable the user to ascertain the profit, why cannot the profit figure be stated? It is not as though it involves an extra accounting effort or extra cost to the firm concerned. All accounts for presentation, for example to the Inland Revenue, have to be prepared on an historical cost account basis, so all the figures are there, as is all the information, even the figures under the heading, as to what was the profit or loss before taxation.

That figure is used to determine corporation tax liability. First you start with the profit before taxation and then you add back certain items and deduct certain items in your corporation tax computation. It is not as though an extra effort or expense must be entered into to produce the figure. Why, therefore, cannot the Government make it mandatory to include the figure for profit or loss? Is there something shameful about a figure produced under the historical cost accounting basis? What do they want to conceal by not making it mandatory for the historic cost accounting profit to be revealed?

The answer given by the Minister is, "They can still do it if they want; it will still be permissible to state the historic cost accounting profit if it is desired to do so". Why should it not be made mandatory for it to be done in all cases—for the information of the public, of the creditors and the shareholders, not all of whom will be able readily, on the basis of these provisions, in particular (c), to calculate back and determine what the historic cost profit may be? It may be easy for accountants and for some sophisticated lawyers with experience of accounts and auditing, and I suspect it would be possible for the noble Lord, Lord Weinstock, but we are not all quite in that category and some of us are not familiar with the principles and detail enshrined in (c) as proposed by the Government.

It is indispensable for shareholders, creditors, employees of the company and for trade unions to know what, on an historic cost basis, the profit was. All concerned could be invited to take into account what the profit would be on the basis of current cost accounting, which sounds a note of caution and seeks to take account of events stretching into the future. But to fail to insist on the production of the historic cost account profit or loss is an abdication of any sense of real responsibility by the Government, who are bringing forward a proposal that it should not be made mandatory.

5.19 p.m.

On Question, Whether the said Amendment (No. 20) shall be agreed to?

Their Lordships divided: Contents, 61; Not-Contents, 84.

CONTENTS
Airedale, L. Llewelyn-Davies of Hastoe, B.—(Teller.)
Amherst, E.
Ardwick, L. Lloyd of Kilgerran, L.
Aylestone, L. McNair, L.
Balogh, L. Mais, L.
Banks, L. Milne, L.
Beaumont of Whitley, L. Nathan, L.
Beswick, L. Noel-Baker, L.
Boston of Faversham, L. O'Brien of Lothbury, L.
Brockway, L. Peart, L.
Brooks of Tremorfa, L. Ponsonby of Shulbrede, L.
Bruce of Donington, L. Ritchie-Calder, L.
Caradon, L. Ross of Marnock, L.
Cledwyn of Penrhos, L. Seear, B.
Collison, L. Sefton of Garston, L.
Cooper of Stockton Heath, L. Shinwell, L.
David, B. Spens, L.
Davies of Leek, L. Stamp, L.
Davies of Penrhys, L. Stewart of Alvechurch, B.
Gaitskell, B. Stewart of Fulham, L.
Gladwyn, L. Stone, L.
Goronwy-Roberts, L. Strabolgi, L.
Gosford, E. Strauss, L.
Greene of Harrow Weald, L. Taylor of Mansfield, L.
Greenwood of Rossendale, L. Underhill, L.
Hale, L. Wallace of Coslany, L.—(Teller.)
Hatch of Lusby, L.
Hooson, L. Wells-Pestell, L.
Houghton of Sowerby L. Whaddon, L.
Janner L. Wigoder, L.
Jeger, B. Wynne-Jones, L.
Listowel, E.
NOT-CONTENTS
Airey of Abingdon, B. Elton, L.
Alexander of Tunis, E. Erroll of Hale, L.
Atholl, D. Faithfull, B.
Auckland, L. Ferrers, E.
Avon, E. Fortescue, E.
Bellwin, L. Fraser of Kilmorack, L.
Boothby, L. Gainford, L.
Buxton of Alsa, L. Gibson-Watt, L.
Cawley, L. Gormanston, V.
Chelwood, L. Gridley, L.
Cockfield, L. Grimston of Westbury, L.
Colville of Culross, V. Hailsham of Saint Marylebone, L.
Colwyn, L.
Cork and Orrery, E. Halsbury, E.
Craigavon, V. Home of the Hirsel, L.
Cromartie, E. Hornsby-Smith, B.
Cullen of Ashbourne, L. Hylton-Foster, B.
Dacre of Glanton, L. Ilchester, E.
Davidson, V. Kemsley, V.
De Freyne, L. Kinnaird, L.
Denham, L.—(Teller.) Knutsford, V.
Drumalbyn, L. Lauderdale, E.
Eccles, V. Linlithgow, M.
Ellenborough, L. Long, V.
Elliot of Harwood, B. Lyell, L.
McFadzean, L. Sharples, B.
Mackay of Clashfern, L. Skelmersdale, L.
Mackintosh of Halifax, V. Strathcarron, L.
Macleod of Borve, B. Strathclyde, L.
Mancroft, L. Strathspey, L.
Morris, L. Sudeley, L.
Noel-Buxton, L. Swansea, L.
Nugent of Guildford, L. Swinfen, L.
Orkney, E. Swinton, E.
Rawlinson of Ewell, L. Tenby, V.
Romney, E. Trefgarne, L.
St. Aldwyn, E. Trenchard, V.
St. Davids, V. Trumpington, B.
St. Just, L. Vaizey, L.
Sandford, L. Vaux of Harrowden, L.
Sandys, L.—(Teller.) Vivian, L.
Seebohm, L. Willoughby de Broke, L.
Selkirk, E.

Resolved in the negative, and amendment disagreed to accordingly.

5.27 p.m.

Lord Bruce of Donington moved Amendment No. 21: Page 95, line 29, leave out ("treatment for taxation purposes of") and insert ("accounting treatment of taxation related to").

The noble Lord said: My Lords, Schedule 1, Part II, paragraph 34(4) states: The revaluation reserve shall be reduced to the extent that the amounts standing to the credit of the reserve are in the opinion of the directors of the company no longer necessary for the purpose of the accounting policies adopted by the company; but an amount may only be transferred from the reserve to the profit and loss account if either—

  1. (a) the amount in question was previously charged to that account; or
  2. (b) it represents realised profit".
Sub-paragraph (5) states: The treatment for taxation purposes of amounts credited or debited to the revaluation reserve shall be disclosed in a note to the accounts". The amendment seeks to delete the words "treatment for taxation purposes of" and replace them with the words: accounting treatment of taxation related to

This matter was dealt with in Committee, as reported at column 690 of the Official Report, to which I should like to refer your Lordships. The noble and learned Lord, Lord Mackay of Clashfern, explained the Government's intentions behind the provision as it then stood in the Bill. He said: It is not intended to raise the question of the returns made by the company to the Inland Revenue but to the treatment adopted in the company's accounts". Precisely, my Lords! That is exactly what the amendment seeks to do. It seeks to translate the noble and learned Lord's clearly expressed intention into the actuality of the legislation. The words are almost precisely those used by the noble Lord, and it certainly clarifies the position. We are concerned, not with the treatment of taxation as such in the returns of the company, but with the accounting treatment of the taxation related to the particular item in question. I hope that on reflection that is so self-evident that the noble Lord may now see fit to adopt the suggestion that I most generously laid before him at Committee stage. I beg to move.

Lord Mackay of Clashfern

My Lords, we have, as I undertook on the last occasion, looked at this again, and I remain of the view that the words in the Bill are appropriate to carry out the intentions which I then expressed; and they are exactly in accordance with the wording of Article 33 of the Fourth Directive on this matter. Accordingly, I do not feel it would improve the Bill to give effect to this amendment.

Lord Bruce of Donington

My Lords, I am very disappointed to learn that from the noble and learned Lord. Are we to assume that the words of the EEC directive enshrine all universal wisdom in the matter, and that once the EEC has spoken in words that it chooses to use they become immediately and automatically binding upon Her Majesty's Government? It would be a shame, surely, if we were to accept as a precedent the wording used in every regulation that is brought forward by the EEC on the basis that that wording, because it is in a directive, is the best wording to incorporate in our own legislation? This is carrying imitation too far.

The words being suggested here are words that are approved by the accountancy profession itself, which has much more experience in these matters than have most of the EEC Commissioners and those responsible for drafting all put together. I would suggest that it is occasionally wise to heed the advice of those whose whole life it has been, over many years, to follow these affairs, and to use the wording that they have put forward after much careful study based on very long and careful experience, both in accounts and in the law. I am very disappointed.

Lord Lloyd of Kilgerran

My Lords, before the noble Lord sits down, would it be helpful if I were to ask the noble and learned Lord where in Article 33 he sees the words that he has referred to as being there? According to my copy, Article 33 occupies quite an area of space. There are hundreds of words here. I am extremely sorry, but I was trying to follow the noble and learned Lord when he said that the Government are adhering to the wording in Article 33, and after some little exploration of all these sub-articles I have yet to find those very words. If they are there, I apologise to the noble and learned Lord in advance.

Lord Mackay of Clashfern

My Lords, if the noble Lord would be kind enough to look in the Green Paper at page 82, the passage I have in mind is in paragraph 2(a), where it says: The treatment of this item for taxation purposes must be explained either in the balance sheet or in the notes to the accounts". It is the phrase, "The treatment of this matter for taxation purposes" that I had in mind.

Lord Bruce of Donington

The noble and learned Lord has really now explained it. The noble and learned Lord has used the term again, "The treatment of this item for taxation purposes", whereas what we are concerned with is the treatment adopted in the company's accounts. We are concerned with the accounting treatment as such; and, indeed, the noble and learned Lord has himself put it forward in his own speech. I cannot understand why he should prefer the EEC directive's wording in this case, which goes completely against all common sense.

On Question, amendment negatived.

5.35 p.m.

Lord Lyell moved Amendment No. 22: Page 96, line 14, leave out from ("shares") to end of line 15 and insert ("the following information shall be given—").

The noble Lord said: My Lords, on behalf of my noble friend Lord Trefgarne I beg to move this amendment, No. 22, which your Lordships will find to be a drafting amendment. At present, paragraph 38(2) of Schedule 1 requires the information specified in heads (a), (b) and (c) of that paragraph to be given in the same note as that giving the information which has to be stated under paragraph 38(1). The amendment I am proposing simply allows paragraph 38(2) information to be given separately. We believe that this adds to the clarity, and I beg to move.

Lord Bruce of Donington

My Lords, the amendment is an entirely sensible one, and we support it.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 23: Page 97, line 28, leave out ("any asset") and insert ("assets falling to be included under that item").

The noble Lord said: My Lords, this is another small, technical and drafting amendment which, we hope, makes it clear that the assets which are referred to in paragraphs 42(2) of Schedule 1 are the same as those referred to earlier, in sub-paragraph (1)(a) of paragraph 42; that is, those assets falling under the general item "fixed assets". We hope that this, too, will add to the clarity of the Bill. I beg to move.

Lord Bruce of Donington

My Lords, I do not in any way dissent from the purpose behind this amendment, but I would be glad if the noble Lord could clear up a point for me. When I was reading through sub-paragraph (2) of paragraph 42 I chanced on sub-paragraph (1), and I always read previous sub-paragraphs because they tend to refer back or to make provisions, which can easily fog one unless one is very careful. I see that in the first line of paragraph 42, which is line 9, it says: In respect of each item which is or would be but for paragraph 3(4)(b) above…". I was working on this for some time yesterday, and it may be that I was a little tired and my mind was moving rather slowly. If the noble Lord can help me I would be genuinely grateful to him, but I cannot find this paragraph 3(4)(b).

Does it refer to the schedule, or does it refer to the clauses in the Bill? Because the same thing arises again in later amendments, where reference is made to this paragraph 3(4)(b). It arises in the case of Amendment No. 24, and in another place as well, Amendment No. 27, where it says, would but for paragraph 3(4)(b) above be…". It may be that I have been singularly obtuse, and I certainly apologise if I have been, but I cannot find this and I would be grateful for the noble Lord's elucidation. But I support the amendment.

Lord Lyell

We are grateful for the support of the noble Lord, Lord Bruce, for the amendment I have moved. I agree with the noble Lord that once one begins to read these paragraphs and finds that they refer back, the language can become rather odd and interesting. But the noble Lord has said that he was looking in the first line of paragraph 42, where it says, Would but for paragraph 3(4)(b) above…". I myself would look at paragraph 3 of this particular schedule, which takes us back to page 75, line 13. I think the noble Lord will find that we have had a minor skirmish earlier this afternoon over this particular line. The noble Lord will find paragraph 3(4)(b) of Schedule 1 to contain the words: the combination facilitates that assessment". This is the answer to the noble Lord's question; and paragraph 3(4)(b) refers back to the third paragraph of Schedule 1 under "Section A, General Rules with Respect to Form and Content of Accounts". I hope that satisfies the noble Lord.

Lord Bruce of Donington

My Lords, I was drawn to Page 75 on the basis that 3(4)(b) referred to the schedule but I could not see the relevance of (4)(b). I have no wish to weary the House. I will sort it out before the Bill comes back. We support the amendment.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 24: Page 98, line 12, after ("amount") insert ("which is or would but for paragraph 3(4)(b) above be").

The noble Lord said: My Lords, I should like to speak to Amendment No. 27 in moving Amendment No. 24. These are minor technical amendments inserting references in paragraphs 44 and 54(3) of Schedule 1 to paragraph 3(4)(b) of that schedule. This parallels references to paragraph 3(4)(b) in other paragraphs of the schedule which deal with information supplementing the balance sheet and profit and loss account. Such references recognise the fact that items to which an arabic number are assigned in the balance sheet and profit and loss account formats may have been combined in a company's accounts if the combination facilitates assessment of the company's profit or loss and state of affairs. In such a case the amendments make it clear that the information concerned is still required. I beg to move.

Lord Bruce of Donington

My Lords, we support the amendments.

On Question, amendment agreed to.

Lord Mackay of Clashfern moved Amendment No. 25: Page 101, line 12, leave out from beginning to ("are") and insert ("section (Financial assistance for purchase of own shares, etc.) (3)(b) or (c) of the Companies Act 1981").

The noble and learned Lord said: My Lords, this minor amendment is consequential to the new clause with which we propose to replace Section 54 of the Companies Act 1948. It replaces a reference to Section 54 in Part III of Schedule 1 to the Bill with a reference to the relevant subsection of the new clause. I think it appropriate to discuss the new clause when we come to that and merely to introduce this particular item with that explanation. I beg to move.

The Earl of Selkirk

My Lords, I would thank the noble and learned Lord for the step he has taken.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 26: Page 101, line 41, leave out ("provided") and insert ("set aside").

The noble Lord said: My Lords, this seems to be an amendment to which we find the names of my noble friend the Minister and the noble Lords, Lord Bruce of Donington, and Lord Ponsonby. I understand that all our minds are in unison on this particular aspect and the Government wish to substitute the words "set aside" for the word "provided". I beg to move.

Lord Lloyd of Kilgerran

My Lords, we agree with this amendment.

Lord Bruce of Donington

My Lords, I am grateful to the noble Lord. Perhaps I could enlarge on it by saying that this amendment was originally moved by me at the Committee stage and the Government undertook to give it favourable consideration. The fact that the Minister's name appears on the amendment is a positive indication that at least on one amendment they have accepted the advice proferred from this side of the House. We thank them, nevertheless.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 27: Page 102, line 32, leave out ("the following items shown") and insert ("the amounts which is or would but for paragraph 3(4)(b) above be shown under the following items").

The noble Lord said: My Lords, I spoke to this amendment when moving Amendment No. 24. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendments Nos. 28, 29, 30 and 31:

Page 107, leave out lines 35 to 42.

Page 107, line 44, leave out ("fixed asset or current asset").

Page 107, line 46, leave Out from ("above") to end of line 3 on page 108.

Page 108, line 18, leave out from ("assets";") to end of line 22.

The noble Lord said: My Lords, perhaps it may be for the convenience of the House if I move these amendments en bloc. I spoke to them when moving Amendment No. 17 today and I hope that I explained these technical amendments at that time. I beg to move.

Lord Bruce of Donington

My Lords, we agree the purpose and wording of these amendments.

On Question, amendments agreed to.

Lord Lyell moved Amendments Nos. 32 and 33:

Page 108, line 28, leave out ("1980 Act") and insert ("Companies Act 1980")

Page 108, line 34, leave out ("1980 Act") and insert ("Companies Act 1980").

The noble Lord said: My Lords, I hope that it is convenient to the House that I move Amendments Nos. 32 and 33 together. These are drafting amendments which change references to the "1980 Act" to references to the "Companies Act 1980". We believe that this will add clarity to the Bill. I beg to move.

On Question, amendments agreed to.

Clause 6 [The exemptions for individual accounts]:

5.48 p.m.

Lord Bruce of Donington moved Amendment No. 34:

Page 9, line 42, at end insert— ("Provided that such modified balance sheet shall contain a note stating the amount of the company's profit or loss on ordinary activities both before and after taxation as shown by its profit and loss account").

The noble Lord said: My Lords, I fear that we are again on slightly more contentious ground. Clause 6 at page 9 refers to the exemption for individual accounts in respect of any copies that have to be delivered to the Registrar of Joint Stock Companies. Your Lordships will note that the directors of a small company shall not be required under Section 1(7)(a) to deliver to the registrar a copy of the company's profit and loss prepared in respect of that period under the section. They have to submit only a balance sheet. It is not necessarily a balance sheet in conformity with the format. It is a balance sheet under Section 1 of the 1976 Act, as I read it.

We have to face the circumstance in which there is going to be filed not (as is the requirement now in the case of a small company) a balance sheet with a profit and loss account giving some indication of the profitability of the firm, but a mere balance sheet in which the balance on the profit and loss account will be stated. It gives no clue as to what kind of profit the firm has made during the year that has ended on the date to which the actual balance sheet itself pertains.

This has been represented by the Government as some kind of concession to small businesses. It is nothing of the kind. The shareholders are still entitled to receive the profit and loss account and the balance sheet. The balance sheet and the profit and loss account still have to be rendered to the Inland Revenue for corporation tax purposes. There is no saving of any kind of labour to the small company. The profit and loss account has to be produced anyway. It would not involve any particular hardship if the profit and loss account were sent along with the balance sheet to the Registrar of Companies.

The accounting profession take a very simplistic view about this, which may or may not commend itself to your Lordships. It is one to which the accountancy profession have adhered for a number of years: that is, the creditors should have as much information as shareholders. This has been an axiom which has hitherto prevailed. Shareholders are entitled to certain information and so should the creditors be so entitled. Outside shareholders or shareholders who have no particular right to the more detailed information that is available to the directors of a company, may therefore receive a profit and loss account different from that available to the directors or to the Inland Revenue. That is possible.

In all cases so far where the shareholders have been entitled to accounting information, creditors have also been so entitled. In order that one may be quite sure where the accountancy profession stands in this, perhaps I may refer your Lordships to their detailed comments put out in the document, the Consultative Committee of Accountancy Bodies' memo on the Companies Bill 1981. Paragraph 14 reads—and I read it to authenticate the position I am putting forward—as follows: Clause 5(1) entitles small and medium-sized companies to the benefit of the accounting exemptions provided by Clause 6. The effect of this is that the accounts delivered to the registrar of companies, and hence available to creditors and the public, will contain less information than that which is contained in the accounts which are sent to shareholders. In our memorandum to the Department, Company Accounting and Disclosure, of December 1979 and again in our memorandum, The filing of abridged accounts, of September 1980, we said that, in our view shareholders and creditors should all receive the same information about a company. Furthermore, the preparation of modified accounts would involve companies in extra expense, the accounts would be less useful and, in certain circumstances could actually be misleading. This remains our view and we should prefer to see the provision for filing modified accounts deleted".

I am suggesting to your Lordships that that is a view that ought to be taken into account. I think that that position is fortified by the directive itself. I want to refer to the more practical aspects: for many years I, like to many of my colleagues, have been accustomed to investigate cases of alleged fraud. We have been accustomed to try to find out on behalf of creditors exactly what has gone wrong with a company in circumstances that do not always give us the right of access to the actual books and documents of the company concerned. The sole information available to us in those circumstances is the information on the file.

All the modified balance sheet would show to the public and all that it is required to do under the directive would be to disclose the balance on the profit and loss account. I do not think that that is good enough. I do not see how people can form any assessment as to the viability of a company or anything else unless they have information at least on how much profit the company has made in the year which is terminated by the balance sheet. It is impossible to derive any historic information about the company's development by reading a succession of these modified balance sheets, because they do not contain sufficient particulars. The noble Lord indicated at column 713 of Hansard at the Committee stage—because I mentioned this matter on the Question, That the clause stand part—that the Government would give some consideration to this matter. I have only just remembered that! I ought to have addressed the noble Lord in far more dulcet tones in order to enable him to accept the amendment. However, I hope that, taking it on its merits, he may see fit to do so.

It puts creditors, and those who make inquiries on behalf of creditors, in an impossible position. It should be borne in mind that it is small and medium-sized firms which are themselves in most instances the actual creditors. To represent the requirement no longer to put a balance sheet on the file as some kind of concession to them may, taken over the whole spectrum of small and medium-sized businesses, be small reward indeed and may work to the detriment of all concerned. I am not asking for the restoration of the filing of the profit and loss account. That has been rejected before; but at least there ought to be included a note stating the amount of the company's profit or loss on ordinary activities both before and after taxation as shown by its profit and loss account. I beg to move.

5.57 p.m.

Lord Mackay of Clashfern

My Lords, this amendment would remove a significant part of the exemption given to small companies in Clause 6(2)(b) whereby they need not file a profit and loss account with the Registrar of Companies. By requiring the profit or loss, both before and after taxation, to be disclosed in a note to the modified balance sheet, which is filed, small companies would be placed in a less favourable position than under the Bill.

In our consultations on implementation of the Fourth Directive it was impressed on the Government that certain information contained in the accounts is particularly sensitive for small companies and can place them at a competitive disadvantage if it is required to be placed on the public file. The Government, therefore, in considering to what extent the exemptions allowed by the directive should be taken advantage of, decided upon an overall package which reflects a fair balance between the various interests of users and preparers of accounts. Under this package no advantage is taken of the exemptions allowed by the directive on the accounts which are drawn up and sent to shareholders, or on the audit of such accounts; but, for small companies, full advantage is taken of the exemptions permitted for the accounts which are placed on the public file. To require disclosure of a small company's profit or loss as required by this amendment would upset the fair balance we have arrived at after full consultations with all the interested parties.

It is worth stressing that the information required to be disclosed by this amendment will be contained in the accounts which are drawn up for shareholders and in many cases it is likely that small companies will not go to the trouble of preparing modified accounts for the public file but will file their full accounts In cases where the information is likely to be sensitive, however, going to the additional trouble might well be worth their while. In those cases where a small company does not wish to disclose its profit and loss account and accordingly decides net to place it on the public file, the information it contains will exist and it will be open to those with a legitimate interest in the company to request that it is made available to them.

I should also point out that other member states are likely to take full advantage of the exemptions contained in the directive on disclosure by small companies. To accept this amendment might well place our small companies at a disadvantage as compared with their European counterparts—a result which I believe your Lordships would regard as unacceptable. I think I am also right in saying that during the time when the exempt private company régime was operating the difference between shareholders and creditors referred to by the noble Lord, Lord Bruce, would have existed. There is, of course, also the point that a creditor, before becoming a creditor, could take steps to secure his position if he wished. However, the information will remain in existence and I would respectfully suggest to your Lordships that, in the light of the considerations I have adduced, your Lordships should not support this amendment.

Lord Bruce of Donington

My Lords, I must once again express regret that the Government have not seen lit to accept this amendment. The suggestion that the disclosure of the profit made in a year by a medium or small-sized firm would somehow expose them to the unfair and harsh rigours of competition of the EEC is, if I may say so with the greatest possible respect, a lot of nonsense. It is stretching to an almost ridiculous extreme the whole circumstances of competition and the expression of interests of individual firms. No question of lack of competitiveness arises on this.

What in fact has happened—and I am sorry now to have to be political, being under some provocation—is that it is politically necessary to convey as a cosmetic to the Government's programme of support or alleged support for small businesses, small items of this kind which are supposed to be a concession to them. I repeat that the information has to be provided anyway. It has been provided over a number of years and nobody has complained before about the harshness of competition. Moreover, the provisions of the directive do not in any way inhibit the steps proposed in my amendment. If the Minister refers to Article 2.6 of the directive, it states: The Member States may authorize or require the disclosure in the annual accounts of other information as well as that which must be disclosed in accordance with this Directive". There is no restriction on that.

This pretence that one is somehow inhibited by an EEC directive from doing what one knows is in the best interests of all concerned in one's own country, can be carried too far; just as many of your Lordships may feel that the whole standardisation of accounts is now getting almost in the same category as the standardisation of mayonnaise and icecream. But nobody yet has proved successfully what results are supposed to emerge from the standardisation of accounts throughout Europe, aside from the intellectual satisfaction it may give for underworked members of the staff of the European Commission.

But that is another story. The idea that we cannot retain our own flexibility and continue with our own traditions here is quite ridiculous. I suggest that the failure to accept this amendment will prove a serious hindrance not only to the profession but to creditors generally, and indeed, if they are going to say they only have to have a balance sheet in these terms, the next step will be not to require them to file a balance sheet at all. This would enable the noble Lord to proceed with further economies in the Registry, which would no doubt please those who want to reduce Government staffs at the present time.

Lord Harmar-Nicholls

My Lords, I do not think the noble Lord ought to be allowed to get away with that. There is no doubt about it that this is an advantage to a small firm. Should we decide not to accept the amendment, what it does, is to leave small firms to make up their own minds as to whether they disclose certain details which they think, if they were disclosed, might work to their disadvantage among competitors. Anyone who has to work with small firms knows how embarrassing it is sometimes to disclose for statutory reasons figures which you know will give information and advantages to competitors who do not deserve them. There is nothing cosmetic about having the choice as to whether you disclose the profit and loss account or not, as distinct from having to disclose it if this amendment is passed. There is nothing cosmetic about it.

I would hope that the Government will go on removing a lot of these unnecessary pieces of legislation which add an extra burden to the people who are having to run the business of this country. However small, any relief from it is very welcome indeed; and from the businessman's point of view I am very interested in the noble Lord's concern for creditors. The creditors are perfectly capable of making up their own minds as to whether somebody is a worthy customer before they give him credit; and, if they are not capable of doing that, they are the people who get into some sort of trouble. But if we have got to run our businesses now on all sorts of disclosed detail to satisfy Governments and the accountants—and now you have to think in terms of satisfying the creditors, who have all got their own means of saying whether or not a customer is a good risk—to try to run small businesses is going to be quite unbearable. Therefore, small though the concession is, I am glad that the Government, through the noble and learned Lord, have said they are going to retain it.

6.7 p.m.

On Question, Whether the said amendment (No. 34) shall be agreed to?

Their Lordships divided: Contents, 46: Not-Contents, 105.

CONTENTS
Ardwick, L. Llewelyn-Davies of Hastoe, B.—[Teller.]
Beswick, L.
Boston of Faversham, L. Lloyd of Hampstead, L.
Brockway, L. Milne, L.
Brooks of Tremorfa, L. Mishcon, L.
Bruce of Donington, L. Noel-Baker, L.
Caradon, L. Peart, L.
Cledwyn of Penrhos, L. Ponsonby of Shulbrede, L
Collison, L. Ritchie-Calder, L.
David, B.—[Teller.] Ross of Marnock, L.
Davies of Leek, L. Sefton of Garston, L.
Davies of Penrhys, L. Shepherd, L.
Elwyn-Jones, L. Shinwell, L.
Gaitskell, B. Spens, L.
Goronwy-Roberts, L. Stewart of Alvechurch, B.
Greenwood of Rossendale, L. Stewart of Fulham, L.
Gregson, L. Stone, L.
Hale, L. Strabolgi, L.
Hatch of Lusby, L. Underhill, L.
Houghton of Sowerby, L. Wallace of Coslany, L.
Hutchinson of Lullington, L. Wells-Pestell, L.
Jeger, B. Whaddon, L.
Kirkhill, L. White, B.
Wynne-Jones, L.
NOT-CONTENTS
Adeane L. Avon, E.
Airedale L. Banks, L.
Airey of Abingdon B. Beaumont of Whitley, L.
Alexander of Tunis, E. Bellwin, L.
Amherst, E. Boardman, L.
Ampthill, L. Brougham and Vaux, L.
Atholl, D. Buxton of Alsa, L.
Auckland, L. Chelwood, L.
Colville of Culross, V. Mais, L.
Cork and Orrery, E. Mancroft, L.
Craigavon, V. Montagu of Beaulieu, L.
Cromartie, E. Morris, L.
Cullen of Ashbourne, L. Mountevans, L.
Davidson, V. Nathan, L.
De Freyne, L. Noel-Buxton, L.
Denham, L.—[Teller.] Onslow, E.
Drumalbyn, L. Orkney, E.
Eccles, V. Portland, D.
Ellenborough, L. Rawlinson of Ewell, L.
Elliot of Harwood, B. Reay, L.
Elton, L. Romney, E.
Erroll of Hale, L. St. Aldwyn, E.
Faithfull, B. St. Just, L.
Ferrers, E. Saint Oswald, L.
Fortescue, E. Sandford, L.
Fraser of Kilmorack, L. Sandys, L.—[Teller.]
Gainford, L. Seear, B.
George-Brown, L. Seebohm, L.
Gladwyn, L. Selkirk, E.
Glendevon, L. Shannon, E.
Gormanston, V. Sharples, B.
Gowrie, E. Skelmersdale, L.
Grimston of Westbury, L. Strathclyde, L.
Hailsham of Saint Marylebone, L. Strathspey, L.
Sudeley, L.
Harmar-Nicholls, L. Swansea, L.
Home of the Hirsel, L. Swinfen, L.
Hooson, L. Swinton, E.
Hornsby-Smith, B. Tenby, V.
Hylton-Foster, B, Terrington, L.
Kemsley, V. Teviot, L.
Kinnaird, L. Thorneycroft, L.
Knutsford, V. Trefgarne, L.
Lauderdale, E. Trenchard, V.
Linlithgow, M. Trumpington, B.
Lloyd of Kilgerran, L. Tryon, L.
Long, V. Vaizey, L.
Lyell, L. Vaux of Harrowden, L.
McFadzean, L. Vickers, B.
Mackay of Clashfern, L. Vivian, L.
Mackintosh of Halifax, V. Wigoder, L.
Macleod of Borve, B. Willoughby de Broke, L.
McNair, L. Winterbottom, L.

Resolved in the negative, and amendment disagreed to accordingly.

6.15 p.m.

Lord Bruce of Donington moved Amendment No. 35: Page 10, line 7, leave out from ("by") to ("section") in line 8.

The noble Lord said: My Lords, like the previous amendment, this amendment relates to paragraph (d) of subsection (2) of Clause 6, which, in its present form, exempts small companies from disclosing directors' emoluments. I shall not go over the same ground as I went over in Committee on this subject. I rather hoped that, on mature reflection and after looking at the arguments that were then put forward, the Government would have come round to the point of view that it is desirable that Section 196 of the 1948 Act, which requires the aggregate amount of directors' salaries et cetera to be disclosed, should be allowed to remain intact.

Such is the view of the Consultative Committee of Accountancy Bodies, who said: We maintain the view that, as profit after emoluments in a small company is often an arbitrary amount, both shareholders and creditors are more likely to be interested in profits before aggregate directors' emoluments". If all that is required to be stated is simply a net figure, then it gives shareholders and creditors no clue as to what are the true profits of a firm. On its ordinary trading activities, a firm may make a profit of £50,000 before charging directors' fees, but after directors' fees the figure may be down to £500. In other words, the final, disclosed figure of profit gives no idea of the profitability of the firm. We still maintain that shareholders and creditors should be entitled to the same information.

This afternoon in your Lordships' House, I apprehend from the response of some noble Lords that they believe that it is in the interests of small and medium-sized traders that these requirements, and others like them, should not be kept, even though that involves the possibility—in fact, the probability—that creditors of many companies will not be able to get the information which they normally need. May I remind your Lordships that there are thousands and thousands of small and medium-sized firms that are, themselves, creditors to other firms and when one is seeking to strike a balance, one should seek to strike a fair balance. One should not lean over, to prefer one section to the other.

It has been proved that the provisions of the 1948 Companies Act in regard to the disclosure of directors' emoluments have been a valuable guide to those who are interested in the profitability of firms. There is no good reason why, taking a balanced view as between creditor and debtor, the previous practice should not continue. I am quite convinced that it does not cause any kind of hardship to the reputable, ordinary, small or medium-sized business which conducts its affairs soundly and with propriety. Such firms have nothing to fear from this. In fact, they have been accustomed to disclose matters of this kind for many years. The people who will rejoice in this concession are those who deliberately want to conceal something; not those who are merely apprehensive about the effect upon competition. I take the view, and I invite the House to take the view, that unless these requirements are complied with, the interests of one section of the community, notably the creditors who comprise very large numbers of individuals in small firms, will be prejudiced to a degree that has not obtained over the past 30 years. I beg to move.

Lord Mackay of Clashfern

My Lords, once again this amendment relates to what statutory burden should be placed upon small companies. In our view, and in the light of the consultation undertaken in connection with the implementation of the directive, it is true to say that in a small company the emoluments of the directors are both very personal and of real competitive interest. As allowed by the directive, we believe that small companies—I must stress that here we are dealing with small companies only—should be able not to place information of this nature on the public file.

The directive would also allow this information not to be included in the accounts drawn up for shareholders, but we have, I think rightly, decided not to go that far. We believe that this is information which is of significance to shareholders and that it should be included in the accounts which they receive. But we consider also that companies should not be required to disclose information of this kind to others who do not have such a direct interest in the company's affairs as do their shareholders.

So far as creditors are concerned, the noble Lord has said a good deal about them. If a creditor wishes to make an arrangement for receiving the accounts as a condition of becoming a creditor, there is nothing in this legislation which would prevent that from being enforceable. I would invite your Lordships to reject the amendment.

On Question, amendment negatived.

Clause 8 [Small and medium-sized companies]:

6.22 p.m.

Lord Lloyd of Kilgerran moved Amendment No. 36:

Page 15, line 45, at end insert— ("(13) In respect of small companies having together with their subsidiaries or associated companies a turnover not exceeding £250,000 and a balance sheet total not exceeding £125,000, the Secretary of State may by regulations made by statutory instrument make, and from time to time may vary, such provisions of this Act as may appear to him appropriate including the total turnover and balance sheet total prescribed in this subsection. (14) No regulation shall be made under this subsection unless a draft of the instrument containing the regulations has been laid before Parliament and has been approved by resolution of each House of Parliament.").

The noble Lord said: My Lords, at this late hour this is a plea for small businesses, those of the order of five or 10 employees, whose interests are not adequately looked after in the Bill. I recognise that in Clause 8 of the Bill the Government have made a real advance in that, at last, statutory recognition has been given to the position of small and medium-sized companies. The definition of "small companies" in the Bill is those companies which have a turnover of less than £1.4 million.

This amendment is an attempt to deal with a very difficult situation, particularly at the present time when hundreds of small firms are going bankrupt, and to get the Government to consider the position of those small companies which do so much for the economic position of this country but which at present are not being considered.

The amendment consists of two additional subsections to clause 8, subsections (13) and (14). Subsection (13) begins: In respect of small companies …". Now what kind of small companies are meant here? They are small companies: …having together with their subsidiaries or associated companies a turnover not exceeding £250,000 and a balance-sheet total not exceeding £125,000,…". Therefore the first step of my amendment is to direct attention to a company with that kind of trading facility. There is no magic in the figures £250,000 and £125,000. I could very well have introduced figures relating to employees; I could have said, say, from five employees up to 25 or even 50 employees. In this amendment I wish specifically to direct the Government's attention to these small firms and to ask the Government to allow them greater concessions.

I fully realise—and the amendment reflects this view—that in a Companies Bill it is difficult to legislate for every case. Therefore, in the first part of the amendment I have tried to delineate to your Lordships the kind of company with which I am concerned, whether by the amount of its turnover or by the number of its employees. Subsection (13) continues: …the Secretary of State may by regulations made by statutory instrument make, and from time to time may vary, such provisions of this Act as may appear to him appropriate including the total turnover and balance sheet total prescribed in this subsection". As I have said before to your Lordships, I am never very happy about giving to the Secretary of State powers to administer things by regulation. But this is a specific class of British industry which requires constant consideration, particularly at the present time.

The safeguard which I apply is in the suggested subsection (14): No regulation shall be made under this subsection unless a draft of the instrument containing the regulations has been laid before Parliament and has been approved by resolution of each House of Parliament". These small companies, as I again emphasise, require careful consideration, quite apart from the progressive kind of measures contained in this clause which deal with the so-called small companies, as there defined. I listened with great attention to the noble Lord, Lord Harmar-Nicholls—I am sorry that he is not in his place—when he urged, while the House was considering another amendment, how essential it is to reduce, so far as possible, the number of regulations dealing with small companies. To paraphrase his words, he said, rather rhetorically, "Let the small companies do the work without being inhibited by regulation after regulation".

As I have already said, in a statute of this kind it is difficult to set down the particular concessions which could be made to these small firms. Therefore, may I ask the Government to consider the suggestion which I have made: that the Secretary of State could legislate by means of regulations for small companies, however they are defined, whether the Government agree that they should be companies with a turnover of less than £250,000 or companies with only five, 15 or 20 employees. It is that kind of company which I have in mind.

I listened with great attention the other day to the chairman of the Conservative Party when he said on television that it was the objective of the Government to assist small companies. He did not indicate the kind of small companies to which he wanted concessions to be given. This Bill gives concessions only to any company which has a turnover of under £1.4 million. That is too high in the context in which I am speaking. It is necessary to carve out from that classification of small companies these much smaller companies which have done so much and which are doing so much for the country, many of them being forced into bankruptcy because they have to do things which are expensive in relation to their own turnover.

No doubt the noble and learned Lord the Minister, who may reply to this amendment—or one of his colleagues—will say that according to the statutory instrument of the EEC they are unable to deal with it. I have studied that lengthy document and in my submission there is no inhibition upon the Government to act in accordance with the amendment that I have suggested. At the present time there are severe problems relating to the small company. I do not want to take a political point on this, but I think it is agreed by all parties that special consideration must be, and should be, given to the companies in this country which employ only a few people. I beg to move.

Lord Mackay of Clashfern

My Lords, the noble Lord, Lord Lloyd of Kilgerran, has underlined the policy of Her Majesty's Government in the assisting of small companies and we were grateful for his support in relation to the exemptions that we have been able to give, which were attacked under the preceding amendments. However, I have to say that in relation to the present amendment so far as the filing of accounts is concerned we have gone as far as we are permitted to go by the Fourth Directive. Therefore I think I should take a minute to deal with the point about that.

I agree that the directive is a little long and somewhat complicated, but its structure is to place obligations on the United Kingdom as a member state in relation to companies that are incorporated—to take the exact words, which are on page 64 of the Green Paper—"public companies limited by shares or by guarantee"—

Lord Lloyd of Kilgerran

My Lords, I am sorry to interrupt the noble and learned Lord, but I have not got a copy of the Green Paper, so perhaps he can give me the article number concerned.

Lord Mackay of Clashfern

My Lords, it is Article 1 and it is the list of the matters to which the registration has to apply. The noble Lord will see a list which tells us that the directive is to apply to the following types of companies. Articles 11 and 27 provide the basis for exemptions, and what we have done is to use Articles 11 and 27 to the full. The first is for what we have called small companies, and the second for medium-sized companies. As I understand the position, we have taken as full account as we can of the exemptions which these provisions give us in relation to the filing of accounts. The desire to keep this matter flexible is of course covered by the powers conferred upon the Secretary of State in Clauses 5 and 18 of the Bill, in relation to modification of the requirements to which the first Part of the Bill applies.

There is another matter which may be of some importance in this connection. The Government are aware of the difficulties that are faced by small companies of the sort described by the noble Lord, Lord Lloyd of Kilgerran, and it has occurred to those Ministers who have responsibility for this matter in the Department of Trade that this ought to be looked at further. The way in which it has been suggested that one should look at this is to consider a new form of incorporation for small firms and that has been the subject of a Green Paper which was published on the 19th February, Cmnd. 8171.

Our view is that the kind of relief that the noble Lord has in mind may perhaps best be sought for along that line. We are extremely grateful for his interest in this matter and we hope that this may enable us to develop a form of structure which will enable small businesses to flourish without the necessity of the kind of burdens which are the minima to be expected of companies having the benefit of corporation and therefore subject to the particular provisions of the Fourth Directive. Accordingly, I fear that I could not advise your Lordships to support this amendment although we have every possible sympathy with the spirit that the noble Lord was anxious to emphasise in putting it forward.

Lord Lloyd of Kilgerran

My Lords, I am grateful for the expression by the noble and learned Lord of his great sympathy for the theme which I had in submitting that there was a class of companies in this country—the small firms—which should have very special consideration. I had looked at the Green Paper to which he referred and I thought that possibly, with this amendment giving the Secretary of State such powers, it might have been opportune for the Government to consider that my amendment, perhaps with improved drafting, would have been acceptable.

The noble and learned Lord referred to Clause 18 of the Bill as providing flexibility in relation to the matters I had in mind. It is certainly true that the Secretary of State may, by regulations made by statutory instrument, add to the classes of document and modify certain requirements of the Companies Act and reduce the classes of document delivered to the registrar. It seems to me that if the Government have gone thus far they could go a little further, to deal with the class of firms which I have in mind. It is the small firms with five, 10, 15 or 20 employees which require special consideration and far greater flexibility in dealing with matters than this Bill gives at the present time.

I am in some difficulty as to what I should do at the present time. I understand the great sympathy of the Government. I should like to see the Government act more positively in relation to these matters, and therefore I wonder whether, even at the Report stage, I could ask the noble and learned Lord to consider once again before the Third Reading this special case of the very small firms. I do not know whether the noble and learned Lord would want to respond in any way to my invitation, with the leave of your Lordships.

Lord Mackay of Clashfern

My Lords, with the leave of your Lordships, as I said, the situation of such businesses is always very much in our minds. Indeed, I think I could say that it is the subject of almost constant consideration. The difficulty in saying anything very positive with regard to this matter before Third Reading is that the directive places obligations upon us and it is unlikely that at a time like that we should be able to bring forward the consultation on the Green Paper, but certainly we will consider what the noble Lord has said.

Lord Lloyd of Kilgerran

My Lords, I am much obliged to the noble and learned Lord and, in those circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 37 not moved.]

Clause 14 [Directors' report to give particulars of acquisition of company's own shares]:

6.40 p.m.

Lord Lyell moved Amendment No. 38: Page 23, line 40, after ("are") insert ("purchased by the company or are").

The noble Lord said: My Lords, if I may, I shall speak to Amendments Nos. 38 and 41 together. These are minor amendments which follow the introduction of the new provisions in Part III of the Bill which enable a company to buy its own shares. As a result of the European Community's Second Directive on Company Law, disclosure must be given in the directors' report of the particulars of any of its shares which are purchased by the company. With that very brief explanation, I beg to move Amendment No. 38.

On Question, amendment agreed to.

Lord Bruce of Donington moved Amendment No. 39: Page 24, line 8, leave out ("or").

The noble Lord said: My Lords, this is purely a drafting amendment designed to assist the Government. I beg to move.

Lord Lyell

My Lords, I understand that Amendments Nos. 39 and 40, which are in the names of the noble Lord, Lord Bruce of Donington, and the noble Lord, Lord Ponsonby, are covered by the amendments to which I have just spoken, Nos. 38 and 41. With that very brief explanation, I hope that the noble Lord, Lord Bruce, may be satisfied.

Lord Bruce of Donington

My Lords, I immediately accept the noble Lord's assurance. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 40 not moved.]

Lord Lyell moved Amendment No. 41:

Page 24, line 16, at end insert— ("( ) the number and nominal value of the shares so purchased, the aggregate amount of the consideration paid by the company for such shares and the reasons for their purchase;").

The noble Lord said: My Lords, I spoke to this amendment a moment ago. I beg to move.

On Question, amendment agreed to.

[Amendment No. 42 not moved.]

Clause 16 [Certain provisions of the Companies Acts to cease to have effect]:

Lord Lyell moved Amendment No. 43: Page 26, line 5, leave out ("section 41(11)") and insert ("sections 39(8) and 41(11)").

The noble Lord said: My Lords, I am somewhat startled by the suddenness with which these technical amendments flow upon the House. I hope it may be for the convenience of the House if I speak to Amendments Nos. 43, 44 and, much further on, Nos. 50, 113 and 118. All these are minor technical amendments. The repeal of Section 39(8) of the 1980 Companies Act reflects the Fourth Directive's requirement that all assets have to be classified as either fixed or current assets. If we accept this, we find that Section 39(8) is now obsolete. But the provision is retained for those companies which continue to comply with the existing accounting requirements—that is what we call the Schedule 8A accounts. Amendment No. 43 repeals Section 39(8), and Amendments Nos. 113 and 118 save it as appropriate. All the other amendments are consequential drafting amendments. With that brief explanation, I hope I shall have satisfied the House. I beg to move.

Lord Bruce of Donington

My Lords, we support this amendment. At the same time, we should like to draw the attention of noble Lords once again—and this will arise on succeeding amendments—to the paramount necessity for some consolidation Act of the whole series of Companies Acts, as made abundantly clear by the whole series of cross-references and contortions which one has to go into to trace all the legislation through.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 44: Page 26, line 6, leave out ("investment").

The noble Lord said: My Lords, I have already spoken to this amendment. I beg to move.

On Question, amendment agreed to.

Schedule 2 [Preparation of accounts under Schedule 8A to 1948 Acts]:

Lord Lyell moved Amendment No. 45: Page 112, line 30, leave out ("149A and 152A of the 1948 Act") and insert ("149A(2) and 152A(3) of the 1948 Act for the words "the Eighth Schedule" and in section 149A(3) of that Act").

The noble Lord said: My Lords, this amendment is a drafting and technical amendment. It is designed to reflect more accurately the incidence of the words "the Eighth Schedule" which we find in Sections I49A and 152A, which, as your Lordships are doubtless aware, have been renumbered under Clause 1. We hope that this is somewhat more correct. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 46:

Page 112, line 45, leave out paragraph (b) and insert— ("(b) in paragraph 11(2A)—

  1. (i) after the word "are" in the first place where it occurs, there shall be inserted the words "purchased or are"; and
  2. (ii) the following paragraph shall be inserted immediately before paragraph (a)—
(aa) the number and nominal value of the shares so purchased, the aggregate amount of the consideration paid by the company for such shares and the reasons for their purchase;").

The noble Lord said: My Lords, on behalf of my noble friend, I beg to move Amendment No. 46. This is again another one of the many minor amendments in my noble friend's name. This one follows the introduction of the new provisions in Part III of the Bill enabling a company to purchase its own shares. This amendment provides for information about the amount and consideration for the shares which are purchased by companies. These companies in this particular case are companies which are using the accounts in the old form required by Schedule 8A. These are the companies which are allowed to deviate temporarily from the provisions in the new Schedule 1, such as banks, insurance companies and indeed shipping companies. Section 16A of the 1967 Act is to be inserted by Clause 14 of this Bill, which will not apply to such companies. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 47: Page 113, line 41, leave out from ("any") to end of line 44 and insert ("Schedule 8A accounts").

The noble Lord said: My Lords, I hope it will be for the convenience of your Lordships if I speak to Amendments Nos. 47 and 49, which is over the page. Amendment No. 47 is consequential on Amendment No. 49, so I hope I may deal with them in reverse order, starting with No. 49. Amendment No. 49 is in respect of Schedule 8A accounts. These are the companies presenting their accounts in the traditional format. Amendment No. 49 disapplies that amendment to Section 56(2)(a) of the 1967 Act. That subsection defines references in Part I of the Act to balance sheets and profit and loss accounts and includes references to things called "documents annexed to those statements". This particular definition is not compatible with what we call the new accounting regime laid down by the Fourth Directive. Therefore, we are amending this definition for the Fourth Directive purposes. The definition does remain appropriate for the old régime, the Schedule 8A accounts, and the amendment retains the definition for that particular purpose.

The second point is that Amendment No. 49 provides for the purposes of the 1967 Act a definition of Schedule 8A accounts. This particular definition is couched in the same terms as the definition which is the tailpiece to paragraph 8 of Schedule 2 to this Bill.

That brings me back to Amendment No. 47. By this particular small definition Amendment No. 47 is made possible. Amendment No. 47 refers to paragraph 5(1) of Schedule 2 to the Bill and this inserts the new paragraph 1B into Section 4 of the 1967 Act. This particular insertion disapplies certain provisions in respect of accounts which are prepared under the old régime, and a simple reference in the new subsection (1B) to Schedule 8A accounts, as now defined in new subsection (2A) to Section 56 of the 1967 Companies Act, is now sufficient. That, I am afraid, is a slightly tortuous explanation, but I hope that it will satisfy your Lordships. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 48:

Page 113, line 44, at end insert— ("(1A) In section 11(1) of the 1967 Act for the words from "to be shown" to the end there shall be substituted the words "to be given in a note to the company's accounts is given in a note to any Schedule 8A accounts prepared by the comany in respect of any financial year, the corresponding amount for the immediately preceding financial year shall be included in that note.".").

The noble Lord said: My Lords, I beg to move Amendment No. 48 and it might be convenient if I speak to Amendments Nos. 109 and 115. All of these amendments are minor, technical amendments which are consequential to the Government's decision to harmonise within the companies code on references to what are called "notes to" a company's accounts, in preference to the phrase "statement annexed to". All three amendments simply preserve, in respect of the old régime Schedule 8A accounts, the existing requirement for the immediately preceding year's figures to be given in relation to such information as is given in a note to the accounts, being information on such things as directors' salaries and emoluments and also employees' salaries which are required by Section 196 of the 1948 Act and also by Sections 6, 7 and 8 of the 1967 Act.

The other two amendments—Amendments Nos. 109 and 115—preserve Section 11 of the 1967 Act and the reference to it in Schedule 2 to the Companies Act 1980 (that covers the point about the increase of penalties for misdemeanours et cetera). The first amendment amends the wording of Section 11, so that information in respect of the preceding year, in the old format, is required in respect of those particular accounts—that is, Schedule 8A accounts. These are all technical amendments. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 49:

Page 114, line 11, at end insert— ("(6) The amendment made to section 56(2) of the 1967 Act by paragraph 27 of Schedule 3 to this Act shall not apply in relation to any Schedule 8A accounts; and the following subsection shall be inserted in section 56 after subsection (2)— (2A) References in this Part of this Act to Schedule 8A accounts are references to accounts prepared in pursuance of paragraph 1 or 2 of Schedule 2 to the Companies Act 1981 which state that they are prepared in compliance with section 149A or 152A of and Schedule 8A to the principal Act.".").

The noble Lord said: My Lords, I beg to move Amendment No. 49. I have already spoken to this amendment with Amendment No. 47. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 50: Page 114, line 16, leave out ("Section 41(11)") and insert ("Sections 39(8) and 41(11) of the 1980 Act").

The noble Lord said: My Lords, I spoke to this amendment with a series of amendments, starting with Amendment No. 44. I think that the House has heard enough. I beg to move.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 51:

Page 114, line 23, leave out ("repeal of section 43(2)") and insert ("repeals in section 43").

The noble Lord said: My Lords, I beg to move Amendment No. 51 and I should like to speak to Amendments Nos. 104, 105, 114 and 119. All of these are technical amendments which are consequential to Amendment No. 170 which was made in Committee. Under the accounting exemption provisions, the accounts filed with the registrar can differ from those which are laid. Only the latter accounts—those are the ones which are laid—are to be the accounts for determining whether a company can make distributions. Accordingly, these amendments, starting with Amendment No. 51, delete references to accounts filed leaving only accounts laid as the relevant accounts for Part III of the 1980 Act. I beg to move.

On Question, amendment agreed to.

Clause 22 [Prohibition on registration of certain names]:

6.55 p.m.

Lord Mishcon moved Amendment No. 52:

Page 29, line 30, leave out paragraph (c) and insert— ("(c) which is the same as a name appearing on the index kept by the registrar in pursuance of section 23 of this Act or which is so similar to such a name that in the opinion of the Secretary of State confusion is likely to be caused;").

The noble Lord said: My Lords, I beg to move Amendment No. 52. If I may say so, this is a most important amendment which was dealt with in Committee before an attenuated body of highly intelligent persons at a very late hour, and because of the lateness of the hour it was decided that the amendment should be withdrawn so that it might be debated before your Lordships at this stage.

I should like to remind your Lordships that this amendment deals with the following situation. Up to now, the Companies Registry has seen to it that an undesirable name of a company should not be allowed to go on the register, and part of the procedure in regard to the undesirability of a name is, indeed, the similarity of a name to another name. Your Lordships will find that this Bill seeks to remove from the registrar and the duties of his registry, the ability to exclude a name which is similar: the sole basis of an exclusion is that the name is the same. On the last occasion in Committee, so far as I recollect, nobody supported the Government's stand in regard to this matter save for a very eloquent Front Bench. Indeed, all the Lords Temporal, apart from the Front Bench, seemed to support the amendment and, if I may say so, there seemed to be a sympathetic look even from the Lords Spiritual on the basis that one should not put a snare before the unwary.

I should like to deal with the matter in the following way, and I do so with complete seriousness. In the view of a great many bodies—organisations which hold great respect in this kingdom—this is a licence to cheat and a licence to blackmail, because the ability for people to register similar names is an invitation to both. I should like to quote an example without in any way—in spite of the protection which is given for utterances in this House; and many of us think that one ought to be rather careful about that protection—suggesting either an intention to cheat or an intention to blackmail. But, while the registry was going through some industrial difficulties, it was well known that the registry was not, in fact, searching for similarity of names. However, there happens to be a very well known company called Aurora Holdings Limited, which is a quoted company on the Stock Exchange. I shall read to your Lordships a letter that was sent to the company secretary in June last year. It reads as follows: Dear Sir, Aurora Limited. My partner and I recently registered and incorporated the above company in England and Wales with an authorised capital of £5,000 (issued £200) to act as the vehicle for a trading venture. In view of the publicity given to your Chairman's recent appointment we have been made aware of the similarity between the names of your company and ours and accordingly we enquire whether you would wish to purchase our company before we commence any commercial activity. The company would be a useful vehicle for your Group to hold even though you may have no immediate requirement. In view of the preparatory work which we have carried out and also the delay which we will experience in reforming a suitable company, we would expect a consideration of £4,000 for the issued share capital. May I add that the similarity between your Group name and that of our company was coincidental and was in no way premeditated. I look forward to hearing from you shortly". The gentleman remained "Yours faithfully" of Aurora Holdings Limited.

As I said, there are organisations greatly respected in our national life which support the amendment that I venture to put before the House tonight. Quickly, I should like to mention them. They include the Chambers of Commerce, the Institute of Directors, the Law Society, the Law Reform Committee of the Senate of the Inns of Court of the Bar, the Consumers' Association, the Consultative Committee of Accountancy Bodies, the Finance Houses' Association, and many other bodies of a similar nature. Therefore, we have a pretty serious duty to perform tonight.

At the Committee stage the spokesman for the Government Front Bench—I believe I am right in saying that it was the noble and learned Lord the Lord Advocate—gave only one reason why the Government were not able to accept this amendment. It was that the administrative difficulty was very great, now that there were some 800,000 names on the register. The noble and learned Lord also felt that it was a judicial, and no longer an administrative, duty to deal with similarity of names. The noble Lord, Lord Lyell— whom I am delighted to see in his place—decided to amplify the answer that was given by the noble and learned Lord the Lord Advocate, and he amplified it by giving some figures, which were rather interesting and which were seized upon not only by me but by the very athletic figure of the noble Lord, Lord Mottistone, who seizes upon anything that is capable of being seized upon to advance an argument that he wants to progress before your Lordships.

The noble Lord, Lord Lyell, said, presumably in support of the Government, that, indeed, with 800,000 names on the register and with a slightly less careful duty imposed upon the registrar, there had been only 300 complaints. Quite obviously, your Lordships will see how successful the registrar must have been, even with a slight loosening of his duties, if there were only 300 complaints. Of course, this was at a time when people were not registering similar names because, if they could, they were careful enough to search in the first instance to make sure that they were not doing that; and, of course, they knew that the registrar, if I may put it this way, would catch them out if they were foolish enough to register a similar name.

To what are we really opening the doors?—obviously, in the first instance, to people who want to try to take advantage of a name which has earned respect, whether in a locality or in connection with a trade, in order to see whether they cannot get in on the ticket of the name, and do so deliberately. There are others who might do it by mistake. We seek to protect the people who are entitled in our commercial and industrial life to have the benefit, unscathed, of their good commercial tradition and the name that they bear, and we seek to ensure that no one is misled.

When one is then referred to a judicial administration of this matter, or a judicial decision upon this matter, what an extraordinary answer it is from a Government Front Bench—which is entitled to take a great deal of credit for this Bill for the way in which they are protecting small businesses from unnecessary expenditure—that they will drive people into the courts, and those people will have the sole remedy of a passing-off action. Lawyers well know the difficulties of the five stages through which one has to go in order successfully to succeed in a passing-off action. To drive people to the expense of such an action, and the risk of that, is surely absolutely iniquitous when one knows that in the past the Registrar of Companies has been able to fulfil this task with great ability and, indeed, has been able to protect consumers and people in commerce and industry alike. I wonder whether tonight we can protect those who deserve to be protected, including the small businessman.

I should have mentioned that I am also speaking to Amendment No. 107, which is referred to in the Marshalled List under Schedule 4. The Government seek to repeal two sections which until now have given that protection. The last few minutes of my address to your Lordships will be taken up purely and simply in ensuring that your Lordships are not misled by seeing another amendment on the Marshalled List—namely, Amendment No. 55—which refers to "Preparatory steps before registration of company".

As I said at the Committee stage, this is a longstop; this is not the amendment that I would commend to your Lordships. I shall not speak to it now, but it deals with having to advertise in the London Gazette every time a name is to be registered in order to give people a chance of looking at the name and then objecting. Obviously, it is not as satisfactory a procedure as we now have; but because through the portals of your Lordship's House there may pour people who have not had the benefit of listening to the debate tonight but who, nevertheless, will possibly be registering their vote, I had that as a longstop. But it is not a longstop that I want to have or that all the professional and other organisations that I have mentioned to your Lordships would wish to have, either. Therefore, I commend this amendment to your Lordships, and repeat that if this is not an amendment which is supported by a revising and careful body on a Bill of this kind, frankly I do not know what is.

The Deputy Speaker (Lord Greenwood of Rossendale)

My Lords, I must tell your Lordships that if this amendment is agreed to, I shall not be able to call Amendment No. 53.

The Lord Bishop of London

My Lords, I am glad to support this amendment, but I do so on less abstract and more practical grounds than the noble Lord, Lord Mishcon, has attributed to the Bench of Bishops. I want to say a few words on behalf of the charities, which have been advised that they are in grave danger should it be possible for some company to register in a name which is very closely related to their own and which might, therefore, deflect gifts and interests from a particular charity which the donor would wish to benefit. Therefore, for the charities this is an important issue. I hope also that it may be made as simple as possible because it is difficult for charities always to keep an eye on the London Gazette and know what is happening. They would wish that this should be done as easily as possible.

There is a particular area of which I am entirely ignorant but as regards which I am told that it is a practical possibility for this matter to be computerised and that a computer could indicate if a name was similar to something that was already registered. A warning light would go up, and the appropriate authority would be able to see that the matter was remedied. It is difficult for charities constantly to keep an eye on publications that might be carrying this information, and therefore they hope that they can be protected and that it can be done as simply as possible.

Lord Trefgarne

My Lords, the noble Lord, Lord Mishcon, during the course of his remarks indicated that he would want to move this amendment separately and then, one way or another, move, or at least speak to, subsequent amendments which suggest a rather different approach to this problem. My response will, I hope, subsume both this amendment and subsequent amendments. Certainly my answer to this amendment will, I hope, be helpful to some extent to the noble Lord.

I am therefore suggesting to your Lordships that we in fact have a single debate on this matter. It is not open to me of course to dictate to your Lordships on this or any other matter, but I shall make my principal speech on this topic now and I hope that that will be agreeable to your Lordships. I should like first to outline briefly the considerations relating to company names, as distinct from registered business names, to which we shall come later in the Bill, which caused the Government to draft the relevant clauses of this Bill as we did.

For some years now the discretion vested in the Secretary of State to refuse to allow similar or confusing names for new companies, or companies seeking to change, has been exercised only with the greatest difficulty. The noble Lord, Lord Mishcon, referred to industrial difficulties, as indeed there have been, but there have been others as well. Indeed, during the last two years or so it has been possible to give only the most cursory inspection to proposed names, and inevitably therefore some names are now being allowed which in former times would not have been permitted. Indeed, the noble Lord, Lord Mishcon, referred to a specific example. Thus one at least of the principal purposes for which the registrar maintains his staff and his facilities is not being achieved.

These difficulties are not of the registrar's making. They stem from the large number of applications and existing companies to which he must give his attention, and indeed the fact that the ingenuity of those whose task it is to devise new names is approaching its limit. Another difficulty with the old system is that the responsibility for turning up resemblances and associations between names rested solely on the department. The registrar's staff had to check tens of thousands of applications annually against the index—in many cases twice over. It is this aspect of the 1948 Act which has proved incapable of proper administration, as the number of incorporations has increased. We have had some help from modern technology, and company names (with other details) are now all recorded in a computer. That will enable the registrar to continue to take the responsibility for sifting out names which duplicate existing names, as the Bill provides in Clause 22(1)(c). But the computer does not help when it comes to the subjective question of whether one name is in practice likely to be confused with another. That involves a human judgment, and the question is how we can keep within manageable bounds the number of cases to which that judgment has to be applied.

Thus, in the context of our general policy relating to the need to contain and where possible reduce the size of the apparatus of Government, we came to the conclusion that we should in future rely on other measures to prevent this mischief. Accordingly, we proposed that the registrar should in future only disallow a name which was identical to an existing one and that in other cases the remedy of a "passing off" action should be available.

These proposals have been the subject of considerable comment, not least in your Lordships' House. The Government have therefore looked again at this matter to see if there was any way we could modify our ideas so as to meet in whole or in part the concerns expressed without unduly eroding the envisaged saving in resources. It seemed to us that our proposals as drafted, logical and effective though they were, overlooked one particular point, namely, the psychological effect upon would-be promoters of the Registrar's discretion. The noble Lord, Lord Mishcon, and others have brought forward certain proposals, the essence of which is contained in Amendment No. 55.

The Government are therefore now willing in principle to agree to amendments akin to those proposed. For the reasons I have described we cannot agree to go along the road proposed by this amendment, giving the Secretary of State wide discretion, which is also the burden of the amendments tabled by my noble friend Lord Mottistone. I regret that I cannot accept Lord Mischon's Amendment No. 55 exactly as drafted because, for example, it does not provide for an accelerated registration procedure where this is desirable. However, the Government accept in principle the amendment and undertake to bring forward appropriate amendments either at Third Reading or during consideration in another place.

With that assurance, I hope that noble Lords who have expressed concern about this matter will be satisfied, anyway for the moment, and will not press this amendment, or indeed the others relating to the same point. I think they include Amendments Nos. 59 and 60, which relate to the question of change of company names, to which of course the same criteria could apply.

Lord Mishcon

My Lords, I have heard the expression that half a loaf is better than none, but I feel that I am being offered a fraction less than half a loaf, and in accepting it would not be protecting, not would your Lordships, those whom we ought to be protecting. Only one sentence and I shall have finished. If the noble Lord the Minister had quoted again to the House what was quoted last time, I think he would have nullified most of his arguments. The figure quoted last time, with all the 800,000—and I must repeat it to your Lordships—was that only 300 objecttions came forward, which meant perfectly simply that the registrar was managing to cope and was doing his duty, and doing it very well.

Lord Trefgarne

My Lords, I hope that the noble Lord will not mind my intervening. The noble Lord complained bitterly that the registrar was not doing his duty. He drew your Lordships' attention to a case which I think he regarded as regrettable.

Lord Mishcon

My Lords, the noble Lord the Minister, I am sure, does not wish to mislead the House. I made it absolutely clear that this occurred during the time when there was industrial trouble in the registry, and when therefore what the Government now seek to do was in fact the practice, unfortunately, of the registry for that short time; namely, there was no check for similarity of names. This is what happens, and these are the demands that occurred.

I do not feel that I can carry the argument any further than I have done already. I hope that your Lordships will feel that this is a duty we have regardless of any political point at all. There is no politics in this that I can see. Therefore, I hope that the amendment will find favour with the House.

7.20 p.m.

On Question, Whether the said amendment (No. 52) shall be agreed to?

Their Lordships divided: Contents, 43; Not-Contents, 58.

CONTENTS
Amherst, E. Mishcon, L.
Ardwick, L. Monson, L.
Aylestone, L. Noel-Baker, L.
Balogh, L. Oram, L.
Beaumont of Whitley, L. Peart, L.
Beswick, L. Ponsonby of Shulbrede, L.
Boston of Faversham, L. Ritchie-Calder, L.
Bruce of Donington, L. Ross of Marnock, L.
Collison, L. Seear, B.
David, B.—[Teller.] Seebohm, L.
Davies of Leek, L. Spens, L.
Elwyn-Jones, L. Stewart of Alvechurch, B.
Greenwood of Rossendale L. Stewart of Fulham, L.
Hale L. Stone, L.
Hatch of Lusby, L. Strabolgi, L.
Houghton of Sowerby, L. Taylor of Mansfield, L.
Howie of Troon, L. Underhill, L.
Kilmarnock, L. Wallace of Coslany, L.
Llewelyn-Davies of Hastoe, B.—[Teller.] Wells-Pestell, L.
White, B.
Lloyd of Kilgerran, L. Wigoder, L.
London, Bp. Wynne-Jones, L.
NOT-CONTENTS
Airey of Abingdon, B. Brougham and Vaux, L.
Atholl, D. Chelwood, L.
Avon, E. Cockfield, L.
Belstead, L. Colville of Culross, V.
Boardman, L. Craigavon, V.
Bolton, L. Davidson, V.
De Freyne, L. Macleod of Borve, B.
Denham, L. Noel-Buxton, L.
Drumalbyn, L. Norfolk, D.
Eccles, V. Northchurch, B.
Ellenborough, L. Orkney, E.
Elliot of Harwood, B. Portland, D.
Elton, L. Rawlinson of Ewell, L.
Ferrers, E. Reay, L.
Fortescue, E. Romney, E.
Gainford, L. St. Aldwyn, E.
Gormanston, V. St. Just, L.
Greenway, L. Sandys, L.—[Teller.]
Grimston of Westbury, L. Selkirk, E.
Home of the Hirsel, L. Sharples, B.
Hornsby-Smith, B. Skelmersdale, L.—[Teller.]
Hylton-Foster, B. Strathclyde, L.
Kemsley, V. Swinton, E.
Lauderdale, E. Teviot, L.
Linlithgow, M. Trefgarne, L.
Long, V. Trenchard, V.
Lyell, L. Trumpington, B.
Mackay of Clashfern, L. Vaux of Harrowden, L.
Mackintosh of Halifax, V. Vivian, L.

Resolved in the negative, and amendment disagreed to accordingly.

7.28 p.m.

Lord Lloyd of Kilgerran moved Amendment No. 53: Page 29 line 30, after ("as") insert ("or too like").

The noble Lord said: My Lords, this may commend itself to your Lordships especially for its brevity. According to the Bill as drafted, it is possible to prevent a company from being registered only if the name is the same as that appearing on the index. My amendment is designed to insert after "the same as" the words "or too like". Some of your Lordships may say that this is identical to the previous amendment, but it is not; it is totally different in many respects, in particular because I am quoting from Section 18(2) of the Companies Act 1948.

Those of us who have been in practice at the Patent Bar or have been associated with chartered patent agents, Institute of Trade Marks agents or business people on this question of the similarity of names and the confusion that it causes, are somewhat unhappy about using the phrase "confusion is likely to be caused", which was the wording in the previous amendment. The simplest way to say it, in our view, is to say that if one name is too like another in the opinion of the registrar, then that name should not go on the register. The words "too like" are small, simple, Anglo-Saxon words and are preferable to "confusion is likely to be caused", and I therefore commend the amendment as one which is supported by industry at large to avoid the piracy of trade names which, as I have said, is rampant. I beg to move.

Lord Trefgarne

My Lords, I had rather thought that the reply which I offered to the last amendment would have covered this one as well. I accept that the proposal put forward by the noble Lord, Lord Lloyd of Kilgerran, is not the same as the proposal put forward by the noble Lord, Lord Mishcon, in his amendment which your Lordships have just considered. All the same, I hope that the noble Lord, Lord Lloyd of Kilgerran, will agree that the concession which I indicated that I was prepared to consider in respect of an amendment which we shall reach very shortly will indeed cover the matter that is worrying him and that therefore he will not see fit to press his amendment. There are a number of difficulties of a technical nature regarding the noble Lord's amendment. I could go into these if the House is interested, but I hope that what I have already said will be sufficient to persuade the noble Lord not to press the amendment.

Lord Lloyd of Kilgerran

My Lords, the concession which the noble Lord has made does not seem to me to go anywhere towards dealing with the question that is established in statute in the Companies Act 1948 with regard to the question of registration where two names are too alike each other. In my view, this is a matter of very considerable importance. The concession made by the noble Lord the Minister with regard to the previous amendment did not carry much weight, apparently—we had to divide. In the circumstances, I wish to press this amendment.

7.33 p.m.

On Question, whether the said amendment (No. 53) shall be agreed to?

Their Lordships divided: Contents, 39; Not-Contents, 47.

CONTENTS
Amherst, E. Llewelyn-Davies of Hastoe, B.
Ardwick, L. Lloyd of Kilgerran, L.—[Teller.]
Aylestone, L.
Balogh, L. Mishcon, L.
Beaumont of Whitley, L.—[Teller.] Monson, L.
Morris, L.
Boston of Faversham, L. Oram, L.
Brooks of Tremorfa, L. Peart, L.
Bruce of Donington, L. Ponsonby of Shulbrede, L.
Collison, L. Ritchie-Calder, L.
Craigavon, V. Ross of Marnock, L.
David, B. Seear, B.
Davies of Leek, L. Stewart of Alvechurch, B.
Elwyn-Jones, L. Stewart of Fulham, L.
Goronwy-Roberts, L. Stone, L.
Greenwood of Rossendale, L. Underhill, L.
Hale, L. Wallace of Coslany, L.
Hatch of Lusby, L. Wells-Pestell, L.
Houghton of Sowerby, L. White, B.
Howie of Troon, L. Wigoder, L.
Kilmarnock, L.
NOT-CONTENTS
Airey of Abingdon, B. Long, V.
Avon, E. Lyell, L.
Belstead, L. Mackay of Clashfern, L.
Boardman, L. Mackintosh of Halifax, V.
Bolton, L. Macleod of Borve, B.
Colville of Culross, V. Noel-Buxton, L.
Cullen of Ashbourne, L. Norfolk, D.
Denham, L.—[Teller.] Northchurch, B.
Drumalbyn, L. Orr-Ewing, L.
Ellenborough, L. Portland, D.
Elliot of Harwood, B. Reay, L.
Elton, L. Romney, E.
Ferrers, E. St. Aldwyn, E.
Fortescue, E. St. Just, L.
Gainford, L. Sandys, L.—[Teller.]
Glendevon, L. Skelmersdale, L.
Greenway, L. Strathclyde, L.
Grimston of Westbury, L. Teviot, L.
Harmar-Nicholls, L. Trefgarne, L.
Home of the Hirsel, L. Trenchard, V.
Hornsby-Smith, B. Trumpington, B.
Kemsley, V. Tryon, L.
Linlithgow, M. Vivian, L.
London, Bp.

Resolved in the negative, and amendment disagreed to accordingly.

7.41 p.m.

Lord Mottistone had given notice of his intention to move Amendment No. 54: Page 29, line 37, at end insert ("or undesirable").

Lord Morris

My Lords, I am speaking on behalf of my noble friend Lord Mottistone, who deeply regrets his inability to be here tonight. I can only say that his regret is matched only by my own. The purpose of the amendment is to try to regain the position as it was previously. The repeal of Section 17 of the 1948 Act has led to an unfortunate position. The test of "undesirable" was very plain. It was fundamentally intended to avoid misleading names—names that suggested various connections that did not exist. The rule has been that registration would be refused if the name of a company is too like the name of an existing company. This has worked perfectly adequately for 32 years. I am convinced that any change in this will cause harm.

I was astonished to hear my noble friend reiterating the same argument as in Committee, that this was really awfully difficult and expensive, and a problem that could not be handled by the Company Registrar in Cardiff. I cannot understand how Her Majesty's Government can believe they are still in the days of 1948. I will remind my noble friend of the computer application of this sort of work. Without any question of doubt, to search is the simplest application of computer work that can be imagined. Any computer company would gladly take on this task; and one girl with a reasonable computer and the proper software could process in the twinkling of an eye 500 applications with ease. That brings us up to 125,000 names per year, and the department itself has said that there are new registrations of approximately 60,000.

I am convinced that no one could belie that. There is something lying underneath the determination of the Government not to give way on this point, and I believe that in the long-term they will bitterly regret it. I think the answer which has been given is unsatisfactory. I believe that my noble friend Lord Mottistone would like me to say that he has not seized the point that Lord Mishcon suggested that he should, but he has been seized upon himself by yet another august body; namely, the CBI. They feel very strongly indeed about this point, and I feel sure that he will advise the CBI, as indeed I shall, to follow this point up with vigour when this Bill reaches the other place. With that, my Lords, I do not move this amendment.

7.44 p.m.

Lord Mishcon moved Amendment No. 55: After Clause 22, insert the following new clause:

("Preparatory steps before registration of company

.—(1) Application shall not be made for registration of a company under the 1948 Act or for re-registration under that Act or the 1980 Act until 21 days after notice of intention to apply has been published in the Gazette, stating the proposed name of the company.

(2) Any person, being a body the name of which is entered on the index of names kept by the registrar in pursuance of section 23 of this Act, may make to the Secretary of State an objection in writing within 21 days after the publication in the Gazette of notice of intention to apply for registration or re-registration, but such objection shall be limited to an objection on the grounds that the proposed name of the company is so similar to the name of the person making the objection that confusion is likely to be caused.

(3) The Secretary of State shall take account of any objection under subsection (2) above before deciding whether to permit the registration or re-registration of a company by a name to which objection has been made.").

The noble Lord said: As was indicated earlier, this is the longstop, the alternative that I would not have wished to commend to your Lordships, but the Division has spoken for the moment and in those circumstances I move this amendment. As I understood the noble Lord the Minister, he was saying that in principle this amendment is accepted as an alternative, the Government realising that something has got to be done to protect people—charities, companies, firms—against the possibility of a similar name. The procedure suggested in this amendment is one by which an advertisement is to appear in the Gazette showing what the name is proposed to be, and then giving an opportunity to objectors.

As the right reverend Prelate said, this is a difficult thing for people to do, and I am hoping very much that the Government, when considering the principle of this amendment (which, as I understand it, they are accepting), will also think of other ways to protect people, that being, as I understood from the majority of the speeches made tonight and at Committee, the desire of this House. I beg to move.

Lord Trefgarne

My Lords, I do not think I need to amplify the assurance I gave when speaking to the earlier amendment on this subject. I have undertaken that the Government will bring forward amendments embodying the spirit (if that is the right word) of what the noble Lord has proposed. There are certain additional features which we shall need to include and which do not appear in the amendment tabled by the noble Lord, but I hope that with that assurance he will feel able to withdraw his amendment.

The Lord Bishop of London

My Lords, I supported the previous amendment on the grounds of simplicity. I am grateful to the noble Lords who have tabled Amendment No. 55, and to the Government for having indicated that they accept it in principle, because this is a very important protection, especially, as I have been saying, for charities. I am grateful to the Government for accepting the principle of this amendment.

Lord Morris

My Lords, may I ask my noble friend whether Her Majesty's Government will be in time to table amendments on this particular point at Third Reading, or will that have to wait until the Bill reaches the other place?

Lord Trefgarne

My Lords, I cannot give an undertaking that amendments will he tabled by Third Reading. We shall do our best, but the pressures on the draftsmen being what they are, I fear that it may not be possible. But, of course, if the amendments are then included by the other place in this Bill, your Lordships will have a chance to consider them when the Bill comes back to us, as doubtless it will, in due course.

Lord Mishcon

My Lords, in view of what the noble Lord the Minister has said, and with as much gracious- ness as I can command, I ask your Lordships' leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Trefgarne

My Lords, I understand that the usual channels have agreed that we should go no further tonight. Accordingly, I move that further consideration of this Bill on Report be adjourned.

Moved accordingly, and, on Question, Motion agreed to.