Companies (No. 2) Bill [H.L.]

HL Deb 17 March 1981 vol 418 cc662-752

3.12 p.m.

Lord Lyell

My Lords, on behalf of my noble friend I beg to move that the House do now resolve itself into Committee on this Bill.

Moved, That the House do now resolve itself into Committee.—(Lord Lyell.)

On Question, Motion agreed to.

House in Committee accordingly.

[The LORD ABERDARE in the Chair.]

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

On Question, Whether Clause 1 shall stand part of the Bill?

Lord Bruce of Donington

I must apologise to the Committee for not having been able to attend your Lordships' House on the occasion of the Second Reading of this Bill due to a long-standing engagement in the United States. Nevertheless, I have followed all that was said in the Second Reading debate, and before we part with Clause 1 I should like to offer one or two observations on it that were possibly not appropriate to Second Reading. It is appropriate, as is my custom, to declare a personal interest in this part of the Bill. I am a practising chartered accountant belonging to the firm of Halpern and Woolf, who may be deemed to have a direct or indirect interest in the Bill.

Clause 1 of the Bill marks a radical departure in regard to the whole question of company accounts in the United Kingdom. The provisions in the 1948 Act relating to the particulars to be disclosed in company accounts did not in any way seek to lay down the form in which those accounts were to be presented. Consequently, over the years the manner in which company accounts and, indeed, the accounts of other enterprises—partnerships and individuals—have been presented, in which they have been filed and in which they have been used for commercial and even for taxation purposes, has largely been the result of the work of the professional bodies, whose business it has been to develop and enhance the way in which the accounts of enterprises are presented.

This particular clause, which lays down that the format of company accounts shall be in accordance with Schedule 1 to the Bill, which is to become the new Schedule 8 to the Companies Act 1948, marks a radical departure from that tradition. The exact formats, or series of alternative formats, are laid down within a comparatively rigid framework. Whereas the old Companies Act 1948, together with that of 1967 and again of 1976, as well as (dare I say it?) of 1980, have been content to make general provisions in regard to accounts and have defined the law only in instances where the business and accounting communities have deemed it necessary that specific rights and specific duties should be defined in law, on this occasion the whole realm of company accounts has been brought under what are termed rules.

The Bill is here with its formats laid out, but I am bound to express on behalf of the accountancy profession—in this respect I speak on behalf of the accountancy profession—their strong misgiving that the rules governing the whole format and content of company accounts should be put into statutory form and should have a degree of rigidity which, in their view, will on application over the years show considerable disadvantages. The accountancy profession, comprising the six component bodies, have for a number of years been developing a series of accounting standards. These have become generally applicable throughout industry; and, indeed, they have shown a considerable flexibility and have worked well. The accountancy profession would much have preferred to have continued on what may be termed the voluntary but nevertheless professionally-guided way of proceeding.

Speaking in purely political terms I must say that I myself am a little surprised, because the party opposite have very frequently avoided specific legislation on the basis that so many things are best left to voluntary agreement. I am a little surprised that in the case of this Bill—which, as your Lordships will know, is extremely complicated in parts—they should have departed from that principle. Your Lordships will note that at later stages there will be endeavours made to eliminate certain parts of Schedule I which are considered to be unduly inflexible and which may impede the satisfactory operation of the Bill when it becomes an Act, and may, indeed, impede the smooth flow of information. That is not a matter for Clause 1; but it should be marked—and I hope that the Government have marked—that it indicates a radical departure from what has been done before and a departure from the whole attitude that the Government have hitherto adopted towards accountancy. It is not for us to obstruct the wishes of Government in this matter, but I should be doing less than my duty if I were not to draw your Lordships' attention to the significance of the step it is desired to take particularly in Part I of this Bill.

Lord Lloyd of Kilgerran

At second Reading I presumed to stress to your Lordships how the Government, by introducing another Bill on Company Law, was further smudging and fudging the position as to company law in this country, making it appallingly difficult for the average practitioner, whether accountant, solicitor or member of the Bar, to see his way through the jungle of present company law. Professional people have difficulty in dealing with company law, let alone the employees of companies who are concerned with advising their boards of directors and shareholders as to the position. I endorse many of the things the noble Lord, Lord Bruce, has said. There is in Clause 1 a radical departure on the presentation of accounts. Hitherto, the way in which accounts have been presented was developed by professionals rather than by rules in a Bill. Nevertheless, the Government have decided that this is the way in which they should proceed in the future. May I suggest that their enthusiasm for harmonisation of British law with the so-called law of the European countries and the EEC has rather carried them away.

May I make a plea in regard to what your Lordships may think is a very elementaty point concerning the opening words of Clause 1. There are now hundreds and hundreds of practitioners concerned with company law who will know what is Section 149 of the 1948 Act. They will know of its scope. This is now to be renumbered as Section 149A. The new clause which the Government are to introduce in this Bill is to have the old number, No. 149. This procedure occurs in Clause 2 and many other parts of the Bill. This is not a matter of semantics; there must be some fundamental reason why one should change the reference to a well-known clause and call it something else. Is this not just causing confusion for the many practitioners? I am sure that the noble Lord, Lord Lyell, will have an answer to this point, but I cannot see why it is necessary to change the reference of an old Act by introducing a new clause with the same number. I am not going to take up your Lordships' time in an analysis of the difference between Section 149 of the 1948 Act and the proposed Section 149. They are to have the same numbers, but their contents are different. This is adding confusion to the despair of the average practitioner.

The Government have laid great stress on the desirability of assisting small companies. Flow can this help the small companies? It adds to their confusion. If Members of this House complain hereafter of the high fees charged by their accountants and lawyers, may I put it at the door of the Conservative Government that at least in this aspect of company law they are adding confusion to the situation.

Lord Strathclyde

I do not wish to make a speech at the moment, but, as a chartered accountant, to express my entire approval with what has been said by most noble Lords who have spoken on this matter.

Lord Boyd-Carpenter

Some noble Lords may recall that on Second Reading I suggested that those who are responsible for the management of companies at this time are being given something of an additional burden as a result of the introduction of this Bill. It follows so closely on that of last year and must involve a good deal of additional effort, not so much for the professional advisers, whose views have already been reported to the House, but to the people ultimately responsible, the chairmen and directors of public companies. Still, at this stage, I remain unconvinced that there is such an urgent necessity for change that it is worth while imposing this additional burden on the management of companies.

This particular clause certainly underlines that point for the reasons so succinctly put by the noble Lord on the Liberal Benches. If one is to amend the law, to amend it by first altering the number of a section which has been part of the law of the land for over 30 years and then allotting that number to this clause which is then put in as a section of the Act, is an extraordinary cumbrous way of doing things. Thinking of it in practical terms, people keep manuals, copies of the Act in their offices; and scissors and paste will have to be used to put all sorts of loose bits into copies of the 1948 Act. And when that is reprinted it will not be immediately apparent to those reading it whether this clause has always been Section 149 of the 1948 Act or when it was introduced. It seems an extraordinarily sloppy way of legislating. If they feel it necessary to proceed at all, I am sorry that my noble friend the Minister and the Department of Trade should feel that they must proceed in this way.

I would comment on a point well put by the noble Lord, Lord Bruce, from the Opposition Front Bench. I, too, feel it is a pity, and a little surprising for a Government of this colour, that we should be departing from the well-established practice of a very distinguished and able profession in order to spell it out in legislation. I suppose one reason may be that this is thought necessary in order to harmonise with the EEC and to comply with our obligations under the laws of the Community. That, I suppose, would be a justification, but I should be interested to hear from my noble friend whether that is so. I hope that he will accept that a decision to change a perfectly satisfactory practice imposes an onus of proof on those who are advocating the change. It may be that he can discharge that onus if he can satisfy the Committee that this is absolutely necessary to comply with our obligations under the EEC; but 1 shall listen with interest because it certainly appears in other matters that our colleagues in the EEC are not always 100 per cent. punctilious in complying with their obligations to the Community.

Lord Hale

No doubt the noble Lord has seen the document which I have in my hand and which I have received from the Law Society. But other noble Lords have not seen it. It contains their well-considered view on the general tenor of the Bill. Inevitably, one must be thinking of later clauses in this Bill where one is referring to the matter of accounts, because accounts are set out in Schedule 8. I have not been a lawyer for a good many years. I relied on my daughter's advice (although she, too, has ceased to be a lawyer) in the reading of what is written under the headings "Clause 1" and "Clause 2".

A note says that the memorandum has the approval of the Law Reform Committee of the Senate, of the Inns of Court and the Bar. They say that under the new schedule a company will be entitled to prepare its statutory accounts on the basis either of historical cost or current cost. The results produced by adopting one such basis might be very different from those which would be produced by adopting the other. It says that there will be an overriding requirement that the accounts shall give a true and fair view. If it be true that there can be at least two—and some would say several—views of the same set of circumstances, each of which is true and fair, it would seem to follow that the requirement to give a true and fair view should be to give a true and fair view on the basis which has been adopted for the preparation of the particular accounts. The committee anticipated that auditors' reports would contain some such qualification.

I also had the privilege of being a member of the legal sub-committee of this House's EEC Committee and the privilege of being a virtually constantly silent spectator of the noble and learned Lord, Lord Diplock, covering with great learning very many aspects of the problems which were arising and must arise and which would be involved in the effort to obtain some uniformity over a very long period. It would be interesting if the Committee were rather more clearly informed how far this Bill is in conformity with the recommendations of the EEC directive and how far it is felt that it would be in danger of being reconsidered in Brussels if it did not fully comply.

3.33 p.m.

The Lord Advocate (Lord Mackay of Clashfern)

As has already been anticipated, the purpose of Clause 1 of the Bill and the relative first schedule is to implement the fourth directive on company law of the EEC. That directive was negotiated on behalf of the United Kingdom by the last Administration. This Bill, so far as Clause 1 and the relevant schedule are concerned, is intended to implement the obligations on the United Kingdom resulting from that agreement. My understanding is that work on the implementation of the fourth directive is presently proceeding in all member states and that most are expected to legislate upon it during the current year. In approaching this directive, the attitude that the present Government have taken is to make maximum use—speaking generally—of the exemptions in order to make as flexible as possible the régime which is being introduced here. This has certainly not been approached in a sloppy manner. I am sorry that my noble friend felt that that was the proper way to describe the drafting of part of Clause 1.

Lord Boyd-Carpenter

Would my noble and learned friend allow me to intervene? I think that he has misunderstood my argument. The term "sloppy" was used not in the context of the substance which he is seeking to enact but in the use of this extraordinary method of putting one clause into the 1948 Act and altering the numerology of that Act. My criticism was of the method, not the substance.

Lord Mackay of Clashfern

I understood that perfectly. My noble friend is much clearer than I am in expressing himself. I understood exactly what he was saying. The Government, in approaching this matter in principle and in substance, did it with great care and considerable thought for the companies to which it will apply—this is where I was going to deal more directly with the matter that my noble friend raised—and in the execution of it they endeavoured to be careful, too.

May I explain that the reason that this particular form was adopted was to try to make it easier for practitioners. The reason is this: the old Section 149 was well known to practitioners. Perhaps the noble Lord, Lord Bruce of Donington, would agree with that. From the time that this directive comes into force here and we apply it, the principal provision will be the new Section 149. The old one has much less effect. It is relevant for past years and for certain limited groups of companies; but for the generality it will be the new Section 149. We therefore felt—and obviously there is room for a difference of opinion, but I certainly cannot accept that it was done without deliberation or carelessly—that it was better to retain from now on the structure of the old system for the generality of the companies. Of course, from the point of view of the law and consolidations it would mean that the provision which has operated for the generality would be the provision which has always had the number that the generality have operated. That is the explanation.

The old provision requires to be retained. We cannot dispose of it altogether, for the reasons that I have explained. It continues to have some effect; but its effect will be subsidiary in amount to that of the main provision. I would press this upon your Lordships as being a useful way of going about it: we thought that the main provision should have the old number which has been so familiar for a number of years.

So far as the rigidity which is imposed on a company's accounts by the fourth directive is concerned, these provisions were negotiated earlier. We have done our best within the structure of the directive to permit the maximum flexibility. There may be some question between us later on the details of that and I shall be happy, with my noble friend Lord Lyell, to try to deal with these matters. In principle, the Government have approached this subject with care and in order to take as much advantage as possible of the exemptions which the directive allows and the flexibility which is permitted under it. I hope that, with my explanation, the Committee will feel that Clause 1 should stand part of the Bill.

Lord Hawke

May I ask my noble friend to deal with one point, because I do not think he has really dealt with the question of whether it is to be historic or current cost accounting. 1 presume the directors of a company can choose which they like at the moment and say that it is a fair view, but the results may be markedly different. Which in practice is the fair view?

Lord Mackay of Clashfern

Perhaps I may say that the question of whether one uses historic cost, current cost accounting or a mixture of the two is in our view primarily a matter for the professional judgment of the auditor and accountant; but we will deal with that in more detail later because there is an amendment down which raises that point expressly. Therefore perhaps I may be excused from dealing with it in more detail at this juncture.

Lord Lloyd of Kilgerran

May I thank the noble and learned Lord for his explanation on the point that I raised? I should like to put forward another suggestion. Throughout this Bill where there is reference to a section from a previous Act there is in parenthesis a very helpful phrase or sentence giving an indication as to what that section in the 1948 Act refers to. I wonder whether in this case it would be felt helpful for the Government to insert in Clauses 1 and 2, in parenthesis, something that would give us a summary of what the old sections were dealing with in the way they have done with so many sections in this Bill.

Lord Mackay of Clashfern

Certainly we will consider that. It is a matter of discretion, because one does not want to make the Bill too long by explaining all that was in earlier Bills on every occasion. We had thought, possibly wrongly, that Section 149 would be pretty plain to almost anyone who had to deal with these matters. Section 149, I think, rings a bell with most people who have any idea of company accounts, but we shall certainly consider the point. I am obliged to the noble Lord.

Lord Bruce of Donington

May I thank the noble and learned Lord for the explanation he has given? We are not anxious to obstruct the passing of this particular clause. As he says, there will be contentious matters arising on Schedule 1 when we come to consider it.

Clause 1 agreed to.

Clause 2 agreed to.

Schedule 1 [Accounts]:

3.43 p.m.

Lord Bruce of Donington moved Amendment No. 1: Page 60, line 39, leave out ("income or expenditure, asset or liability") and insert ("asset or liability, income or expenditure").

The noble Lord said: I beg to move this amendment, which is purely a drafting amendment, because, if your Lordships will refer to paragraph 3(2), you will see that it refers to in that order the contents of a company's balance sheet or profit and loss account. It would therefore seem appropriate that the reference to items should be: asset or liability, income or expenditure". That order seems to be a more logical way of putting it, and I beg to move.

Lord Lyell

First, following the introduction of the noble Lord, Lord Bruce, perhaps I too should declare that I am a member of a different institute from that of the noble Lord but connected with the same profession. It is more than flattering that the noble Lord, Lord Lloyd of Kilgerran, should have addressed me not once but twice as "learned". Unfortunately, I am not learned in the sense in which the word is used in your Lordships' House, but there is always time. We started off this afternoon's proceedings on this particular stage of the Bill, which I regret did not endear itself entirely to your Lordships' House at an earlier stage, nor indeed to many of my noble friends this afternoon, but the noble Lord, Lord Bruce, has moved his Amendment No. 1 and I am happy to say that the Government are pleased to accept the amendment because it does clarify the Bill. I hope that the noble Lord will be happy with that.

On Question, amendment agreed to.

Lord Bruce of Donington moved Amendment No. 2: Page 61, line 29, after ("withdrawn") insert ("or proposed to be withdrawn").

The noble Lord said: This is another more or less drafting amendment which is designed to make the purport of the clause a little clearer than it appears at the moment. Paragraph 3(7) on page 61 reads as follows:— (7) Every profit and loss account of a company shall show separately as additional items— (a) any amount set aside or proposed to be set aside to, or withdrawn from, reserves;". We think it should be made clear that the requirement itself includes amounts proposed to be withdrawn from reserves so that, on amendment, the paragraph would read as follows: any amount set aside or proposed to be set aside to, or withdrawn (from or proposed to be withdrawn) from reserves;". It is purely a drafting amendment, designed to assist the noble Lord and it is not contentious. I beg to move.

Lord Lyell

Lightning, in the form of the noble Lord, Lord Bruce, has struck twice! The Government are happy to accept his amendment.

On Question, amendment agreed to.

Lord Lyell moved Amendments Nos. 3 and 4:

Page 64, line 29, leave out ("fund").

Page 66, line 7, leave out ("fund").

The noble Lord said: I hope it may be for the convenience of the Committee if I move Amendments Nos. 3 and 4 together. They are both minor drafting amendments and we believe that they will make the Bill clearer. I beg to move.

Lord Bruce of Donington

I am happy, in a spirit of reciprocity, to accept completely the noble Lord's explanation, and I entirely support him.

On Question, amendments agreed to.

Lord Bruce of Donington moved Amendment No. 5:

Page 69, line 15, at end insert— (". Profit or loss on ordinary activities before taxation").

The noble Lord said: Perhaps it will be for the convenience of the Committee if Amendments Nos. 5, 6, 7 and 8 are taken together, because they all embody the same point. There is a requirement in Schedule 1, Part I, Section A, paragraph 3(6), page 61, line 23, that— Every profit and loss account of a company shall show the amount of the company's profit or loss on ordinary activities before taxation". This, of course, will now have to be reflected in the format of the profit and loss accounts that are set out under various heads on pages 69, 70, 71 and 72, which your Lordships will see are the four alternative formats of profit and loss account with which companies will have to comply.

If paragraph 3(6) is to apply, the requirement must be carried forward into the format itself. That is why, after Item 12 in Format No. 1 we seek the insertion of the words: profit or loss on ordinary activities before taxation". We ask also that those words should be inserted after Item 14 in Format No. 2, after Item 5 in Format No. 3 and after Item 7 in Format No. 4. This is purely to assist Her Majesty's Government. If these items which we have put forward as amendments were not incorporated in the format, the formats would not comply with the law that is being laid down by the Government in paragraph 3(6). So once again I hope that this will be entirely non-controversial. The amendments are offered in a spirit of complete cooperation with the Government in order to achieve their stated objectives. I beg to move.

Lord Lyell

I hope that the noble Lord, Lord Bruce of Donington, and the Committee will accept that I may speak to Amendments Nos. 5 to 8 together. The noble Lord, Lord Bruce of Donington, mentioned paragraph 3(6) of Schedule 1, which we find on page 61 of the Bill. As your Lordships will see, paragraph 3(6) of Schedule 1 already contains a requirement that every profit and loss account of a company shall show the amounts of that company's profit or loss on ordinary activities before taxation. This requirement was included at the suggestion of the Consultative Committee of Accountancy Bodies. The Government agree that it is a very important item which ought to appear in every company's profit and loss account. But the effect of the amendments which the noble Lord, Lord Bruce of Donington, has proposed extend a little beyond mere duplication of the requirement contained in paragraph 3(6). If the item is inserted as an additional line into the profit and loss account formats, which are Formats 1, 2, 3 and 4 on pages 69, 70, 71 and 72, the Government believe that there would be uncertainty as to whether or not the item was covered by the power given to companies by paragraph 3(4), which also is on page 61. This allows companies to combine together items in the profit and loss account and to show the breakdown only in a note to the accounts.

We believe that the profit and loss on ordinary activities before tax is one of the most important figures in the profit and loss account and that it should always appear in the account proper and not be capable of being relegated to a note to the accounts. This confirmation of our belief is achieved by the requirement in sub-paragraph (6) to paragraph 3. But we believe that this achievement would be in danger of being undone by the amendments which have been proposed by the noble Lord, Lord Bruce of Donington. I am sure that both he and the Committee will be happy to know that last week we discussed this point with representatives of the CCAB and managed to persuade them to agree with the views which I have expressed this afternoon. Therefore, I hope that the noble Lord will agree with the explanation which I have given.

3.54 p.m.

Lord Bruce of Donington

I am most grateful to the noble Lord for his explanation. I understand from him that he agrees that the existing form will, to put it in quotes, "do" so far as the Consultative Committee of Accountancy Bodies is concerned. I have had no opportunity to consult it on this point but I should be less than frank with the Committee if I did not tell it that the noble Lord's explanation does not satisfy me. Saving any amendments which may be passed through your Lordships' House and what happens to the Bill in another place, it appears likely that this Bill will become an Act. Therefore, I repeat that it is stated in paragraph 3(6) of Section A in Schedule 1 that Every profit and loss account of a company shall show the amount of the company's profit or loss on ordinary activities before taxation". The word is "every". It is completely inclusive, unless the word "every" has lost its meaning.

When we come to profit and loss accounts on Formats 1, 2, 3 and 4, they are the profit and loss accounts to which companies, according to whichever one they select, are required to conform. The profit and loss accounts set out in Formats 1, 2, 3 and 4 are, may I reiterate, profit and loss accounts and are therefore included in the term "every". In other words, the provisions of paragraph 3(6) are as applicable to any one of the formats as they are to any particular profit and loss accounts which a company might wish to prepare for itself or might wish to provide for Her Majesty's inspector of taxes. Yet when we come to the published form we find that there is no requirement to disclose the profit before taxation.

No matter what the noble Lord may say about the desire to have flexibility, there is no flexibility in the term "every"—none at all. "Every" means precisely what it says: that it includes Formats 1, 2, 3 and 4. I should therefore have thought that the insertion of the words which I have incorporated in the amendments, which were designed purely to assist Her Majesty's Government in carrying out the provisions of their own schedule, would have been immediately acceptable to the noble Lord. I trust therefore that on reflection the noble Lord will conclude that I have on my side not only logic but the precise thrust of the clause which he has put into the Bill and which he desires us to accept. I am at a loss to understand why these very constructive amendments should not have been immediately accepted. I remain completely mystified.

Lord Lyell

The noble Lord has made a considerable point of the main thrust of his argument. We take the point that in sub-paragraph (6) the words "Every profit and loss account" appear. But nowhere in the remarks which I made on these four amendments did I say anything about flexibility. I hope that the noble Lord did not mishear me. However, we can check this tomorrow in Hansard. I mentioned nothing about flexibility when I replied to the noble Lord's amendments. I hope he will accept the main thrust of my reply: that the Government put their points fairly forcefully to the representatives of the CCAB and that they were entirely happy that the formats set out on pages 69 to 71 of the Bill certainly met the wishes of the accountancy profession and were adequately clear.

If the noble Lord, Lord Bruce—and indeed the Committee—would care to glance at any of the formats that the noble Lord mentioned so far as his amendments 5, 6, 7 and 8 were concerned, I think, looking at Format 1 on page 69, the noble Lord will find that the figure he particularly wishes to see is immediately visible from the combination of items 13 and 14. If the noble Lord, or indeed any student of the accounts, would wish to derive the profit or loss on ordinary activities before tax, it would seem to me to be immediately deducible. I would not go beyond my original remarks, apart from saying that the accountancy profession was entirely happy with the points that I made.

Lord Bruce of Donington

I must now therefore give the Committee the information that is derived from the consultative committee to which the noble Lord has referred. It is evident that the consultative committee may have had some degree of flexibility which the Government have not, because I have before me their document which sets out their views on this particular subject, and I quote from paragraph 36: We support the requirement in paragraph 3(6) that every profit and loss account shall show the amount of the company's profit or loss on ordinary activities before taxation. We believe, however, that the requirement should be expressed as a separate line in each of the profit and loss formats given in Section B of the schedule". That is precisely what I have done. The amendments put forward are therefore in full conformity with the consultancy committee of accountancy bodies. It may be that during the past week the noble Lord has so used his eloquence to persuade them that they may have decided to be far more flexible than he; but I am not so flexible as the consultative committee may seem to have been and I should much prefer the amendments to be put into operation.

It may well be that the noble Lord will wish to have time to reflect on this matter and I shall have to have consultations with my colleagues to find out their present attitude. It may therefore be necessary for me to return to the matter on the Report stage, and if the noble Lord is not prepared to accept the amendment now then in order to facilitate business I am happy to withdraw it.

Lord Hawke

Before the noble Lord withdraws the amendment, may I ask my noble friend to look at it again, because as an ordinary investor I should very much like to see these things in the company accounts.

Lord Lyell

I will certainly consider what the noble Lord, Lord Bruce, has said, but we cannot accept the amendments as they stand this afternoon. The noble Lord suggested that I—and he might have added "or the department"—may have persuaded the consultative council. In two words: we did.

So far as my noble friend Lord Hawke is concerned, I will study what he has said and if necessary I will write to him. I, too, am an investor, and if my noble friend will glance at the company accounts and look at the format, as I mentioned in my earlier remarks, if he checks lines 13 and 14 in most of the formats he will find that by the simple process of addition he will be able to obtain the figure for profit or loss on ordinary activities before taxation. But I undertake to see what my noble friend has said.

Lord Lloyd of Kilgerran

If the noble Lord the Minister is writing to any member of this Committee about matters on which I may not have intervened, will he send a copy to me as well? In order to expedite business on this Bill I shall not intervene on many occasions; therefore I should like to know what is going on.

Lord Lyell

I will certainly give the noble Lord, Lord Lloyd of Kilgerran, copies of any letters he requests, but I have undertaken to write to my noble friend Lord Hawke only if there was anything in his remarks. That was the hypothesis. I do not think there is a great deal in his remarks but I will check and ascertain.

Lord Hawke

I quite appreciate that, but will my noble friend remember that we investors are rather inclined to be lazy-minded and we do not like having to do arithmetic in order to discover the facts that we want to learn.

Amendment, by leave, withdrawn.

[Amendments Nos. 6, 7 and 8 not moved.]

4.8 p.m.

Lord Bruce of Donington moved Amendment No. 9: Page 74, line 17, leave out ("realised") and insert ("made").

The noble Lord said: This amendment refers to some accounting principles with which companies are required to comply, set out at Part II, Section A of Schedule No. 1, and in paragraph 12 it is stated: The amount of any item shall be determined on a prudent basis, and in particular— (a) only profits realised at the balance sheet date shall be included in the profit and loss account; The amendment that is put forward seeks to substitute for the word "realised" the word "made" because that is more in conformity with the fourth directive itself, as Article 31(1)(c) of the directive (which is reproduced, incidentally, as an appendix to Cmnd. 7654) provides at paragraph 2(c). Only profits made at the balance sheet date may be included. In the present Bill the term "realised" has been used. The problem really 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.

In this connection I should like to refer your Lordships to the decision in Re Oxford Building Society, 35 Ch. D., 502: the word 'realised' must have its ordinary meaning which, if not equivalent to 'reduced to actual cash in hand', must at least be 'rendered tangible for the purpose of division'… The meaning of the word is the direct converse of 'estimated'.". Your Lordships will appreciate that there is a difference between profits made and profits realised, and it is this principle that we desire to highlight in suggesting that it would be far safer, bearing in mind the other uses to which the term "realised" is put, if we put "made" instead of "realised" at paragraph 12(a). I beg to move.

Lord Hawke

I spotted this, too, though not from the technical angle that the noble Lord, Lord Bruce of Donington, has done. One realises, of course, that it is only proper that profits realised by, for instance, hire purchase people should come into their profit and loss when only they have actually got the cash in hand. But what about a bank that lends money? If a bank lends money, I presume at the moment it brings into its profit and loss account the interest on that money, quite regardless of whether or not the loan has been paid back. If I am right, I think the noble Lord, Lord Bruce, must be correct in suggesting that "realised" is not quite the right word for this paragraph.

Lord Mackay of Clashfern

I am obliged to the noble Lord for the very constructive way in which he moved this amendment, and I should like to make it clear that we appreciate the help that is given in trying to get the right formulation for these rules, which we hope will last for a considerable time. But, in this particular instance, if I might answer the question of my noble friend Lord Hawke first of all, whether it was "realised" or "made" that was the word used bank interest which had been paid by the customer would be properly covered in either case. Whether the loan itself had been repaid or not, the interest, which in that case would be presumably a measure of the profit, would already have been realised if it had been paid.

Lord Hawke

It might well be that the interest had not been paid; the loan is still outstanding, and perhaps the interest is only paid after the date of the balance sheet.

Lord Mackay of Clashfern

In that case, I would think if the debt is a good one at that date it would be reasonable to take it into the account as something which is sufficiently definite in amount to be regarded as realised. The provision we have used here is intended to reflect the meaning of the directive as we understand it. I agree that the word actually used in the directive at this place is the word "made", but we have looked at this against the background of accountancy practice, and the provision that we have adopted is intended as an expression of the well-understood prudence concept in the Statement of Standard Accounting Practice No. 2 under which profits are not anticipated but only recognised when there is sufficient certainty to make such recognition reasonable. In this context, "realised", does not mean realised only in the form of actual cash but is used in the wider sense adopted in accounting terminology of realised either in cash or other assets the ultimate realisability of which can be assessed with reasonable certainty. It is difficult to see that use of the term, "made", would make any difference in the application of the principle. In other words, at least at the moment I am unable to grasp with certainty the area that would be different if the word "made" was used, as against the word, "realised", in the sense in which we have endeavoured to use it, which I think is in accordance with the authority the noble Lord has referred to, which does not restrict "realised" to strictly realised in the form of actual cash.

There is another point that I should mention to your Lordships. It would, it seems to us, create confusion and imply that different principles were intended to be applied in Part III of the 1980 Act in connection with distributable profits and this paragraph, paragraph 34 of Schedule 1, where "realised" is used in connection with the transfer of revaluation surpluses to the profit and loss account. In other words, we would see value in trying to keep these two in line and not create the sort of difference to which the noble Lord has referred. All profits, I think, can be said to be either realised or unrealised. These two classes are exhaustive between them of the whole class of profits, and it is clear from paragraph 34 of Schedule 1 that unrealised profits must be carried to a revaluation reserve and may only be carried to profit and loss account if they are realised. If "made" is intended to mean more than "realised" in the sense in which I have explained it, then it will include unrealised profits, which may not, in accordance with that paragraph, be carried to profit and loss account. It is, therefore, inconsistent with the policy embodied in that paragraph. The point is not a particularly easy one, and it is one to which we have given attention in view of the word used at this place in the directive; but I hope the noble Lord will feel that this is an adequate explanation for the stance we have taken.

Lord Bruce of Donington

I am sorry to be unable to follow the noble Lord all the way in his argument. The noble Lord referred to the professional position on this matter, and I am authorised to say that the views I have put forward in connection with this matter are indeed the views of the profession. They think that the term "realised" would lead to undue confusion. Moreover, the noble Lord, in citing to me the rules relating to revaluation—I believe he referred to paragraph 34—should not really pray that in aid as a basic accounting principle, because that is within the rules covering current cost accounting, so far as I can recall. We shall have to refer to this matter again when we come to consider the whole question of current cost accounting, which is raised by the next amendment.

The noble Lord asked for an illustration as to the point at issue. The noble Lord will be aware that the profits of a company are determined after taking into account its stock position, its physical position and everything else. It does not require that all the stocks in its possession should be realised for them to be taken into account for the purpose of assessing profit ability. There is a perfect example. When stocks are taken into account for the purposes of profit and loss it is not necessary that they are in fact realised, and hence the differentiation, and the term "made" in the EEC directive. It must not be thought because of this—I shudder at it—that because I am quoting the EEC directive I am necessarily 100 per cent. for everything contained in EEC Directive No. 4, but the Government are supposed to be following it. I would have thought that the same word which is used by the EEC Directive No. 4—the term,"made"—is far more appropriate; it does ally the Government's version more closely to the directive if they use the identical term. And, in view of the fact that the profession considers that it is likely to give rise to some ambiguity, I would have thought the noble Lord would have been better advised to accept the professional view of this matter.

Once again I am anxious to be most co-operative with the noble and learned Lord. I have no desire to hold up the Bill on what may be a small point of construction. I should like the noble and learned Lord to take further advice on this matter and indeed have further consultation with my colleagues in the profession before finally making up his mind. A change of word, after all, would not strike to the root of the Bill but it might affect the susceptibilities of parliamentary counsel who are notoriously inflexible in matters of this kind once they have put something into a Bill However, I have no doubt that the noble and learned Lord, with all his charm, would be able to get over that in his usual way. In the meantime, and on the understanding that we may have to refer to this matter once again at Report stage, I—

Lord Hale

Is the noble Lord about to withdraw the amendment?

Lord Bruce of Donington

Yes, I was about to ask the leave of the Committee to withdraw it.

Lord Hale

Before the noble Lord does so I should like to make a few additional comments, purely to be helpful. The memorandum to which I previously referred expresses specific doubt about the use of the word "realised" because it has two separate meanings, and doubt as to whether a judicial interpretation would produce something new in this matter. It takes the view that the use of the word "realised" in paragraph 12 on page 74 creates a very serious problem. It says that the existing criteria applied by the courts go far to give some definitions which must be considered in the light of the interpretation of this clause. Some decisions on company law recently have shown such a vast diversity of opinion, with such immense length and cost of argument, as to emphasise the fact that we ought to go very carefully about using decisive words without being absolutely sure of their interpretation.

Lord Mackay of Clashfern

Before the noble Lord, Lord Bruce, asks leave to withdraw the amendment, I should like to say that we will certainly consider the matter further and perhaps—pursuing the noble Lord's illustration—it would be easier to consider it in another situation, other than just here. We will certainly look at what the Law Society said. We have considered it, but we shall be happy to consider it further.

Lord Bruce of Donington

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

4.23 p.m.

Lord Bruce of Donington moved Amendment No. 9A: Page 74, line 41, leave out ("Subject to section C of this Part of this Schedule").

The noble Lord said: I beg to move Amendment No. 9A. It might be for the Committee's convenience if Amendment No. 12A were discussed simultaneously with this amendment, because, as your Lordships will see, the purport of the two amendments taken together is to eliminate completely from Part II of the Schedule, Section C.

This matter raises the whole question of current cost accounting. Section B of Schedule 1 sets out the rules to govern the preparation of accounts prepared on the basis of historical cost accounting. But your Lordships will note that at paragraph 16 the whole process of preparing historic cost accounts is to be subject to section C which, as your Lordships will note, deals with alternative accounting rules. By the operation of these two sections the option is given for any company that so wishes to prepare its accounts on one of two bases: either on the basis of historic cost accounts alone or on the basis of a combination of historic cost accounting and current cost accounting.

I must apologise if I am addressing some noble Lords who are already familiar with the whole principles of current cost accounting, but there may be some of your Lordships who are not perhaps entirely familiar with it. In short, the reasons for the emergence of current cost accounting lie in the sharply accelerating rates of inflation that have taken place, in particular over the last 10 or 15 years. So at the end of a particular year, with accounts prepared on the basis of historic cost—which has been the basis of the preparation of accounts almost since time immemorial—it was thought that although any profit disclosed after the preparation of historic cost accounts (and it should be remembered that a balance sheet is in effect a photograph of a business at the date to which the accounts are taken) was a perfectly accurate one, in the sense that the profit had been made in money terms and emerged quite logically and correctly through the inexorable process of accounting treatment from the original primary documentation, it was nevertheless not really worth the profit which had in fact been made.

It was feared, perhaps, that if a company, on the basis of the profit revealed by historic cost accounts, made rather hefty sums of profit, then perhaps the boards of the companies might be importuned by shareholders who would say, "You made so much profit last year; therefore you can pay us much more dividend than evidently you propose to do". Alternatively, it might be thought by some boards that if trade unions that were in negotiation with the management for adjustments to wages and for the betterment of conditions fastened on the profit that was produced on the basis of historic cost accounts, they might be faced with artificially inflated claims. In times of inflation the management could say, for example, and with every justification," We have been depreciating our assets and have made allowance for them in our profit and loss account on the basis of the historic cost of those assets. But when we come to replace these assets in one, two or three years' time, owing to inflation we are going to have to pay very much more for the assets that replace them. Therefore a correct depreciation charge would be far greater than that which has been incorporated in the historic cost accounts, and if the true depreciation, based on the expectation of replacement at a higher price, had been inserted, then the profit in the accounts has been overstated".

Exactly similar observations apply to the question of stocks. There have been refinements of rules in recent years, but in broad and general terms the stocks in trade and work in progress of a business have normally been valued at the lower end of cost and market value. But with inflation running at high levels—and I am talking now of inflation in double figures, about which we have an elusive promise that it will be brought down to single figures some time in the future—the management can say, quite truthfully, "It is all very well having those stocks in at the lower end of cost or market value, but we shall have to replace them in order to continue trading, and on the basis of current inflation we shall therefore have to pay more for them". Therefore, they say that the profit produced from the profit and loss account prepared on an historic cost basis really reflects a misleading view of the situation as they see it now, as distinct from the photograph that was made as at the year end itself. This is the reason for the whole emergence of current cost accounting.

I shall not weary your Lordships by giving further examples. Exactly the same considerations apply in regard to debtors, which are in the accounts at one figure but, as money will be worth less by the time they are paid, some adjustment is due to be made for that. As to the validity of those arguments there can be no dispute at all. I would say immediately that any management or any board of directors that failed to take into account for management account purposes the various complications that would arise because of inflation would indeed be failing in their duty

But there are two different aspects. Inevitably, the adoption of the principles of current cost accounting bring into the realms of accountancy an element of speculation which many of us in my profession find undesirable. For many years there has been a widespread reliance on accounts properly certified by qualified accountants on an historic cost basis. Once one introduces current cost accounting into the position, inevitably accountants cease to perform the function that I have always understood that they were there to perform—that is to say, the ascertainment, marshalling and presentation of fact—and they begin to enter the field of industrial astrology, however skilled and however necessary it may be.

Over the years the profession of accountants have given considerable study to this whole question of inflation accounting. After a long period of time in which practically every business interest of significance was consulted, they brought out a booklet entitled Accounting Standards in respect of current cost accounting. In effect, this became binding on all members of the accounting profession belonging to the six bodies that compose the consultative committee. They say—and I quote from Statements of Standard Accounting Practice, 16 at page 246 of the 1980 edition of Account ing Standards: This requirement to include current cost accounts in Addition to historical cost accounts or historical cost information can be complied with by"— and then they decided on three alternatives—

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; or
3. (c) presenting current cost accounts as the only accounts accompanied by adequate historical cost information".

Those three alternatives were given. By the combination of paragraph (b) and paragraph (c), the Government themselves, in effect, have chosen to give us an alternative to the presentation of current cost accounts accompanied by adequate historical cost accounts information. I think that this is bound to be misleading and, indeed, is undesirable.

The Committee will recall a speech made by the noble Lord, Lord Weinstock, on 27th November last year in which he referred to the mumbo-jumbo that had been created by the accounting profession. He referred somewhat nostalgically to the old days, when it was quite possible for him to read his accounts on an historic cost basis and gain all the information that he wanted from them; he seemed to think—and I am bound to say on that occasion that I was constrained to agree with him—that it would have been far easier to have the situation as it was.

If the existing options which are given to companies are to remain in the form in which they now are it will not be possible within the same industry to compare the performance of companies like with like. Some companies in the industry will prepare their accounts on an historic cost basis; others will prepare them on a current cost accounting basis. Although, of course, by sheer mathematical calculation and much study it will ultimately be possible to reconcile them, it will not be possible readily to compare them. Moreover, in so far as the Inland Revenue are concerned, they will invariably require the presentation of historic cost accounts for corporation tax purposes. The Government may have legislation in contemplation to bring in current cost accounting for the purpose of determining corporation tax liability for companies. I do not know whether or not that is so; but certainly it is not so at the moment.

I would therefore urge on the Government that they should accept this amendment. They would not suffer in the slightest thereby if they eliminated current cost accounting from the current Bill, because notwithstanding the fact that the historic cost accounting rules set out in Section B of Schedule 1 would be the only ones within the new statute, the provisions of SSAP 16 would still continue to apply. All professional accountants preparing the accounts or auditing the accounts of companies would still be bound to comply with SSAP 16. Therefore, in practical terms the Government would be in no worse position at all.

I am hopeful, at least—I sincerely trust the Government are hopeful—that ultimately the policies of one party or another, or some future parties, will, together with the conduct of the British people, whether they are employed in management, provide the money, are operatives or whatever they may be, ensure that our joint conduct, as people operating in this country, will ultimately result in the bringing down of inflation. This is the avowed aim of the Government, however painful the efforts so far most certainly have been.

Therefore, is it wise to enshrine in a statute provisions relating to current cost accounting which themselves arise from inflation, apparently on the assumption that inflation at the rates that prompted the introduction of current cost accounting is going to continue? I should have thought that it would be most unwise to incorporate those provisions in a statute. It is as though the Government were now writing on blocks of stone that they see continuing indefinitely into the future the inflationary trend which brought the CCA rules into existence.

I ask the Government to have more faith in themselves or, if they have no faith in themselves to bring down the rate of inflation to acceptable levels, then faith in their successors. Surely it is unwise to incorporate these rules as they are now into a statute. Moreover, as I have shown—or at least I hope I have shown—they are concepts which give rise to a degree of speculation, doubt and estimate which are unacceptable as a firm base for the financial accounts of a company, which ought to rest where they have rested—I was going to say almost over the centuries—on the basis of facts that are easily ascertainable, rather than estimates and speculations of the future.

This is not to say—and I venture with your Lordships' leave to repeat it—that companies should not, if they wish, publish current cost account information alongside historic cost. This is not to say that it does not have its uses for management purposes. But once we get into the position where the whole basis of accounting in the United Kingdom departs from the historic cost basis and begins to enter into the more misty areas of inflation rates and of estimates as to the value of assets that have to be replaced in the future, then it is going to strike a blow at the confidence which, by and large, the people of this country have reposed in accounts that are properly produced and properly certified.

I repeat that there is no objection to current cost accounting as an aid to management. There is no objection to providing the information or anything else as an additional note to shareholders and to the public; but I urge the Committee that we should not lightly abandon the whole principles that have been sustained by my profession over the years. I invite the Committee to support the amendment.

4.46 p.m.

Lord Mackay of Clashfern

When the noble Lord, Lord Bruce of Donington, opened his observations in this debate earlier in relation to Clause 1, he told us that he was all for flexibility and that the Government were all for rigidity. I think that at this stage of the debate it looks as though the tables have suddenly somewhat turned, because what the Government have sought to do in this Bill is to take advantage of a flexibility which the fourth directive gives to enable a company, if it thinks that is the best and the correct thing for it, to use the current cost accounting method.

It does not oblige a company to do that. All it does is to confer on the company an option to do so. I must say that we should have thought it extremely retrograde, having regard to the tremendous developments that there have been in the accountancy profession on this matter, to force company auditors to use the historic cost method in every case, which is the effect of the amendments to which the noble Lord has spoken.

The noble Lord talks about fact, and suggests that the historic cost accounts are all based on precise facts and that current cost accounting is in the nature, I think he called it, of industrial astrology. I am not an accountant, but I had always understood that it was possible in historic cost accounts occasionally to find things that were referred to as "valued at cost" or "market value". That seems to me to involve an element of judgment; and far from current cost accounting involving speculation in the way that is suggested, in my submission it involves a question of developing judgment. It is not an easy matter, I quite agree, and that is why—

Lord Kaldor

May I interrupt the noble Lord? The concession to value stocks at market value when it is below cost does not really ultimately involve any arbitrary judgment. It allows a trader to anticipate losses without compelling him to anticipate gains. That is to say, if the market value fell below the cost, he could substitute market value. But when he finally disposes of the stock, then all this is brought back into the accounts and the element of judgment disappears. However, once you enter this inflation cost accounting business you are in entirely different territory.

Lord Mackay of Clashfern

I am obliged to the noble Lord for his helpful intervention. I agree that the amount of judgment required may vary, but I still maintain that if you have to arrive at the market value of something which has not actually been sold, that involves an element of judgment—perhaps not a big element, if a lot of these things are sold, but at any rate some element of judgment. The current cost accounting methods, which have been developed by the profession over the years with a great deal of hard work, are to be encouraged.

The noble Lord says this suggests the Government have no confidence in the future and in their ability to bring down inflation. The position is, in fact, nothing of the kind. It is surely right to recognise a state of affairs which has existed, and at least for the moment does exist, and to recognise the methods by which the accountancy profession have themselves sought to deal with the matter, in a way that gives a true and fair view of the company's position. I do not think I need remind the Committee that the accountancy profession's desire to deal with this issue has been supported by Governments of both parties, and I quote a Parliamentary Answer given by the then Secretary of State for Trade, Mr. Edmund Dell, in December 1976 when he said, talking of the Government of which he was then a member: The Government reaffirm their support for the system of current cost accounting and their desire that this should become the basis for the preparation of accounts as soon as practicable". Indeed, Article 33 of the directive, which permits alternative accounting methods, was obtained as a modification of the original text of the directive by the Government of the United Kingdom which were then a Labour Administration. Accordingly, I strongly submit that Governments of both parties have supported the view that this is a problem which must be grappled with by the accountancy profession and that it is right that when they do grapple with it, and that when the company and those concerned with the accounts of a particular company consider that the current cost accounting method is the correct method to use in the circumstances of that company, in accordance with good accountancy practice as they see it at the time, the Bill should allow them the flexibility to do so.

There are two further points I should mention. First, if the noble Lord's proposals were accepted, companies would lose their existing power to make selective revaluations of amounts in the accounts, and that would be a most retrograde step. Secondly, although companies may, under Section C, value items included in the accounts in accordance with the alternative accounting rules, certain historical cost information will always be required to be shown—that is a requirement of the directive—and of course if the alternative method is used, that must be stated. Thus, the historical cost information that is relevant will be available and the fact that the accounts have been prepared in accordance with the current cost accounting standard would be stated.

Lord Bruce of Donington

Could the noble Lord say whether, under the arrangements he now proposes under Section C, included in the notes and information will be a statement showing what the net profit would have been had historic cost accounting been adopted, and will that figure be set against the figure that emerges from the various adjustments that are set out in Section C to produce the net profit on the CCA basis? In other words, can he assure me that on any published accounts the two figures will be there; net profit on an historic cost accounting basis and net profit on a current cost account basis? There is a difference between saying, "You can get that figure by doing a series of additions and subtractions" and the answer to the question I am asking: whether the figure as such will be stated against the corresponding figure for current cost accounting.

Lord Mackay of Clashfern

I will have this checked, but my understanding is that it would not be necessary to state (if one is using the current cost accounting convention to arrive at the profit) the final result of an historic cost accounting calculation. But certain historic cost accounting information is required by the directive to be stated as a basic minimum. There is a point about this I should stress; I was just coming to it, so the noble Lord's intervention was particularly timely. This Bill makes it the supreme test of accounts that they should show a true and fair view of the state of the company, and that provision, which takes precedence over all other requirements, is in that position because of the efforts of the United Kingdom negotiators on the directive.

It therefore follows that if the current cost accounting convention is used and the auditor proceeds on that basis, he will be satisfied that that is the way, in the circumstances of that company, to give a true and fair view of the company's position. It seems to follow therefore that to proceed on some different convention, such as the historic cost convention alone, would not do so, and thus to put forward the sort of figure the noble Lord is asking for, except in some fairly dismissive way, would be to direct attention to something that has capacity, in the circumstances of the particular company, to mislead.

Accordingly, I invite the Committee to agree that companies should continue to have the flexibility they have now when the Bill becomes law and should continue to have the option to use the current cost accounting convention or any other development of that which the accountancy profession develops and which is consistent with the rule as a way in which they can state their accounts if it seems right that they should do so.

Lord Hawke

I again approach the matter as an ordinary investor, and in that capacity I am rather disappointed with my noble and learned friend's reply. From the investor's point of view, if some companies adopt historic and some current cost accounting, it will be most muddling and it will be impossible to compare the results. Suppose a person is thinking of making an investment in, say, the engineering section and he finds that half the companies are doing historic cost and half current cost; he will not know where he stands without doing a tremendous amount of arithmetic. Whereas if, as the noble Lord, Lord Bruce of Donington, says, they were bound to show the historic cost figures and could then show the others if their accountants thought them more relevant, at least he would know where he stands in comparing the results of one company with another.

Lord Mackay of Clashfern

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 would therefore answer my noble friend by saying that if he finds that two companies are having their accounts presented under the accounting standard on these two different bases, he should look further to ascertain what are the differences between the companies—because they must be very relevant from an investor's point of view—which leads the companies and the auditors to take the view that they should be distinguished in that way. It suggests that merely to look at companies' accounts presented on the same basis does not necessarily tell one the whole story; there is something a good deal deeper that one should look into if one is contemplating investing in two such companies and one is trying to compare them.

Lord Hawke

I suggest to my noble and learned friend that the answer to that one is that it depends on which firm of accountants is doing the accounts; one firm will favour historic and another may favour current.

Lord Mackay of Clashfern

That is the whole purpose of developing the accounting standard—so it will not depend on the whim of the particular accountant, but that in deciding which method to use the accountant will have the guidance of rules of general practice which are accepted by the generality of those who practice in the profession, just like many other conventions that accountants over the years have used, as the noble Lord, Lord Bruce, pointed out.

Lord Bruce of Donington

The noble and learned Lord is of course aware that under the provisions of the Bill an option is given; there is no compulsion on a company or its auditors to adopt current cost accounting The term "may" is used, and when that term becomes effective the words Subject to section C of this Part of this Schedule come into operation so far as historic cost accounting is concerned. Perhaps I ought to explain that in the views that I am putting forward to your Lordships' Committee this afternoon I do not speak with the authority of the six accounting bodies which produced the consultative document, negotiated with the Minister, and indeed were responsible for producing these excellent accounting standards. I wish to make that quite clear.

Nor for one moment do I dispute the fact that the previous Administration adopted an attitude very similar to that being displayed here this afternoon by the noble and learned Lord. But the previous Administration did not have the benefit of my advice on this particular subject, and I have no doubt that, had I been available at the time so to advise them, Her Majesty's previous Administration would not have taken up the position that they evidently did.

The noble and learned Lord has spoken of the question of a true and fair view, and I concede immediately that the incorporation of the term "true and fair view" into the EEC Directive No. 4 itself represents a considerable victory, upon which I congratulate the previous Administration and Her Majesty's present Administration. It must have been a very considerable achievement, in view of the attitude of our French colleagues, and in particular our Italian colleagues, who apparently are not conversant with the term.

But it now emerges that there can be at least two true and fair views. There can be a true and fair view of the situation of a company whose accounts have been prepared on the basis of the historic cost convention. Any accountant can prepare a company's accounts on that basis and can certify them as showing, in accordance with the historic cost convention, a true and fair view. This point was very well made by the noble Lord opposite, whose name escapes me at the moment. At the same time, another accountant working on the accounts of the same company—imagine this hypothetical situation—but operating on the current cost accounting convention could certify a totally different profit, and in times of inflation probably a reduced profit, as being a true and fair view of the company's affairs. That is where there arises the confusion to which the noble Lord, in my view quite correctly, referred.

The Bill legislates for two or more true and fair views of a company's affairs at a given date, or at the date of the preparation of the accounts, or whatever the date might be. In my view that is confusing. It is confusing not only to shareholders, but also to trade unions. In fact those with suspicious minds might have taken a certain view—I am not saying that they did—in the light of the considerable profits produced on the historic cost basis, showing much higher profits than would be shown by the current cost accounting method. There might have been a fear that the trade union movement would take undue advantage of the situation. There might have been the suspicion that the whole purpose of having current cost accounting within the convoluted formulae, in regard to which we might seek elucidation in later amendments, is to confuse the public in general and perhaps the trade union movement as to the true extent of the profitability of a company.

I can only repeat the point: if the amendment is carried, it will not make the position much different from what it is today. The abolition of Section C would still leave the professions free to operate as they have operated in the past, and there would be no noticeable difference. But I take a firm stand, and I invite my colleagues to do likewise, regarding the inclusion in a statute of measures relating to current cost accounting, the total effect of which may be to mislead, rather than to reveal to the public and to those interested the true state of affairs of the various companies concerned.

5.6 p.m.

On Question, Whether the said amendment (No. 9A) shall be agreed to?

Their Lordships divided: Contents, 60; Not-Contents, 116.

CONTENTS
Ardwick, L.	Lovell-Davis, L.
Baker, L.	McCarthy, L.
Birk, B.	McGregor of Durris, L.
Blease, L.	Maelor, L.
Blyton, L.	Mishcon, L.
Boston of Faversham, L.	Oram, L.
Briginshaw, L.	Peart, L.
Brockway, L.	Phillips, B.
Brooks of Tremorfa, L.	Ponsonby of Shulbrede, L.
Bruce of Donington, L.	Ritchie-Calder, L.
Cooper of Stockton Heath, L.	Rugby, L.
Crowther-Hunt, L.	Sefton of Garston, L.
Davies of Leek, L.	Segal, L.
Davies of Penrhys, L.	Shinwell, L.
Donnet of Balgay, L.	Spens, L.
Elwyn-Jones, L.	Stedman, B.
Gaitskell, B.	Stewart of Alvechurch, B.
Hale, L.	Stewart of Fulham, L.
Hayter, L.	Stone, L.
Houghton of Sowerby, L.	Strabolgi, L.
Howie of Troon, L.	Strauss, L.
Jacques, L.	Taylor of Mansfield, L.
Janner, L.	Underhill, L.
Jeger, B.	Wallace of Coslany, L. (Teller.)
Kaldor, L.
Killearn, L.	Wells-Pestell, L.
Leatherland, L.	Whaddon, L.
Lee of Newton, L.	White, B.
Llewelyn-Davies of Hastoe, B. (Teller.)	Willis, L.
	Wilson of Radcliffe, L.
Longford, E.	Wootton of Abinger, B.

NOT-CONTENTS
Ailesbury, M.	Alport, L.
Airey of Abingdon, B.	Ampthill, L.
Allen of Abbeydale, L.	Amulree, L.
Allerton, L.	Auckland, L.

Avon, E.	Kimberley, E.
Balerno, L.	Kinloss, Ly.
Banks, L.	Kinnaird, L.
Belhaven and Stenton, L.	Lloyd of Kilgerran, L.
Bellwin, L.	Long, V.
Belstead, L.	Loudoun, C.
Bessborough, E.	Lucas of Chilworth, L.
Boyd-Carpenter, L.	Lyell, L.
Bradford, E.	McFadzean, L.
Braye, L.	Mackay of Clashfern, L.
Caccia, L.	McNair, L.
Carrington, L.	Mancroft, L.
Chelwood, L.	Mersey, V.
Chitnis, L.	Milverton, L.
Clifford of Chudleigh, L.	Minto, E.
Cockfield, L.	Montagu of Beaulieu, L.
Cottesloe, L.	Montgomery of Alamein, V.
Craigavon, V.	Mottistone, L.
Craigmyle, L.	Murton of Lindisfarne, L.
Craigton, L.	Noel-Buxton, L.
Cranbrook, E.	Northchurch, B.
Dacre of Glanton, L.	Nugent of Guildford, L.
Daventry, V.	O'Neill of the Maine, L.
Denham, L. (Teller.)	Orkney, E.
Donegall, M.	Pender, L.
Drumalbyn, L.	Penrhyn, L.
Eccles, V.	Redmayne, L.
Ellenborough, L.	Rochester, L.
Elliot of Harwood, B.	St. Just, L.
Elton, L.	Saint Oswald, L.
Erroll, E.	Sandford, L.
Ferrers, E.	Sandys, L. (Teller.)
Forester, L.	Seear, B.
Fraser of Kilmorack, L.	Seebohm, L.
Gladwyn, L.	Selkirk, E.
Glasgow, E.	Skelmersdale, L.
Glenarthur, L.	Strathcarron, L.
Glendevon, L.	Strathclyde, L.
Gormanston, V.	Strathspey, L.
Gridley, L.	Swinfen, L.
Hailsham of Saint Marylebone, L.	Swinton, E.
	Terrington, L.
Halsbury, E.	Teviot, L.
Hampton, L.	Tranmire, L.
Hanworth, V.	Trenchard, V.
Harmar-Nicholls, L.	Trumpington, B.
Harris of Greenwich, L.	Vaux of Harrowden, L.
Harvington, L.	Vickers, B.
Henley, L.	Vivian, L.
Hillingdon, L.	Waldegrave, E.
Holderness, L.	Westbury, L.
Hornsby-Smith, B.	Wigoder, L.
Hunt, L.	Winstanley, L.
Hylton-Foster, B.	Young of Darlington, L.
Ironside, L.

Resolved in the negative, and amendment disagreed to accordingly.

5.15 p.m.

Lord Bruce of Donington moved Amendment No. 10:

Page 75, line 18, at end insert— (". In the case of debts due or accruing due to the company purchase price shall be taken to mean the value of the consideration given in transaction giving rise to the debt").

The noble Lord said: Paragraph 17 of Schedule 1 provides that the amount to be included in respect of any fixed asset shall be its purchase price or production cost". This does not seem appropriate in the case of debts, and it is suggested that in relation to both this particular paragraph and paragraph 22, which deals with the amounts to be included in respect of any current asset, this provision should be inserted. If it is agreed in relation to this particular paragraph then perhaps a similar provision could be inserted in relation to paragraph 22.

Exactly the same principle arises on Amendment No. 11, which it will probably be convenient to consider in conjunction with this one. That suggests that we carry the same wording through on page 76, at line 31: In the case of debts due or accruing due to the company purchase price shall be taken to mean the value of the consideration given in the transaction giving rise to the debt".

This is purely technical and is designed to assist the Government. I beg to move.

Lord Mackay of Clashfern

We appreciate the assistance offered here, but the point is a slightly difficult one. The phrase "purchase price or production cost" is a phrase which is not easily applicable to a number of different types of asset, but we believe that accountancy practice can deal with these matters and that the phrase "purchase price or production cost" is sufficiently general to enable an accountant to make the proper application of it to a variety of different assets. We feel that to provide a specific definition of this kind in the case of debts without doing it for all other assets where there might be difficulty might not be particularly helpful, and it is for that reason that so far we have not been persuaded that this suggestion, which I quite accept is made in the most helpful way, would in fact be an improvement.

Lord Bruce of Donington

I am grateful to the noble and learned Lord. I shall not seek to persuade him further. The amendment is put forward to be helpful. If the noble and learned Lord does not want to be helped, that is entirely up to him. With the permission of the Committee, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 11 not moved.]

Lord Bruce of Donington moved Amendment No. 12: Page 77, line 43, leave out from ("any") to the end of line 45 and insert ("generally accepted accounting method provided that the method is one of those mentioned in sub-paragraph (2) below and is applied to all such assets of the same class ").

The noble Lord said: By this amendment we propose, in page 77, line 43, to leave out the words, of the methods mentioned in sub-paragraph (2) below in relation to any such assets of the same class", and to substitute the words which appear on the Marshalled List. It is considered to be important that accounting standards should be allowed to continue to operate without apparent conflict with statutory provisions. Indeed, I referred to that earlier this afternoon in the opening part of my remarks on Clause 1. The risks of such conflict are heightened where detailed specifications of accounting rules, including valuation rules, are incorporated in statute law. My view is that accounting requirements in the legislation should be kept in as general terms as is possible.

A present example of the difficulties is to be found in the provisions of paragraph 27 of Schedule 1, which specify methods of valuation of stock which are not wholly consistent with the present Standard of Accounting Practice No. 9 on stocks and work in progress, to which, with your Lordships' permission, I should like to refer. Page 185 deals with the method of costing. It reads: The method of arriving at cost by applying the latest purchase price to the total number of units in stock is unacceptable in principle because it is not necessarily the same as actual cost and, in times of rising prices, will result in the taking of a profit which has not been realised. One method of arriving at cost, in the absence of a satisfactory costing system, is the use of selling price less an estimated profit margin. This is acceptable only if it can be demonstrated that the method gives a reasonable approximation of the actual cost". Then it says: Furthermore, where standard costs are used they need to be reviewed frequently to ensure that they bear a reasonable relationship to actual costs obtained during the period. A method such as base stock and LIFO—last in first out—do not usually bear such a relationship". Yet, within paragraph 27, particularly at sub-paragraph (2), one of the methods listed at sub-paragraph (2)(b) is that known as "last in first out". There is the conflict; because LIFO is not considered by the profession to be satisfactory in all circumstances. We consider that these difficulties could be avoided by a simple amendment which would have the effect of setting the method of valuation prescribed in paragraph 27(2) within the context generally accepted by accounting methods. This is the whole purpose of the amendment which would clarify the position in paragraph 27 and would bring it more into conformity with standard practice as adopted by the accountancy profession at this time. In order to reassure the noble Lord, I may say that this amendment is put forward with the object of assisting. I would not dream of pressing it any further. If the Government do not wish to take advantage of it, I have the melancholy satisfaction of putting it forward with the best possible motive in order to assist.

Lord Mackay of Clashfern

It is perhaps not great gratitude to leave the noble Lord melancholy; but I will have to do that. The purpose of this particular set of provisions is to lay out the possibilities and LIFO (last in, first out) is one of the possibilities. The noble Lord read from Accounting Standards. What that says about this particular matter is: It is not usually appropriate". That suggests that there may be circumstances in which it might be appropriate. We have sought to make it available where it is appropriate. The difference between us is whether it is necessary to bring in at this particular place expressly "generally accepted accounting method". To enshrine that phrase in this place would be to inhibit the progress and process of development of accounting methods. If only what is generally acceptable is to be used, that will be a very great clog on appropriate innovation.

It reminds me of a story about a certain solicitor in Glasgow who never instructed counsel except of established reputation and was left wondering how counsel ever came to have established reputation. It seems to me to be that sort of problem. We have to allow the accountancy profession to regulate these matters. This is another instance of the Government seeking to be as flexible as possible within the framework of the directive, leaving the accountancy profession to develop its own approach within that minimum legal framework. I should have thought that as a lawyer I could commend that approach to an accountant.

Lord Bruce of Donington

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 12 not moved.]

[Amendment No. 12A not moved.]

The Deputy Chairman of Committees

Amendment No. 12A pre-empts Amendments Nos. 13, 14 and 15. I cannot call these amendments. Amendment 16, Lord Trefgarne.

Lord Bruce of Donington

Amendment 12A, as I understand it, resulted in the "Not-Contents" exceeding numerically the "Contents" and therefore Section C still remains in the Bill. I submit with respect that that does not now inhibit the calling of Amendments Nos. 13, 14 and 15; but I defer to the Chair.

The Deputy Chairman of Committees

If the noble Lord wishes to move Amendment No. 13, I think that is in order.

Lord Bruce of Donington moved Amendment No. 13:

Page 79, line 30, at end insert— ("(5) Current asset investments may be included at their current cost").

The noble Lord said: I beg to move Amendment No. 13. It will be noted that although I recommended to the Committee that Section C should be eliminated from the Schedule, Section C having been retained in the Bill by the will of the Committee, I will now seek constructively to effect amendments to Section C itself in the hope that my endeavour to be constructive on this matter will not be construed as my giving any support to Section C itself. It is purely the acknowledgment by me of the fait accompli. The accountants' co-ordinating committee believe that it would be desirable to provide specifically for current cost valuation in respect of current asset investments under the alternative accounting rules. I have no further comment to offer than that and I commend the amendment to the Committee.

Lord Lyell

The purpose of the amendment is to attempt to provide some scope for the future development in current cost accounting, about which the noble Lord was speaking to us a short while ago. It will not surprise the noble Lord to find that the Government are sympathetic to that objective. What may surprise him is that we accept his amendment in principle. There is one small caveat: the Government want to consider the drafting of the amendment to see whether it is appropriate for the particular purpose that he has in mind. We undertake to draft an amendment of our own and bring it forward at a later stage. I hope that the noble Lord might see fit to cheer this small mercy.

Lord Bruce of Donington

Yes. With the leave of the Committee, I shall withdraw the amendment.

Amendment, by leave, withdrawn.

5.32 p.m.

Lord Bruce of Donington moved amendment No. 14: Page 81, line 28, leave out ("a").

The noble Lord said: This is a small drafting amendment. I commend to the Committee the elimination of the little word "a". If the position is left as it is concerning the revaluation reserve, it appears to have the possible effect of restricting transfers from the revaluation reserve to reversals of amounts relating to the same item previously credited to a revaluation reserve. If one eliminates the word "a" so that the paragraph reads: … it represents realised profit". we think that that more accurately reflects the real wishes of the Government in the matter. I beg to move.

Lord Lyell

My Lords, this is a small amendment. Nevertheless, it is a point of interest, a point of detail and a point of some importance. The noble Lord, Lord Bruce, has moved it; I detect a trace of hope on his face and it is realised: we accept it.

On Question, amendment agreed to.

Lord Bruce of Donington moved Amendment No. 15: Page 81, line 29, leave out ("treatment for taxation purposes of") and insert ("accounting treatment of taxation related to").

The noble Lord said: This amendment again refers to the wording of paragraph 34(5). It seeks to leave out the words "treatment for taxation purposes of", substituting "accounting treatment of taxation related to". That is a more accurate way of what it is believed are the Government's real intentions. Paragraph 34(5) provides that the treatment for taxation purposes of amounts credited or debited to the revaluation reserve shall be disclosed in a note to the accounts. The whole purpose of the amendment is to make it clear that the treatment for taxation purposes relate to the accounting treatment of taxation related to amounts credited or debited to revaluation reserve rather than the treatment of such amounts in the returns made by the company to the Inland Revenue. We think that this amendment achieves that purpose and is fully consistent with the whole purpose of paragraph 34. From the standpoint of the professionals, it clarifies the position. I beg to move.

Lord Mackay of Clashfern

The intention of this provision is to deal with the way in which the amount is treated for tax purposes. 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. The point—so far as the directive appears to bring it out—relates to the actual sums that go into the reserve rather than the treatment of the taxation. It may be that there is some difficulty between us on the way in which this is phrased. I should be glad if the noble Lord would accept an assurance that we shall look at this. At the moment it seems to us that we have it correct, and that the provision as drafted is in accordance with the directive and does not have the detrimental effect to which the noble Lord referred.

Lord Bruce of Donington

I am happy to accept the assurance of the noble and learned Lord that he will take another look at the amendment. Although this is a comparatively small matter, it is one which the consultative committee would once again like to impress upon the Minister. They are clear in their minds. The point may be abstruse but most points relating to the treatment of taxation tend to be a little abstruse. I think that the noble Lord's offer to look at the matter again ought to be acceptable to the Committee. With the leave of the Committee, I wish to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Mackay of Clashfern moved Amendment No. 16: Page 82, line 14, leave out ("preference").

The noble and learned Lord said: On behalf of my noble friend Lord Trefgarne I move this amendment and speak also to Amendment No. 20. The reason for this amendment is that we have tabled amendments designed to enable a company to purchase their own shares. In the past, redeemable preference shares were subject to the possibility of being redeemed. This possibility is being opened out now and therefore is is no longer appropriate to restrict the shares in question to redeemable preference shares, but redeemable shares as such are appropriate. I beg to move.

Lord Bruce of Donington

I am not prepared to advise the Committee to do anything other than support the amendment at this stage. It is something that anticipates events which we understand are to take place later. On the supposition that the Government are likely to obtain their will in regard to the later clause that has been tabled, I do not see any reason why we should not support this particular amendment.

On Question, amendment agreed to.

The Deputy Chairman (Lord Jacques)

I have to advise your Lordships that, if Amendment No. 17 is agreed to, I shall not be able to call Amendment No. 18.

Lord Bruce of Donington moved Amendment No. 17: Page 84, line 20, leave out paragraph 45.

The noble Lord said: I beg to move this amendment. In view of the overall disclosure requirements of the Fourth Directive, the requirements to distinguish "listed" from other investments and to differentiate "investments listed on a recognised stock exchange" from other listed investments would appear to be unnecessary. So, with the object of minimising legislation —a course to which we are quite sure the Government are committed—we offer to assist them in this matter by not resisting any endeavours to minimise legislation by eliminating the paragraph.

Lord Lyell

The noble Lord, Lord Bruce of Donington, has proposed this amendment. It seems quite drastic to leave out the whole of paragraph 45, because we believe that this requirement in paragraph 45 of Schedule 1 does not stem from the Fourth Directive. It is, as we see it, a modification of several of the existing requirements of Schedule 8, specifically in paragraph 8(1)(a), 8(3), and paragraph 11(8). These small and detailed requirements in the existing Schedule 8 have not been the subject of any criticism so far and the Government take the view that disclosure of the amount of any company's investments which are listed and the market value of these investments does provide very useful and desirable information. I hope the noble Lord, Lord Bruce of Donington, will accept, for this reason, that we cannot accept deletion of the entire paragraph and I would hope the noble Lord might see our views in that light.

Lord Hawke

Could my noble friend explain the difference between a "listed investment" and a "listed investment on a recognised stock exchange"? That is what is rather defeating me at the moment.

Lord Lyell

I understand that there are recognised and unrecognised stock exchanges and that the London Stock Exchange, together with the provincial branches, is a recognised stock exchange. I believe there are differing rules as to what is a listed and an unlisted security on a recognised stock exchange, but perhaps I might write to my noble friend with a particular definition of this.

Lord Hawke

I do not want the noble Lord to waste pen and ink in writing to me: I want him just to look at the Bill and see whether it is necessary in some way to redefine them, because I still do not understand why some are "listed" and some are "listed on a stock exchange".

Lord Lyell

I am sorry: I did not quite hear the last words of the noble Lord.

Lord Hawke

May I repeat that I still do not understand the difference between a listed investment and one which is listed on a recognised stock exchange. The ones that are just "listed"—what are they listed on?

Lord Lyell

As I hoped I had suggested earlier, the noble Lord has stumped me. Could I inquire and could I let him know?

Lord Hawke

No, I merely want the Bill to be put right, if it is wrong.

Lord Lyell

If my noble friend believes that the Bill should be put right, perhaps he could put down an amendment. We believe that the Bill before us is presented in reasonable form, but perhaps we might study what has been said and we could perhaps write to him.

Lord Mishcon

I wonder whether I might intervene for a moment and keep talking while a certain note reaches the noble Lord, as a result of which he may be able to enlighten the Committee and we can move on.

Lord Lyell

Once again the solicitors' profession, in the person of the noble Lord, Lord Mishcon, has come to the aid of the accountant! I am advised—and I hope that my noble friend and the Committee might accept this—that there is no need for a definition of "a recognised stock exchange" because that definition is already contained in Section 455(1) of the 1948 Act. I have that beside me but it is temporarily out of reach. Investments which are listed on other than on a recognised stock exchange are those which are listed on other stock exchanges. I hope that might help my noble friend.

Lord Hawke

I really would suggest to my noble friend then that he should insert in the Bill some phrase such as— listed on non-recognised stock exchanges".

Lord Bruce of Donington

Perhaps I can assist the noble Lord, Lord Lyell, a little. If he will turn to the balance sheet formats, Format 1 (page 63) he will find under B III, "INVESTMENTS", the following classifications:

• "1. Shares in group companies
• 2. Loans to group companies
• 3. Shares in related companies
• 4. Loans to related companies
• 5. Other investments other than loans
• 6. Other loans
• 7. Own shares".

Under C III "INVESTMENTS" he will find listed shares in group companies, own shares and other investments. In Format 2, "ASSETS", he will find under B III "INVESTMENTS":

• "1. Shares in group companies
• 2. Loans to group companies
• 3. Shares in related companies
• 4. Loans to related companies
• 5. Other investments other than loans
• 6. Other loans
• 7. Own shares.".

This is all that is required on the pro formal. All one is really asking is why, in view of the requirements on the formats of the balance sheet, which go into considerable detail as to which is required, do we want this extra paragraph 45, since all the requirements have already been set out in the formats? I am only trying to be helpful to the noble Lord. I would have thought he would have found it much simpler to eliminate this paragraph which, on the basis of the EEC directive and indeed of his own Formats 1 and 2 for balance sheets, appear to be redundant anyway. I do not understand why he will not co-operate with himself.

Lord Lyell

I find the invitation of the noble Lord, Lord Bruce, most interesting, but perhaps we need legal advice as to how I can co-operate with myself. I have nothing further to add to what I said originally. Basically, we believe the effect of what the noble Lord would have us do—and it is quite drastic to remove the whole paragraph—would be harsh. It would remove the disclosure of any amounts related to listed investments. For the benefit of my noble friend Lord Hawke, I have Section 455 of the Companies Act 1948 in front of me, but I do not immediately find in front of me the definition schedule to the 1948 Act. However, I would assure my noble friend that the definitions of "listed stock exchange" and "recognised stock exchanges" are within this particular section.

Lord Hawke

My Lords, I apologise to my noble friend because I was the secretary of the Conservative Committee in this House which considered the 1948 Act, but I am afraid I have forgotten the contents of Section 455.

Lord Lyell

May I then put my noble friend's mind at rest? In the 1948 Act, Section 455, says that a recognised stock exchange means any body of persons which is for the time being a recognised stock exchange for the purposes of the Prevention of Fraud (Investments) Act, 1939;". This is possibly going back even further than when my noble friend was doing all the preparatory work on the 1948 Act. I am very grateful to him for pointing out his problem and for his helpfulness.

Lord Tryon

I do not want to prolong this debate but I find that sub-paragraph (2)(b) of paragraph 45 is somewhat confusing. Could the noble Lord, Lord Lyell, explain to me how the market value and the stock exchange value can in any way be different? I have been involved with these things all my working life, and the terms "stock exchange value" and "market value" have always meant the same thing to me.

Lord Lyell

Could I defer just briefly my reply to the noble Lord, Lord Tryon. I have received a note regarding the point made by my noble friend, Lord Hawke, about the distinction between listed and non-listed investments. It seems to be an important one for the sake of giving what we regard as useful information about the character and value of a company's investments. If we draw that distinction, whether "recognised stock exchange" or not, I hope my noble friend will see that the listing of investments is meant to be helpful. I hope that the words "recognised stock exchange" will give to my noble friend some indication of where the listing of the investments takes place.

The noble Lord, Lord Tryon, asked me about the terms "market value" and "stock exchange value" which appear in the first line of paragraph 45(2)(b). His point is germane to the one I raised earlier when answering my noble friend Lord Hawke about "recognised stock exchange" and otherwise. I am advised that the market value and the stock exchange value may differ according to the size of the investment and (something which will be familiar to the noble Lord, Lord Tryon), its marketability. To take one example, the controlling stake would be worth more than a mere minority of the shares in a company. I hope that this will be especially relevant to the noble Lord, Lord Tryon, who has interests in this particular area.

Lord Hawke

If my noble friend would consider replacing the word "listed" in line 24 by the word "corporate", it might make things a little clearer.

Lord Lyell

I will certainly consider my noble friend's suggestion.

Lord Bruce of Donington

I have listened very carefully to the noble Lord and to the exchanges which have taken place between him and his noble friend. I wonder whether he would now give me some guidance as to exactly how companies which use Format 1 are going to enter items under C.III investments and exactly how they are going to deal with the same investments under C.III of Format 2. Those formats appear on pages 63 and 65 respectively. Are companies going to be required to elaborate further the specific items which have been set out in this format? If all that is required—and this is implied by the formats themselves—is the bare figure against each item on the format, then the relevance of paragraph 45 disappears. If on the other hand paragraph 45 is to remain, will the noble Lord show exactly how the entries are going to be made, and the respective entries?

Lord Lyell

The noble Lord has done exactly what I should have done. If he will look at the top of page 82 he will find in heavy type: Information supplementing the balance sheet and that it is Schedule 1, Part III, paragraph 37 onwards which we are discussing. I understand that paragraph 45 relates to the notes, which is information supplementing the balance sheet. Therefore, the requirements of paragraph 45 will not necessarily be in the format. I have much sympathy with the noble Lord. I hope I have explained it.

Lord Bruce of Donington

I am obliged to the noble Lord. He has indeed clarified the position.

Lord Hale

I had a letter in January which I put on one side in the hope that I might understand it. I am anxious to know whether it is supposed to be favourable or unfavourable to me. It came from a well-known insurance company with a name which promises resurgence. Apparently they are the trustees for shareholders in a company. They say this: As you are aware"— that is me; I was not— the Stock is an unsecured obligation of Brittains Limited, and several subsidiaries of Brittains Limited ('Guaranteeing Subsidiaries') guaranteed its due repayment. Those guarantees are also unsecured. In addition to Brittains Limited, twelve of the Guaranteeing Subsidiaries are in receivership. Messrs. M. A. Jordan and R. A. Stone of Messrs. Cork Gully are the receivers of Brittains Limited and nine of the Guaranteeing Subsidiaries, while Messrs. A. R. Houghton and C. Morris of Messrs. Touche Ross & Co. are the receivers in the case of the three other Guaranteeing Subsidiaries in receivership". How the accounts of guaranteeing companies and non-guaranteeing companies and the more or less quiescent and non-active companies arc mingled in some common account somewhere, I do not know. And they say that they are not going to tell me. They say that they can tell me but that on the whole there is a lot of work to be done yet to clear it all up and that it must be nicely tidied up. But there will not be any assets.

I am sorry to intervene. Indeed, I should not have intervened at all if I had reached the stage of comprehension of what was being discussed, but not being able to comprehend what was being discussed I thought this was an opportunity to suggest that if the noble Lord could let me know whether or not that is Favourable, and what it means, I should be grateful

Lord Mackay of Clashfern

I think the noble Lord will agree that we shall need time to consider that question.

Lord Tryon

To return to sub-paragraph (2)(b) of paragraph 45, although I thank the noble Lord, Lord Lyell, for his answer and see what he is getting at, if (2)(b) is to stay in the Bill he will cause confusion if the terms "market value" and "stock exchange value" remain there together. Why not say "realisable value"?

Lord Lyell

I should like to thank the noble Lord, Lord Tryon, for his suggestion but I fear that both he and I may get into particularly boggy ground if we go on with this. We have already had a lengthy discussion this afternoon on "realisable". It is perfectly clear to me what "market value" and "stock exchange value" mean. I hope that I gave a partial explanation to the noble Lord. May we consider what he has said? If we find that there is anything of intrinsic merit in it, we will write to him. I am sure the noble Lord will accept my word that we shall consider everything that he has said.

Amendment, by leave, withdrawn.

6 p.m.

Lord Bruce of Donington moved Amendment No. 18: Page 87, line 24, leave out ("each of the amounts") and insert ("the amounts relating to each item").

The noble Lord said: This is a drafting amendment. Paragraph 53 requires a separate statement in the profit and loss account of certain items of income and expenditure. Paragraph 53(1) requires "each of the amounts mentioned" to be disclosed. This does not seem to be clear in relation to paragraph 53(2). It is not clear what the effect of the use of those words in paragraph 53(1) is on those in paragraph 53(2). If it is intended, under sub-paragraph (a) which is at line 28 on page 87, to require interest on bank loans to be shown separately as regards both heads (i) and (ii) of that sub-paragraph, I think the words in the amendment will be more appropriate—namely, "the amounts relating to each item" rather than the words that are in the Bill as at present drafted. It is purely a matter of clarification and I do not press it. I beg to move.

Lord Lyell

The noble Lord, Lord Bruce, has proposed this amendment, and indeed we have also considered whether there seems to be any lack of clarity as to exactly what type of information is demanded by paragraph 53. It has been put to us that it might be better to have separate information which would be required in respect of the items which are described under the two particular elements (i) and (ii) in sub-paragraph (a). If there is a problem, which the noble Lord seems to have spelled out for us, certainly it is not a new problem, since this particular provision has existed in this form since 1948 in Schedule A. At the same time we believe that there could not be much doubt as to what information is specially required.

If your Lordships will consult sub-paragraph (1) you will see that each of the amounts "mentioned below"—that is, in sub-paragraph (2)—"shall be stated". Sub-paragraph 2 refers to only two amounts: the amounts described under (2)(a) and (2)(b) are the two differing amounts. Thus we do not think that any separate information needs to be given in respect of the several elements described in sub-paragraph (a), but the proposed amendment might call for further information and therefore would increase the amount of disclosure that would be required. We do not think it is necessary that such detailed disclosure should be in the Bill. I hope the noble Lord will accept that we would rather leave the particular provision in paragraph 53 as it is.

Lord Bruce of Donington

I am grateful to the noble Lord for that information. Now his intention is quite clear I entirely agree that it would be wrong to require the expenditure relating to each particular item, which would of course include items under heads (i) and (ii). If he says he does not want that, I am happy that he should not get it, and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.3 p.m.

Lord Bruce of Donington moved Amendment No. 19: Page 87, line 41, leave out ("provided") and insert ("set aside").

The noble Lord said: This amendment seeks to leave out the word "provided". It is a drafting amendment but it is an important one, and I am suggesting that there should be put, instead of "provided", the words "set aside". At page 96, paragraph 87, the use of the term "provision" is quite clearly explained, and I think it would be wrong to confuse the term "provision", which to the accounting profession carries a particular connotation, which is confirmed in paragraph 87 at page 96, if this were used at paragraph 53(3). I think the accountancy profession—and indeed the noble Lord—would agree that the term "provided" is in fact inappropriate and that the insertion of the term "set aside" is the correct accounting term to use in that context. I beg to move.

Lord Lyell

The noble Lord, Lord Bruce, has pointed out that the use of the word "provided" in paragraph 53(3) would make for some uncertainty and he has doubts about it. It also seems that he has doubts as to whether or not the amounts in paragraph 53 would be within the definition of "provision". The Government agree that the applicability of the definition of "provision" for liability and charges to these particular items, and indeed the implication for a proper balance sheet treatment, requires a little further consideration. The Government will give the undertaking that we will give further consideration to the points raised by the noble Lord and we will bring forward an amendment at a later stage if we think it appropriate. I hope the noble Lord will accept that. We do not want to clutter up the Bill and to waste your Lordships' time with completely unnecessary amendments, but we will take on board everything that the noble Lord has said, and if we deem it necessary we will bring an amendment forward to meet his point.

Lord Bruce of Donington

I hope that the noble Lord, Lord Lyell, will give this point serious consideration, because it is a matter on which the accounting profession is quite firm and has been so for many years. May I respectfully suggest to the noble Lord that the desire of parliamentary counsel to keep precisely to the text and nothing but the test should not be allowed to impede the undoubted progress of his own intellectual judgment in these matters, which we trust will prevail. On his undertaking that he will bring the matter again before the House at Report stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Schedule 1, as amended, shall be the first schedule to the Bill?

Lord Bruce of Donington

Before we part with this schedule, which has taken a lot of your Lordships' time, there are still one or two matters to which I should like to refer. These are matters on which it has not been possible or even thought desirable to bring forward amendments, but we should like the Government to consider them before the Report stage.

The first matter relates to paragraph 29 of Schedule 1 which contains a definition of "depreciation". It defines depreciation rules and, in paragraph 32, their application. I wonder whether it would be possible for the noble Lord to take another look at these provisions to see whether they could be put in rather simpler words. If we take paragraph 32, we find that it says: Where the value of any asset of a company is determined on any basis mentioned in paragraph 31 above, that value shall be or (as the case may require) be the starting point for determining the amount to be included in respect of that asset in the company's accounts, instead of its purchase price or production cost or any value previously so determined for that asset; and the depreciation rules shall apply accordingly in relation to any such asset with the substitution for any reference to its purchase price or production cost of a reference to the value most recently determined for that asset on any basis mentioned in paragraph 31. With the best will in the world, I do not think that paragraph is one of the finest examples of the draftsman's art. These drafting questions are very difficult. Parliamentary counsel has to take into account every contingency, and one understands in relation to legislation that there has to be what appears to be convoluted language in order that the precise legal effect may be expressed. This one fully understands, and I am not trying to make a snide point about it. All I am saying is that I should be extremely surprised if any of your Lordships could readily understand paragraph 32 and rise forthwith and explain the precise point in very great detail. I think the Government might have a look at it to see if it is possible to produce some simpler form of words.

There is another point in relation to Schedule 1, namely, paragraph 43(b). It provides that where assets have been valued during the year, the names of the valuers or their qualifications and the bases used shall be given. On the assumption that revaluation of fixed assets under the indexation method in accounts prepared under the current cost convention constitutes a valuation under paragraph 31, then the requirement could be unduly onerous. In major groups a considerable number of valuers might be involved, resulting in a statement of excessive length. I think this ought to be looked at to see whether there is any way of simplifying it. The reason I have mentioned these points on the Question that the schedule be agreed to is that quite purposely we did not submit amendments. The reason I raise them here is so that the Government are under notice that they really ought to do something about them before Report stage, at which stage we shall of course return to both these questions.

Lord Mackay of Clashfern

We will certainly look at what the noble Lord has said. Of course, the definition in paragraph 32 was not primarily designed for oral recitation and therefore it may not be particularly adapted for that purpose. Nevertheless, I think it is reasonably plain so far. But we will certainly look at what the noble Lord says, to see whether we can improve it even further.

Schedule 1, as amended, agreed to.

Clause 17 agreed to.

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

Lord Mackay of Clashfern moved Amendment No. 20:

Page 98, line 42, at end insert— ("(aa) in paragraph 2(a), the word "preference" shall cease to have effect;").

The noble and learned Lord said: I have already explained this amendment. I beg to move.

Lord Bruce of Donington

We are happy to facilitate the amendment.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 21:

Page 100, line 11, at end insert— ("(1A) Section 41(11) shall continue to have effect for the purposes of any Schedule 8A accounts.").

The noble Lord said: On behalf of my noble friend Lord Trefgarne, I beg to move Amendment No. 21. It might be for the convenience of the Committee if I were to speak also to Amendments Nos. 42, 43 and 44, as well as Amendments Nos. 167 and 169, which I think are the last amendments on today's Marshalled List. All these amendments deal with a fairly minor technical point and I hope your Lordships will find it helpful if, in dealing with the amendments, I point out that they take care of that one point.

Paragraph 41(11) of the 1980 Companies Act requires that any investment companies which determine their profits and losses under that particular paragraph shall treat assets which are neither fixed nor current assets as fixed assets; in other words, where there is any doubt as to whether an asset is a current asset it shall be a fixed asset. The fourth directive requires that all assets must be classified either as fixed or as current; it does not permit the prevision of paragraph 41(11) to be continued. The provision can be retained for those investment companies which continue to comply with the existing accounting requirements—that is, the Schedule 8A requirements—for the financial years before the directive becomes mandatory. The amendments to Clause 16, which are Nos. 42, 43, and 44, repeal paragraph 41(11), and the amendment to Schedule 2 which I am moving now saves it as appropriate. The other amendments are consequential drafting amendments in line with the two amendments I have already spoken to. I beg to move.

On Question, amendment agreed to.

Lord Mackay of Clashfern moved Amendment No. 22: Page 100, line 17, after ("respectively") insert (" (and the consequential repeal of section 43(2) made in Schedule 4 to this Act) ").

The noble and learned Lord said: This amendment is consequential on the same point. I beg to move.

On Question, amendment agreed to.

Schedule 2, as amended, agreed to.

Clauses 3 and 4 agreed to.

Clause 5 [Companies entitled to the benefit of the exemptions for individual accounts, etc.]

Lord Bruce of Donington moved Amendment No. 23: Page 8, line 44, leave out ("or").

The noble Lord said: I beg to move Amendment No. 23, which is purely a drafting amendment, leaving out the word "or". It would seem to me entirely noncontroversial.

Lord Mackay of Clashfern

Unless I have misunderstood, this "or" is left out for the purpose of the following amendment. It is uncontroversial only if the following amendment is accepted.

Lord Bruce of Donington

I will speak to Amendment No. 24, page 9, line 5 insert "or (d) an overseas bank". Clause 5(5) defines an ineligible group for the purpose of subsection (3) in relation to the exemptions for individual accounts described in Clause 6 of the Bill. As indicated in the enclosure of the consultative committee's letter to the Department on 31st December 1980, it would seem logical that an ineligible group should be defined as including a group any of whose members is an overseas bank. The point is a comparatively small one, but I beg to move.

Lord Mackay of Clashfern

As has been pointed out Amendment No. 23 is really a paving amendment for Amendment No. 24 which is the amendment of substance, and the purpose of this amendment is to render ineligible a group which contains an overseas bank. The policy of this part of the provisions is to render ineligible groups, or indeed companies, which carry on banking business in this country. That is the purpose of this provision. Perhaps there may be some misunderstanding about this. The reference to "an overseas bank" would not of course have the effect of making the company ineligible unless it carries on business in this country, and overseas banks which carry on business here but having their principal offices elsewhere will, of course, require an authorisation under the Banking Act 1979, and therefore be ineligible. Therefore, this amendment would seek to extend that to deal with banking business overseas and that seems to be outside the purpose of this provision. Accordingly, in the light of that explanation, I would invite the noble Lord to withdraw this amendment and perhaps not move the following one.

Lord Bruce of Donington

I am grateful to the noble and learned Lord for his explanation, which has clarified the position so far as I am concerned. My Lords, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 24 not moved.]

Lord Bruce of Donington moved Amendment No. 25: Page 9, line 17, leave out from ("above") to ("shall") in line 20.

The noble Lord said: The purpose of Amendment No. 25 which, by the leave of the House I will discuss together with Amendment No. 26, is to clarify the position in regard to the making of regulations. We desire that the regulations under subsection (7) shall not be made unless a draft containing the regulations be laid before Parliament and approved by resolution of both Houses. We do not believe that should be done merely when the regulations seek to reduce the class of companies. We want it to be generally applicable. Exactly the same purpose inspires us to eliminate the subsection 9. I beg to move.

Lord Lyell

The noble Lord has moved these two amendments together and it seems that they are addressed to the particular parliamentary procedure which is applicable to the power provided by subsection (7). Clause 5(7) gives power to the Secretary of State to modify the accounting exemption provisions by statutory instrument. These provisions are defined in sub-paragraph (6) as the provisions of Clauses 5 to 10. As we understand it, the amendment which has just been moved by the noble Lord, Lord Bruce, would require any regulation to amend the provisions of Clauses 5 to 10 to be subject to Affirmative Resolution.

Nobody could deny that Clauses 5 to 10 contain a wealth of detailed and technical references but it would be very surprising if over the light of the years to come and, above all, in the light of experience and also because of developments in accounting opinion and changes in circumstances in these matters and others, all these provisions in Clauses 5 to 10 were to remain absolutely inviolate, as they are now.

May I refer the Committee to one possibility? The fourth directive permits us to allow medium-sized companies to omit certain details of amounts which are payable after more than five years hence. The fourth directive permits such amounts, if need be, to be omitted from the notes to the accounts. We have not yet taken advantage of this provision but possibly in the future we might want to take a different view of the particular provisions—as indeed might any Government—and for this reason the Government does not consider that it would be right to require the positive procedure for the approval of regulations making amendments of that particular and rather detailed character. The approach that we have adopted in this particular clause is exactly that which is already enshrined in the Act. One example is provided in Section 454 of the 1948 Act, and we find provisions there to alter or indeed to add to the requirements of all of the Acts as to matters to be stated in a company's accounts.

If the regulations to make the provisions are even more onerous than the Affirmative Resolution procedure is required; it is required at the moment. But otherwise the negative resolution procedure is normally used in both Houses. So far we do not have any concrete evidence that these provisions of Negative or Affirmative Resolutions have given rise to problems, or indeed to outraged comment, in the 33 years since 1948. I hope that my explanation might convince the noble Lord, Lord Bruce.

Lord Bruce of Donington

What the noble Lord, Lord Lyell, has just said fills me with despair. It looks very much as though having embarked, on an unprecedented scale, of legislating in the accounting field, it seems likely that we are now going to have a spate of regulations amending the existing provisions of the Bill, which are themselves quite complicated enough.

One of the banes in the lives of professional men is to keep an eye on an apparently unending stream of regulations which emanate from various Government departments. It is bad enough in the case of the Companies Bill, which has almost littered the country over the past two or three years, with an acceleration in company Bill legislation which will take a very considerable time to digest. Now to feel that we are going to be inundated with regulations every time that the EEC blinks an eye or every time a Commissioner gets some new idea about standardisation, or some new quirk about what information is required by the Commission, fills one with some dismay.

The reason why this amendment has been put down is to make it more difficult for the Government to start making regulations under this particular head, in the knowledge that if it does want to make regulations then at least it will have to go to the trouble of having the Affirmative Resolution in both Houses. Many Ministers have been known to be deterred from making too many regulations if the affirmative procedure is laid down. Indeed, that is the reason for which it is being done.

If the noble Lord, or if his right honourable friend, has any further thoughts in mind, buoyed up by the passing of this Bill through here and another place, and he wants to make yet further alterations, let him wait for a new Bill in which to do it. Let him give the professions and the commercial world generally time to digest this Bill rather than make any regulations. However, if he does want to make regulations, let him be compelled to go through the Affirmative Resolution way of doing it, which we hope will deter him from being too voluble in the legislative field. I beg to move.

6.31 p.m.

On Question, Whether the said amendment (No. 25) shall be agreed to?

Their Lordships divided: Contents, 57: Not-Contents, 72.

CONTENTS
Airedale, L.	Blease, L.
Amulree, L.	Blyton, L.
Ardwick, L.	Boston of Faversham, L.

Broadbridge, L.	Lovell-Davis, L.
Brockway, L.	McCarthy, L.
Brooks of Tremorfa, L.	Maelor, L.
Bruce of Donington, L.	Melchett, L.
Chorley, L.	Milner of Leeds, L.
Collison, L.	Mishcon, L.
Davies of Leek, L.	O'Brien of Lothbury, L.
Davies of Penrhys, L.	Ogmore, L.
Elwyn-Jones, L.	Oram, L.
Erroll, E.	Phillips, B.
Foot, L.	Ponsonby of Shulbrede, L. [Teller.]
Goronwy-Roberts, L.
Gosford, E.	Ritchie-Calder, L.
Hale, L.	Rochester, L.
Hampton, L.	Seear, B.
Hanworth, V.	Stewart of Alvechurch, B.
Houghton of Sowerby, L.	Stewart of Fulham, L.
Howie of Troon, L.	Stone, L.
Jacques, L.	Strabolgi, L.
Janner, L.	Taylor of Mansfield, L.
Kaldor, L.	Underhill, L.
Kilmarnock, L.	Wallace of Coslany, L.
Lee of Newton, L.	Wells-Pestell, L.
Llewelyn-Davies of Hastoe, B. [Teller.]	White, B.
	Wilson of Radcliffe, L.
Lloyd of Kilgerran, L.	Young of Dartington, L.
Lockwood, B.

NOT-CONTENTS
Alport, L.	Kinloss, Ly.
Auckland, L.	Long, V. [Teller.]
Avon, E.	Loudoun, C.
Baker, L.	Lucas of Chilworth, L.
Belstead, L.	Lyell, L.
Bessborough, E.	McFadzean, L.
Boardman, L.	Mackay of Clashfern, L.
Bradford, E.	Mancroft, L.
Brougham and Vaux, L.	Mansfield, E.
Campbell of Croy, L.	Mills, V.
Chelwood, L.	Minto, E.
Clifford of Chudleigh, L.	Montgomery of Alamein, V.
Craigavon, V.	Mottistone, L.
Craigmyle, L.	Murton of Lindisfarne, L.
Dacre of Glanton, L.	Noel-Buxton, L.
Daventry, V.	Northchurch, B.
De L'Isle, V.	Nugent of Guildford, L.
Denham, L.	O'Neill of the Maine, L.
Donegall, M.	Orkney, E.
Eccles, V.	Pender, L.
Faithfull, B.	Penrhyn, L.
Ferrers, E.	Polwarth, L.
Ferrier, L.	Renton, L.
Forester, L.	St. Just, L.
Gainford, L.	Saint Oswald, L.
Glasgow, E.	Sandys, L. [Teller.]
Glenarthur, L.	Selkirk, E.
Gridley, L.	Skelmersdale, L.
Hailsham of Saint Marylebone, L.	Spens, L.
	Strathclyde, L.
Halsbury, E.	Swinfen, L.
Harvington, L.	Tranmire, L.
Hertford, M.	Trenchard, V.
Holderness, L.	Tryon, L.
Hornsby-Smith, B.	Vaux of Harrowden, L.
Hylton-Foster, B.	Waldegrave, E.
Killearn, L.

Resolved in the negative, and amendment disagreed to accordingly.

[Amendment No. 26 not moved.]

Clause 5 agreed to.

Clause 6 [The exemptions for individual accounts]:

6.39 p.m.

Lord Bruce of Donington moved Amendment No. 26A: Page 10, line 7, leave out from ("by") to ("section") in line 8.

The noble Lord said: I beg to move Amendment No. 26A. The general purport of this clause is to exempt the directors of a company entitled to the benefit of exemption from the provision necessitating the disclosure of the aggregate amounts of directors' salaries. The deletion of Section 196 of the 1948 Act, which relates to the aggregate amounts of directors' salaries, would leave that responsibility still there, and we want it left there. We want the aggregate amount of directors' remuneration still be be disclosed in companies' accounts, although we concede that in certain instances the more detailed provisions of Sections 6, 7 and 8 of the 1967 Act possibly need not be provided. We simply seek to maintain the disclosure which would then still be required by Section 196 of the 1948 Act. I beg to move.

Lord Mackay of Clashfern

As the noble Lord has explained, his intention is to disallow the exemption on companies covered by this clause whereby they need not disclose in the information that they file with the registrar the aggregate amount of the directors' emoluments. That does not mean that they are not obliged to disclose it; it just means that they are not obliged to disclose it in the accounts filed with the registrar. They continue to have the obligation to disclose it to their shareholders, but in our view companies covered by this provision are sufficiently small and sufficiently personal in character to be entitled to this exemption so far as the other people are concerned.

Indeed, the amount one has to pay the directors of a small company of this sort may be of very real competitive interest. The directive allows this exemption, and we have taken advantage of it. The directive allows the accounts going to shareholders also to have the advantate of this exemption; but we have not availed ourselves of that. We believe that this is a very reasonable situation. Those who have an interest in knowing—the shareholders—will still know, in spite of the directive; the public at large, entitled by the directive not to have this information, will not have it because of the particular circumstances of these small companies. I would ask your Lordships not to agree with this amendment. In our view this is a valuable relief for very small companies from an obligation which could be onerous, without being of any real benefit to the public.

Lord Bruce of Donington

We take the view that creditors are also entitled to some information, information that they have hitherto been able to obtain. Creditors as well as shareholders are interested in limited liability companies and ought to be able to obtain information of this kind. It should be freely available. Shareholders and creditors are, of course, also more likely to be interested in the profit that emerges before directors' emoluments have in fact been charged. There is no reason at all why this particular exemption should now be granted.

I should like to draw your Lordships' attention to the problems that are very often created in cases where accounting firms are investigating instances of alleged fraud. Very often the only information that can be obtained by investigating accountants is by a system atic search of company files, and with the existing obligation that is well-known for disclosure of directors' interests in other companies, other than the particular one that one is searching, one can obtain a vast amount of information as to the interests of particular directors in particular firms—all of them probably being small companies within the definition prescribed even in this Bill—and one is able to build up a comprehensive picture to suggest how the directors have failed in the various enterprises with which they are concerned.

Therefore, this kind of information is a very valuable tool in the hands of those who, on behalf of creditors of companies which have got into difficulties or which perhaps may get into difficulties, are making inquiries on their own behalf. One begins to hazard the view—and it is not in relation only to this particular piece of legislation, but it emerges as current thinking in the Government's reply to the interim report produced by the committee under the chairmanship of Sir Kenneth Cork—that there seems to be a gradual development of disinterestedness by the Government in the fate of creditors who have certain rights in relation to limited companies. I regret to say that this is another melancholy example of the way in which Government thinking is moving. I would sincerely hope that the disclosure requirement is not onerous. It has never proved onerous in the past. There does not seem to be any reason why it should not still remain. I must insist on the amendment.

Baroness Phillips

I do not often take issue with my noble friend—in fact, I very rarely do—but as the unfortunate company secretary of a very small trading concern which is limited, I am bound to say that I find that each Government—not necessarily this one—have heaped on small companies so much work that we now have the ridiculous situation that, out of a staff of six, one is there simply to deal with all the various matters that are required by law. Where you have directors who are not receiving any remuneration, you still have to make all the returns of their directorships of other companies.

I would plead that we want less work. Of course, we know that in seeking to obtain all the information, my noble friend has in mind very large companies, companies of a multi-national character. But I can assure him that many small trading concerns suffer the many requirements that Governments put upon them, and the situation is now quite out of balance. In fact, one often feels that the staff whom one employs are much occupied in returning information, which detracts from the opportunity to earn money for the company. I think that we are getting totally out of balance in company law, and I was horrified to see that there is to be yet another Act of Parliament to deal with these unfortunate small companies.

Lord Lloyd of Kilgerran

I am delighted to follow the noble Baroness, Lady Phillips, on this theme. I am also delighted to see that there is a division in the Labour Party on this important matter relating to small companies. I am impressed by what the noble and learned Lord, Lord Mackay of Clashfern, says—that this is an exemption of value to small companies. On the other hand, I have a little sympathy with the sub- missions of the noble Lord, Lord Bruce, in this matter. I am not as distressed as he is, but the position of creditors should, I agree, be considered as a general matter.

Would it not be helpful of me to suggest that, as regards this part of the clause, the Government should limit this exemption to small companies. Small companies are now defined in the Bill. I am very glad that the noble Baroness, Lady Phillips, is present, for I am sure that I shall have at least one supporter for the rather drastic amendment that I shall shortly move. Would it not be a solution to the problem between the Government Front Bench and the Opposition Front Bench on this matter that the exemption should be limited to small companies, as defined in Clause 8 of the Bill?

Lord Mottistone

I should very much like to support what the noble Baroness, Lady Phillips, has said. If the noble Lord, Lord Lloyd of Kilgerran, would turn to line 35 on page 9, he would find that the whole of Clause 6(2) relates to small companies. The point he makes is covered. I should like to suggest that because it is small companies perhaps the noble Lord, Lord Bruce of Donington, would like to think again, because surely the creditors, whose interests must be supported, will obtain more than enough information from other sources without having this particular piece of information which the Bill seeks to cut out.

I should have thought that he was making a bit of a mountain out of this molehill, when one bears in mind that we are talking only about small companies, on whom the burdens are onerous. Anybody who has had anything to do with small companies—I am sure that the noble Lord has—will know that increasingly, just as the noble Baroness, Lady Phillips, said, they are having to provide more and more information from all sorts of sources for all sorts of Government departments. If we can cut down on that—and I should have thought that this was a reasonable area where we could—the directive, as we are told by my noble and learned friend the Minister, allows us to do it. Therefore, it is being given special thought within Europe as a whole, and I should have thought that it was not something we wanted to make a great issue about.

Lord Bruce of Donington

I am most reluctant to impose any extra burdens on small companies—even small companies as defined within this Bill. But the idea that the insertion in the accounts of the total of directors' emoluments imposes enormous burdens on company secretaries, staff, bookkeepers and everybody else is taking things a little too far. All that happens is that the accountants who prepare the report just specially segregate this item. There is no inconvenience to the company whatsoever. To say that it is an extra burden on a company is stretching imagination a little too far.

I still stand on the proposition that the directors' emoluments in the small company are a matter of legitimate interest both to shareholders and to creditors, and therefore should be known. However, in view of the sentiments expressed in the Committee on the matter I have no intention of pressing the amendment. I shall return to a similar theme at a later stage affecting a rather larger area. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.54 p.m.

Lord Lloyd of Kilgerran moved Amendment No. 27:

Page 11, line 13, at end insert— ("(6A) Notwithstanding anything in the Companies Acts a small company within the meaning of section 8 of this Act having a turnover not exceeding £50,000 and a balance sheet total not exceeding £25,000 shall be exempt from filing and publishing its annual accounts. (6B) Any creditor of such small company as defined in subsection (6A) above shall have the right to inspect and receive a copy of the annual accounts as certified by the qualified secretary of that small company and that right shall be enforceable by the Registrar.").

The noble Lord said: The object of Amendment No. 27 is to endeavour to reduce the expense, both in time and money, to small companies as I have defined them in this amendment. When I spoke on the previous amendment I had in mind my definition of small companies as in this amendment. Perhaps I was not quite clear in my submission on that previous amendment. I am unashamedly a strong supporter of the Prime Minister in her oral and published announcements that it is necessary, in the economic interest of this country, to encourage new companies and small companies. We have heard this from time to time.

Here, with this amendment, I am giving an opportunity to the Front Bench of the Conservative Party to put into practice, perhaps for the first time, a real, basic encouragement to small companies. I was happy to see the noble Lord the Chairman of the Conservative Party present earlier, and I had hoped that pressures of other business would not have taken hint away from his place, so that he could hear my submission in regard to Amendment No. 27. Definitions of what is a small company are difficult. I am sure that the noble Lord, Lord Mottistone, would agree with me. My definition of a small company for the purpose of this amendment is that it should have a turnover not exceeding £50,000; nor should it have a balance sheet total exceeding £25,000.

There is no magic in those figures. Other figures, preferably smaller, would probably be helpful to a large number of small companies. What I say in this amendment is that notwithstanding anything in the Companies Acts a small company, as I have defined it, shall be exempt from filing and publishing its annual accounts. According to the practice in Germany, it is only companies over a certain size which, by regulation or by law, have to publish their accounts. I am advised that that is the position there.

The second part of my amendment relates to the position of a creditor. Obviously, as the noble Lord, Lord Bruce of Donington, indicated earlier, the position of a creditor must to some extent be safeguarded. Therefore, while the first part of my amendment sets out that the company shall be exempt from filing and publishing its annual accounts, there is one circumstance where it has to produce further information: if there is a creditor of a small company, as I have defined it, he shall have the right to inspect and receive a copy of the annual accounts of that small company. Those annual accounts shall be certified by the qualified secretary of that company. If there is any dispute arising between a creditor and the small company, as I have defined it, then that right shall be enforceable by the registrar of companies.

It seems to me that this amendment would be helpful to the small company of a turnover of under £50,000. The noble Baroness, Lady Phillips, has indicated the pressure on small companies. This does not need any elaboration by me. I feel that here is the opportunity for the Government to make a step forward in relation to assistance to small companies. I beg to move.

Lord Mackay of Clashfern

I would certainly support the sentiments that the noble Lord, Lord Lloyd of Kilgerran, has expressed in relation to relieving the burden on small companies as much as possible. That is a fair part of the object of what we are doing here, and it is unfortunate, in a way, that Acts of Parliament are required in order to do that. One cannot achieve that in this area without an Act of Parliament. I also should like to express my appreciation of what the noble Baroness, Lady Phillips, said on that subject. It is an unfortunate corollary that one has to do it in this particular way.

Unfortunately we cannot take our enthusiasm so far as Lord Lloyd of Kilgerran's amendment, for the reason that this particular exemption is not allowed by the directive. If it be the position in Germany, as he explained to us, that this sort of exemption is available at the moment, then when the directive is implemented by West Germany it will no longer be the case as we understand it. We have endeavoured in this area to take as full advantage of the exemptions contained in the directive as we could. Accordingly, we feel that this particular amendment would put us in breach of the directive, and therefore we could not advise the Committee to support it.

Lord Lloyd of Kilgerran

I am grateful to the noble and learned Lord for that explanation, but I am a little surprised that we are being so closely governed by directives of the EEC on a matter of such consequence to the small companies of this country. When I explained to the Committee the position of a creditor and how the creditor's position was safeguarded, I should have added that I am advised that that is the position in Switzerland. I fully realise that Switzerland is not a member of the EEC. In view of the statement made by the noble and learned Lord, I will endeavour to check whether that is the precise position and whether any amendment of the directive would be feasible, if not now then later, and in those circumstances I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Viscount Long

I beg to move that the Committee do now adjourn during pleasure until 7.45 p.m.

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

[The Sitting was suspended from 7.1 until 7.45 p.m.]

Committee stage resumed on Clause 6.

House again in Committee on Clause 6.

Lord Bruce of Donington moved Amendment No. 27A: Page 11, line 22, leave out from ("Act") to end of line 25.

The noble Lord said: With this amendment I should like to take Amendment No. 27B, since in each amendment the point is almost exactly the same, and I feel that both amendments can be dealt with together, if your Lordships' Committee agrees. I do not see why medium-sized companies should be exempt from the responsibility to provide particulars of their turnovers. The medium-sized company, at any rate as defined in the present Bill, is really of quite substantial size. Its results are quite significant, and its performance figures are a matter of interest not only to the company itself and its shareholders, but to the public as well. There are quite a large number of medium-sized companies, even within the current definition of such companies, and the aggregate results of their activities are of public interest. There does not seem to be any reason why they should be exempt from providing particulars of their turnovers, though I willingly concede that a case could easily be made out for a small company which is already exempt from filing a profit and loss account.

Let us consider the modified profit and loss account that is referred to in subsection (8). In my view the various "addings together" that can be accomplished in the actual formats that are put forward can result in a situation where quite insufficient particulars are revealed. I do not see any particular reason why a medium-sized company should not be required to provide particulars. Format 1 refers to turnover, cost of sales, gross profit, and other operating income. That may be a convenient form of shorthand for the company, but I should have thought that there was a public interest, and even a creditor interest for that matter, in obtaining the particulars that are set out in the format, whether it is Format 1, Format 2, Format 3 or Format 4. No good reasons have been adduced as to why there should be exemption in these particular cases. Such reasons need to be advanced. I think that there is an overwhelming case for adhering to the requirement to state turnover and particulars of gross profit, as set out in the formats. I do not see any reason why a medium-sized company should be exempt from that requirement. I beg to move.

7.50 p.m.

Lord Mackay of Clashfern

As has been explained by the noble Lord, the amendment would remove the exemption given whereby a medium-sized company need not file with the Registrar particulars of its turnover, as required to be given by paragraph 55 of Schedule 1, in its accounts drawn up for shareholders. I should have thought that this amendment displays a somewhat grudging attitude to the medium-sized company.

When the Government undertook consultations on the implementation of the fourth directive it was very strongly impressed upon us that information relating to turnover is particularly sensitive for medium-sized companies. If such information was required to be placed on the public file—and this would be the effect of accepting the amendment—the provisions would have the effect that the various classes of turnover would require to be separated out. For example, if different markets were supplied the turnover attributable to each market would have to be separated out from the rest. Although there is a provision that this information need not be disclosed if it is seriously prejudicial to the interests of the company I would suggest that, in the case of a medium-sized company, even if it is not split up in that way it would be possible to infer a great deal from the accounts that one could not infer in the case of a larger company, where the figures would be subsumed in larger aggregates in their accounts.

The other point I should like to mention is the risk that if we were not to take advantage of an exemption given by the directive our medium-sized companies would be at a disadvantage in relation to their competitors in Europe, who could come along and make an analysis of this material in their accounts. On the consultation the Government considered very carefully where the correct balance lay and concluded that we should take advantage of the exemption to the extent of relieving medium-sized companies from the obligation to file this information with the registrar. The directive would also entitle us to exemption from giving this information in the accounts for shareholders, but the Government concluded that it would not be wise to go that far. Accordingly, I would suggest that this particular exemption is well given to medium-sized companies.

If one goes on to look at the next amendment that the noble Lord has mentioned—and I am content to do that—it is a little difficult to see what exemptions he proposes to give medium-sized companies at all. It would seem to us that medium-sized companies are an important group and that some exemptions—and the ones we have suggested for them we think are the right exemptions—should be given to them. I would hope that your Lordships would not support this amendment.

Lord Bruce of Donington

Before the noble and learned Lord sits down, could he refer the Committee to that portion of the EEC directive, which I have in front of me—and, indeed, it would assist me—where these exemptions are given to medium-sized companies? So far as I am aware—I may he wrong—in the EEC directive there are only two kinds of company, the small company and the rest. Perhaps I am wrong in this, but it would certainly be to my assistance if the noble and learned Lord could refer me to it. I have Article 11 in front of me, in which it is said that member states may permit companies which, on their balance sheet dates, do not exceed certain criteria, to draw up abridged balance sheets.

Lord Mackay of Clashfern

The articles are Article 27 and 47(3) of the directive, on page 80. The criteria, of course, have to be translated into sterling from the European units of account.

Lord Bruce of Donington

I am greatly obliged.

Lord Lloyd of Kilgerran

As the noble and learned Lord is assisting the noble Lord, Lord Bruce of Donington, to find things in the directive, I wonder whether it would save time if at some stage convenient to the Government they could let me know where is the objection in the directive to my Amendment No. 27. It is probably out of order for me to ask that, but the noble and learned Lord did say that he had sympathy with the theme of my amendment to help small companies but he was precluded from doing anything to help them because of the fourth directive.

Lord Mackay of Clashfern

It is perhaps not in order, out if I can be out of order only very briefly the answer is that the obligations cast on small companies may be relieved to a certain extent, and the extent that the noble Lord was asking for in his Amendment No. 27 goes beyond what the directive allows. Article 47(1), I think, is the relevant one.

Lord Lloyd of Kilgerran

With the leave of the Committee, I fully gathered that that was the position, but I wondered whether it was possible to guide me to the exact passages in the directive on this matter.

Lord Mackay of Clashfern

Article 47(1) is perhaps the best reference I can give. Perhaps I can guide the noble Lord more fully outside the Chamber, if necessary.

Lord Bruce of Donington

I am grateful to the noble Lord for having directed my attention to those parts of the directive. In so far as our affairs in this country are concerned, I am still not convinced that we should of necessity keep meticulously to those items in the directive itself. We still have a very wide discretion in these matters; and I would have thought that the more information one can get about the performance of significant sections of the economy, the better. I am talking now of the practice of the art or science of econometrics, where it is desirable to obtain national statistics in regard to the performance of various industries, both as regards sales and even the division of sales, where this can be done without adverse effect upon the companies concerned. I would have thought that the more we were able to measure these various factors on a macro-scale, taking into account the various component factors, the better it is, because there is already an exemption if any harm is going to be done to the firm concerned.

Nor would the disclosure of these particulars impose any particularly onerous obligation on the company. The company, if it is going to conduct its affairs satisfactorily and is going to manage them satisfactorily, will have all the figures readily available anyway. All that needs to be done is for them to be assembled by the accountants and ultimately approved by the auditors, which, as I say, is not an onerous obligation imposed upon the company's staff. I would have thought that it would have been in the public interest that this quite significant section of the economy should reveal its essential business factors where, as I say, competition is not particularly involved and where the individual interests of the firm are not adversely affected thereby, rather than allow them to remain within the confines of the company itself.

Of course, we can quite understand those whose firm philosophy it is that the ultimate aggregation of the figures in terms of their measurement is really of very little significance to the country or anybody anyway; that these are essentially private affairs, that in due course competition takes care of everything, and there really is not any necessity for economists to know very much what is happening in the private sector of the economy anyway. This is a tenable proposition, but it is not one that I hold. I would have thought that, on balance, the advantage lay, particularly in the case of the medium-sized companies—I can see the point with regard to the small ones, but particularly with regard to the medium ones—in these particulars being disclosed.

On Question, amendment negatived.

On Question, Whether Clause 6 shall stand part of the Bill?

8 p.m.

Lord Bruce of Donington

There is one further point in connection with Clause 6 which I should like the noble Lord to consider with a view to an amendment possibly being introduced by the Government at the Report stage or, at any rate, to consideration being given to it. At the present time when we are discussing the exemptions for individual companies, the exemption in the case of small companies means that, if the provisions of this Bill apply, they will only have to file a modified balance sheet. That balance sheet, if the format is adhered to, will not have to state what profit is made in the year. If the noble Lord looks at the format for any of the balance sheets he will find that all that is required to be stated on the balance sheet is the balance on the profit and loss account. Consequently, a small company will not have to give any indication on its filed document as to whether during the year it made a profit or not; because all that will appear on the abridged balance sheet is the one item, the profit and loss account.

I cannot believe the Government intend a position to obtain where any creditor inspecting the file of the small company is not to be informed whether or not during the last financial period, or the financial period before, it had made a loss or a profit. I cannot believe that that is the intention of the Government. After all, the public have, I agree, a residual interest, but certainly an interest, in what happens to small companies. Otherwise there is no point in their filing anything at all.

Perhaps some provision can be made by way of addition to the notes required whereby the item of profit and loss account in any one of the formats selected by the small company as being the one under which it files can be extended into an appropriation account showing at least the balance on the profit and loss account at the commencement of the year under review, and then the addition to or subtraction from any profit or loss made during the year immediately prior to the date of the balance sheet submitted. This, I think, is absolutely minimal. If a small company, by virtue of being small, is to give no indication of what its last year's results were, whether it was trading at a loss or a profit, then I do not see any point in its filing even a modified balance sheet.

I think, once again, that on Clause 6 there is still an overwhelming case for the directors' emoluments in the small company to be stated; otherwise no one can know what the profit before directors' remuneration was, and this is the figure in which there is a fundamental interest. Is the noble Lord prepared to contemplate a situation where a small company makes a profit of, say, £70,000 before charging directors' emoluments and directors' emoluments can be charged at £75,000, producing a loss of £5,000? Is the noble Lord prepared for an incident of that kind? I am only picking a figure out of the air. Does he think it right that that position should remain undisclosed on the company file when, in fact, the very extent of the remuneration itself may have imperilled the company's continued existence and may be therefore of quite legitimate interest to the creditors?

No creditors are popular, particularly one's own. When one is a creditor oneself then the position becomes a little more acute. I would draw the attention of the Committee to the fact that when we are talking about the creditors of small companies, we are often talking of other small companies with whom those small companies trade. There is in this a commonality of interest. I think these matters should receive the noble Lord's consideration and I hope that he may feel able to respond. These are matters to which I think it right to return at the Report stage, and we hope he will be prepared to meet us on that occasion.

Lord Mackay of Clashfern

I share that hope. Our belief is that we have reached the balance due in the light of the consultation; and the interests of small companies as creditors in the affairs of others will be present in the minds of those representing small companies in the consultation. We feel that the results in this clause are reasonably balanced, taking into account the exemptions and giving effect, as far as possible, to the reliefs that small companies are entitled to under the directive. Accordingly, we hope that in due course the clause will stand part of the Bill. We shall consider later any amendments that the noble Lord might suggest.

Lord Lloyd of Kilgerran

The noble and learned Lord has emphasised that he has to have certain strict rules arising out of the exemptions which are set out in the directive. The noble Lord, Lord Bruce, indicated that even though it would appear that any amendment put to the Committee could not be accepted by the Government because of the terms of the directive, there was some discretion in the matter by the Government. Would it be convenient for the noble and learned Lord to indicate the kind of discretion that the Government can give in regard to certain exemptions such as the one I indicated about small companies recently?

Lord Mackay of Clashfern

Taking the exemptions we are talking about in these amendments, the directive entitles one to go up to a certain limit and the Government had to consider whether to go to the full extent of the limit or something less in the definition of those companies which would benefit as small and medium-sized companies. That is the nature of the discretion which arises under the kind of exemptions that we talk of in Clause 6.

Clause 6 agreed to.

Clause 7 [Provisions supplementary to section 6]:

Lord Lloyd of Kilgerran moved Amendment No. 28:

Page 13, line 12, at end insert— ("( ) In respect of all accounts of small companies requested in accordance with section 6(6B) the certification of such accounts by the Secretary of the company shall be accepted in lieu of an auditors report unless such report is ordered by the Registrar of Companies.").

The noble Lord said: This is another attempt to assist the small companies, to save them time and money in regard to their official requirements under the law. The amendment is directed to small companies having—

Lord Mottistone

Does the noble Lord not believe, in view of the fact that he withdrew Amendment No. 27 and there is now no Section 6(6)(b), that therefore this amendment has no point to it?

Lord Lloyd of Kilgerran

I expected somebody from the other side to point out to me that technicality. I was coming to the point. The real reason why I mentioned Section 6(6)(b) in my amendment was to define the nature of the small company to which I was referring. Therefore, I would have submitted that I was in order in moving this amendment because my reference to Section 6(6)(b) is a reference to the previous amendment (which was not accepted) in order to define the kind of small company I am dealing with. I await any decision on this matter. If the noble and learned Lord is going to take that very technical point, I shall have to reconsider the position at Report stage.

I am also asked to remind the Committee that there is an error in the Marshalled List. Amendment No. 28 should refer to page 13, line 8. When this amendment was put down through the usual channels it was not indicated in the copy of the Bill as printed that the first four lines on page 13 had been deleted.

If I may continue with my submission in regard to what I say is a helpful amendment to small companies whose turnovers do not exceed £50,000 and having a balance sheet total not exceeding £25,000, the certification of any accounts should be made by the secretary of the Company. This certification should be accepted in lieu of an auditors' report unless such a report is required by the Registrar of Companies. In effect, the amendment is intended to save expense to the small company, as I have defined it, from having to go to the expense of a full auditors' report.

When I raised this matter on Second Reading, the noble Lord, Lord Lyell, replied that so far as the cost element was concerned, the little information which was available to the Government—and indeed the general public—about the cost of the audit of small companies did not suggest that it was excessive in relation to the benefits to shareholders, creditors and indeed to the small companies and small businesses themselves. The noble Lord was good enough to say that the Government had only a little information. I have made inquiries of small firms of accountants which are dealing with small businesses which have a turnover of under £50,000. I am given figures of this order. To produce a balance sheet would cost some £300 or £400. To produce an audit it would cost the company something of the order of £800 to £1,000. The expense is not inconsiderable to the smaller company. I should be very much obliged if the Government could see their way to relieve this kind of company of having that kind of audit and enable it to rely upon accounts as certified by the secretary.

Most companies employ fully qualified men as their secretaries. The secretary of the company has very wide powers. He represents the company to the outside world. He is a person responsible for complying with the law and seeing that the company complies with the law. His responsibilities are very great indeed. I should have thought that it would be a great help to a small company, instead of having to go to the expense of an audit, that creditors and other persons requiring to see the accounts would accept them as certified by the secretary of the company, always giving the creditor who is not satisfied with the accounts the opportunity to apply to the registrar of companies who would order an audit in those circumstances. I beg to move.

Lord Mottistone

May I suggest that the calling and the speaking to this amendment is out of order in view of the fact that Amendment No. 27 was withdrawn? There is therefore no Clause 6(6B). This clause is meaningless and speaking to an amendment can only have the ultimate object of the amendment being incorporated in the Bill. But if the amendment were to be incorporated in the Bill, it would be a nonsense because it would be referring to something which had already been rejected by the Committee. I should have thought that it is out of order to speak to it and indeed to progress further with this amendment.

Lord Lloyd of Kilgerran

I am very much obliged for the helpful submission made by the noble Lord, Lord Mottistone. I tried to explain that there was a technical difficulty in that the whole object of referring to Section 6(6B) was to refer to the previous amendment in order to define the scope. I see the noble Lord, Lord Mottistone, wishes to intervene. I have given way to him on several occasions, and so may I conclude? The object of having this reference to Clause 6(6B) is merely to define the kind of small company which I have in mind.

Lord Mottistone

May I suggest to the noble Lord that the way he could have done that, as he was talking to an imaginary and non-existent subsection, would have been to talk on the Question whether Clause 7 should stand part of the Bill, and not take up the time of the Committee in dealing with an amendment which is meaningless.

Lord Lloyd of Kilgerran

I apologise if I am taking up the time of the Committee, but I think I have made my point clear. If the noble and learned Lord the Minister cares to take that technical point, I shall be happy to withdraw the amendment.

Lord Mackay of Clashfern

The noble Lord sees difficulties in his amendment as it stands. The Government considered this question of the auditing of the accounts of small companies. In the light of replies that we received on consultation we conclude that the interests of shareholders and creditors—and these have been referred to—required that we should ask that the small companies should continue to require to be audited. I hope that is sufficient on the substance of the matter to enable the noble Lord to withdraw the amendment.

Lord Lloyd of Kilgerran

I am very much obliged to the noble and learned Lord. I fully appreciated that he probably would not take a technical point of the order raised by the noble Lord, Lord Mottistone. In the circumstances, I propose to withdraw this amendment and raise the matter again on Report.

Amendment, by leave, withdrawn.

Clause 7 agreed to.

Clause 8 [Small and medium-sized companies]:

8.17 p.m.

Lord Bruce of Donington moved Amendment No. 29: Page 14, line 6, leave out ("£1,400,000") and insert ("£500,000").

The noble Lord said: With the permission of the Committee and in order to save time, I propose to discuss with this amendment Amendments Nos. 29, 30, 32, 33, 34 and 36. The same principle is involved in each case. The amendments that we seek to make concern companies that qualify for treatment as small companies. Roughly speaking, their turnovers are less than half the figures which are stipulated in Clause 8(2). The amendments stipulate that the balance sheet should be £250,000 instead of the £700,000 in the Bill, and the average number of persons employed would be 30 instead of 50. In so far as medium-sized companies are concerned, we set the limits of the turnover rather lower. In the Bill, the amount of turnover is stipulated to be £5,750,000 and we prefer £3 million. We prefer balance sheet totals of £1,500,000 as against £2,800,000 in the Bill. We prefer 100 as the average number of employees, instead of 250.

These are what we consider to be reasonable figures, bearing in mind the extent of the exemptions that are given to small companies. To give the exemptions which we have already discussed in our debates today and to define as "small" a company whose turnover does not exceed £1,400,000 with balance sheet totals of £700,000 and which employs 50 persons is setting the limits of "small" higher than we would wish. Similar reasons have impelled us to scale down the various financial levels which determine whether a company can come into the medium-sized category. This, we think, is a matter of common prudence.

It may well be, as no doubt the noble and learned Lord will point out, that these to some extent conflict with the limits set out in the fourth directive, but once again, as the noble and learned Lord is well aware, we are not bound in every meticulous detail of the directive. We have a very wide discretion and we should adapt it to British conditions. I repeat that the size is of some significance when one comes to consider the various exemptions and privileges given to the various grades of companies. On the assumption that the various exemptions remain substantially unchanged from what they are in the Bill, we would commend to the Committee our proposed new limits, and I beg to move.

Lord Mottistone

I see the point of what the noble Lord, Lord Bruce of Donington, has to say. It is very difficult to strike the right figure for this purpose, but in this country the best assessment of the size of a small company was that contained in the Bolton Report, about 1967 or 1968, in which Bolton, for manufacturing, hit on the figure of 200 for small companies and on a very much lesser figure—more like 20—for retail companies. There is a great difference between the two. I rather forget the retail one, but I certainly remember the manufacturing one.

If you look at these figures, which I am sure my noble and learned friend the Lord Advocate will tell us are based on the directive, you will find that the small company, in manufacturing terms, at any rate, in a sense, as defined in subsection (2) is on the small side. So, too, in those terms is the medium-sized company, because if the small manufacturing company is 200, the medium must be a good deal more than that, and 250 would seem to be pressing it down; so all I am saying to noble Lords opposite is that one sees the problem—and it creates all sorts of other problems, this business of hitting upon a figure for definitions, and I shall say more about that when I come to deal with my own amendments in this area. But so far as Britain is concerned, which was the point made by the noble Lord, Lord Bruce, our only really authoritative document on the general subject of how to measure what a small company is, on the whole goes higher, rather than lower, than these two clauses. Therefore, I should have thought that if one were trying to "muck about" with this—if indeed one can, because I suspect that there is not room for derogation in this area, though no doubt my noble and learned friend will tell us whether that is so—one wants to turn to Bolton rather than to the figures which the noble Lord and his friends have tabled in their amendments.

Lord Mackay of Clashfern

As has been explained, these amendments seek to lower the thresholds in subsections (2) and (3) of Clause 8 under which companies may qualify on the basis of turnover, balance-sheet total and the number of employees, as small or medium sized. They would reduce significantly the number of companies able to take advantage of the accounting exemptions applicable to such companies as listed in Clause 6. As I believe the Government have demonstrated—and the noble Lord, Lord Lloyd of Kilgerran, referred to the statements of my right honourable friend the Prime Minister earlier—the Government wish to assist the small and medium-sized company sector of our business community wherever it is possible and where it is reasonable to do so. We regard small companies as vital to our future economic prosperity. We have therefore set the threshold at virtually the maximum permitted by the fourth directive for the classification of small and medium-sized companies in order that the maximum number of companies may take advantage of the exemptions.

We consider that this is the right thing to do in the light of the consultation that we held on implementing the directive. We cannot go further up because the directive itself puts ceilings on it, but clearly it would be open to us to come down; and what noble Lords opposite are asking us to do is to come down. We could do that, but in our view it would not be right to do so. In seeking to reduce the threshold by the extent proposed, noble Lords opposite appear to take a somewhat grudging attitude towards exemp tions for small and medium-sized companies. They are not opposing the principle of the exemptions but are trying, in effect, to make them of minimal impact.

Our approach has been, and is, quite different. What we have done is to weigh up in the light of the views expressed, as I said, in very extensive consultations on this matter, the various interests and concerns of companies themselves, of their shareholders, their creditors and other users of accounts. The accountancy provisions in this Bill amount to a carefully considered balance of these interests. Shareholders will continue to get full information—that I regard as very important—and accounts will still have to be audited. That of course is what we were discussing a moment ago. The information, therefore, will be there and in a proper form; but if medium and small-sized companies wish—and the choice will be theirs they will be able to file modified accounts. With that balanced and rational approach, in the Government's view we are fully justified in enabling as many companies as we can, under the terms of the fourth directive, to take advantage of the exemptions.

I mentioned earlier a further point: it is an important one and I think it is right to mention it again in this context. The thresholds proposed by the noble Lord, Lord Bruce, would almost certainly put our companies at a competitive disadvantage with some of their European counterparts which are very likely to adopt the maximum thresholds allowed by the directive. It is therefore very important that we should set the levels as high as possible, as has been done in the Bill: otherwise this information would be open to European companies, competing at the same level with our companies, whereas the corresponding information about them would not be available to our companies. We would regard that as a very important point and I hope that in the light of all these considerations your Lordships will not feel able to support these amendments.

Lord Bruce of Donington

I have listened to the noble and learned Lord very carefully. There seems to be a complete misapprehension in his mind as to what constitutes a relief to small and medium-sized businesses. No matter what form of accounts are submitted to the Registrar of Companies and what accounts are filed, whether they are in a full or an abridged form, the fact is that having certain concessions as to filing and making public certain parts of their accounts does not mean that the company itself or its accountants will be relieved of the burden of preparing the accounts as usual. The accounts of the company, in whatever form they may be filed with the registrar, have to be prepared anyway and there may be many cases in which the submission of abridged accounts, in addition to those already prepared on behalf of a small company by its accountants, may represent an additional cost. It does not seem to be appreciated that these so-called reliefs are more cosmetic reliefs than actual reliefs in any cost. The exemptions merely mean that not quite so much information is available as was formerly available to creditors.

There has been much discussion as to what constitutes "small", and the noble and learned Lord opposite was kind enough to refer to this aspect of the matter. I am one of those who believe that small is beautiful, at any rate in the manufacturing sense of the term. Within the context of what, in managerial circles, we would call a social unit of production, where people can identify with one another and be part of a general production team, then 200 or 300 is probably about right. But there, within the social and organic context, we are talking about a small firm as a productive unit.

I am not using the terms "small", "medium" and "large" within that connotation at all. The only use that "small" and "medium" has here is to entitle companies which fall within the definition to certain exemptions from accounting and disclosure provisions. This is the reason for the terms "small" and "medium". There is no comparison with what the noble and learned Lord would understand as "small", from the managerial point of view or even from the point of view of an economist. Smallness, in that sense, is not connected with any smallness that we have here. Smallness here is concerned purely with ensuring that certain information is not made freely available.

It is not only a question of the shareholders and creditors being entitled to information. No matter how small a firm is, the ordinary person who works there has more than a passing interest in the fortunes of the company. The ordinary salaried employee, who spends his life in a small-or medium-size company, is also a producer of wealth. Is he not entitled to know? Perhaps, if he cannot get the information from the firm in which he works, he can go along to the company's file and see what the results were. That seems to be reasonable.

No; the figures here have been set too high with the object of not making information available to interested parties outside the firm, but parties who have social connections with the firm, since all firms are part of society as a whole, with the object of keeping as much information to itself as possible. We on this side do not think that this meets the public interest and we shall press the amendments to a Division.

Lord Mottistone

Before the noble Lord sits down, would he not perhaps agree that the one thing he has missed out, the important point which my noble and learned friend made—and the noble Lord has done this consistently over the last few amendments that he has been speaking to is the competitive aspect? In fact, at one stage he said he did not think that competition was a very good thing, or words to that effect. I think the noble Lord was exaggerating when he talked about the work force, because we are talking about small firms, by any standards, and people in such firms can know what is going on in a way that cannot happen in a bigger one. One does not have to think too deeply about that.

But the most important point that my noble and learned friend made is that competitors will get vital information. As he also said, in a large firm the information is buried within other information and is difficult to extract. But the smaller the unit, the easier it is to learn from what you see in the accounts, if they are made public. It is in this area where the noble Lord is exaggerating the disadvantages to the other kinds of people, such as the creditors, and is not giving enough attention to the competitors. I would ask the noble Lord to think again before he presses this amendment any further, because I should have thought he might think he was overdoing it and might like to think about it and bring it back at another stage.

Lord Bruce of Donington

I am most grateful to the noble Lord for his courtesy in giving me time to reconsider. I should like to assure the noble Lord that I, too, have considered the competitive factor. I have asked myself the question in regard to competitors overseas, particularly in the EEC on the other side of the Channel: what real, competitive information would be conveyed to them by, for example, particulars of a company's turnover and factors of that kind? In other words, what competitive edge is given to overseas competitors by the inspection of statistics relating to turnover, gross profit ratio and matters of that kind. I have come to the conclusion that the risk is a comparatively small one; in fact, a very small one indeed. I can understand overseas competitors wanting to find out details of secret processes. I can understand them wanting to find out know-how and so on. But I do not feel that the revealing of particulars of this kind could be regarded as exposing our companies to all that overseas competition. If that be the case, then successive Governments back over many years stand very considerably indicted by the amount of statistical particulars, relating to companies' performance, that already resides on companies' files and has done for the past 40 or 50 years.

Lord Mottistone

if a competitor is not going to gain from this information, who else is going to benefit? How can a creditor learn anything worth while from these apparently worthless statistics?

Lord Bruce of Donington

Simply because, normally speaking, the creditor himself has a financial relationship with the company. The creditor is not in competition with the company as such. He is very often a supplier to the company and is not trying to beat the company at its own trade. The relationships of creditor and company and competitor and competitor are—as I think even the noble Lord must admit—slightly different.

8.38 p.m.

On Question, Whether the said amendment (No. 29) shall be agreed to?

Their Lordships divided: Contents, 25; Not-Contents, 53.

CONTENTS
Blease, L.	Northfield, L.
Boston of Faversham, L.	Pitt of Hampstead, L.
Bruce of Donington, L.	Ponsonby of Shulbrede, L. [Teller.]
Collison, L.
David, B.	Ritchie-Calder, L.
Goronwy-Roberts, L.	Stewart of Alvechurch, B.
Hale, L.	Stewart of Fulham, L.
Houghton of Sowerby, L.	Stone, L.
Irving of Darftord, L.	Strabolgi, L.
Jeger, B.	Underhill, L.
Llewelyn-Davies of Hastoe, B. [Teller.]	Wedderburn of Charlton, L.
	White, B.
Lockwood, B.	Young of Dartington, L.
Mishcon, L.

NOT-CONTENTS
Airedale, L.	Hornsby-Smith, B.
Alport, L.	Killearn, L.
Auckland, L.	Lloyd of Kilgerran, L.
Avon, E. [Teller.]	London, Bp.
Bellwin, L.	Long, V. [Teller.]
Belstead, L.	Lyell, L.
Boardman, L.	McFadzean, L.
Bradford, E.	Mackay of Clashfern, L.
Brougham and Vaux, L.	Masham of Ilton, B.
Caldecote, V.	Montgomery of Alamein, V.
Chelwood, L.	Mottistone, L.
Chorley, L.	Murton of Lindisfarne, L.
Cockfield, L.	Noel-Buxton, L.
Craigavon, V.	Seear, B.
Drumalbyn, L.	Selkirk, E.
Dulverton, L.	Skelmersdale, L.
Elton, L.	Strathclyde, L.
Evans of Claughton, L.	Sudeley, L.
Ferrers, E.	Swansea, L.
Ferrier, L.	Swinfen, L.
Forester, L.	Tranmire, L.
Gainford, L.	Trenchard, V.
Glasgow, E.	Trumpington, B.
Glenarthur, L.	Waldegrave, E.
Gridley, L.	Wilson of Langside, L.
Hampton, L.	Winstanley, L.
Harvington, L.

Resolved in the negative, and amendment disagreed to accordingly.

[Amendment No. 30 not moved.]

8.45 p.m.

Lord Mottistone moved Amendment No. 31: Page 14, line 8, after ("employed") insert ("on a full time basis").

The noble Lord said: In moving Amendment No 31, with the leave of the Committee I should like to take Amendment No. 35. This is a technical point. I hope that my noble friends on the Front Bench will not have to say, "You can't do this because the directive didn't do it". Their purpose is to point out that in a company it is very difficult to take an average number without being more precise in your definition. I have sought to widen this, because it is easier to define, by taking the average number of full-time employees. The principle of full-time employment is fairly well defined in labour law and therefore is easy to identify and specify.

If my noble friends resist these amendments, the danger will be that if people are employing near the top limit averages for the year of 50 and 250 they will say to themselves, "We like the benefit which we get from this definition, because of all the relaxations, so we will continue in this way". Even if the noble Lord, Lord Bruce of Donington, thinks that they are cosmetic advantages it may be that in real life people will find that they are not and that they will come to like them and will want to have them. They may say to themselves, "I won't take on the extra part-timers I would normally employ in the late summer or just before Christmas". There is a great deal of seasonal employment in manufacturing, in retailing and also in the hotel trade. A great range of part-timers are employed. But people might hesitate to employ them if they feel that this will push them above the limit specified in the Bill.

This would be a pity from all sorts of points of view, particularly in these days of large-scale unemploy ment. It would also be a pity so far as straightforward efficiency is concerned. If people have the flexibility to be able to employ part-timers at the time they normally employ them, this is to be encouraged. Speaking from a certain amount of experience in personnel work, I believe that from a practical point of view "full-time" is easily definable and is a better way of describing it. A subsidiary point is that it encourages people to employ part-timers without feeling that they will suffer any penalty thereby because of the Bill. I beg to move.

Lord Lyell

We are grateful to my noble friend Lord Mottistone for speaking to his two amendments, Nos. 31 and 35. We believe that they seek to provide something which is fairly simple: that the number of employees which determines the size classification of a company relates to full-time employees only. Subsection (10) of Clause 8 already provides one means of determining the number of persons who are to be employed for the purposes of (2)(c) and (3)(c), which are the relevant paragraphs pertaining to my noble friend's amendments. The formula which is embodied in Clause 8(10), which is the one we would seek to use, is the same formula as that which determines the number of employees to be stated in the notes to the accounts, which we find in paragraph 56 of Schedule 1.

This is a fourth directive requirement, so I am afraid that I may have to disappoint my noble friend slightly, but I hope he will bear with me. The directive itself does not provide a definition of "employees" but my noble friend—and indeed the Committee—will find the definition included in Section 18 of the 1967 Act. Indeed, earlier this evening the noble Lord, Lord Bruce, was looking at what he referred to as "gobbledegook". With all the good will in the world and with the great skill of the parliamentary draftsmen, I think that the relevant paragraph 3 in Section 18 of the 1967 Act is difficult to understand, but I think it is not impossible to understand.

Section 18 of the 1967 Act has been considerably simplified, and I think that my noble friend Lord Mottistone will find its basic characteristics maintained in paragraph 56 of Schedule 1 to the Bill which is now before us. In using the formula which we have adopted in the Bill, the figure for determining the number of employees under Clause 8 will be readily available to any company, and indeed the method of deriving that formula should be familiar to each and every company. We believe that it will be inconsistent and indeed confusing to determine the number of employees (for size purposes) on the basis of full-time employees only, whereas on the other hand for the purpose of giving information in the notes to the accounts part-time employees would be included.

The amendment seems not to be consistent with subsection 10 of Clause 8 and also with paragraph 56 of Schedule 1. We find it a little difficult to understand, but further, as indeed my noble friend has pointed out, some companies have part-time employees as a very large proportion of their workforce and if these employees were not included in the calculation of course the Committee would see that it would discriminate against companies of similar size whose workforce was comprised of full time employees only. The directive does not say that the number of em- ployees is to be taken as being full-time employees and we believe that to accept these amendments would be damaging to the fourth directive and would be confusing in the Bill.

Lord Mottistone

I am humbled by my noble friend that I overlooked subsection (10). I had great difficulty in finding paragraph 56 of the 1948 Act, because it is not in that Act, but now I find myself helped through Schedule 1 to this Bill. I think it is a pity in fact that my noble friends have gone to the trouble of paragraph 56 of Schedule 1—to be known as Schedule 8—in fact I think they would do better to be simple on this point. I have a fair amount of experience on it, but at this time I will not delay the Committee any further. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 32 to 36 not moved.]

Lord Mottistone moved Amendment No. 37:

Page 15, line 45, at end insert— ("(13) The Secretary of State may by order as circumstances require amend the figures in subsections (2)(a) and (b) and (3)(a) and (b) of this section. A statutory instrument containing such an order shall he subject to annulment in pursuance of a resolution of either House of Parliament.").

The noble Lord said: This amendment is really brought about by the fact that when one looked at the figures, to be precise at this moment, one said "What about inflation?" We felt that it was going to be terribly burdensome and I know that the figures themselves come out of the directive and therefore we should have to wait for the directive to be amended, but it seemed that it would cause quite a lot of trouble to have to amend these figures upwards, as we shall have to do as inflation goes by. Sadly, however well my noble friends do in controlling inflation, they will not sweep it away just like that, and one would have thought that certainly in five years' time for reasonable purposes one would wish to adjust the figures, relatively easily, in the earlier part of this clause. Therefore, I propose that it should be made easy for the Government of the day to do so by having enabling powers to amend them by regulation. I beg to move.

Lord Lyell

Once again we are grateful to my noble friend for moving his amendment clearly and succinctly. It is an amendment of some substance, but I hope my noble friend will accept that the power that he seeks in his amendment, I understand, already exists in Clause 5(7) of the Bill which we were discussing a little earlier this evening. My noble friend will find it at page 9 of the Bill at lines 11 to 16. This subsection already empowers the Secretary of State to modify the accounting exemption provision by statutory instrument and by virtue of subsection (6) of Clause 5, which is just above the original paragraph on page 9 —the accounting exemption provisions means all the provisions in Clauses 6 to 10 and this naturally extends to amending the criteria in Clause 8.

I hope that will settle the query in my noble friend's mind, but I would add that we have gone to the maximum levels permitted by the directive in all these criteria, and therefore we should not be able to raise the threshold until the figures in the directive itself are raised. I hope that will go some way towards clarifying the issue in my noble friend's mind.

Lord Mottistone

I am again humbled by the fact that my noble friend is much more widely read in this Bill than I am and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lloyd of Kilgerran moved Amendment No. 38:

Page 15, line 45, at end insert— ("(13) The disqualifications for appointment as auditor specified in section 161(1) of the 1948 Act shall not apply in the case of a company which qualifies to be treated as a small or medium-sized company within the meaning of this section.").

The noble Lord said: The purpose of this amendment is to attempt to reduce the disqualification for the appointment of auditors as set out in Section 161 of the 1948 Companies Act. Your Lordships will recall that the purpose of Section 161 is to define the eligibility for appointment as auditor of a company incorporated under the Companies Act. It is neither an assessment of competency nor a barrier to the provision of accountancy services to the public, but it is within the hands of the Government to decide which bodies shall be capable of acting as auditors of a limited company. Parliament has given to the Departments of Trade and Industry the right to recognise certain bodies of accountants. In fact no further body of accountants has been recognised since the Companies Act of 1948 was enacted. No new boy has been allowed in this rather closed field.

I will take the opportunity of saying that so far as small and medium companies are concerned this disqualification should not be pursued so strictly as it has been in the past. The Government have recognised for the first time—I warmly support this step—that there are such things as small companies and medium-sized companies as defined under that section of the Act. Therefore it seems to me that it would be appropriate at this stage, so far as certain bodies are concerned, to act less sternly in the appointment of bodies that can act as auditors.

May I now briefly take up the point that was put to your Lordships by the noble Lord, Lord Energlyn, at Second Reading. He brought to your notice the case of the Association of International Accountants. They are not recognised by the Secretary of State. This is one of the bodies that I submitted to your Lordships, when considering the Companies Act of 1980, that should be recognised by the Secretary of State. I understand, however, that certain investigations have been made by the Government, or on behalf of the Government, into the standards of examinations of this body. The Association of International Accountants were founded about 40 or 50 years ago, and I understand that they operate all over the world; therefore it is a little surprising that they are not recognised by the Secretary of State. The noble Lord, Lord Energlyn, made some study of the kind of examinations and criteria for membership of this body. I beg to move that the disqualification in Section 161 of the 1948 Act should not be pursued so diligently as it has been in the past.

Lord Lyell

It is apposite once again that I should declare an interest, in that I am a member of one of the bodies mentioned in Section 161, but I hope they will not hold against me anything that I have to say now or at a later stage. The noble Lord, Lord Lloyd, mentioned various comments that had been made by the noble Lord, Lord Energlyn, at Second Reading. If the noble Lord would read on in that column, particularly my reply to the noble Lord, Lord Energlyn, he will find that the one thing that causes panic and trouble in the world of commerce is disputes—I think I used the word "war" at Second Reading—between various accountancy bodies. Even the noble Lord, Lord Bruce, would be a brave man to stand between various bodies of accountants or professional auditors who might wish to obtain their position in Section 161 of the 1948 Act. I think I said in reply to Lord Energlyn at Second Reading that there were already adequate powers for the Secretary of State to add any professional bodies to those bodies named in Section 161, should he wish.

If I may direct the attention of the Committee to the amendment which has been moved by the noble Lord, Lord Lloyd, I hope he will think it relevant if I also address my remarks to Amendment No. 147 in his name, which is right at the end of the Bill.

Lord Lloyd of Kilgerran

I am much obliged to the noble Lord. I omitted to ask the leave of the Committee to refer to No. 147. I have it in my notes, but I forgot to mention it.

Lord Lyell

I hesitate to move other noble Lords' amendments for them. I hope it is for the convenience of the Committee if I speak to that amendment. The amendment the noble Lord has moved is, in our opinion, something of a retrograde one, because we believe that the standards of training and of expertise required of an auditor of a company—a company is a fairly specialised incorporated body with great privileges, and we believe that an auditor of a limited company is someone who must employ the highest standards—are the same as far as the auditor is concerned, regardless of the size of the company whose accounts he is to audit. I do not think anybody in the Committee would suggest that a solicitor—and I look carefully at the noble Lord, Lord Mishcon, and indeed my noble friend Lord Noel-Buxton—who advises only private clients, of whatever means or power, would need a lower standard of qualification than one who advises large organisations or corporations. I do not think anybody would hold that view. I hope the same view would be held in regard to anybody auditing a limited company.

We believe that still less would anyone suggest that the person auditing—or indeed the solicitor giving advice—should have no qualifications at all. The Companies Act 1948 recognised that the position of the auditor was a skilled one which carried a great degree of responsibility, and this was sufficient to require formal and defined qualifications. Both Governments and the profession itself have since been very alive to the need for the maintenance and improvement of high standards in auditing. The Companies Act 1976 made it an offence for an unqualified person to act as an auditor.

The statutory duties of an auditor are the same, whatever the size of the company. In brief, his duties are to report whether the accounts give a true and a fair view and also whether those accounts comply with the Acts. That is not to say that the auditor of a very small business, like a corner newsagent or even a chain of newsagents, will adopt the same approach and procedures as the auditor of a vast corporation, BP or Imperial Chemical Industries. Of course the auditor would adopt different procedures for different clients of different sizes. This is recognised by the accountancy profession in their auditing standards which they published in 1980; they recognised the differences in treatment which may be dictated by a company's size.

The eighth directive of the European Communities, which deals with company law, is especially relevant. The aim of this directive is to set minimum standards of qualification for auditors. It does not, at least in its present form, permit differentiated standards according to the size of the company. By definition, it also goes on to forbid unqualified persons to act as auditor in any circumstances. Even if we in this country thought there was some degree of differentiation which might be desirable or even permissible, we think it would be very wrong to change the law with the prospect of having to restore the position as it is now in a few years when the eighth directive is implemented.

With the greatest respect to the noble Lord, Lord Lloyd, even if it were acceptable to turn the clock back in auditing terms more than 33 years and permit the accounts of a limited company to be audited by a person who was not qualified to act as auditor under the present law, we wonder whether an audit carried out by such a person in such conditions would have any real value.

Lord Lloyd of Kilgerran

I have listened with care, great care, to the brief which the noble Lord, Lord Lyell, has read out, and most of it seems on first hearing to be totally irrelevant to the matter with which I am concerned. I am not concerned about unqualified auditors, a subject which this Committee has referred to so frequently; I am talking about auditors who are members of a highly respectable institution which has been in being since 1928. They have a thousand members and they are well-known internationally. Also, I must again express surprise that no new institution has been allowed to enter this closed area of institutions which was set up in 1948 under the Act, and that is in itself surprising, having regard to the competency of the members of the institution referred to by the noble Lord, Lord Energlyn.

However, I am advised that the Department now has in its possession reports for the 1977 and 1978 examinations for this association, that consideration is being given to recognition of the association under Sections 161, and that this is pending. I am concerned only to suggest that in the general rule there should be a modification of the strict rules of qualification for these two new classes of companies—the small company and the medium-sized company. Having regard to what the noble Lord has just said, I will look very carefully at Hansard and will come back to the matter if I am so advised at a later stage.

Amendment, by leave, withdrawn.

Clause 8 agreed to.

Clauses 9 to 12 agreed to.

Clause 13 [General nature of directors' report]:

9.10 p.m.

Lord Mottistone moved Amendment No. 39: Page 23, line 10, leave out subsection (1).

The noble Lord said: This is by way of being a probing amendment. Reading it carefully, I believe that the change which is effected by Clause 13(1) to the 1948 Act is of no substance whatsoever in practice. Modern companies of all sorts, in reporting on the state of their affairs, automatically make a fair review of the development of their companies' business and so on. Any who wish to hide what they are doing in a way that might be considered to be against the interests of people in employ or creditors, or even the public, are going to do that, whether there is a more elaborate set of wording as indicated in this subsection, or whether there is the old wording. Therefore, one would have thought that subsection (1) is really an unnecessary addition to the Bill. I beg to move.

Lord Mackay of Clashfern

I believe it is true, as my noble friend, Lord Mottistone, has said, that the best practices do this already. The directive requires us to do it, however, and that is why it is in this Bill.

Lord Mottistone

If it is as simple as that, then I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Mottistone moved Amendment No. 40: Page 23, leave out lines 26 to 29.

The noble Lord said: This is the most important amendment I have moved so far. Whether the directive requires what is provided in the subsection or not, I hope that the Government will resist it, even to the extent of informing the Commission that they will not embody this part of the directive. The point of the amendment is to omit head (iii) of subsection 13(3). Quite enough is said by any company under head (ii)"—an indication of likely future developments". But when that is stretched further to go into the area of research and development, in a very large number of companies you are striking at the bedrock of information which is vital for their competiveness.

That does not apply to every company and to some of them it does not matter, in which case probably they are not doing any significant research and development; but there are companies which do, and this particular Bill embodies all companies and makes no exceptions. There are companies for whom research and development is vital, and it would make a very great difference indeed if their competitors were to have an indication of their activities. That is enough in itself for alert businessmen, watching their rivals in the market place. I believe a great deal of damage could be done to companies of a certain sort. They could be the very companies which the Government are trying to foster and encourage; companies dealing with new technology. Those are the ones which will suffer from this little but dangerous subsection.

It could be said, as I said as regards the earlier amendment, that people can hide. However, this is rather specific because it says: an indication of the activities". If it means anything at all, it means saying enough to give the rival a clue at a particular point in time—research and development time—that you particularly do not want him to have if you are to prosper and he is not. One needs to think of this in the context of the total EEC market and to see it against the world as a whole. This sort of information will not be restricted to the people who pay attention to the directives of the European Community: it will be available to the Japanese, the South Koreans, indeed anyone one cares to think of. Therefore, I trust that my noble friends will fall over backwards to ensure that this particular provision is omitted from the Bill. I beg to move.

Lord Mackay of Clashfern

I well understand the fears that my noble friend has expressed in this connection. I must say, however, that paragraph (iii) implements Article 46(2)(c) of the directive. I have looked into the matter a little and so far as I have been able to discover there were no representations against this particular provision when the directive was being negotiated. I think that the explanation may well be that the phrase: an indication of the activities (if any) is intended to be a pretty vague phrase and not a sufficiently definite obligation to oblige directors to disclose matters which would be of real value to competitors. It is only an indication of the activities in the field of research and development that is required. I hope that, with that explanation, my noble friend will feel able to withdraw the amendment. I quite understand his concern, but as I say, I think that the paragraph must have been accepted on a basis such as I have described.

The Earl of Selkirk

Would this include research by contract? Many companies do research by contract. On the face of it, it would not do so, but it might be much more important than research carried out by the company itself.

Lord Mackay of Clashfern

I think that if what the company does by contract can properly be described as its activities—and I should think that in most cases it could—then it would be covered, but I would not expect this clause to require a company to specify the method by which it was carrying on its research and development. It would only be "an indication of the activities", which is a vague enough phrase to enable sufficient compliance without giving very much away.

Lord Mottistone

Before I deal with this matter, I should like to ask my noble and learned friend a question. He mentioned that there were no objections to this when the directive was being negotiated. Can he give me a rough idea of the date on which the directive was being negotiated?

Lord Mackay of Clashfern

I think that it was 1977–78—it was that kind of time.

Lord Mottistone

The heyday of the noble Lords opposite of course—just what one would have expected.

Several noble Lords: Oh!

Lord Mottistone

Oh, yes, 1977 was their worst period. It was absolutely terrible. They should be ashamed of it.

I shall have to study the directive very carefully and see if I cannot somehow construe some further amendment to tone down this little clause even more when we come to the next stage of the Bill. With that in mind, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

On Question, Whether Clause 13 shall stand part of the Bill?

Lord Bruce of Donington

Before parting with Clause 13 which deals with the directors' report, I should like to have some indication from the Government as to what additional information they would propose ought properly to be disclosed to the shareholders and, indeed, to the public in so far as the directors' report may be made public even within the restricted circulation that is implicit in the classification of the grades of companies. I have in mind that when the future of companies' reports was being discussed in 1977 under the previous Administration—and I have before me Command 6888—it was quite clearly in mind that much more extensive particulars should be provided either by way of the directors' report or by way of annexed notes and statements than appear to be envisaged in the current Bill. In saying that I take account not only of the provisions of Clause 13 of the Bill, but also of the provisions of Part III of Schedule 1.

Has any thought yet been given to the consultative document, The Future of Companies' Reports, Cmnd. 6888, and in particular to paragraph 4 thereof which emphasises the importance of a statement being annexed to the accounts or incorporated in the report or notes, of the value added as defined in paragraphs 13, 14, 15 and 16 of the particular document to which I refer? One recalls that even a statement of turnover—which is still required by the larger companies falling outside the categories which are exempt in certain particulars—in respect of large enterprises may be quite meaningless in terms of the value added by the efforts of those employed in that particular company.

In our view, a value-added statement would be a useful piece of information, not only to the shareholders but also to the outside world and indeed to the creditors, because, as Cmnd. 6888 states at paragraph 13: A company's turnover is in part the result of other people's work—namely, the raw materials, products and services which the company has purchased from outside—and in part the result of the efforts of the company's workforce and the use of its physical and financial assets. This latter part is the value added by the company and can therefore be expressed as turnover less goods and services provided from outside". A statement of that kind would be of enormous assistance to the shareholders of large companies, the companies that are not to benefit—if benefit is the term to use—from the exemptions that have been given to them by earlier clauses in this Bill. I should have thought that some consideration ought to be given to that.

At this stage I should also like to ask the noble and learned Lord, Lord Mackay, whether it is proposed to annex to the directors' report a statement showing the source and application of funds. In most companies now, even though it is not required by law, a statement of source and application of funds has been found to be enormously useful, both to companies and to outside bodies, in order to see where the flow of funds has actually taken place. In addition to the information which is required at Part III of Schedule 1, is there any intention in the directors' report in future to make any reference to the employment of disabled people? Are any particulars available about that?

In general, we should like the directors' report, as supplemented by the provisions of Part III of Schedule 1, to give information more in keeping with the modern outlook towards management-employee co-operation. Very often in this country we pay tribute to the productivity of German and Japanese industry. What we sometimes do not always remember is that that is achieved by collaboration between the employees and management, encouraged by freely available information to all parties, whether they be employees, staff, shareholders or whatever. We had rather hoped that there would be more progress towards that in this Bill than there appears to have been up to the present time. It is something to which we may return on Report, unless we get some indication that the Government are prepared to give a little in this respect.

Lord Mishcon

I intervene briefly, because, as usual, the noble Lord, Lord Mottistone, brought a bit of lightness and fun to our proceedings late at night. Would the noble and learned Lord the Lord Advocate when replying to this debate indicate whether it is not a fact—because I personally have a great deal of sympathy with the point that he raised, only to be answered by the fact that the directive had this and there we are, and these things have to be included in the report—that a directive in its draft form was available not only to Her Majesty's Opposition but to the great Confederation of British Industry? Would he indicate to the Committee whether any representations were made by either of those worthy bodies; namely, Her Majsety's Opposition at that time or the Confederation of British Industry, who are supposed to be very observant of these matters, criticising these provisions in the directive, so that Her Majesty's Government were asked to make representations?

Lord Mackay of Clashfern

May I first take the point raised by the noble Lord, Lord Bruce. The noble Lord asked whether we have considered requiring further information of the kinds that he has described. There are of course provisions under which certain other information can be asked for; for example, the employment protection law entitles the employees to ask for certain information. But when it came to considering whether further burdens of information should be put upon companies in this Bill, in the light of the consultation which has been held we came to the view that it would not be appropriate in this Bill to add to the burdens being imposed upon companies by the provisions of the directive itself. Accordingly, we have considered it unwise to add to these burdens at this juncture. As noble Lords on all sides of the Committee have said, the burden of these matters on companies is considerable and we feel that it would be unwise to add to them.

So far as the point raised by the noble Lord, Lord Mishcon, is concerned, the point I was seeking to make earlier was that in relation to the matter we were then discussing, so far as I know there were no representations from any United Kingdom interests against the inclusion in the directive of the provisions we were then considering, and I think that would include such an important body as Her Majesty's then Opposition and the Confederation of British Industry.

Clause 13 agreed to.

Clause 14 agreed to.

Clause 15 [Auditors to verify information given in directors' report]:

Lord Bruce of Donington moved Amendment No. 41: Page 25, line 12, leave out second ("the") and insert ("such").

The noble Lord said: I need not detain your Lordships for very long with this amendment, which is purely technical, and it is at page 25, line 12, when we come to Clause 15, which itself reproduces a new Clause 23A, which is divided into two subsections, (1) and (2). We would suggest that in place of "the" in line 12 it would be a little more consistent, and probably more helpful to the correct construction of the new clause, if the word "such" were put in instead. At the same time, since I understand that it is not in order to put amendments down to indents, may I point out to the noble and learned Lord that in the indent "Auditors to verify" it is possibly a good thing, in the light of the new contents of the clause, if it were "Auditors to consider information given in directors' report", and not required to verify. Possibly the indent can be made in conformity with the contents of the clause itself. As for the substitution of the word "the" by "such", I propose this in a desire to be helpful. I beg to move.

Lord Mackay of Clashfern

We have considered this and for the moment we think that what is already in the Bill is preferable to inserting the word "such". The word "the" in subsection (2) refers back to the word "the" in subsection (1) and I have not been able to find any qualifying content for the word "such", so for the moment at least we prefer to leave the provision as it is. As for the indent, I agree that the noble Lord has made a point that is worthy of consideration and we may be able to do something about that.

Lord Bruce of Donington

May I press the noble and learned Lord to go a little further? Difficulty arises in that one must relate Clause 2 to the financial year in question. If the word "the" is left as it is, it may relate not particularly to the financial year, and I think the insertion of "such" would more neatly relate to the financial year in question.

Lord Mackay of Clashfern

So far we have not found it necessary to make the change, but we will look at it in the light of what the noble Lord has said.

Lord Bruce of Donington

I am obliged. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

9.32 p.m.

On Question, Whether Clause 15 shall stand part of the Bill?

Lord Mottistone

It has been suggested that it is doubtful whether this clause is necessary. At present it is the responsibility of directors to ensure that their directors' report contains all the information necessary for their shareholders; it is very much their important responsibility. It could be considered an infringement of their responsibilities and duties—almost, one might say, an encouragement to them not to take their responsibilities as seriously as they do—for auditors to have to verify that the information given in their report is consistent with the company's accounts. It is the sort of thing that any competent board of directors, aided by a reasonable company secretary, would do as a matter of course. To have their hand held by statute seems almost an insult. I suggest therefore that the whole clause could well be omitted.

Lord Mackay of Clashfern

It is of course true that the directors have a responsibility for the directors' report. But the directors have a responsibility for the accounts as well, and that does not in any way dispose of the need to have them audited. The idea of this provision is simply to enforce what is presently good practice, namely, for the auditor to make sure that the information given in the directors' report is consistent with what the accounts say. Further, this is an obligation under Article 51 of the Fourth Directive.

Clause 15 agreed to.

Clause 16 [Certain provisions of 1948 and 1967 Acts to cease to have effect]:

Lord Lyell moved Amendment No. 42: Page 25, line 27, leave out ("and 5(3) and (5) ") and insert (" 5(3) and (5) and 6(1A) ").

The noble Lord said: I spoke to Amendments Nos. 42, 43 and 44 when I moved No. 21. They are in the nature of drafting and clarification amendments and I do not think I need speak further to them.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 43: Page 25, line 38, leave out ("and").

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 44:

Page 26, line 4, at end insert ("and (e) section 41(11) of the 1980 Act (treatment of assets of investment companies which are neither fixed nor current).").

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

On Question, amendment agreed to.

Clause 16, as amended, agreed to.

Clause 18 [Alteration of Companies Acts' requirements relating to accounts, etc.]:

Lord Mottistone moved Amendment No. 45: Page 26, leave out lines 23 to 36 and insert (" modify the requirements of the Companies Acts 1948 to 1981 as to the matters to be stated—

1. (i) in the documents required to be comprised in the accounts of any company in respect of any accounting period for the purposes of section 1(6) of the Companies Act 1976; or
2. (ii) in any document to be delivered to the Registrar of Companies under section 1(7) of that Act;").

The noble Lord said: In moving this amendment, with the leave of the Committee I should like to speak also to Amendments Nos. 46 and 48. The purpose of these amendments is to remove the new power which would be conferred upon the Secretary of State in adding, by statutory instruments, to the classes of documents to be prepared and filed by companies. Section 454(l) of the 1948 Act already empowers the Secretary of State, by regulations made by statutory instrument, to alter, or to add to, the content of documents filed with the registrar but does not add thereby to the classes of documents themselves. It is suggested that the question of the imposition of such a requirement on companies merits a much fuller debate in both Houses of Parliament than would be permitted by the procedure on statutory instruments; hence the amendments. I beg to move.

Lord Mackay of Clashfern

The amendment that the noble Lord has moved, and the other amendments, would have the effect of depriving the Secretary of State of the power to take account of changes that may occur. It has been recognised for at least 30 years that in this area accountancy is an inexact and developing science, or perhaps I should say, art. It is essential that it should be possible to alter the requirements of the Acts to take account of developments in practice and changes in economic circumstances without always having recourse to primary legislation. The much more prescriptive approach to the requirements which we have been obliged to adopt by the directive is bound to make this need greater in future. The Secretary of State's existing powers under Section 454, as amended, already take account of that need by enabling him to alter, add to, or reduce the disclosure required in the balance sheet, profit and loss account, group accounts, and directors' report.

That has enabled the Secretary of State in recent years, for example, to raise financial thresholds for disclosure, and in response to strong representations in another place last year to require an entirely new statement on employment policy for the disabled to be incorporated in the directors' report. The clause before the Committee is really an application of that principle to the circumstances of the present case, and I would suggest that no harm has resulted from the existence of a somewhat similar power since 1948. In the light of those factors I invite the noble Lord to consider whether he needs to restrict the power in the way that he proposes.

Lord Mottistone

I shall read with care what my noble and learned friend has said and consider whether to return to the charge at a later stage in the Bill. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 46 not moved.]

Lord Mottistone moved Amendment No. 47:

Page 27, line 19, at end insert— ("(d) reduce the amount of information required from any company falling to be treated as a small or medium-sized company within the meaning of section 8 of this Act with respect to the drawing up of the accounts of such a company; (e) exempt any company which qualifies to be treated as a small company within the meaning of section 8 of this Act from the requirement to have its accounts audited annually.").

The noble Lord said: This amendment seeks to encourage the Government—this has been tried earlier in regard to other parts of the Bill—to take full advantage of all the concessions for the small and medium-sized firms that are permitted by the EEC fourth directive. It is intended to secure for the Secretary of State the power to make regulations by statutory instrument, reducing the amount of information to be required from small and medium-sized companies in the drawing up of their accounts, and relieving small companies from audit requirement to a greater extent than the Bill already does. I beg to move.

Lord Lloyd of Kilgerran

If I may, I should like to support very briefly what the noble Lord, Lord Mottistone, has had to say in moving this amendment.

Lord Mackay of Clashfern

So far as the first paragraph of this amendment is concerned, it is already covered by the new subsections (1) and (2A). So far as the second paragraph is concerned, we are on to the auditing question, which we discussed earlier, and the Government's view at present, at least, is that it would not be wise to relax these obligations. That is the present situation with regard to these two paragraphs, and I hope that in the light of that explanation my noble friend will feel able to withdraw his amendment.

Lord Mottistone

Before proceeding further, could my noble and learned friend tell me whether, in the terms of the Bill, the Government will have the power effectively to introduce my proposed paragraph (e) by regulation at a later stage if they decide, after experience, that this particular derogation can be taken up later on?

Lord Mackay of Clashfern

As I read the Bill, this power is not given because the Government consider the obligation to have the accounts audited to be an important one, and the decision has been taken, as I explained earlier, that we should leave this obligation. Therefore, there is no power in the Bill as at present drafted to enable this to be done by regulation. Our view is that primary legislation is more appropriate for this purpose.

Lord Mottistone

Once again, I shall give thought to this. I should like to thank the noble Lord, Lord Lloyd of Kilgerran, after having jousted with him somewhat fiercely earlier in the evening, for supporting me in this amendment. Having taken note that my proposed paragraph (d) is already covered, it could be that we shall return to the charge on paragraph (e) at a later stage. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 48 not moved.]

Clause 18 agreed to.

9.43 p.m.

The Earl of Selkirk moved Amendment No. 49: After Clause 18, insert the following new clause:

("Interest in transactions

. In section 54(4) of the Act of 1980 at end insert— ;and (c) an interest shall not necessarily be treated as material on account of the size or nature of the interest (that is to say having regard as to whether the interest is a sole or partial or actual or contingent interest or the like) if the transaction or arrangement in which such interest consists is not material.".").

The noble Earl said: I am moving this amendment, or these two amendments, at the request of the Law Society of Scotland. They refer to the 1980 Act. This Government are trying, I think, to relieve companies of unnecessary burdens—burdens which add to the difficulty of what they have to do. These amendments both have this in common, that they suggest that some of the disclosures demanded by the 1980 Act are excessive; indeed, not only are excessive but are not easy to interpret. It is suggested here that there should be clearer guidance as to what should in fact be disclosed.

Amendment No. 49 deals with directors, and in this case the directors are governed by Section 54(4) of the 1980 Act, which provides that any transaction or arrangement must be settled in the opinion of the majority of the directors (other than that director) of the company …". That leaves it perfectly open as to what they should do. Some of them—the more conscientious ones—have said, "What is the law? Ought we to disclose this, or ought we not?" I think this is too vague. It is an unnecessary burden.

This is restricted to aggregate amounts of over £5,000. There is, therefore, necessarily, an idea behind this that the size of the arrangement is the dominant factor in deciding what they have to disclose and what they do not. This is not so. I do not think it is intended to be so, and this amendment seeks to make it quite clear that it is the material nature of the arrangement, not its size, which is the dominant factor in deciding what should be disclosed. It is easy, I think, to think of various things like insurance, which might be more than that, perfectly properly, or, should I say, retirement pensions of this character. This could help directors to be quite clear what it is they should disclose and what they should not. The lawyers whom they consult do not find it easy to give a clear definition of what is proper and what is right, and I think this would clear the issue. I beg to move.

Lord Lyell

Did my noble friend wish to take both amendments together?

The Earl of Selkirk

I was not intending to do that. The second amendment deals with officials and the first with directors. I could do so if my noble friend wishes.

Lord Lyell

It would suit the Committee well to take the directors first. We are grateful to my noble friend for moving this amendment which deals with a subject which has arisen in this House on earlier Bills and is still a point at issue. This subject has been raised by the Law Society for Scotland. The Committee will see that Section 54 of the Companies Act 1980 requires the disclosure in the accounts of any transaction or arrangement (other than any loans which are dealt with elsewhere in the Act) between any limited company and its director in which the director had any material interest whether direct or indirect. Taking one example of the provisions for disclosure, we can see the contracts with the company for the employment of someone's services or, another example, property transactions between any one person and a company. Disclosure of either of these points should reduce the risk of any misuse of company resources.

But the amendment which my noble friend has moved appears to be designed to give exemptions from any disclosure if the relevant transaction or arrangements are not material which, I, not being a lawyer, would interpret as being of no great significance. I hope that my noble friend and I myself are on parallel lines so far. One thing about which we are not clear is whether the words "not material" are intended to apply to the company or to the director, or to both company and director.

We have misgivings about this particular amendment because we think it would enable the director not to put an arrangement in which he had a clear material interest to his fellow directors simply because he himself was able to judge the substance of the arrangement not to be material or, possibly, not to be of any great significance. The proposed amendment by my noble friend does not seem to provide any test of what is or is not material. This would give rise to certain instances where the company might have or might appear to have substantial assets or, indeed, if a director had considerable personal assets or, again, could suggest that he had considerable personal assets. Again, in this case no disclosure would be required although, in the real world, the company's net assets were very slim indeed and the director could appear to be a man of straw.

We hope that the Committee might recognise that the disclosure provisions of the 1980 Act, and especially Part IV of that Act, were designed to be comprehensive; and we hope they are. They were also designed to prevent the sort of avoidance which had occurred under the previous disclosure provisions especially set out in Section 197 of the Companies Act 1948. Those of your Lordships who discussed the 1980 Companies Act and dealt with that will recall the lengthy discussion we had upon directors' disclosures. Secondly, I would not wish to remind the Committee of the many inspectors' reports which called attention especially to the transactions of the kind which now have to be disclosed. I hope that my noble friend will accept that his amendment could easily be used to encourage avoidance by unscrupulous presons and, especially, unscrupulous directors. I hope that my noble friend will accept what has been a rather lengthy and complicated explanation. However, he knows that the subject is complicated and I hope that he will accept the explanation bearing that in mind.

The Earl of Selkirk

I hope that the noble Lord will look at that answer again. It does not bear much relation to the amendment that I moved. In the 1980 Act it says: … an interest in such a transaction or arrangement is not material if in the opinion of the majority of the directors". I have said that it is not material simply from size. I have never said for one moment that it was not material. If it was material, it obviously was of consequence.

I ask the noble Lord to tell whoever devised that answer for him that he has not begun to understand the simple point that I make; it may be some arrangement which is a substantial size but then it is still not material because it deals with an insurance company or some other matter. I ask the noble Lord to look at this again carefully. My intention is to make it simpler for the directors to come to a decision. I shall not press the matter and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Earl of Selkirk moved Amendment No. 50: After Clause 18, insert the following new clause:

("Aggregate amounts outstanding

. After section 56(3) there is inserted— Subsection (2) above shall not apply in relation to any accounts in which the aggregate amounts which, apart from this subsection would require to be disclosed by virtue of subsection (2), do not exceed £5,000.".").

The noble Earl said: This is a similar amendment but it deals with officials. In the case of officials, there is no limitation to which disclosure should take place. There is no £5,000 and therefore any indebtedness at the end of the year by an official has to be disclosed. This might amount to a pair of shoes if it was a shoemaking company. It might amount to credit cards used to purchase petrol or anything like that. That is absurd; it does not amount to anything. It is something which does not need to be disclosed in the way it is in the Bill. As a very broad point, I suggest that the same limitation should be made; nothing under £5,000 a year need be disclosed. It is obviously a trivial matter which adds to the burden of what has to be done. It does not reveal anything of consequence and adds to the work of the company.

That is a simple method of doing it. It may be in many cases the sum will be much bigger than that; but that is neither here nor there. This sum is a reasonable amount to exclude small matters which are not worth recording but merely put an added burden and add nothing to the public interest and increase work. I would ask noble Lords to consider this very carefully. It is a simple way of getting out of an unnecessary burden which the Act of 1980 imposed possibly without adequate thought. I beg to move.

Lord Lyell

I once again thank my noble friend for moving what he says is a very simple amendment. I live in hope that this explanation may be a little briefer but more favourably received by him. We accept that the purposes of Section 56 of the 1980 Act are to require disclosure in matters of contracts which concern officers of the company. I am sure that my noble friend will accept that there are no de minimis and very small exemptions. We believe the reasons for the lack of exemptions are twofold: first of all, the disclosure which is required in relation to officers is far less comprehensive than that which is required for transactions which concern directors.

One example would be that there is no requirement for "material interest" transactions with officers which have to be disclosed. That was the main thrust of my noble friend's amendment.

Secondly, only any amounts which are outstanding at the end of the year are required to be disclosed, so that any loan or any other transaction needs to be disclosed in the accounts only if it is outstanding under this arrangement at the end of the company's financial year, and then only with other similar amounts outstanding to other officers in one amount. We do not think this imposes a very serious burden on major companies, and certainly we would expect the directors to wish to compile figures of this kind for their own purposes and indeed for the efficient running of the company's financial resources.

I am equally sure that my noble friend appreciates that any amounts which are advanced to an officer of a company for the purpose of meeting company expenses are not disclosed under these provisions, which are concerned purely with the disclosure of loans, credit cards and other forms of remuneration which are granted by the company as what is called "a perk" and repayable by the officer to the company. We hope that the conflict of interests for officers should be less than for directors. Equally, we believe it is important that shareholders once a year should be told how much is owed to the company by the staff—that is very relevant at the year-end—in order to judge the scale of the perks and remuneration and also the nature of the company's debtors. I hope that explanation will go some way towards mollifying my noble friend—perhaps "mollifying" is the wrong word, but at least I hope it is slightly more acceptable than the last explanation I tried to give to him.

The Earl of Selkirk

I appreciate what the noble Lord has said. I think it is a pity to add to the work which has to be done. This is really putting down sundry creditors, I suppose, in one form or another and it is probably fair enough in itself. But it seems to me that this should be shown separately, or that every single account which has not been dealt with should be added up at this time may seem excessive. However, I shall not press this matter. I will only ask the noble Lord to look at it and see if there are ways in which burdens which are not necessary can be relieved. I beg leave to withdraw the amendment.

Amendment, by leave. withdrawn.

Clause 19 [Accounts of oversea companies]:

9.57 p.m.

Lord Mottistone moved Amendment No. 51: Page 28, line 6, leave out from ("accounts") to end of line 17.

The noble Lord said: This amendment seeks to delete all of paragraph (b), and I regret to say that it should not end with line 17 but it ought to have ended with line 25. I apologise to the Committee for that. If your Lordships read this carefully it would seem that the Government, in writing the whole of Clause 19, said: "We had better do something about bringing the accounting of overseas companies into line." They did that in the earlier subsections and then apparently they said: "We are never sure about overseas companies: let us give ourselves complete freedom by regulation to introduce practically any restraint on overseas countries that we can think of." If we look at the proposed new subsection (3B) it says: An order made under subsection (3A) above may make different provision in relation to different cases or different classes of case and may contain such incidental and supplementary provisions…". That is a save-all for everything! I know that overseas companies are sometimes unpopular. They are suspect because their head offices are somewhere else, but they do bring employment to this country. There is no doubt about it at all; and even if we cannot provide a company which will employ motor workers, some of these Japanese motor manufacturers can, and are going to do so. I would have thought that in the first instance it is not entirely appropriate to give the Secretary of State quite such immense powers to legislate by regulation.

If at this time the Government wish to give powers for restraining overseas companies in some way or another, they should spell it out within the primary legislation and put something else in place of paragraph (d)—1 suppose it ought to be that, although mine is labelled "(b)" which starts in line 7. Something else should be put in there which says what they now think needs to be done to restrain overseas companies. Then everybody will know where they stand. Otherwise, someone in an overseas company reading this will think "My God! I wonder whether I should go there, because the Secretary of State can, by regulation, make me do all sorts of things, particularly in relation to accounting, which may not suit me." So may I suggest to the Government that they accept my amendment now, and at a later stage of the Bill introduce an alternative and more specific, primary legislative clause to replace it. I beg to move.

Lord Mackay of Clashfern

The intention of Clause 19 is to apply all the new accounting requirements to overseas companies within the structure provided for. The purpose of the paragraph, to which my noble friend objects, is to parallel a similar order-making power given to the Secretary of State in relation to the generality of companies. So if one looks at the Bill as a whole, there is no kind of discrimination against overseas companies. What there is is an application to overseas companies of the general rules that apply to others. In relation to the others, the Secretary of State has power to make alterations for reasons which we have described, and this is a similar power in relation to overseas companies. It is, of course, possible that this power could be misused, but the safeguards which apply to the other provisions also apply here, and we would say that they are sufficient to prevent any misuse of this power. I think that the experience of the past in regard to similar powers has been reasonably good, and I invite my noble friend to withdraw the amendment.

Lord Mottistone

Somewhat reluctantly, I accept what my noble and learned friend has said, but I will not promise not to come back at a later stage. At this stage, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 19 agreed to.

Clause 20 agreed to.

Clause 21 [Interpretation of accounting and disclosure provisions]:

Lord Lyell moved Amendment No. 52: Page 29, line 9, leave out ("(10)") and insert ("(9)").

The noble Lord said: This is in the nature of a small drafting amendment. If your Lordships care to glance at the top of page 12, it can easily be seen that the definition is not relevant to subsection (10), but is relevant to subsection (9) at the foot of page 11. For that reason, I beg to move.

On Question, amendment agreed to.

Clause 21, as amended, agreed to.

Clause 22 [Prohibition on registration of certain names]:

The Deputy Chairman of Committees (Lord Ampthill)

I should point out that if Amendment No. 53 is agreed to, I cannot call No. 55 or 56.

Lord Mishcon moved Amendment No. 53:

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: A weary, attenuated but, if I may say so, still highly intelligent Committee has now reached an important Part of the Bill. I do not want, in any way, to minimise the importance of Part I, but, as I ventured to say in the Second Reading debate, while it is perfectly correct that that Part of the Bill which deals with the fourth directive has been ably dealt with in this Bill—one can quarrel with details and we have discussed them—and while it is perfectly true that matters dealing with investigation by inspectors have been very usefully dealt with in this Bill, when the Government came to consider the question of limiting the powers and duties of the Registrar of Companies and abolishing the Registry of Business Names, they became confused, muddle-headed and, if I may say so with the deepest possible respect and then use words which are highly disrespectful, they behaved with an incompetence in putting provisions before this House which has seldom been equalled.

I would not say that lightly, but when we came to discuss on Second Reading the question of the abolition of the Registry of Business Names and putting self-regulatory procedure before this House, I decided to take one clause—Clause 29(2). I could not believe that I could be correct. But then I delivered on behalf of the Opposition a barrage of attack upon the sheer intelligibility of this self-regulatory clause which had no time limit attached to it regarding a direction to supply particulars and which dealt with the exemptions that people could claim before they gave those particulars if, indeed, the applicant had visited the premises. I did not know, and I invited somebody to tell me, what visiting the premises in fact constituted.

There were other defects in that clause which I ventured to point out. The House was kind enough, with the exception of the Front Bench opposite, to greet what I had said with sallies of laughter. I, too, could not believe that all my criticisms were right. I notice, only so that your Lordships pay special attention to this particular amendment, that the Government have now, at this Committee stage, put down revisions to that clause which I attacked, taking into account every point of criticism which I levelled at Second Reading. I would have hoped possibly for a gracious note from the Minister concerned, in place of the angry look which he gave me at the time, saying that the Opposition had been rather useful in pointing out the terrible weaknesses of the draftsmanship of that clause. But I know that the Minister must have been very much too busy to drop me that line. I appreciate that it was only as a result of his manifold activities that the Opposition did not receive it. And I did not receive it as the spokesman oil that occasion.

I mention this only because of the duty imposed upon us to look at what is being done in regard, for example, to the Registry of Business Names. The fact that under the old law the Registrar could say that he would not admit a name because it was objectionable —and part of the nature of the objectionable quality of a name was the fact that it was similar to another name has now been omitted from the Bill. The only objection that the Registrar can take regarding a name as such—I am not talking about whether the objection is represented to be on behalf of a Government department or a local authority—is that it is the same name: not a similar name but the same name. I venture to describe that as a licence to confidence tricksters to imitate the names of well-known concerns and to give the impression to the public at large that they are in fact part and parcel of the same concern.

Under the Bill as it is now before us, even with the same name the Secretary of State has got the following powers: that on it being pointed out to him (and he has 12 months within which to act) that the name is the same, he can then require the person who has registered the same name as somebody else on the index to put it right within six months thereafter, or within such extended time as the Secretary of State may decide. What a lovely length of time to allow to somebody who has possibly deliberately created this confusion in the public mind: in the minds of consumers, suppliers and other people. So this amendment seeks to do one thing and one thing alone. It seeks to give the power to refuse a name if it is similar to a name which is already registered, with the result, obviously, that confusion could be caused.

I wonder whether I may turn quite briefly to an amendment which succeeds the one which stands in my name and that of my noble friend Lord Wallace of Coslany. It is Amendment No. 54 and it might help if I merely pointed out, with great respect to those whose names are associated with that amendment, that of course paragraph (c) is the one which I am now dealing with and is in my amendment; paragraphs (e) and (f ) are in the Bill anyway and so far as paragraph (d) is concerned— which is a false or misleading indication of the objects of the company and the intended business"— I venture to suggest that anybody who knows anything about a memorandum of association knows that a company usually puts in every object under the sun in order to give it the vires, the powers, to carry on such a trade which may be mentioned in those all-pervading, all-inclusive objects. Therefore, for the registrar or the Secretary of State to have to adjudge whether that company in future is going to carry out an object mentioned in the memorandum I should have thought was not a practical thing to do.

I merely mention that in the hope that one day, when this is put to a vote in this Committee—unless the Government with their usual graciousness are prepared to accept this amendment—I may enlist their support. I hope that I have put sufficient argument at this late hour for the Government at the very least to say that with so many bodies behind the principle of this amendment: my own Law Society, chambers of commerce, finance houses associations, all sorts of people who are in favour of this—the CBI I mention with terrific respect—

Noble Lords: Oh!

Lord Mishcon

I am delighted that the CBI should take this view and I mean that in all seriousness. Because of the weight of opinion behind this principle and the weight of argument and logic, and because, as I have said, nobody wants to give a licence to confidence tricksters, I hope that the Government at the very least will say that they are prepared to consider this matter between now and the Report stage, in which case I, with equal graciousness, will ask leave to withdraw the amendment and see what comes up at the Report stage. I hope that will be the answer that I shall be given. I beg to move.

Lord Boardman

The noble Lord, Lord Mishcon, has prayed in aid for his amendment bodies with which I, too, have a close association—the Law Society and chambers of commerce. I think my noble friend will be aware of their very serious reservations about this clause and indeed the clauses which follow it. I certainly would not associate myself with the noble Lord in the reason that he gave. I believe that my noble friend will say that part of this provision is to reduce public expenditure, and I believe there are other ways in which the gap between what it costs and what industries provide to supply the service can be met. But I hope that my noble friend will give full weight, as I am sure he will, to the very real and sincere reservations in criticisms which have been made by bodies who are daily concerned with the registration of companies and business names.

Lord Mackay of Clashfern

The problem in connection with this matter is that if one is to decide whether a company which is seeking to register a name is seeking a name which is so similar to a registered name as to be likely to cause confusion, it involves a very considerable judgment on the circumstances. It is reasonably easy to devise an administrative procedure for identifying identical names, subject to the minor additions to these which are permitted under the Bill. That is something that an administrative office can do efficiently and one can be reasonably confident that the result sought has been achieved. But when it comes to a matter of this sort which is suggested by the noble Lord, Lord Mishcon, one is in a very different field. There are many cases in the books dealing with this problem, or a problem very similar to this, in the field of passing-off, and it is obvious that one has to make a pretty extensive consideration of all the circumstances before one decides whether or not the similarity is sufficiently close to cause confusion.

The Government point of view is that if central Government are going to do a task, then the principle should be that they must be able to do it properly and that the citizen can have reasonable confidence that the result aimed at has been achieved. It has not been found possible to devise administrative techniques which are adequate to discharge the task put upon the registrar under the present law. The phrase "too like", for example, is one of the phrases in this area of the present law.

I would suggest to your Lordships that the noble Lord, Lord Mishcon, realised clearly, as one would expect, the deficiencies of a purely administrative procedure for this purpose when he put down Amendment No. 60, providing for notification. In other words, when someone asks to put a new name on the companies register people interested will have a chance of looking at it and coming forward with their claim, "Here, I claim that a new name is too like mine". Then you are in a situation where there is a dispute between the person seeking registration and the other. I think certainly the noble Lord, Lord Mishcon, and perhaps I, would agree that that kind of question is best settled by a judicial rather than an administrative approach. It is true also that this work, presently shouldered by the registrar, does involve staff time and that kind of thing, and it is wise for central Government to restrict their operations to necessary operations that they can do well.

On looking at this matter carefully in the light of all the evidence that was received, the Government's view was that the best solution here was to restrict the task to the task that the Bill has taken up and leave the rest to be settled otherwise if it arises. Accordingly, while I am certainly prepared to consider further what the noble Lord has said, I want to say that the Government have not reached their present position without very serious consideration of the arguments that have been put forward. Therefore I am not to be taken as indicating any likelihood of a change from our point of view in acceding to the suggestion that it would be wise to have this matter reconsidered.

Lord Lloyd of Kilgerran

May I express my surprise at some of the observations made by the noble and learned Lord, in so far as I understood them. The main objection he appears to have raised to this amendment is that the Government find it very difficult to set up an administrative arrangement to decide whether one name is confusingly similar to another. The Government have such an administrative organisation, the Registrar of Trademarks, as part of his work is constantly considering, with another procedure, whether or not one word or trademark is confusingly similar to another. I should have thought that in view of the serious attitude adopted by industry in relation to this matter the Government could quite easily set up a simple procedure whereby, by charging a fee, they could arrange, as they can do under the present law, to have this matter referred to either the Board of Trade or the Registrar of Trademarks. It merely involves some simple administrative arrangement.

The office of the Registrar of Trademarks does a good deal for British industry and I would have thought that this was an administrative matter which would satisfy the fears and anxieties of industry. Since the last war I have spent most of my life at the patent and trademarks Bar, where we have constantly found that entrepreneurs deliberately set out to get a name for their companies or trademarks which are just as near as possible to well-known names or trademarks.

In business activities the attempts to ride on the goodwill of companies which have been in business some time is very well known, and I think it is a great mistake for the Government to dismiss this matter and say that one should go to the courts to deal with these difficulties. There should be a simple administrative arrangement, involving if necessary the Registrar of Trademarks, to deal with this serious problem.

Lord Mackay of Clashfern

I am reasonably well aware of the functions of the Registrar of Trademarks and Patents, but I regard the Registrar of Trademarks as discharging a judicial function when deciding between competing claimants about the question of whether the mark which it is sought to register is confusingly similar to another.

There is another point. The Registrar of Trademarks is dealing with a trademark in relation to a particular subject matter. With all respect, that is difficult enough and the Registrar sometimes finds it difficult to come to a decision. That is a much more difficult thing than dealing with a company name in relation to the breadth of subject matter which is nowadays to be found in the objects clauses of a company's memorandum of association. It is very difficult to guess exactly what the shape of a company's business will be at the outset and, indeed, how it will develop.

In the light of the information we have had, I just feel that the task which is put upon the Registrar, or the Secretary of State at the moment, is too difficult. It is well to recognise that fact and to take action accordingly. As the noble Lord, Lord Lloyd, has said he has had a lot of personal experience of this at the trademarks and patents Bar, the reason for that must be that the present administrative procedures in relation to companies are not adequate to prevent the mischief of which he complains.

Lord Boardman

As I understand it, the present law is working fairly satisfactorily. I wonder if the noble Lord could just say, if indeed he envisages difficulties in making changes, why make any changes at all to this particular aspect of the law?

Lord Mackay of Clashfern

There are two particular factors involved. The amount of work which is presently put to the Registrar of Companies has increased a great deal in recent years, and therefore the existing staff has had to cope with much more work than it had before. Secondly, and with great respect, I do not agree that the existing law has worked well in the sense that has been suggested because, as the noble Lord, Lord Lloyd of Kilgerran, has said, with all his experience at the trademark and patents Bar and notwithstanding the present situation, people try to go as near as they can to the names of existing companies.

Certainly quite a number of cases occur in which the company's name is the source of the confusion, notwithstanding the present law. The present law does not have as its result that a company cannot register a name which may be confusingly similar to that of another company, having regard to all the circumstances of the business which it carries on. Certainly as at present we feel there is a very strong case for making the improvement which we have suggested.

Lord Mishcon

I am most grateful to the noble Lord, Lord Boardman, and to the noble Lord, Lord Lloyd of Kilgerran, for the support that they have given to this amendment. I am somewhat downcast—although not entirely surprised—by the reply given by the noble and learned Lord the Lord Advocate. I say that for the following reason. The point made just now by the noble Lord, Lord Boardman, was absolutely correct. The view which I am about to express is shared by the Law Society and by the Bar Council, and I beg of the noble and learned Lord the Lord Advocate, in spite of the fact that he has graced the Scottish Bar and not the English Bar with his very powerful professional experience, to listen with the deference that I am sure that he would to the views of the Bar Council and the Law Society of England. The experience of those of us who are in practice and who deal with company matters is that our only complaint is that we might have had to wait rather a long time before we heard from the registrar that a name was approved. However, I can assure the noble and learned Lord that our experience of the Registrar of Companies' department is that very few cases of confusion have crept through.

There is no complaint at all about the administrative work. If the noble and learned Lord wants to say quite frankly that the Government are determined at all cost to save expense and to cut down the personnel of the registrar's department, then I understand the point; but I do not accept it because I think that the protection of the public and the protection of decent commercial firms who value their good name and goodwill are of sufficient value in this country to our economy as to be set against the very poor and almost meagre saving that there would be in personnel in the Registrar of Companies' department.

It was not because I saw a weakness in the administrative department that I put down Amendment No. 60 which deals with a procedure of advertising in the Gazette and gives the opportunity of objection: it was because in the same way in which I understand the wicket keeper of the West Indies team in Barbados has decided after the hurricane bowling that he has seen, that he needs a longstop, that I felt, in exactly the same way, that I needed a longstop. If I found that I was overcome by the fast bowling of the noble and learned Lord and that therefore the ball passed this amendment, I felt that I needed a longstop to say: If you have convinced this Committee that, because of expense or whatever it may be, the valued assistance given by the Registrar of Companies must now cease and the practice that we have enjoyed for so long shall no longer be the practice in regard to the safeguards that I have mentioned, then I want an amendment by way of a longstop—which, of course, has not yet been moved—in which I could say, "All right, still try and safeguard the consuming public and industry and commerce at large by having a procedure outside the registrar's jurisdiction, to look at the names and let people say 'This is a name so similar to mine that I ask for consideration to be given to that other name not being allowed'".

The noble and learned Lord the Lord Advocate referred to a judicial process. I am sure that he knows much better than I do what a passing-off action means to the very small firms that he with such eloquence was defending on behalf of the Government and very rightfully looking after in the provisions of this Bill with the full support in principle of the Opposition. It is the small firms, we were told, upon whom the future of this country to a large extent depends. We want to help them. We want to protect them. Does the noble and learned Lord think that he is protecting and helping small firms by telling them, "Somebody has pinched your name. They have been awfully clever and they have just altered a syllable. Phonetically it is the same, but the spelling is different so now you had better go along to a lawyer and bring a passing-off action"?

The noble and learned Lord knows as well as I do the five elements in a passing-off action which were decided, if I remember correctly, only last year in one of the leading cases which followed a 1979 case. There are five ingredients which are so very difficult. The noble and learned Lord knows perfectly well that a passing-off action means, as a rule, quite a long action, an expensive one—and as a rule it is not a matter that is decided by injunction; it is very often a matter that has to go to a full hearing and, therefore, time elapses and as a result people have advantages which they should not get if they have wrongly been using a name. That cannot be the answer of the noble and learned Lord, especially to small businesses. Is that the Government's answer? If so, I am surprised. I did feel that, although the noble and learned Lord was not going to concede the point tonight, he would at least give an open-minded reconsideration to this matter, in spite of the fact that there are noble Lords behind him who feel as I do. The noble Lord, Lord Lloyd of Kilgerran, enhancing the Liberal Benches, feels precisely the same as my friends and I. In spite of that, the noble and learned Lord will not yield. I respect him for his obduracy, although I do not welcome it.

However, at this late hour in regard to the duty of this attenuated Committee—and I say this with the utmost deference—with so many organisations, professional and otherwise, looking to us to put right this clause in this Bill, I think that it is absolutely wrong to test the view of the Committee tonight by a Division. Therefore, for that reason—and that reason alone—and so that, quite frankly, I can table this amendment (or someone else can, and the more support I get the better) at the Report stage, that I ask the Committee's leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees

I should point out to the Committee that, if Amendment No. 54 is agreed to, I cannot call Amendments Nos. 55, 56 or 57.

[Amendment No. 54 not moved.]

Lord Lloyd of Kilgerran had given notice of his intention to move Amendment No. 55: Page 29, line 30, after ("as") insert ("or confusingly similar to")

The noble Lord said: This amendment raises somewhat similar points that we have already discussed at length. It may be helpful to the Committee if I indicate now that I do not propose to move Amendments Nos. 55, 64, 65 or 159 at this stage. However, I reserve the position as far as the Report stage is concerned.

[Amendment No. 55 not moved.]

Lord Lyell moved Amendment No. 56: Page 29, line 30, leave out second ("the") and insert ("a")

The noble Lord said: I regret that this is in the nature of being a small and minor drafting amendment. Line 30 on page 29 of the Bill contains a self-evident error. It should read which is the same as a name appearing on the Index". I ask for your Lordships' support for this amendment.

On Question, amendment agreed to.

10.34 p.m.

Lord Mottistone moved Amendment No. 57: Page 29, line 37, at end insert ("or undesirable").

The noble Lord said: Section 17 of the 1948 Act provides that no company shall be registered by a name which, in the opinion of the Board of Trade—but I understand that the modern interpretation is the Secretary of State—is undesirable. As I understand it, over the years the main criterion by which a name has been judged undesirable is that it is misleading, and in particular by being confusingly similar to the name of an existing company. I do not wish to pursue all the arguments of the noble Lord, Lord Mishcon, or my noble friend Lord Boardman, with both of whom I agree, and indeed the noble Lord, Lord Lloyd of Kilgerran. I trust that my noble friend on the Front Bench will take note that we are all deeply concerned about this. But I noted that my noble and learned friend said that he was concerned to take note of what we had said, or words to that effect. I hope he takes very serious note.

The point of this amendment is to make sure that what is in Section 17 of the 1948 Act is read within the context of the legislation in this part of this Bill. I hope that this would appeal to the Government rather more firmly than perhaps the other arguments, because it is really only repeating what earlier Governments have said and done. I should like to take my Amendment No. 66 with the general point that I have been talking to because that too is reiterating the same point again, that we must have legislation to deal with "too like", "similar", and other phrases.

I have been advised on these amendments by the CBI, which has not been always the case with some of the earlier amendments. I think that everybody has a certain degree of respect for the CBI's understanding about the needs of companies of all sizes. I hope that my noble friends take to heart what has been said from all sides of the Committee; that is, that they must do something about this risk of similar and identical, or near identical, names to a greater extent than the Bill now does at this stage. I beg to move.

Lord Lyell

The proposals of the Government to reform the legislation governing company names whether on first registration or at a subsequent change are contained in Clauses 22, 23, and 24 of this Bill. All these recognise the difficulties which have been experienced over so many years, and have been expressed all round the Committee tonight. These have been experienced, certainly since the 1947 Act, in seeking to apply the discretionary powers which are enshrined in Section 17 of the 1948 Act. I am sure that my noble friend will appreciate that there are 800,000 names now on the register. This number is increasing by something in the region of 60,000 new names every year.

It would be, with such vast figures, quite impossible to ensure that there is no possible confusion between any of the names. It is important to put the whole of this matter into perspective. I mentioned that the annual rate of new first registrations is in the region of 60,000 new names every year. But the number of objections—and one may be too many—which 1 would ask the Committee to consider out of 60,000, or indeed out of the 800,000 names altogether on the register (it is increasing every year) received by the Registrar during the last 12 months was in the region of 300. This was despite some relaxation in the last two years of the criteria within the present very wide discretion against which new names are compared with those already registered. It is against this background—

Lord Mishcon

Is the noble Lord the Minister coming to a new point? If the noble Lord wishes to complete a thought or a sentence, I would not be rude enough to interrupt him at this stage.

Lord Lyell

The noble Lord was not rude, but he has interrupted.

Lord Mishcon

I am not sure that I interpret that as a welcome to my intervention or not. I would ask the Minister to help me on this. I am not sure—other Members of the Committee may be—what he means by objections received by the Registrar. Does he mean objections received by people who thought that the names that were being registered were rather similar to their own? I am not sure what he is referring to as objections. Possibly the noble Lord could tell the Committee.

Lord Lyell

1 thought I had made the position clear; they are objections received by the Registrar. That is clear, is it not?

Lord Mishcon

Objections against what?

Lord Lyell

Objections received on any grounds; objections received by the Registrar out of 60,000 new names every year.

Lord Mishcon

I know the noble Lord is anxious to help the Committee; that is why I am pursuing the point. I gather he is bringing forward that figure as showing how ably the Registrar manages to deal with 800,000 names—because there are only 300 objections on any ground from other people to the effect that he has done the job badly—in which case I welcome the point and I am sure all those who are in favour of my amendment will welcome it as strengthening our case.

Lord Lyell

I understand the objections are those received after a name has been registered. I am told that the objections usually come from companies which are already on the register, and I hope that puts the figure I gave, of 300 objections by companies already on the register, about their name or trademark being stolen, removed or somehow threatened by a new interloper, as to speak—

Lord Mishcon

I am sorry to interrupt the noble Lord, but is he saying that that shows that the Registrar has done an extremely good job in sifting these things out beforehand?

Lord Lyell

Among other things, yes, but it is not just the Registrar; it shows that the scale of objections, and thus the scale of the problem, is 300 out of well over 800,000. That is the main thrust of my argument, and I am sure there are others which the noble Lord, Lord Mishcon, with his facility, would be able to adduce, but I am advancing my argument on a fairly broad front and I hope the Committee will bear with me while I attempt to complete my answer to my noble friend.

The provisions of Section 18 of the 1948 Act, under which companies are permitted to change their names voluntarily or may be directed to do so in certain circumstances by the Registrar, are reflected in Clause 24 of the Bill, although the powers of the Secretary of State to direct a change of name are related, of necessity, to the criterion set out in Clause 22 by reference to which a name may or may not be allowed. To do otherwise would mean, in effect, changing the rules half way through the game, which clearly would not be equitable to any companies, either companies wishing to join the register or companies already on the register.

Section 19 of the 1948 Act allows companies which meet certain strict criteria to be licensed to omit the word "limited" from their names; for example, charities constitute the majority of companies which have taken advantage of this provision. Although the Government virtually suggested that this privilege should be withdrawn—as being no longer relevant in a situation where, under the European Communities Act 1972, all limited companies are required to reveal that status on their notepaper—we have taken account of representations we have received. Clause 25 of the Bill now provides for that particular privilege to be retained by companies which meet the criteria which are set out in the clause, and that retains the effect of the existing Section 19 without the requirement for specific licensing. I am afraid that of necessity my explanation has been very lengthy, but I hope that it might be of some assistance to my noble friend.

10.45 p.m.

Lord Mottistone

I am afraid that the explanation is of no assistance, because my noble friend did not answer my point about the word "undesirable"; nor did he deal with the fact that I was trying to ensure that what is contained in Section 17 of the 1948 Act is included in the Bill. I shall not pursue the matter. I noted that my noble and learned friend the Lord Advocate said that he would look closely at this point. As I said earlier, I hope indeed that he will, since there is no doubt that we are all very disturbed about it. I very much take the point that the noble Lord, Lord Mishcon, made; namely, if there are 800,000 names and only 300 complaints, it cannot be—as my noble and learned friend has said—that there is a problem of being unable to cope with the large number of names. That does not add up; it is not logic. Having said that, at this stage I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Lyell moved Amendment No. 58: Page 30, line 16, after ("expressions") insert ("where they appear at the end of the name").

The noble Lord said: This amendment, and the following amendment, are Government amendments which we hope will clarify the clause somewhat. I wish briefly to try to explain the reasons for putting forward this clarification. It seems that the invention of Clause 22(3) is to ensure that only what might be described as the distinctive elements in a company's name are taken into account for purposes of comparison against other names. Let us take the example of "J. Smith & Company Ltd". For this purpose that would be regarded as the same as "J. Smith Company Ltd.". The Government recognise that although the words and expressions are usually found at the end of a company's name, there may be occasions on which they form part of the "distinctive" element; for example, "Company Searches Ltd", or "Associated Company Registrars Ltd". In such cases as those it would be most appropriate to take account of the word "company" when considering subsequent applications.

At the same time the Government wish to add two further expressions to those specified in the Bill; namely, "company limited", and "and company limited". That is in order to avoid any doubt which might otherwise exist in your Lordships' Committee, or elsewhere, to the effect that the words in question are to be ignored for comparison purposes, even when they are associated with one another. My noble friend Lord Noel-Buxton raised this matter on Second Reading, and it is to meet his point, as well as other points that were raised, that I move the amendment. I beg to move.

The Earl of Selkirk

May I ask whether the three categories of company that we are creating—large, medium and small—are to appear anywhere, so that people will know with what type of business they are dealing? Is the category of company to be indicated in the name of the company, or in some other convenient form which people could discover? This point is not wholly without concern to people who might be carrying out trading activities with the companies.

Lord Lyell

I wish that I could help my noble friend further, but I do not think that there is much that I can say, other than to suggest to him that the type or statutory size of a particular limited company could not be adduced from its name or from any letters that might follow the name. The purpose of the company's name is to set it apart from other registered companies. We have already gone into the question of likeness and similarity quite enough for this evening. I fear that I do not think there is any method whereby my noble friend or anyone else could adduce the size of any relevant concern. The category of the company certainly would not appear in the name. I fear that any such requirement as is suggested by my noble friend would be rather onerous. But the category would definitely appear in the accounts, and that might be of considerable assistance to my noble friend or anybody else who might wish to discover what type of concern or what size of concern they were considering dealing with. I hope that explanation might be of some help to my noble friend.

The Earl of Selkirk

I am grateful for that answer. Of course, what is important is that they are governed by slightly different regulations, and that should be known. My noble friend has said that this will appear in the accounts. I did not notice that in the Bill—that means nothing, of course; I have not read the whole Bill—but possibly he is correct.

On Question, amendment agreed to.

Lord Lyell moved Amendment No. 59: Page 30, line 17, after ("company"") insert (""company limited", "and company limited",").

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

On Question, amendment agreed to.

Clause 22, as amended, agreed to.

Viscount Long

I beg to move that the House be now resumed.

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

House resumed.