§ 2.59 p.m.
§ The Parliamentary Under-Secretary of State, Department of Trade (Lord Trefgarne)
My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
§ Moved, That the House do now again resolve itself into Committee.—(Lord Trefgarne.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The LORD ABERDARE in the Chair.]
§ Lord Lloyd of Kilgerran moved Amendment No. 123:
§ After Clause 41, insert the following new clause:
("Disclosure of substantial individual Interests in share capital carrying unrestricted voting Rights: parties acting in concert
.—(1) The Secretary of State may by regulations made by statutory instrument make and from time to time vary such provisions as appear to him to be appropriate for ensuring that the obligation of a person under section 33 of the 1967 Act (obligation of persons to notify company of acquisition, changes in amounts of, and disposal of shares in the company carrying unrestricted voting rights) shall apply to any one or more persons who are (or, under such regulations, are deemed to be) acting with a common purpose as if such one or more persons were a single person.
(2) Regulations under this section may make different provisions for different cases or classes of case and may contain such incidental and supplementary provisions as the Secretary of State thinks fit.
(3) No regulations shall be made under this section unless a draft of the instrument containing the regulations has been laid before Parliament and has been approved by resolution of each House of Parliament.").
§ The noble Lord said: I beg to move an amendment concerning the secret dealing in shares which has caused so much anxiety in the City of London in recent months. This amendment is intended to deal with that problem satisfactorily in so far as it seems to us on these Benches and to many organisations at present in the City who have indicated to me that the scope of this amendment is adequate for the purposes of dealing with the problem expeditiously.
§ Under Section 33 of the 1967 Companies Act it is incumbent on people to disclose their holding of shares with unrestricted voting rights if their quantity of shares amounts to 5 per cent. of the total paid-up capital of 965 the company. However, now there are many persons who though individually they do not own more than 5 per cent. of the shares, they work in concert and, in a non-legalistic way, together they are able to get more than 5 per cent. control over the shareholding of the United Kingdom company. This can be a very serious matter. The company does not know who holds these blocks of shares. It may be embarrassing to a United Kingdom company to have foreigners owning shares—particularly a large holding of shares—in a company, and nobody knows who they are. This is particularly so when companies have defence contracts.
§ The problem was brought to light in a strong way in the case of Consolidated Gold Fields. Members of the Committee may have seen recently in the press that the Dunlop Company were worried that something like 30 per cent. of their shareholding was held in the Middle East by persons unknown to them. There have been two or three other cases brought to notice recently, but in some cases no press announcement has been made about the problem.
§ Where these people act in concert—we call them, in the jargon of the law, "concert parties"—this amendment is intended to force a disclosure of who holds more than 5 per cent. of the shares or to give powers to the Secretary of State, if necessary, to limit the voting rights of those who do not disclose their identity in relation to their shareholdings when those become over 5 per cent.
§ I should also like to speak to my Amendment No. 152. The scope of the amendment is this: it is well known that it will be very difficult indeed to recite in a statute all the detailed ways in which these "concert parties" can act. It seemed to us that the best way to deal with the problem was to give the Secretary of State power to introduce a regulation when a problem of this kind was brought to his notice. The facts, as I say, differ from case to case. The matter can then be dealt with by regulation.
§ I am always reluctant to suggest that government should be by regulation; but this is a case of such urgency and seriousness, and the variety of cases is almost infinite, that regulation would be justified. This is subject of course to the safeguard which I have included in subsection (3) of my amendment that no regulation shall be effective unless it is passed by both Houses. That would give the protection that a lot of us would find satisfactory in this problem of dealing with regulation.
§ There is a statement in the Financial Times this morning that the Government may be introducing some measures regarding the amendment that I have proposed. At Second Reading nearly a month ago (at col. 1174 of Hansard for 26th February) I explained fully what I proposed to do in the Committee stage. My amendment was one of the first amendments put forward. The Government have had three to four weeks to consider the basis for this amendment that I set out so fully in the Second Reading.
§ The Financial Times were good enough to refer to me; but they made a great mistake. They referred to me as a Labour Peer. May I say publicly now—in case it is not known in all parts of the Committee—that I am and have always been a Liberal Peer. Now that I am presuming before the Committee to correct statements in the Financial Times, may I say that last 966 week, when they were dealing with my amendment, which I succeeded in passing through this Committee regarding business names, they referred to me as a solicitor. I am not sure what course a silk at the Patent Bar who has been referred to as a solicitor and a Labour Peer should take in the future. That will be no doubt considered at a later stage.
§ I do not think it is necessary for me to speak in greater detail except to say once again that it is very difficult to define in a statute the actions of these people who are acting in concert. There are so many variations of it. No doubt it could be defined but I am sure that a number of people could escape the conditions in the statute. I therefore suggest that power be given to the Secretary of State to introduce a regulation to deal with a specific problem, subject always to the fact that the regulation would not be effective unless it had been passed by both Houses. I beg to move.
§ 3.7 p.m.
§ Lord Seebohm
I confess that I am puzzled. I fully agree with Lord Lloyd's motives but there are three amendments which seem to have precisely the same objectives; Amendments No. 123, 125 and the amendment in my name, No. 139. The amendment I am putting forward has been approved and is strongly recommended by the Council of Securities Industries, which is the watchdog in the City for these matters. I have also had a letter from the chairman of the Stock Exchange saying that he is strongly in favour of the amendment in my name. I wonder whether these amendments should be taken together or whether the Government have a view as to which is the best one. If we pass this amendment do we automatically cancel the other two?
§ Lord Trefgarne
If I may respond to the noble Lord, Lord Seebohm, without any disrespect to the noble Lord, Lord Lloyd, if the Committee is persuaded by the arguments that I shall seek to deploy, I hope that noble Lords who have similar if not identical amendments will not seek to move them when we get to them later.
§ Lord Lloyd of Kilgerran
I am sorry to interrupt the noble Lord so early in his speech, but the other amendments are not identical. They are not so broad as my amendment. They attempt to deal with the matter more specifically. Although the basic theme is the same, they are not identical. Opinions of course differ as to which is the best amendment. I was telephoned this morning by some high person in the Stock Exchange who supports my amendment as against Lord Seebohm's amendment.
§ Lord Trefgarne
If I may say what I have to say and then if noble Lords who have other amendments on the Marshalled List are not satisfied, they may deploy their arguments when we come to their amendments. May I first congratulate the noble Lord, Lord Lloyd, on the ingenuity of his attempt to deal with the problem of "concert parties". Sensitive to the concern expressed by the Government about the burden which the Bill even in its present form will impose on your Lordships and on the other place, the noble Lord suggests that 967 the Secretary of State should be able to deal with this matter by secondary legislation. I have to say, first, that the Government do not consider that it would be appropriate to deal with a matter such as this by regulations. Quite apart from the sensitivity and significance of the policy issues that so-called "concert parties" raise, subjecting them to disclosure requirements would involve an important extension of the application of criminal penalties in this area. It cannot, in the Government's view, be right to make such an extension in a manner which does not provide for full parliamentary scrutiny by burying the new offence away in secondary legislation that will not be evident on the face of the Act.
If one were, nevertheless, tempted to follow the noble Lord's approach, I fear his clause is too imprecisely worded. I have in mind, for example, the words "acting with a common purpose". What does "acting" mean? Acting to acquire? Or acting, having acquired? Acting in what way—by voting together? Exercising rights together? The noble Lord may say that these are matters for the regulations. But the regulations must be within the scope of the power, and this power is, as I say, far too imprecise to provide a sound foundation for future action.
However, the Government do not have a negative approach to these matters. We noted carefully the references in the Second Reading debate to the omission from the Bill of provisions to tighten up the law on the disclosure of interests in shares. We have always recognised that there are problems about the effectiveness of the present law and the Committee knows that we have given very full consideration to the subject over the last year. This Government, like any Government, can only bring forward so much legislation at any one time, and we were forced to the conclusion, reluctantly, that this subject could not be dealt with in this Bill. We recognised that this would cause disappointment, but felt that we had no alternative.
Since the debate on the Second Reading we have reviewed the position with particular reference to the parliamentary time available. I am pleased to inform your Lordships that the Government now consider that they will be able to bring forward their own proposals. I cannot promise at what point in the progress of the Bill through Parliament we shall be in a position to do so. These are difficult and complex matters, as the noble Lord, Lord Lloyd, recognised, but we shall bring forward proposals as soon as we can. Nor am I able to comment at this stage, I regret, on the nature of the proposals and provisions which the Government will bring forward. What I can say is that they will deal with so-called "concert parties" and, on that basis, I invite the noble Lord to withdraw his amendment.
§ Lord Lloyd of Kilgerran
I am now at a complete loss as to what course the Government are proposing to take. I understand that they are going to bring forward their own proposals, having regard to the indication in the Second Reading debate of the problems that we on these Liberal Benches were attempting to deal with by amendments. May I ask the noble Lord the Minister whether he proposes to bring new 968 clauses into this Bill? I do not see the noble Lord, Lord Boyd-Carpenter, in his place but on several occasions he has commented on the structure of this Bill. May I therefore ask the Minister: is he proposing to bring forward by 6th April—that is, by Report stage—new clauses to the Bill? Or is he saying that your Lordships will not have the opportunity of considering amendments to the Bill in this Chamber but that amendments to the Bill will be produced in the other place? If so, that appears to raise a constitutional matter with which I am not capable of dealing; but it savours to some extent, quite bluntly, of discourtesy to this Chamber if the Government are not producing amendments in this Chamber and are now saying deliberately that the amendments will be brought forward in another place when and if the Bill gets there.
§ Lord Wedderburn of Charlton
May I intervene before the noble Lord replies so that he can perhaps deal with all the points raised at the same time. The noble Lord, Lord Lloyd, has surely raised a matter of very great importance in relation to the way in which company law appears to be made under this Administration in the legislature. The last Companies Bill went through your Lordship's House with a certain girth and then expanded to twice its inches in another place. This Bill has now had made to it perhaps one of the most important additions in company law for a century; namely, that which reverses the rule in Trevor v. Whitworth to allow companies to purchase their own shares. When the noble Minister speaks about lack of parliamentary time, I recall one evening last week when 16 pages of fundamental amendments to our company law went through the Committee in, I believe, 40 minutes after dinner. There was plenty of time to deal with his new clauses then. When the noble Lord says it is all terribly difficult because one cannot define "acting for common purposes", may I point out that there are three or four easy references for him to note in other statutes which use very similar phrases—for example, in the Industry Act.
What is holding the Government back? Why is it that on company law we always get a Bill which begins by looking as if it is about A, B and C, but then in Committee stage it begins to be about D and E, and by the time it gets to another place it has become W, Y and Z? This is a very difficult area of company law legislation—an area which is highly political, contrary to the belief of most people, and an area where public policy is absolutely fundamental—and this amendment of the noble Lord, Lord Lloyd, is fundamental to disclosure philosophy, to society and to company law. Is it that the Government cannot make up their mind what to do in this area? The difficulty cannot be the technicalities of defining "acting with a common purpose" and it cannot be lack of parliamentary time, at least not just at the moment. What is holding the Government back?
There is a clear call from all sides of British society for legislation regarding persons acting in concert and the amendment which is in my name, and the names of my noble friends Lord Ponsonby and Lord Bruce, is a supplement to this one, and in one respect also to the one of which the noble Lord spoke earlier. Surely the Government can at least give us some idea 969 of the substance of what they are about to propose? Can they tell us at least the vague lines of the structure of the legislation they propose on "concert parties"? If so, then perhaps in speaking to our amendments we could have a worthwhile debate in a genuine attempt to help the Government to bring forward points which would be relevant to the structure. But if we do not know the structure of their thinking, we shall be debating amendments which are more or less in the air.
§ Lord Trefgarne
I think the hall mark of the Government's response to the points made in Second Reading of this Bill is one of flexibility. Instead of maintaining dogmatically the hard line that we were not in any circumstances going to proceed with the introduction of the control of these "concert parties" to which the noble Lord's amendment refers, we considered very carefully all that was said and came to the conclusion, in the light of a reassessment of the parliamentary time available, that it would, after all, be possible to deal with this matter.
The Government have long acknowledged that the problem of "concert parties" was a difficult one and that it was a question of when we could get the appropriate provisions fitted into the legislative programme. Now an opportunity has presented itself, and we have been constrained to look particularly carefully at the legislative timetable, having regard to the very strong feelings that were expressed by your Lordships during the Second Reading of this Bill.
I am sorry it is not yet possible to tell your Lordships precisely what it is that we have in mind in this matter, because the details of the clauses that we shall be tabling are not yet available. I cannot give an undertaking that these clauses will necessarily be tabled in this Chamber. I hope it will be possible to do that, but it is simply a question of whether we can get them properly drafted in time. If that is not possible, then I fear they will have to be tabled when the Bill goes through another place; and if that is necessary that is what will be done. I regret that these amendments cannot be brought forward now, but that is simply not possible within the constraints of the parliamentary draftsmen and, indeed, of the other persons involved. I hope that your Lordships will be satisfied with the assurance I have given, that we shall deal with this problem in this Bill just as soon as we can.
§ 3.20 p.m.
Lord Campbell of Croy
The noble Lord, Lord Lloyd of Kilgerran, is to be congratulated on having had the effect on the Government of their saying that they will be bringing forward amendments to meet this point, and the points of other noble Lords such as the noble Lord, Lord Sebohm, who have been concerned with this matter. Like my noble friend, I hope that it will be possible for these amendments to be introduced into your Lordships' House—if they can be drafted in time—rather than into another place. But the fact that the Government are responding to these amendments, and will produce a formula which one hopes will meet all the problems, means, I think, that the principle has been accepted.
The noble Lord, Lord Wedderburn, raised what sounded like a constitutional point and I should just 970 like, for a moment or two, to point out that this has happened on several occasions in recent years in your Lordships' House, in which I was involved, as was the noble Lord, Lord Lloyd, To illustrate the point, major amendments to a Transport Bill were suggested by me from the Front Bench opposite about three years ago. It was not possible for the noble Lord, Lord Harris, who was dealing with that Bill, to get them in in time in your Lordships' House, but enormous additions were made which we welcomed in another place and then came back here. I kept bobbing up from the Bench opposite thanking the noble Lord, Lord Harris, for about 20 amendments which came through, which had really been the result of an initiative taken in this House. So that is one alternative. We were quite pleased with the results, but we had no opportunity to discuss them except as amendments. We could not amend Commons amendments.
To put it another way, I remember when the Energy Bill was going through this House in 1976. On that occasion, we were able to convince the Government—it was the noble Lord, Lord Kirkhill, who was then dealing with the Bill from this Front Bench—that their Bill as originally drafted needed considerable amendment. The whole Bill was completely transformed in your Lordships' House. That deprived the other House of an opportunity to see the original proposals of the Government. So that is the situation in another form. By changing a Bill a great deal in your Lordships' House—in that case, it was the Energy Bill—the other House had no opportunity to consider the original proposals, because the Bill was completely transformed by the time it reached another place.
So I would remind your Lordships' House, particularly in regard to what the noble Lord, Lord Wedderburn, said, that we can have a considerable effect on legislation. Sometimes it operates in the sense of depriving another place of a chance of considering the Government's original proposals, and in other cases it deprives us of a chance of considering in detail amendments which have been introduced as a result of our initiative, before they come back to us.
§ Lord Ponsonby of Shulbrede
As has been said by previous speakers, this is an unsatisfactory situation which has characterised the whole progress of this Bill through this House. As my noble friend Lord Wedderburn said, we had a whole series of amendments tabled just before the start of the Committee stage and, certainly, we are far from satisfied with the position as it exists today. In making this statement the noble Lord, Lord Trefgarne, no doubt hoped that he would be saving a considerable amount of your Lordships' time, but in view of the woolliness of his statement T think your Lordships will want to debate in detail today some of the amendments which have been tabled on this subject. Indeed, I believe that the view of the Committee on these various amendments could help to crystalise the Government's views before they table their own amendments.
§ Lord Trefgarne
That is one view though, I must say, not one that I share. I had, indeed, hoped that the assurance that I have given, which is a very clear one, to the effect that we will, as soon as maybe, table amendments to deal with the problem which noble Lords 971 have identified—which has, indeed, troubled the Government for some time, but which has only now found a place in the legislative programme—if not in your Lordships' House, then in the other place, would have satisfied your Lordships. Incidentally, w hen and if such amendments are agreed in another place, it is not the case that when they come again to your Lordships they have to be accepted or rejected. They can be considered and, indeed, further amended, if that is what your Lordships wish. But I should have hoped that the assurance that I have given would have satisfied your Lordships on the principal points which lie at the heart of some of the following amendments. None the less, those amendments must take their chance when we come to them. For the moment I hope that the noble Lord, Lord Lloyd of Kilgerran, will not press this one.
§ Lord Lloyd of Kilgerran
May I thank the noble Lord, Lord Campbell of Croy, for his very kind words about the potential effect of my amendment upon the Government's attitude in this Bill, perhaps in another place. I am grateful for the support of the noble Lords, Lord Wedderburn and Lord Ponsonby, on this matter. As the noble Lord, Lord Trefgarne, is becoming increasingly reasonable, if I may presume to say so, as he speaks to your Lordships on this very important and difficult matter—and I am not raising here the acrid atmosphere of party controversy; we are all seeking to do our best, and I am seeking to do my best in a humble way to be of some help, if that is not too pompous an expression to use at this stage—may I try two other matters on the noble Lord?
Would the noble Lord the Minister be able to produce a draft amendment within the next two or three days, on which we could then have a reasonable debate? I fully realise the difficulties of parliamentary counsel and the pressures upon them, but, after all, this is recognised as an important matter. Therefore, I ask: would it be possible to get a draft amendment in the next two or three days, so that we could get some structure into a debate on the matter, with the expertise of your Lordships, on Report?
Secondly, would it be possible, in view of the complexity of the timetable of the Government, to postpone the Report stage of this Bill until the first week in May, after the recess, which will give us all the opportunity of getting expert advice on all these important matters, including the clauses to which the noble Lord, Lord Wedderburn, has referred, regarding the purchase by a company of its own shares? I make those two suggestions in the hope that they may be helpful to the Government.
§ Lord Trefgarne
With regard to the first point that the noble Lord raised, as to whether it would be possible to produce draft clauses or draft amendments at some stage for your Lordships' consideration before this Bill leaves your Lordships' House, even if those amendments were not in a form that could be formally added to the Bill, I am not certain that that is a procedure that has ever occurred in the past. However, I think it is one that, on this occasion at least, deserves some attention. I can give no assurance on it, but I will look into the matter and see whether it is possible to 972 give your Lordships some indication of what is proposed before this Bill leaves your Lordships' House.
On the second point, of postponing the Report stage of this Bill, that is a matter for the usual channels and not for me. On the other hand, I can imagine that if we were to do that it would create considerable difficulties in the other place, where, of course, their programme is even tighter than ours.
§ Lord Lloyd of Kilgerran
I do not want to waste the time of your Lordships in this matter. As your Lordships will see, the noble Lord, Lord Trefgarne, has been most reasonable, particularly in his last speech. Having regard to the assurances that I have now been given, I do not propose to press this matter to a Division now, but I reserve whatever rights there are to me at a later stage. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ 3.29 p.m.
§ The Earl of Selkirk moved Amendment No. 124:
§ After Clause 41, insert the following new clause:
("Amendment of s. 54 of 1948 Act
. Section 54 of the 1948 Act (prohibition on companies' providing assistance for purchase or subscription of own shares) shall not prohibit a company from doing anything if (a) the purpose or principal purpose is not to provide any financial assistance for the purchase or subscription of any shares in the company or if it is a subsidiary, in its holding company; or (b) if the directors, having regard to their principal intentions with respect to the management of the company's business during the year immediately following and to the amount and character of the financial resources which will in their view be available to the company during that year and, after making full inquiry into the affairs and prospects of the company, are of the opinion that the company will be able to continue to carry on business as a going concern throughout that year and have made a statutory declaration to that effect.").
§ The noble Earl said: I am moving this amendment, first, at the request of the Law Society of Scotland. However, I have now been informed that the London Clearing House Committee give this amendment its full-hearted support. That is the chairman of Lloyds Bank, the chairman of the National Westminster, the chairman of Barclays, the chairman of Midland, the chairman of Williams and Glyn's, and the representative of the Scottish Bank. I put down this amendment before the 15 pages of Government amendments which reached Edinburgh only at midday on Monday, so it was quite impossible to do anything about them. But in any case I am quite satisfied that they do not in any way alter the need to bring some sense into Section 54. I do not trust entirely my own judgment in the matter but I have consulted others whose business it is to understand it and they are quite satisfied that the situation does not make the slightest difference. If I had any doubt about it, the noble Lord, Lord Seebohm, referred last Thursday night to Section 54. So did the noble Lord, Lord Wedderburn, who called it anomalous, which indeed it is in many ways.
§ What we are trying to do in this new clause is to bring some sense into Section 54 of the 1948 Act. I believe it has been called the "bankers' bogey" because they never know where they stand. May I explain what Section 54 does. First, it says that it is illegal for a company to purchase its own shares. Then it makes provision for providing shares for 973 employees either as trustees or alternatively by direct advance, but it makes it quite clear that it is illegal for a bank to advance money for the purchase of a company's shares; for a company to use a loan from a bank to purchase own shares. Immediately the criminal sanction comes into operation. First, the officers of the company concerned are all fined £100. In a way that does not matter to the banks but, as an illegal act, the loan is then void. That is the problem which the banks have to face. When a loan takes place, supposing the borrower told a lie it would not make any difference. The loan would be void.
§ My proposal makes it clear that if a loan is made, its purpose has to be stated and it has to be supported by a statutory declaration. That makes the position quite clear, and the bank is completely safe. What matters more than whether the bank loses some money is that it inhibits the free use of loans for perfectly legal, normal processes. It makes banks reluctant to make loans. Therefore it is in restraint of trade. The noble and learned Lord the Lord Advocate said that he was trying to remove obstacles to trade, but this is an obstacle to trade. I have no doubt that this would give a great deal of satisfaction to those who have to handle these matters. It is an improvement. It would not alter anything else. It is not covered in any way by the 15 clauses which the Government put in last Thursday. I beg to move.
§ Lord Lloyd of Kilgerran
It gives me pleasure to follow the noble Earl, Lord Selkirk, and to support his amendment. I have come across certain difficulties which banks have got themselves into by a misunderstanding of the word "assets". A client comes along and says that he wants to purchase certain assets, and the assets that he wants to purchase are know-how—quite clearly the know-how of other companies. In the course of the discussions the word "assets" seems to become prominent. It is thereafter found that the money was used for the purchase of the shares of a company, not for technology. It is all quite inadvertent, a complete misunderstanding. They had involved provincial lawyers who knew the law, but there was a muddle between the directors of the company and the managers of the bank. It seems to me that in a case of that kind, section 54 is far too stern a weapon to be used against a company. Therefore I support the amendment of the noble Earl, Lord Selkirk.
§ Lord Seebohm
I should like to support this amendment very strongly. I joined Barclays Bank in 1929, the year in which Section 84 of the Companies' Act 1928 came into force. Ever since that time, it has been a plague for those operating in the banking field. The points have been well made by the previous speakers. I hope we can get this amendment through today.
§ Lord Noel-Buxton
I should also like to support my noble friend Lord Selkirk. At Second Reading I described Section 54 of the Companies' Act 1948 as the "dreaded Section 54". I had hoped that the Government against the background of their proposals to give power to a company to purchase its own shares would put down their own amendment. I do not see 974 it, although I may have missed it; but I am pretty sure it is not there. I understand that the purpose of Section 54 of the 1948 Act is simply to prohibit what would amount to a reduction in capital without the sanction of the court. Is this really so heinous an offence as to justify the almost infinitely wide net of Section 54 which, if breached, renders the transaction and any security entered into unenforceable? The practical difficulties caused by the section are only too well known by practitioners and their clients. They are perhaps highlighted by the recent case of Belmont Finance Corporation v. Williams Furniture (No. 2). My noble friend's amendment would, if enacted, go a long way towards alleviating the practical difficulties to which I have referred. I hope that the Government will support it or at least will undertake to table an amendment of their own to amend Section 54.
§ Lord Wedderburn of Charlton
I hesitate to speak in a different sense on this amendment because the noble Lord, Lord Lloyd of Kilgerran, appears to have established a norm of close agreement which is reasonable, from which one trespasses at one's peril. But I hope that your Lordships' Committee will not accept the amendment. For once I hope to hear from the Government Front Bench the sentiments which I wish to put before your Lordships. It is true that, after the two decisions of the Court of Appeal in the case of Belmont Finance Corporation v. Williams Furniture, the application of Section 54 of the 1948 Act has been strict indeed—or, on one reading of the judgments, it may be very strict indeed. It is true that after the 1980 Act the penalties have now gone way beyond the £100 fine. Nevertheless, I hope that the Government will ask the Committee to look at the purpose of Section 54 and at the possible maladministration, at least of financial affairs, which could be the result of passing an amendment of this kind.
The amendment is in two halves: first, the relaxation of the ban on providing financial assistance for the purchase of shares where that is not the purpose of the transaction and, secondly, the declaration of a solvency route to exception from the prohibition. The first point I want to put to your Lordships' Committee is that if one looks at the many inspectors' reports of the last decade and asks oneself whether either of those exceptions would have allowed the malpractices that are there apparent to have gone through the net more easily, the answer is, yes. If one looks at the Hartley Baird case of Dr. Wallersteiner's extraordinary company mismanagement, at the Ferguson and General Investments report and, indeed, at a dozen others, the relaxation of Section 54 would have made life easier.
It may be said that Section 54 as it stands is frequently evaded. That is true. That is why, over the last 15 or 20 years, committees and debates have centred around the difficult problem of not attaching liability to what one might regard as a genuine loan or other provision of finance for the purchase of shares which does not in any way reduce capital or attack the concept of the maintenance of capital and, on the other hand, maintaining what it must be said, in view of previous speeches in your Lordships' Committee, is surely the very culpable practice of using a company's own financial resources for the finance of the 975 purchase of its shares. It strikes at the very heart of British company law understanding.
The Government, I think, are in a difficulty. As I suggested to your Lordships' Committee when it was dealing with the clauses on companies purchasing their own shares, the structure which the Government have put into the Bill relating to the purchase of own shares puts them in difficulty regarding Section 54. It may be that the line that they wish to draw, if they are prepared to accept any amendment to the 1948 Act—perhaps one logical for them—is to say that purchase of a company's own shares, given the conditions apparent in the clauses they put in, does not reduce capital or attack the concept of maintenance of capital, and therefore we will relax Section 54 in regard, for example, to loans but not in regard to provision otherwise of financing, which would attack the principle of the maintenance of capital. That is a possible line to explore, but it is very difficult from this amendment, and I hope that the Government will remember the conclusions of a previous Conservative Administration in 1973.
Since we are not making party points, I should like to say that I think the Companies Bill of 1973 was perhaps the best post-war Companies Bill to have been brought before Parliament, and it is a great pity that much of it has not been acted upon and a great pity that this Administration cannot be wise enough to bring many of its provisions forward again. But in the White Paper (Cmnd. 5391) which preceded that Bill, in paragraph 47 the Government regarded Section 54 as fulfilling a useful purpose in inhibiting unscrupulous transactions, regarded the declaration of solvency as not being a sufficient harrier against those unscrupulous transactions, but saw the point of an attempt to stop it hitting the innocent in the way that the Jenkins Report described in 1962.
The Jenkins Report in 1962 suggested five conditions that might be considered for the relaxation of Section 54 of the 1948 Act. It required that the transaction, to be excepted from Section 54, should be approved by special resolution; it required, secondly, declaration of solvency; it required, thirdly, a right for dissentient shareholders to complain of the transaction if they held 10 per cent. of the relevant shares; fourthly, it required 28 days between the special resolution and the transaction; and fifthly, it deemed financial assistance to arise, despite all those conditions, if within 12 months of the acquisition of control, the company purchased an asset from the controllers. Those conditions are a long way from this amendment, and I would urge your Lordships' Committee to look askance at an amendment so loosely drawn as this: loosely drawn to widen the net of the use of company resources for the purchase of shares, which is in the middle of a very great deal of corporate malpractice. I hope that the Government will very strongly resist this amendment.
§ The Lord Advocate (Lord Mackay of Clashfern)
As my noble friend Lord Selkirk has said, this is a proposal for the alteration of Section 54 which, as he has mentioned, has been put forward by the Law Society of Scotland, and with considerable support. The Government are well aware of the concern which 976 is felt among financial institutions and practitioners in company law about Section 54, and consultations are proceeding with a range of bodies, including, as well as the Law Society of Scotland, the Law Society of England and Wales, and also the Committee of London Clearing Bankers, to which my noble friend Lord Selkirk referred. There are, of course, implications for the job ownership companies which were the subject of amendments tabled by the noble Lord, Lord Seebohm, on the previous occasion. That aspect will certainly require to be considered in the talks which we are hoping to arrange on that matter.
This consultation is proceeding as rapidly as possible, given the difficult questions which are involved, to some of which the noble Lord, Lord Wedderburn, has pointed. At the moment, while we recognise the need to solve this problem, we are not satisfied that this particular clause would necessarily be a good solution to it. For example, so far as branch (a) of the clause is concerned, we would not think it sufficient merely that the purpose or principal purpose should be not to provide financial assistance. There should require to be some further provisions about the purpose, in our view. So far as (b) is concerned, if I have understood the proposed clause correctly, financial assistance of the kind to which Section 54 applies would be permitted, provided the company was solvent. We do not think that this is of itself a sufficient or appropriate test for an exception to the present Section 54. Indeed, it is hard to see that any protection at all on that line would be left if effect were given to this particular proposal.
So I hope my noble friend will feel that we recognise the importance of this problem, of the necessity to get, so far as possible, an agreed solution to it—which is extremely difficult—and, in the light of that, will feel able to withdraw his amendment, in the hope and expectation on our part that our consultation will prove fruitful and that we shall be able to bring forward a satisfactory answer to this extremely complicated problem.
The Earl of Selkirk
The noble and learned Lord is proposing a holding operation. This holding operation has been going on for 30 years. Are the Government any wiser than any other Government have been over the last 30 years? It is known by the noble and learned Lord that representations have been made by all sorts of bodies, including the clearing house. They have been made time and time again, and by the Scottish Law Society, but the noble and learned Lord continues with his great principle of hasta manana—as the Spaniards say—let the thing solve itself sometime in the future.
Can the noble Lord really not take it further? This may not be a final solution. This clause will clarify the issue, it will enforce the purpose, it will not hit at the innocent and it will avoid a great many of the faults. It may not be perfect, but from what I understand—and I am by no means an expert—it will make the position very much easier and it will certainly not prevent the Government from arriving at a better solution than this, if they can find one. This matter has been hanging on for a very long time indeed and I see no particular reason why this amendment should not be accepted, unless the noble and learned Lord can say that he will make some effort 977 to bring it into this Bill. There is nothing in this subject which is not perfectly well known to the City and also to the Department of Trade. This is a measure of alleviating an urgent situation. It does not hurt anybody. With great respect to much of the learning of the noble Lord, Lord Wedderburn, it does not hurt anybody, but it safeguards the proper execution of legal business, and for that reason I should like to ask the Government to think again and to be a little more forthcoming.
§ Lord Mackay of Clashfern
We will certainly do our best to bring forward at the earliest possible moment a solution to the problem. It is not just a question of tomorrow, dear as that may be to the hearts of some Scotsmen. So far as we are concerned, the situation is that we are undertaking extensive and fairly precise consultations with these bodies at the moment, and the difficulties to which, for example, the noble Lord, Lord Wedderburn, drew attention, are substantial difficulties which could have an effect on the structure of our financial institutions and companies for the future. So I hope that the noble Earl, Lord Selkirk, will feel that we are not just waiting for tomorrow to solve the problem; we are in fact doing our best to achieve a solution which will be satisfactory to all parties and we hope to complete that within a reasonably short time.
The Earl of Selkirk
I have no option but to withdraw this amendment, but I will ask the noble and learned Lord, certainly at Report stage, whether he has made any progress. In the meantime, I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Lord Lyell
It might be for the convenience of your Lordships if the House were to resume in order to take a Statement. I beg to move that the House do now resume.
§ Moved accordingly and, on Question, Motion agreed to.
§ House resumed.