§ 3.6 p.m.
§ Lord Lyell rose to move, That the draft regulations laid before the House on 6th July be approved.
§ The noble Lord said: My Lords, I beg to move the regulations which are before the House today and I hope that your Lordships will accept them. The regulations which your Lordships are now to consider are a corollary to the Companies Act 1981 and they deal with two separate matters: merger accounting and the reports of auditors.508
§ If I may turn first to merger accounting, your Lordships may recall—and I put this politely—the extensive discussion of this subject during the passage last year of the Companies (No. 2) Bill. As I am sure your Lordships will remember, when that Bill returned to this House for consideration of amendments made in the other place, my noble and learned friend Lord Mackay of Clashfern explained how the clauses in the Bill dealing with merger accounting—which subsequently became Sections 36 to 41 of the Act—had been revised to take account of the recommendations of a working party which, I as am sure the noble Lord, Lord Bruce of Donington, is aware, was set up by the CBI, the Law Society and the Consultative Committee of Accountancy Bodies. My noble and learned friend also explained that certain recommendations of the working party would be implemented by regulations under Section 454 of the Companies Act 1948, as amended by Section 18 of the 1981 Act, since this would enable further consultations on the detail and would provide greater flexibility for the future. These regulations implement those remaining regulations which concerned disclosure of information in companies' accounts following a transaction under Section 37 of the 1981 Act.
§ If I may now very briefly turn to the question of merger accounting, I am sure your Lordships will be aware that it is an extremely complicated issue. Briefly, Section 37 of the 1981 Act permits merger accounting in circumstances where one company allots shares at a premium, under an arrangement whereby it achieves a holding of 90 per cent. or more of the equity share capital of another company. It thus allows such a company to make an acquisition without necessarily setting up a share premium account as would otherwise be required by Section 56 of the Companies Act 1948. Your Lordships will, I am sure, recall that the provisions in the 1981 Act resulted from demands for changes in the law, following the High Court decision in the case of Shearer v. Bercain.
§ Under these new regulations, a company obtaining merger relief under Section 37 will have to disclose in its accounts for the financial year in which the transaction takes place certain particulars of the transaction, such as the name of the acquired company and details of the shares involved in the transactions, the accounting treatment adopted and any pre-acquisition profits or losses included in the group accounts. The acquiring company will also have to disclose for that year, and for the next two years, details of how the profit or loss is affected by any profit or loss arising on the disposal, whether direct or indirect, by any member of the group, of shares in the acquired company or of assets which were fixed assets of the acquired company or its subsidiaries.
§ The thinking behind the proposals of the working party for these requirements, and thus our aim in the regulations before us, is that, in the light of concern that merger accounting might be used in a way which obscured the realities of the company's transactions, accounts prepared after a merger should contain adequate information regarding the accounting treatment adopted and, as I hope I have fairly briefly, but in a somewhat tortuous way, described, its effect on the results disclosed in the accounts.
§ The second part of the regulations which are before us 509 this afternoon, Regulation 3, makes a simple amendment to Section 14(3)(b) of the Companies Act 1967. This, at present, requires auditors of banks, insurance or shipping companies, which take advantage of the disclosure exemptions which are available to such companies under Schedule 8A of the Companies Act 1948, to state in their report whether, in their opinion, the accounts have been prepared in accordance with the Companies Acts of 1948 to 1980. Certain provisions of the 1981 Companies Act, such as those on merger accounting, are relevant to the accounts of these companies and so it is at least desirable that auditors should also comment on the compliance with the 1981 Act. This Regulation 3 makes the necessary amendment which corrects a minor error in the 1981 Act. Your Lordships have shown commendable patience and kindness in bearing with me in this brief explanation of these regulations which are before us this afternoon, and I beg to move.
§ Moved, That the draft regulations laid before the House on 6th July be approved.—(Lord Lyell.)
§ 3.13 p.m.
Lord Bruce of Donington
My Lords, the House will be indebted to the noble Lord for the very detailed and clear explanation he has given of these regulations. It will not have escaped notice that, although sometimes regulations meet with disagreement among those Members of your Lordships' House who happen to be members of the legal profession, when they concern the accounting profession, as these regulations undoubtedly do, there is a striking degree of unanimity. In fact, the explanation that has been given, with his customary clarity, by the noble Lord enables me to agree with him entirely and to say that we on this side of the House believe that these regulations should be brought into force.
At the same time, and since the accountancy profession is in unanimity across the Chamber on these matters, perhaps the noble Lord will forgive me if I say that these are further regulations, among many, which underline the necessity for some consolidation of company law. We agree about and accept the necessity for much argument among the legal profession over the various aspects of company law, but it is the accountancy profession that in the main is concerned, together with those directors of companies and managements of enterprises which are vitally concerned by Companies Act provisions.
I know I am knocking at an open door when I ask the noble Lord opposite to bear in mind that for some considerable time we have had the Companies Act 1948 as the main provision, since when we have had the Companies Act 1967, the Companies Act 1976, the Companies Act 1980 and the Companies Act 1981, certain important sections of the last two Acts having been brought in because of European Community legislation. But the time has now come when there really must be some consolidation. Even this particular section of the 1948 Act which is amended by the 1981 Act and under which this regulation is issued has already given rise to a number of regulations. I refer only to Section 18 or, in the old Act which is amended, to Section 454.
In this section alone there are cross-references to the Banking Companies Accounts Regulations 1970, the 510 Companies Accounts Regulations 1970, the Companies Accounts Regulations 1971, the Companies Accounts Regulations 1973, the Companies Annual Return Regulations 1977, the Companies Accounts Regulations 1979, the Companies Directors' Report (Political and Charitable Contributions) Regulations 1980 and the Companies Directors' Report (Employment of Disabled Persons) Regulations 1980. These are regulations which have been issued in respect of one section of the Companies Act 1948, as amended by Section 18 of the 1981 Act alone. Members of the legal profession in your Lordships' House and in another place may find these regulations fertile ground for argument and perhaps litigation, although it is not noticeable that those Members of your Lordships' House who are of the legal profession are abundantly represented here this afternoon. However, businessmen and directors of companies are vitally concerned with these matters. Therefore, if only for the sake of students of the accountancy profession who have to wade through this mass of regulations and Acts before they are able to acquire a working knowledge of them, may I implore the noble Lord, who belongs to the same profession as I do, to make representations to his right honourable friend that at the earliest possible opportunity there ought to be a consolidation Bill. There ought to be a comprehensive measure that is readily available to the businessman and to the company director, as well as to the student, in order that we do not have to cross refer and cross refer, to a point where tracing even the meaning of a regulation and its impact on a business becomes a matter of very arduous labour.
I gave notice to the noble Lord of the fact that I was going to raise this aspect. It does not, however, detract from our support for the regulations themselves; nor does it detract from our admiration for the very clear manner in which the noble Lord has presented them on behalf of Her Majesty's Government.
§ Lord Lyell
My Lords, failing further discussion of the detailed regulations which are before us today—I look round your Lordships' House and, alas! I find nobody willing to join the lists with the noble Lord, Lord Bruce of Donington, and myself in these, if not abstruse, certainly complicated fields of company accountancy—first I should like to thank the noble Lord for his reception of these regulations which we believe are detailed but, above all, are important. I feel very much for the noble Lord. Indeed, every time that I go to my little cupboard to remove what I call my "company package", it is something akin to a Charles Atlas course because, as the noble Lord will know—because he read out the particular Acts—it requires some feat of strength to extract and, above all, to hold on to all the Acts, let alone every single one of the regulations which were so clearly introduced and mentioned by the noble Lord. All these Acts and regulations have to be tied in, and allocated to, the "master" Act, the 1948 Act, which itself was in the nature of a consolidation Act of all the companies legislation up to 1948.
I am very pleased to assure the House, and especially the noble Lord, Lord Bruce of Donington, who speaks with a very sure and robust voice for the accountancy profession in which he is currently engaged, that consideration of the matters he has mentioned and, above 511 all, consolidation of all the regulations and disparate Acts, is now a major priority of the Department of Trade in the field of company law.
I am able to assure the noble Lord, Lord Bruce of Donington, that good progress is being made, but, as the noble Lord and I are exceptionally well-qualified to know after our experiences with the 1980 and 1981 Acts, it is and will remain a mammoth job. Even to the noble Lord, Lord Bruce of Donington, I cannot say when we shall have consolidated companies Acts. But I will assure him and your Lordships that every effort is being made to achieve that happy outcome at the earliest possible date. It is a major priority in the department and I am sure that the noble Lord will accept that.
I am afraid we are not able to say in which year the new consolidated Acts will appear, but we do appreciate the remarks made by the noble Lord, Lord Bruce of Donington, not least in respect of the young students who, perhaps, are currently involved this year in attempting to master the entire field of company law. It is close to 18 years ago since I was studying this particular Act, and I am pleased to see that Section 245 is still in its appointed place. I recall entering in some exam papers the powers of the liquidator, and I am pleased that they still come to mind, as I am sure they will still be fresh in the mind of the noble Lord, Lord Bruce of Donington.
I hope that I have answered to the best of my ability, and with the usual clarity that is afforded to me by the department, the queries raised by the noble Lord. I hope that I have put to rest some of the fears which were in his mind—not least as a forceful and robust spokesman for the accountancy profession. I hope that they will note our concern for consolidation of all the companies Acts. With that, I beg to move the regulations before us this afternoon.
§ On Question, Motion agreed to.