HL Deb 29 January 1985 vol 459 cc593-629

5 p.m.

House again in Committee on Clause 7.

Lord Bruce of Donington moved Amendment No. 6: Page 5, line 2, leave out ("shall") and insert ("may if it is satisfied that that person's conduct makes him unfit to be concerned in the management of a company").

The noble Lord said: This is the first of a series of detailed amendments to Clause 7 of the Bill as it now stands. Amendment No. 6 right the way through to Amendment No. 14 seek to amend the more objectionable features of Clause 7 in detail, while leaving the main framework of the existing clause intact.

Amendment No. 7: Page 5, line 5, leave out from ("day") to end of line 9.

Amendment No. 8: Page 5, line 14, leave out from ("voluntarily;") to end of line 18.

Amendment No. 9: Page 5, line 21, after ("order") insert ("or for such further period as the court may allow if application to annul under subsection (5) of this section has been made").

Amendment No. 10: Page 5, line 37, leave out paragraph (c) and insert— ("(c) that the evidence or basis upon which a provisional disqualification order was made was erroneous or inadequate;").

Amendment No. 11: Page 5, line 43, at end insert ("or that it would be just and equitable so to do").

Amendment No. 12: Page 5, line 44, leave out subsection (6).

Amendment No. 13: Page 6, line 20, after ("receiver") insert ("or any creditor").

Amendment No. 14: Page 6, line 21, at end insert ("or may appear by his solicitor or counsel and evidence may be given for the purposes of this subsection by affidavit if the court so permits.").

I should perhaps inform your Lordships' Committee that there are later amendments, notably Amendments Nos. 15 and 16, which will assail the whole structure of Clause 7 from top to bottom and will provide perhaps a convenient opportunity for many noble Lords who feel strongly on these matters to offer their views to the Government.

Amendment No. 15: Leave out Clause 7 and insert the following new clause:

Disqualification in certain cases.

("7.—(1) This section applies in circumstances where—

  1. (a) at the time when a resolution to wind up a company is passed, the company is unable to pay its debts or is insolvent (as defined in subsection (2) below); or
  2. (b) a winding-up order has been made by the court.

(2) For the purposes of subsection (1) above a company is insolvent when its assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up.

(3) Where subsection (1) above applies—

  1. (a) the Secretary of State or the Director General of Fair Trading; or
  2. (b) the liquidator or a creditor,
may apply jointly or severally to the court for a disqualification order, or a declaration (or both), in respect of any director or shadow director at that time.

(4) Any application made under subsection (3)(b) above must be obtained with the leave of the court.

(5) No director or shadow director shall be the subject of any application for a disqualification order under subsection (3) above unless he held the office of director within the period of two years prior to the date of the resolution or winding-up order referred to in subsection (1) above.

(6) On an application under subsection (3) above the court may—

  1. (a) order that a director or shadow director be disqualified from acting in such a capacity in any company for such period as the court may decide; or
  2. (b) declare the extent to which each director or shadow director is personally liable for all or any of the debts or other liabilities of the company,
or both.

(7) In determining whether to make a disqualification order or a declaration, under subsection (6) above, the court shall consider whether—

  1. (a) the director or shadow director knew, or in the circumstances ought reasonably to have known, that the business of the company of which he was director was carried on with intent to defraud the creditors of the company or for any fraudulent purpose;
  2. (b) the directors have failed to keep proper books of account within the meaning of sections 221 and 222 of the 1985 Act; or
  3. (c) the director or shadow director knew or in the circumstances ought reasonably to have known that the company of which he was director had no reasonable prospect of avoiding going into insolvent liquidation.

(8) For the purposes of this section, the director or shadow director shall not be liable if the court is satisfied that that person took any steps reasonably open to him with a view to minimising the potential loss to the company's creditors.

(9) Section 630 of the 1985 Act (responsibility of individuals for company's fraudulent trading) shall apply without prejudice to any section of this Act.

(10) Where a court makes a declaration under subsection (6)(b) above or section 630 of the 1985 Act that a director or shadow director is to be personally responsible, without limitation of liability, for all or any of the debts or other liabilities of a company, then, whether or not an application for a disqualification order is made by any person, the Court may, if it thinks fit, also make a disqualification order against the person to whom the declaration relates.

(11) The costs of any successful application under subsection (3) above shall be borne by the Crown in the event of there being insufficient funds from the assets of the company after all creditors have been paid and all liabilities discharged".)

Amendment No. 16: Leave out Clause 7 and insert the following new clause—

("Disqualification and liability of directors.

7.—(1) This section applies in circumstances where—

  1. (a) there is a resolution to wind up a company; or
  2. (b) a winding up order has been made by the court.

(2) For the purposes of this section—

  1. (a) the directors of the company shall be individually and collectively responsible for the management of the company and the manner in which its business is conducted;
  2. (b) "relevant date" means the date upon which the resolution referred to in subsection (1)(a) is passed or as the case may be, the date upon which the winding up order referred to in subsection (1)(b) is made.

(3) Where this section applies, the Secretary of State, the Director General of Fair Trading, the Official Receiver, the liquidator or, with the leave of the court, any other person may apply to the court for an order in respect of any person named in the application that such person shall—

  1. (a) be disqualified for such period not exceeding five years as the court may decide from holding office as a director of any company, and
  2. (b) be personally liable for all or any of the debts or other liabilities of the company.

(4) No application may be brought under this section later than one year after the relevant date.

(5) No person shall be the subject of any order under this section of this Act, unless he held the office of director, or acted in the capacity of director at any time during a period of one year prior to the relevant date.

(6) In determining whether an order should be made under this section against any person named in the said application, the court shall first be satisfied that immediately prior to the relevant date the assets of the company were insufficient for the payment of its debts and other liabilities at their due date for payment and that any one or more of the following circumstances applied namely—

  1. (a) the person knew, or in the circumstances ought reasonably to have known, that the business of the company concerned was carried on with intent to defraud the creditors of the company or for any fraudulent purpose, or
  2. (b) the person, by false pretences or by means of any other fraud, induced any other person to give credit to the company, or
  3. (c) the company failed to present management accounts or financial statements, at regular intervals appropriate to the business, which revealed (to the directors) the state of its trading operations and its financial position, or
  4. (d) the person knew or in the circumstances ought reasonably to have known that the company concerned had no reasonable prospect of meeting its liabilities as they fell due.

(7) Notwithstanding that the court may be satisfied as to any of the matters described in subsection (6), no order shall be made against a person if it is shown to the satisfaction of the court that he took such steps as were reasonably open to him to minimise or prevent potential losses to the company's creditors.").

However, dealing with the detailed points on Clause 7, your Lordships' Committee will recall that the present Bill provides in Clause 7(2): Subject to subsection (3) below, immediately upon making the winding-up order the court shall (without any application having been made) make a provisional disqualification order against every person appearing to the court to have been a director of the company on the relevant day". The amendment, instead of making the issue of a provisional disqualification order mandatory in terms of "shall", seeks to substitute the words: the court may if it is satisfied that that person's conduct makes him unfit to be concerned in the management of a company", and then continues with a reference to the making of the provisional order.

This is a very important question, involving assessment of a principle as to whether it is right that any person should be subject to the imposition of what clearly is a very serious disability by the courts that is completely mandatory, the only way of reversing it being for that person to prove himself innocent of any kind of offence, or alleged offence, that may have been sufficient reason, at any rate in some people's mind, for the granting of the provisional disqualification order.

Lord Mottistone

Do I understand that the noble Lord is speaking to these amendments separately from Amendments Nos. 15 and 16? The only embarrassment, from the point of view of the time of the Committee, is that the speech that the noble Lord has just delivered, which I entirely support, is going to be a part—a major and important part—of the speeches that I, and, I suspect, other noble Lords will make when speaking to Amendment No. 16. I quite see the point of what the noble Lord is doing. Is there not some way, however, of avoiding using up the time of the Committee in running over the same ground more than once?

Lord Bruce of Donington

I am most indebted to the noble Lord. My intention, where I have referred in detail to some of these matters on intermediate amendments, is to refrain from duplicating those remarks when it comes to discussion on Amendments Nos. 15 and 16, in the hope that noble Lords will be able to express their views freely without being inhibited by any repetition on my part. I shall of course reserve the right, in moving Amendment No. 15, to refer briefly to some of the matters that will not be covered in detail in the arguments that I now adduce. But the noble Lord may rest assured—I have already given the noble Lord the assurance—that, in this matter, I shall endeavour to expedite the progress of the Bill as much as is conceivably possible.

Lord Mottistone

That is fine. There is one small point. I quite understand what the noble Lord wants to do. The only difficulty for the rest of us is that if we adopt the same inhibition, we shall naturally want to preserve our ammunition for our own main amendment which, in the case of myself and some of my colleagues and noble friends, is Amendment No. 16. We shall therefore feel inhibited from supporting the noble Lord, Lord Bruce of Donington, in an amendment such as that to which he is now speaking, even though we may think it a jolly good amendment. That is the complication. We do not want to waste our time, although we may well like what he is saying. I have not studied the other amendments, but on that now under discussion the noble Lord is depriving himself of a certain amount of support if all of us play the game in the way that I think he suggests.

Lord Bruce of Donington

My views on this Bill are well known. I regard it as a completely non—party issue. Although there may be certain questions of vital principle to which all of us should give attention, I do not regard it as necessary for me on this Bill to adopt a posture of adversary politics to which I am accustomed and which, of course, is correct within a democratic assembly. I shall endeavour to be as brief as possible, but there may be some considerations that noble Lords care to bear in mind when they come to consider the rather wider amendments.

I wonder whether it has occurred to the Government, when drafting a subsection of this kind, the extent of the considerable disabilities that will immediately fall upon any director to whom the full rigour of this clause will be directed, especially of course a completely innocent director—one, who, in the event, and before the time limit expires, does eventually succeed in persuading the court that a provisional order should not have been made against him at all. An innocent director, who has acted in a totally responsible manner, at some personal expense, is automatically disqualified. How long is it going to take him to set aside the order? It could take months. He will need to consult a solicitor, and briefing the solicitor in detail will take several hours. He will certainly have to get a solicitor to brief counsel, as a solicitor has no right of audience in the High Court. He will need to attend one conference, and perhaps two conferences, with counsel. He will need to swear an affidavit prepared by his solicitors. He will need to attend court to give evidence if necessary.

Even though he goes through all that process—it can be still more complicated than that—he is going to embark, and will have to embark, on considerable expense to prove himself innocent. From our standpoint, sitting on these Benches, and I am sure from the point of view of quite a number of your Lordships sitting on other Benches, this is not really a tolerable position.

For example, if the clause were not amended to give the court complete discretion, who knows what precedents this would create for application in other spheres? A director, aside from his possibly privileged position in relation to other members of society, possibly has a higher standard of life, though not invariably so; and possibly it is an agreeable profession compared with many others in which the citizens of our country are engaged. All these things should mean that he is treated just like anybody else. I do not like a citizen of our country being in that position. I do not like his being put under the disability, at considerable cost, of having to overturn what is, under this particular subsection, a mandatory responsibility for the court to enforce. I beg to move.

Lord Boyd-Carpenter

This is an important amendment, as the noble Lord said, and one on the merits of which I am bound to say that I have some sympathy with him. I am bound to say also that I welcome very much the concern which he has shown, which is not always shown from those Benches, for that persecuted class of humanity, the directors of public companies. But I rise really to question the procedure—

Lord Bruce of Donington

Will the noble Lord forgive me for interrupting? I am most grateful to him. If I may say so, it is not only a question of directors of public companies. Indeed, as I think will emerge later, most of the directors likely to be involved in this are in fact directors of smaller companies and private companies. It is very rarely that precedents of this kind are going to be brought to bear in connection with a large, public liability company.

Lord Boyd-Carpenter

I am particularly obliged to the noble Lord, because that indicates that the width of his benevolence and human sympathy is even wider than appeared at first sight; and that is a very agreeable element to introduce into this discussion.

I rise simply to question the procedure which we are following. My noble friend Lord Mottistone referred to the fact that there are two amendments on the Marshalled List—Amendments Nos. 15 and 16—which propose the complete deletion of Clause 7 and its substitution by another clause. Meanwhile, we are embarked on a series of 10 amendments to Clause 7 as it stands. Should either Amendment No. 15 or Amendment No. 16 be successful, any labour which we have put into Amendments Nos. 6 to 14 will be wasted, whether those amendments have been successful or unsuccessful.

I wonder whether the noble Lord, Lord Bruce of Donington, has considered this. His suggestion of holding back relevant arguments on Amendments Nos. 15 and 16 because he has used them on Nos. 6 to 14 is going to make for very ragged debate, even if in fact the noble Lord's self-control is strong enough to enable him to carry out that suggestion. Some of us who have studied the noble Lord's dialectical skills may have reservations about that. Would it not have been better not to have moved any of these amendments, Nos. 6 to 14, at this stage, but to have awaited the outcome of Amendments Nos. 15 and 16 to see if Clause 7 remains in the Bill? If the outcome—I have no idea what the outcome will be—is that it remains in the Bill, it would then be open to the noble Lord to move all these amendments to Clause 7 on Report, on the basis that he was moving them to a clause which really was in the Bill. As it is, we may be wasting a lot of very valuable time, to no point whatever.

5.15 p.m.

Lord Bruce of Donington

I am most grateful to the noble Lord, Lord Boyd-Carpenter, for pointing out a solution to the problem which really I ought to have thought of myself. I must apologise to the Committee for not having thought more constructively about this. It seems to me that the suggestion put forward by the noble Lord, Lord Boyd-Carpenter, is the most sensible one in all the circumstances; and on the basis, which I believe to be true, that if I do not move the amendments in Committee it will be possible, within the rules of order, within the rules of your Lordships' House, to move them on Report, then I think that is a much better solution to the problem and I am perfectly willing to fall in with it. Is it in order if I do that? I am just seeking advice as to whether that is in fact possible on the Report stage, if I have not moved the amendments in Committee.

I am very happy to accommodate myself to the suggestion of the noble Lord, Lord Boyd-Carpenter. I shall therefore postpone moving any of the Amendments Nos. 6, 7, 8, 9, 10, 11, 12, 13 or 14. That may also make for the expedition of our proceedings and entitle me to the undying gratitude of the Government Chief Whip.

Viscount Colville of Culross

Before the noble Lord sits down, I should like to say that it occurs to me that another possibility would be that, if Clause 7 remains in the Bill after the subsequent major clauses have been discussed, there is always the possibility of recommitting Clause 7 as it stands, which might give us a full discussion on all the points in the noble Lord's amendments.

Lord Bruce of Donington

Yes. The noble Lord, Lord Boyd-Carpenter, has brought forward a suggestion, and that possibility did occur to me. However, I thought that, in view of the very important issues which were going to be raised today and the number of contributions which were likely to come from your Lordships in all parts of the Committee, it might be wise to allow a lapse of time between the Committee stage and the Report stage, so that mature reflection could take place based on the contributions which I hope will fall from the lips of noble Lords and which I shall then be able to take into account over a rather more protracted period of time, as I should like to do in order to study them thoroughly.

The Deputy Chairman of Committees (Lord Jacques)

We have to take this in two parts. First of all, Amendment No. 6 has been moved, but the noble Lord, Lord Bruce, has given an intimation that he wishes to withdraw the amendment. Is it your Lordships' pleasure that this amendment be withdrawn?

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees

The noble Lord has also given notice that he does not propose to move Amendments Nos. 7 to 14 inclusive.

[Amendments Nos. 7 to 14 not moved.]

The Deputy Chairman of Committees

We therefore go to Amendment No. 15.

Lord Bruce of Donington moved Amendment No. 15:

[Printed earlier: col. 593.]

The noble Lord said: I have already given at least one reason why I do not agree with the whole structure and emphasis of the existing Clause 7: first, because it makes the decision of the court mandatory over a very wide area; and, secondly, because it places the onus of proof on the presumed guilty to prove themselves innocent. I do not like this, for reasons which I have already expressed. It seems to me that the clause, in its existing form, is going to inhibit people coming forward as non-executive directors or administrators—whatever they may be—in order to assist companies in difficulties if they feel that they are going to be subject, or are in danger of being subject, to a provisional disqualification. That is the reason why this clause has been drafted in its present form.

One cannot help feeling that the reason why the existing clause has been drafted in a way that throws the onus on the director himself to prove his innocence is that the Government themselves are reluctant, first, to apply the existing law; and, secondly, to involve the Official Receiver in the normal responsibilities attaching to his office.

It is as though the Government have thrown their hands up in the air and said, "Well, there are all these offences that are taking place"—and I am bound to say that they take place on a daily basis—"and if we were going to prosecute and pursue all the suspected cases of misfeasance by directors—and indeed fraud by directors or wrongful trading by directors—it would involve us in a very considerable sum of money. It would involve masses of actions against individual directors that would cost the state a great deal of money. Therefore, it is by far best to adopt a blanket measure which says, 'right, if you were the director of a company which goes into compulsory liquidation you are for the hatchet, and it is up to you to hack your way out of the situation' ". I do not think that that is a very good way of going about it.

Over the past few years there have been cases in which prosecutions have taken place under Section 332 of the Companies Act 1948. That is the particular section which has been in existence for a long time and it enables the state to bring prosecutions against fraudulent directors. The trouble is that these prosecutions have not been pursued very rigorously, partly because of the Fraud Squad itself being undermanned and partly also as a result of the Fraud Squad establishment itself not containing sufficient people of professional accounting investigation skills. Also, similar considerations apply to the office of the Director of Public Prosecutions which—and I think that I speak within the knowledge of the Committee—is miserably understaffed to deal with the tremendous responsibilities that accrue to the director under the various Acts.

In 1976 only 13 persons were proceeded against; in 1977 there were 2; in 1978, there were 4; in 1979, there were 16; in 1980, there were 22; in 1981, there were 37; in 1982, there were 40; and in 1983, there were 40. These must represent a very small proportion of those directors in the country who have been engaged in fraudulent or at any rate highly dubious activities and in wrongful trading even within the definitions to which we are accustomed.

It cannot be too heavily emphasised that the bulk of the British public companies do not suffer from this disability. It is very rare that large public companies—PLCs—go into liquidation. Quite clearly the whole drift of this Bill regarding the disqualification of directors is fundamentally concerned with those very well publicised instances of directors who put their own companies into liquidation and who have a pally liquidator who will sell them the business at a very small price, distribute the small amount of funds available to the creditors and then repeat the practice over and over again. That is quite true, and it has been dealt with to some extent already in the Bill by requiring liquidators to be specially qualified people under the Act. But that is what the Bill is really concerned with—the smaller and medium-sized companies.

As your Lordships will be aware, a large number of the smaller and medium-sized companies have gone into liquidation. In fact, in 1984 there were 1,671, mainly concerned with building construction, textiles, clothing, engineering, furniture, upholstery, food, agriculture, chemicals and wholesale and retail outlets. But one could not include within their number any of the large PLCs which I am happy to see have featured among the 500 most successful companies in Europe, of which no less than 222 are British. We are dealing with the smaller people.

What bothers me is that it is the small firms which get into difficulties for quite bona fide reasons. They get themselves into difficulties possibly because of external events. Noble Lords must face it—and I do not want to make this a too controversial point and underline it, but it is a fact—that the high rate of exchange in 1980–81 of 2.40 dollars inflicted very grievous injury on many medium-sized and small firms in the country; and, of course, some of those firms are less equipped to withstand economic recession in comparison with other firms. It is also quite true that many of these firms can benefit by having the help of either consultants or non-executive directors who have had some experience of finance and industry, and some may possibly have more extensive experience in marketing or even in production engineering and the close alliance that has to be established between production engineering and design.

All those services can very often be provided—not necessarily on a full-time basis, but that is sometimes so—by a non-executive director. Very often the services of these consultants (by whatever name they are called) are sought when the proprietors of the firm, the directors of the small and medium-sized firms, suddenly apprehend that they are going to get into difficulties and they seek help from outside. It has very often been the case that consultants—management consultants, non-executive directors or whatever they may be—have succeeded in aiding the full-time and possibly more technical directors or owners of the company in producing a turn-round.

It has been the policy not only of the Institute of Management but also of the CBI and other very distinguished organisations in the country (including that to which I have the honour to belong) that this tendency should be encouraged and that increasingly more advice should be sought along these lines. Therefore, nothing should be done to discourage that.

5.30 p.m.

My own view—and other noble Lords who have far more experience than I in other fields will no doubt be able to elaborate in an even more authoritative way on this matter—is that the clause as it now stands will act as an inhibitor. One of the subsections in the new Clause 7, which I am moving—and it is similarly dealt with, although not in precisely the same words, in the amendment standing in the name of the noble Lord, Lord Benson—says that: In determining whether to make a disqualification order … the court shall consider whether— (b) the directors have failed to keep proper books of account within the meaning of sections 221 and 222 of the 1985 Act". I am particularly concerned about the insertion of this subsection. Of one thing I am quite certain: even though the issue by the court of a disqualification order should be the court's own voluntary decision—that is, it should be a positive decision rather than a mandatory one—it should take into account certain factors that are specified in subsection (7) of the new clause. Included in these is the keeping of proper books of account.

As I indicated briefly on Second Reading, as a result of the experience that I have had in investigating cases of alleged fraud in liquidations, it appears that one of the principal reasons for the failure of medium and small companies, outside cases of direct fraud, which are already covered, is that they failed to keep proper books of account. I have met that time and time again.

Unfortunately, the prosecutions which have taken place under Section 222 of the new Act, which corresponds to Section 147 of the 1948 Act and Section 12 of the 1976 Act, have been very few indeed. No proceedings were taken in 1979; two were taken in 1980; six in 1981; 10 in 1982; and 18 in 1983. In fact, the requirements to keep proper books of account have been laid down since 1948. They are very simple requirements relating only to the keeping of the barest possible details concerning everyday transactions. There is nothing complicated about them. The company merely has to keep a record as distinct from the accounting superstructure on which it is erected.

In my view, failure to keep proper books of account has been responsible for a very large number of businesses failing and going into liquidation. I hope that your Lordships may be constrained to agree with me, because I know that the view is held quite widely in the accountancy profession that, where a company has not kept proper books of account within the simple requirements of the Act, which has been on the statute book for well over 30 years, that ought to be a ground for a disqualification by the court after it has taken a factor of that kind into account.

I shall leave the remainder of the arguments in support of the clause to other noble Lords who have had experience in this field and who feel very strongly about the matter. One reason why this new clause has been tabled is that Amendment No. 7 seeks to take out of the existing clause that part which allows the court to assume that a disgruntled creditor or a person ill-disposed towards a director only has to name someone in a petition for a compulsory winding-up, whether it is true or false, and that automatically becomes grounds for the issue of a provisional disqualification, This particular feature, which is set out on page 5, lines 5 to 9 of the Bill, is quite absent in new Clause 7.

I hope that the amendment that stands in my name will command the support of noble Lords; but, if it does not (possibly because of its origins, and I am not noted for being non-controversial in your Lordships' House), I should be very glad to commend Amendment No. 16 to the Committee. I beg to move.

Lord Lucas of Chilworth

As the change in the order in which we shall proceed has been agreed by the Committee, perhaps I may intervene at this stage. At the outset I should like to say that I am quite willing to accept that the Government may not have got this clause completely right. It is controversial. That controversy has been broadcast around your Lordships' House and in other places over the past 10 days to a fortnight. Therefore, I should like noble Lords to appreciate that I accept that, not as a charge but as a simple statement.

In order that the Government may best benefit from this debate, I think it would be helpful if, alongside the general objection of the noble Lord, Lord Bruce, to the clause—and I listened carefully to him and should like to respond to him when I have heard all the arguments that will be adduced this evening—I give our general reason for including the clause in the Bill.

We wish to prevent the continued abuse of limited liability and, very importantly, we wish to encourage directors to take a closer interest in the financial affairs of their companies and to take prompt action when problems arise. The Cork Report, at page 407, paragraph 1808, recognised this problem and said: To provide proper safeguards to the general public, the law must also provide that those whose conduct has shown them to be unfitted to manage the affairs of a company with limited liability shall, for a specified period, be prohibited from doing so. It is desirable that restraints of this kind should apply as much to the director of an insolvent company as they apply to the individual who has become insolvent". An individual insolvent who makes a voluntary arrangement with his creditors suffers none of the disabilities of the bankrupt, but the individual who is made bankrupt by the court is disqualified from being a director of a company until he has obtained his discharge. On the other hand, a director is treated no differently whether the creditor agrees to the company being wound up voluntarily or whether it is wound up compulsorily by the court. We believe that this is wrong and that there should be a distinction, one effect of which will be to encourage directors to take prompt action when difficulties arise. That is why subsection (3)(b) provides that no provisional disqualification order is made against the directors if the company is being wound up voluntarily or has had an administration order made in respect of it.

The second and main reason why we believe there should be a distinction and why we have introduced automatic disqualification following a compulsory winding up order is this. A company whose financial difficulties are allowed to grow to the stage where the interest of creditors requires the court to intervene to ensure an orderly winding up when other procedures exist for reorganising or winding up the company at the initiative of those controlling it at an earlier stage has clearly been run in a way which reflects badly on those controllers and raises the question of their fitness to act as directors. This is not, as has been claimed, a reversal of the burden of proof and contrary to the concept of justice.

The process of automatic disqualification is a two-stage procedure in which the making of the winding up order raises a prima facie case against the directors. They are not, as some have argued, deemed guilty and required to prove in one stage that they are innocent, in isolation. I do not myself care in fact for this terminology of "guilt" and "innocence". We are talking all the time in this section of the Bill of an unfitness; of a prima facie case demonstrating an unfitness to proceed with the job of being a director. We are not dealing with a criminal matter, but just with the question of fitness.

Directors are able to refute a prima facie case against them by satisfying the court that they meet the criteria for relief set out in the clause. They will be better able to demonstrate that they can meet those criteria than the Official Receiver would be able to demonstrate that they cannot. Such a two—stage procedure for determining liability is a well established technique in English law. I would refer your Lordships to the means of proving carelessness in actions for negligence, which will be familiar to noble Lords and to noble and learned Lords as the doctrine of res ipsa loquitur. The person then has to disprove carelessness to escape liability. There is an analogous procedure under Section 11(1) of the Civil Evidence Act whereby a connection on a criminal charge can be introduced as evidence into civil proceedings, and once admitted the effect is that the defendant has to displace the presumptions raised against him by the fact of connection.

The advantages of making the disqualification automatic are certainty, simplicity and swiftness. It is certain because every director or potential director knows the course of events which will follow should his company go into compulsory liquidation, and he also knows what avenues of relief are open to him. The procedure will be simple. There are no long drawn out court hearings to determine whether or not the order should be made. Finally, it is quick. It prevents unnecessary loss being suffered by creditors of his other companies through his continued unfitness to manage or be a director of those other companies.

5.45 p.m.

When the Government's proposals were first published in the White Paper they were criticised as being too harsh, and amendments were made to take account of the concern expressed without destroying the concept which lies behind the clause. First, to avoid the stigma (if that is what it is) of having a disqualification order made against a director who is, if fact, competent, we provided in subsection (2) that the court would only make a provisional disqualification order against those persons named in the petition. By subsection (3)(b) the court is prevented from making a provisional order against those named if, when the winding up petition was presented, the company was being wound up voluntarily or an administration order was in force. This was to encourage directors to take action (perhaps some may say that such action may be at a very late stage) in an endeavour to minimise the loss suffered by creditors.

Subsection (4) provides for the provisional order to have no effect for three months. This will enable the court to hear applications from persons claiming relief under subsection (5). Grounds (a) and (d) are straight-forward. Ground (b), which allows relief to the person who joined the board of the company for the first time during the three months before the relevant day, is designed to safeguard the director who joins the board as part of a rescue operation as a so-called company doctor, or perhaps as the nominee of an institutional investor.

If I may digress, I agree with the noble Lord, Lord Bruce of Donington, that persons in either of those two roles do indeed have a most valuable contribution to make to industry, to commerce, and to many companies which find themselves in difficulties.

Three months may appear to be a short time. Perhaps it is too short; but we wish to encourage people to consider carefully before they join a board, whether it is in the capacity of a "doctor" or as a non-executive director, because, in our eyes, whatever prefix you put before the word "director" the responsibilities are exactly the same. We feel therefore that this would provide encouragement for these people being invited to join a company to consider carefully whether the company's activities are, and will continue to be, viable. Professional directors, if I may use that expression, should be well able to acquaint themselves properly, certainly before they join the company or most exactly in three months of their joining.

Paragraph (c), together with subsection (6), grants relief where the court is satisfied that for three months before the relevant day and up to the petition being presented the applicant not only acted in the best interests of the creditors but also, within that three-month period, served notice on his fellow directors that the company should seek either an administrative order or that the company should be wound up voluntarily. This will protect what I perhaps might describe as the caring director who cannot persuade his fellow directors to take the action he would like, or the action which might minimise the loss to creditors, and who, rather than resign his position, sees it more proper and to the benefit of the company and his creditors that he should stay on the board to protect those interests.

To obtain relief the applicant is required to set down the application within 28 days of the making of the provisional order, arid a copy of the application setting out the grounds for relief will have to be served on the Official Receiver or, in Scotland, the Secretary of State. It is proposed to provide in the rules that the Official Receiver will either endorse the application "not opposed" or report to the court the grounds for his opposition to relief if, from the information available to him at the time, he is of the opinion that the grounds on which the relief is sought are not correct. The Official Receiver, in turn, will be restricted to reporting on the facts set down in that application for annulment, and therefore there will be cases where an unfit person avoids automatic disqualification. However, in those circumstances the Official Receiver would be able to make an application for a disqualification order under Clause 9, notwithstanding that relief had been granted earlier under the provisional disqualification provisions.

Finally, having outlined the purposes behind the clause and what we aimed to achieve by it, I repeat that it is possible that the Bill does not provide sufficient grounds for relief in any case. There may be, for example, grounds for granting relief to a person who can satisfy the court that there were good reasons; perhaps an enforced hospitalisation where he was incommunicado might be a valid reason; perhaps he had not received a copy of the statutory demand or the petition; perhaps he did not have access to the company's financial records for some reason or another. There could be a person—I should find it difficult to believe—continuing to serve on a board who was quite unaware that his fellow directors were perpetrating a fraud. If any of those cases applied, there would not be the automatic disqualification from holding directorships on other boards because there is provision in the Bill for that director to apply for leave to act.

That outlines the Government's reasoning behind the amendment. I reiterate that our views are not set firmly in concrete, that I myself and my colleagues who are dealing with this Bill in another place, are not rigid in any way about what we have set down. I see this evening as the opportunity—in the light of the amendments, Amendments Nos. 15 and 16, that are set down, and of the views that have been expressed to me personally—for those in the Committee who wish to do so to put forward a different view or perhaps an alternative.

I shall look forward with great interest and much concentration—that I promise—to hearing what noble Lords have to say. Perhaps the Committee will allow me to respond at the end. But I repeat that in no way am I sitting down rigid and inattentive.

Lord Benson

Under the procedures of the Committee, I ask leave to speak to Amendment No. 16, which is all part of the same subject, and on that basis I now speak to that amendment. Its object is to substitute one simple, intelligible clause for the existing Clauses 7, 8, 9, 10, 11 and 12. There are many defects in those clauses, but I intend now to stress probably the first six of them.

The first arises under Clause 7. I still do not understand what is the intention of that clause. If it is designed to force directors to go into voluntary rather than compulsory liquidation, it is a sledgehammer to crack a nut. But the more offensive part of it is that to achieve its purpose it puts the director under threat of losing his livelihood. That is the offensive part of the clause, if that is its intention.

If that is not the intention of the clause, and we take it as it stands, it is offensive for other reasons. It imposes compulsory and immediate disqualification and all the obloquy which falls upon a director as a consequence. The director then, within 28 days, has to prove his innocence at his own expense.

I know it will be urged that that is not proof of guilt, but ordinary individuals such as myself and ordinary directors will regard it as conviction without trial. I believe it is contrary to what the ordinary man in the street understands as natural justice. I do not intend to develop this subject any further. I dare say that the clause in its present form is repugnant and I hope that it will be withdrawn in due course.

The second point is that what these clauses are attempting to do is to impose sanctions when a company goes into liquidation and does not pay its creditors in full and, in addition, to stop wrongful trading. It does not really matter whether a company goes into voluntary or compulsory liquidation. It is still necessary to deal with the situation when creditors are not paid in full. I suggest therefore that the confusion between voluntary liquidation and compulsory liquidation which appears here and there in the six clauses should be removed and that the provisions should apply whatever form of liquidation is adopted.

The third objection to the Bill is based on the same premise that what we are dealing with is failure to pay debts on liquidation and wrongful trading. But there are two standards of behaviour imposed upon the directors.

Under Clause 9(1)(c) the director's conduct must have been such as to make him unfit to be a director. There is no definition of unfitness and that leaves the matter at large. The second standard of behaviour is under Clause 11 and that is so complex that I cannot attempt to précis it for the Committee. My point is that it is unreasonable to have two different standards of behaviour to achieve the same purpose. What is even more unsatisfactory is that there are different penalties under the two different forms of behaviour.

The fourth point is that under Clause 11 it is apparently open to directors of the same company to arrive at different conclusions at the prospect of insolvent winding up. Under those conditions, it is not clear whose view is to prevail or by what standards one view is to be preferred to another.

The fifth objection is that all the clauses are extremely complex and tortuous. I am glad to see that in the recent Oxford Dictionary the word "gobbledygook" has been brought in. The definition of "gobbledygook" is "unintelligible jargon". I suggest that there is a great deal of gobbledygook in these clauses which ought to be removed so that directors and the public at large may really know what is intended.

But the final objection is compelling. So long as these complicated, inconsistent clauses remain I can say without risk of contradiction that it will not be possible to recruit the quality of director which is needed for the conduct of British commerce and industry, particularly in companies which are going through a difficult patch and which need to recruit directors with special skills to bring them back to prosperity. It would be a strange result if this Bill and the subsequent Act prevented the recruitment of the high quality directors necessary.

Those are just some of the objections to the clauses in their present form. I should like to suggest some of the advantages that would flow if the concept in Amendment No. 16 is adopted. I know many of your Lordships may find deficiencies in the wording, and there are possibly warts. All I suggest is that the concept is sound and what it attempts to do is, first, to remove simply and clearly the difference between compulsory and voluntary liquidation. Secondly, in legislation dealing with directors, I suggest that it is imperative to say what they can and cannot do so that they know where they stand. It must be put absolutely simply before them.

6 p.m.

All directors, all boards of directors, are entitled to make errors of judgment. We all do that every day of the week upon one scale or another. What I suggest boards of directors should not be allowed to do is, first, to conduct their business fraudulently, and, secondly, to conduct it recklessly or irresponsibly. What the amendment to which I am speaking attempts to do, I hope fairly successfully, is to express that perfectly straightforwardly and clearly.

The third point I should like to suggest is that we must deal with wrongful trading—a point on which the Cork Committee laid great stress. With I hope the same clarity, the amending clause to which I am speaking makes it clear that wrongful trading, be it fraudulent trading or irresponsible trading, will attract severe sanctions on the directors concerned.

There is a fault to which I should like to draw particular attention. If one looks at Clause 7(2)(a) of the amendment to which I am speaking, one will see that it makes clear that directors are collectively responsible for the business which they are running. I do not think that the Government will be able to restructure these clauses unless they make up their mind what are the responsibilities of directors.

I have had the misery of attending the obsequies of a very large number of companies. On the day in question what happens, I am sad to say, is that there are piteous cries from the non-executive directors, who say, "I'm not responsible. How could I know what was happening? Nobody told me." The refrain is then picked up by the functional directors and one hears exclamations like, "I'm not responsible. I was only the sales director. How could I know what was happening?" The fact is that the main responsibility, of course, rests with the chairman and the managing director; but the whole responsibility rests collectively on the board: I think that that has got to be made clear.

May I direct attention to one other clause of the amendment? It is very short and I attach the most enormous importance to it. I will read it because it is so short. It is Clause 7(6)(c) and it says: the company failed to present management accounts or financial statements, at regular intervals appropriate to the business, which revealed (to the directors) the state of its trading operations and its financial position". If your Lordships cared to make an inquiry as to the reasons for the insolvencies which have taken place in the last 15 years, beginning with Rolls-Royce and ending recently with Johnson Matthey, I think that you would find that one of the major features, if not the sole feature, which caused the insolvency was that the directors collectively did not have in front of them clear statements of what was happening to the business so that they could take steps and avoiding action in time. I commend those two points very strongly to this Committee in the hope that they will meet an answering and sympathetic chord.

The last advantage that I claim for the amendment to which I speak is simply that, in that form, it is clear what directors may do and I do not think that it will deter the recruitment of directors of adequate quality, particularly in those cases where they are needed when a company is going through a very bad patch. We shall listen in due course with great attention to the revisions to the clauses which the Government have in mind.

Lord Seebohm

I have put my name down in support of the amendments that have been sponsored by the noble Lord, Lord Benson, not because I object to the Bill as a whole but because I think it is high time that we had something like this to protect the ordinary creditors in business. The noble Lord, Lord Benson, himself has immense experience in the currency field and also as a director of companies. I do not propose to repeat the, I think, very convincing arguments that he has made to show that some amendments are certainly necessary to this Bill and particularly to Clause 7, which practically all businessmen in your Lordships' House will find, in some ways at least, objectionable.

I speak as one who has been chairman of a number of companies and who has naturally made a number of directors' appointments when I have been chairman. The reasons for appointing directors are various—some are appointed because they have special technical knowledge. Not necessarily does one want to have them assisting in the management of the company. Others in my case—and generally when I have been in an international company—have been people who knew all about the international markets. Again, they would not necessarily be expert on financial matters from the point of view of the company. Therefore, I think that we are putting some very onerous burdens on directors and I would say therefore that one must perhaps look to see if one can give them some protection at the same time.

The noble Lord, Lord Benson, has mentioned something which I myself believe to be very important: that is that companies just must produce at regular intervals meaningful accounts which can be looked at by all the directors. I would say myself that this certainly should be quarterly. A lot of people would say (and probably rightly) that they should appear at less than that interval—monthly; but there is a growing tendency in businesses to have a two-tier system nowadays. I was chairman of a board which had a two-tier system. The top tier met, generally speaking, quarterly. Therefore, I say that there should be, if possible, a legal requirement anyway that accounts (which need not be audited) should be produced and presented to the directors at least every quarter.

There is another matter which disturbs me very much. In recent years auditors, in qualifying accounts, apart from reporting that they present a true and fair situation of the affairs of the company, add on the words, "as a going concern". This is a warning order. It means that the company is not completely liquid; in other words, that all its liabilities could be paid off in liquid assets. It means that there are fixed assets which may well be of a very specialised nature, properly valued in the balance-sheet—because that is what they cost, less depreciation—but, in the case of a liquidation, would be valueless because nobody else wants them. They are specialist assets.

In this case sometimes when a liquidator is appointed it is in fact the liquidator who makes the concern insolvent. It is not the directors because the directors have a properly-produced and valued balance-sheet. I welcome very much in this particular case the end of this Bill which produces the principle of an administrator who can look after a company, particularly in this position, to see whether in fact it should not be continued in order to preserve what is very probably a specialist situation. This is nothing new. In fact, it has been operating in South Africa for years and years. When I operated there we found it of great use to appoint what we called in those days a judicial manager, who was able to freeze the creditors and carry on the business; and very often (in the medium businesses, anyway) he succeeded in pulling them round. I think that I can say that I agree entirely with what the noble Lord, Lord Benson, has said and with pretty well everything that the noble Lord, Lord Bruce of Donington, has said. I shall not say any more than that; but I believe that this matter must be looked at very carefully. I do not believe that Clause 7 will do as it stands.

Lord Denning

Not as a man who has had any practice in business but just as a lawyer, may I say that I have considerable sympathy with the approach of the Government to this clause; but, on the other hand, I have even more sympathy with the fact of leaving it out altogether at this stage. This is because the principle underlying Clause 7, as it stands, is that there is to be automatic disqualification of a director on a compulsory winding up order being made. It goes through the report a good deal that, in a way, the framers of it assume that when a compulsory winding up order is made it gives rise to a suspicion of misconduct or dishonesty in regard to the directors concerned. The report says in paragraph 628: Under our proposals, the making of a compulsory winding up order will be reserved for the comparatively few serious cases. These include cases where those responsible for conducting the company's affairs are suspected of having been guilty of dishonesty or other serious misconduct in relation to the company, and where their conduct requires investigation, as well as cases where the insolvency is a matter of legitimate public concern". So the report proceeds on the basis that when there is a compulsory winding up order there is something suspicious, and indeed wrong, in the conduct of the directors; and that is why they proceed on the principle that if there is dishonesty or suspicion of wrong doing that is a prima facie case against them and the director concerned must be called upon to prove his innocence. That is how they view the burden of proof.

I would suggest that that is wrong. A compulsory winding up order can be made if a company is unable to pay its debts or if it is just inequitable that it should not. It does not follow in the least, certainly, that all the directors have been guilty of any misconduct in any way at all. So I would suggest that automatic disqualification straightaway is wrong in principle, and it is wrong in principle to presume that upon a compulsory winding up order being made the directors have been guilty in same way. The burden should be the other way, and that is why, in these amendments which are being put forward, it is said: "Do not let it be automatic. Let there be an application made to the court for the judge to consider because automatic disqualification puts the burden entirely on the man concerned".

Of course I can see the arguments on the other side. I can see what the committee were concerned about. We must remember that directors have no particular qualifications. With the great public companies, as I have said before, they are a self-perpetuating oligarchy. No doubt they hardly ever get into trouble. But what we are concerned with more is the small private company, the one-man company—maybe himself or his wife. The committee thought that if the man is made bankrupt he is automatically disqualified if he is carrying on a personal business; he is automatically disqualified from being even a director of a company. In our little town there is a man—quite a humble man—who carries on, first, a taxi business in his own name, and then he has a business which hires out cars in the name of a company. Then he has another apparent interest in yet another company. If his personal business fails and he is made bankrupt, he is disqualified from being a director of those companies; but if one of the companies fails and is wound-up, he is not disqualified from going on.

The underlying theme throughout the Cork Report was indeed the bringing of them together in this way, and I will read what their recommendation was at page 446: the introduction of a simplified and flexible court procedure for the administration of the affairs of insolvent debtors, with a view to ensuring that the more severe process, namely, bankruptcy in the case of an individual or compulsory winding up for a company, is restricted to serious cases where misconduct exists or is suspected, and that other less serious cases are dealt with by a process of liquidation of assets, or … under a debts arrangement order". So they are saying that in severe cases there should be compulsory winding up and in less severe cases there should be a liquidation of assets.

The underlying theme behind much of this thought is that there must now be a new system of an administrator. An administrator will be appointed by the company or the court when the company is on the verge of liquidation. The aim throughout these proposals seems to be that instead of compulsory liquidation the company should go into voluntary liquidation or have an administrator appointed. I do not know whether that is a satisfactory solution. It seems to me that, on the whole, Clause 7 has two great defects. It is wrong to impose automatic disqualification, which should only be on the order of the court; and it is wrong to put the burden of proof on the director concerned. So I would support the amendments, or one of them.

6.15 p.m.

Lord Harmar-Nicholls

If I understand parliamentary language, my noble friend on the Front Bench has made it clear that the Government are not satisfied with Clause 7, either. He has made it perfectly clear, I think, with the words that he used, that they are prepared to look at this again and to take into account what has been said. If that is the message that he intended to give, I should like him to know that, from some experience connected with small companies, if the eventual Bill does not convey the message which is contained in subsection (7)—the last subsection in Amendment No. 16—it will not be satisfactory to me and I do not think it will be doing true justice. Subsection (7) in Amendment No. 16 says Notwithstanding that the court may be satisfied as to any of the matters described in subsection (6)"— this is the important part— no order shall be made against a person if it is shown to the satisfaction of the court that he took such steps as were reasonably open to him to minimise or prevent potential losses to the company's creditors". If that is not the principle which is enshrined in the Bill when it becomes part of the statute, I do not think it will be satisfactory. Those words sum up what we ought to aim at.

I was a little disturbed at the distinction made by my noble friend between what he called an order and a provisional order. I was interested that he should say that the prefix in front of "director" does not matter. He said that whether he was an executive or a non-executive director, the prefix was not important: it is the fact that they are directors. I would say exactly the same with the order, in terms of the effect it would have upon any individual's reputation and his general standing. Whether the order is an order or a provisional order it would be devastating, and I do not believe that an order, whether in a provisional form or in any other form, ought to be inflicted upon any individual until the court itself has decided that all the circumstances surrounding whatever a man has done in the years he has been a director have been taken fully and properly into account.

The automatic decision is no good, and the suggestion that a provisional order may be mitigated to some extent I do not think is satisfactory. I was in the Isle of Man recently in connection with the Commonwealth Parliamentary Association, and we were told about Witch's Hill. Apparently, in medieval times it only required one person to say "She's a witch!" and automatically, because that charge had been made by one person, the accused woman was taken to the top of the hill and put into a barrel which had spikes inside it. Then the barrel was rolled down the hill and, apparently, when it got to the bottom, if the person was still alive she was adjudged to be a witch because she had survived, but if she was dead then she was declared innocent and not a witch.

I believe that this mandatory clause, as it stands at present, would be equivalent to the witch's barrel, and I do not think it would be either natural or even intellectual justice. I hope that the language that my noble friend has used means that they will look at this again and will make of this Bill a good and necessary Bill, and one that is a just Bill to those individuals who are concerned with running businesses in this country, whether large or small. I hope it will contain the spirit of subsection (7) in Amendment No. 16. Anything less than that I do not think would be good enough.

Lord Marsh

I think that the problem with this clause and with some of the following clauses is not that it is in need of looking at again and reconsidering; in many cases, it is fundamentally wrong in its aims. I certainly hope that the Committee will see fit to support Amendment No. 16, although Amendment No. 15 moved by the noble Lord, Lord Bruce of Donington, would also be an improvement.

It is wrong, because it is aimed at the wrong target. I think that the Government, quite understandably, are deeply concerned at the attitude of directors who are either consciously fraudulent or grossly irresponsible, and one can make a very strong case of criticism of the authorities in not using the powers already at their disposal in many of those cases. As the noble Lord, Lord Benson, said, the words of the Bill tend to use a blunderbuss to crack what is a very specific problem. But it is not only that some of the shot will go to the side and perhaps injure odd individuals; I think that the Bill as drafted could have an extremely damaging effect upon smaller, start-up companies.

The noble Lord, Lord Lucas, mentioned this and referred to it on Second Reading when he was talking of the three months' exclusion and said: "Surely, within three months it is possible for a director to examine the evidence before him and to decide whether or not the company is in a healthy position". If a director takes on the responsibilities of a company, it ought to take him far less than three months to establish the situation that the company is in, and I agree with the noble Lord, Lord Lucas.

But the problem is not simply defining the condition of the company; it is then deciding what one should do about that situation. Should one at that stage immediately pull the rug, with all that that implies for people inside and outside the company who are already at considerable risk, or should one seek to save it? That is one of the damaging aspects of the Bill as drafted, because it is possible then to examine the situation of the company and to determine—frequently, fairly easily—what the problems are.

In small companies the problems are very frequently those of cash-flow and lack of experience. In great public companies that is unacceptable, but in many small, start-up companies, which subsequently become big companies by definition, they frequently lack experience, they are under-capitalised, they make mistakes, and possibly their overheads are far too high for the likely revenues. All those things can be identified quickly.

Cost reduction is not something that can always be achieved quickly, and therefore over and over again people in companies of this size find themselves with two conflicting desires: one is to achieve more money by cash or by credit, and the other is to achieve more time. Frequently, they need more time to achieve more credit or more cash. It is not easy, if a company is in difficulties, to go to a bank and ask for another couple of million pounds. One has to show that steps are being taken in that direction. At the very moment when the directors of a company decide to make a fight, to see whether they can save the company and the jobs, avoid redundancy payments, and secure the creditors they continue to exacerbate the situation.

I have been a member of the boards of public companies and private companies. One private company of which I became chairman was in a very serious financial situation. It took some three months before we could eventually get the additional funding needed and that proved insufficient, because we could not get the costs down rapidly enough. It took nine months before we managed to obtain a complete restructuring of the company. One of my colleagues said to me some time afterwards: "At least, now when we see the light at the end of the tunnel we know that it is not Kenneth Cork tearing down towards us in his car." While that company is not out of all its problems, it can now meet all its creditors, it can give stability to its labour force, and it has every chance of being a highly profitable company.

My fear is that as the Bill stands no director in his right mind would take risks of that sort and the tendency would be to pull the rug much more early. That would be damaging to many companies after they have overcome the initial difficulties, after they have run all the risks and after they have had, as the amendment rightly demands, the responsibility of having to say that they could not reasonably have been expected to know that there was no reasonable prospect of meeting the company's liabilities. That is a judgment that they have to make. If the company falls, they will very rightly be held to account, but if they take that risk they have to be very clear that they believe they can justify the actions which they have taken. My fear is that under the present Bill as it stands they will not take that risk and the country will be poorer for it.

Lord Meston

Your Lordships' Committee has to consider the rival attractions of three versions of Clause 7 and I would respectfully say that the Government's flexible attitude is welcome. Your Lordships have stated the objections and I shall not repeat them, but there is one risk upon which your Lordships have not touched and that is the risk that Clause 7 in its present form could be used by the unscrupulous as a blackmail weapon. The other defect of Clause 7 in its present form is that it deals only with the compulsory liquidation. The Government say that that is a deliberate omission to encourage voluntary liquidation, but I question that. In the real world the directors of small companies simply do not have the resources or the inclination to go to so-called company doctors or even to consult their accountants for the necessary advice.

One other objection that I shall briefly mention—it is an important one, if a little mundane—is really a logistic and administrative objection. If one keeps the figures simple, and if there are 10,000 liquidations a year of companies, each of which has two directors, then there are at least 20,000 potentially disqualified directors every year. If 75 per cent. of those feel that they are able to apply to be exonerated under the terms of Clause 7 as at present drafted, there will be something like 15,000 applications a year.

In each of those the official receiver will have to consider the application on its merits and, even if the official receiver decides that he will not oppose the application, the court will have to give some consideration to the application on its merits, which will sometimes involve quite a detailed analysis of the state of the company in its dying period and a detailed analysis of the state of mind of each individual director of that company. Our Companies Court and our county courts are simply not equipped for that sudden burden of work, and even if the Government had adopted the Cork recommendations for a separate insolvency court, the position would be no better.

The thrust of Clause 7 in any of these versions is a protection of the public interest, but I suggest that it is not in the public interest to impose such a disproportionate burden on the courts and such a disproportionate burden of expense and effort on the truly innocent director. There are much better mechanisms than Clause 7 in its present form for bringing the truly delinquent director to the attention of the appropriate authorities, to be dealt with by the courts, and I therefore seek to support Amendment No. 15.

Viscount Colville of Culross

I wonder whether I may ask my noble friend Lord Lucas a little about the logic of this part of the Bill, because I believe that it has a distinct bearing on the question of automatic disqualification under Clause 7. It is good to see that in subsequent clauses in this Bill the Government are, indeed, taking the question of disqualification very seriously. For instance, having introduced, most admirably in my view, the concept of wrongful trading in Clause 11, they then provide that the court can disqualify on an individual basis any person who is responsible for that wrongful trading.

In addition to wrongful trading, Clause 12 provides for disqualification for the even more serious offence of fraudulent trading, which is the subject of Section 630 of the new Companies Act. Then, as my noble friend has already pointed out, in Clause 9 we have provisions whereby further disqualification orders may be made in somewhat vague circumstances; perhaps, for instance, where people have behaved in such ways as are described in Section 626 of the Act, which involve all kinds of offences by directors and officers of companies created in the course of a liquidation, whether it is voluntary or compulsory.

6.30 p.m.

All those kinds of disqualifications are aimed at persons who have been identified as being at fault individually, to a greater or lesser extent. The disadvantage of doing it that way inevitably means that the courts will have to come to a conclusion about the individual fault of the person and that may mean that the disqualification does not happen immediately. The person will be able to continue as a director of other companies—perhaps not behaving any better in that capacity—for a substantial period of time before the court finally disqualifies him.

Then we come to the provisions of Clause 7 which apply only to the compulsory windings up. As many noble Lords have said and have explained from wide experience, the directors who are involved in those companies may by no means necessarily be individually at fault at all. There is no reason why, if the matter was to be adjudged—there is a provision for it to be adjudged—they should end up by being disqualified after the three months because they would be exonerated. Yet the illogicality is that, where there is no primary implication of fault, they are immediately disqualified, while where the cases are matters of serious dereliction of duty—involving fraud, wrongful trading and so on—they may go on being directors for a substantial period of time until, as a result of an individual application by the receiver, the Secretary of State or somebody of a similar basis, and upon a proper adjudication by the court, they are found to be unfit to be directors and are disqualified. I cannot understand the logic of this.

It seems to me that the automatic disqualification is exactly the wrong solution for the people who have not yet been determined to be in dereliction of their duties as a director. Yet it comes at the forefront of this whole provision and reverses, as noble Lords have said, the burden of proof. I do not understand the logic of the way in which this part is laid out. I very much approve of the individual basis upon which some of the later provisions for disqualification are approached—by an application by the receiver or somebody else, and by an adjudication by the court—even if it does take some time. I can not see how that stands with the provisions of Clause 7 as it stands at the moment.

Lord Templeman

As a former practitioner in the Companies Court, perhaps I may draw attention to the very great step that is made in this Bill. There is already legislation and material for dealing with fraudulent persons, and for the first time this Bill attempts to put limitations on incompetent directors. The whole object of Clause 7, as I understand it, is to protect creditors from incompetent directors. The reason that they need protection is that towards the twilight end of a company's existence it is really trading, although it may not know it, on the creditors' money. It is accepted by both the Government and those who moved amendments that we need to move into the area in which incompetent directors can be disqualified and also will possibly have to pay towards the company's liabilities. That obtains from both the amendments and the Government's original proposals. So the principle is apparently acceptable. The question is: what are the steps to be taken to prove that a director has been incompetent?

In Clause 7, as the Government have laid it down, the crucial provision is subsection (6), which provides: The court shall not annul a provisional disqualification order … unless it is also satisfied that, within the period of three months ending with the relevant day"— that is 28 days before there is a presentation of a petition for compulsory winding-up— the person against whom the order was made gave to the other directors of the company … notice of his opinion", in effect, that they ought to go into voluntary liquidation.

As the Minister said, the object of Clause 7 and of subsection (6) in particular is this. A company often goes into compulsory liquidation because the directors are ignorant and incompetent. They are not fraudulent. They do not realise in time what is happening; and when they do realise they stand there petrified until some creditor does not get paid, issues a writ, gets judgment and then presents his petition. This clause will mean that whenever a director is with a company it will be his duty to see whether the company has reasonable prospects of surviving. If he thinks it does, he will do nothing. If he is proved to be wrong, I do not see why he should not be disqualified. If he is right, there is no problem.

Your Lordships' Committee will observe that by subsection (6) the director is safeguarded if, within the period of four months before a compulsory winding-up petition, ending with one month, he gives a notice saying that the company ought to be wound up voluntarily. Normally he will not have to give the notice because if he has formed that view, the company will go into voluntary liquidation. So this clause is saying to directors, "We do not accuse you of fraud, but you must, out of fairness to the creditors, consider from time to time whether the company reasonably has a prospect of going on. If it has not, you must not wait until a creditor comes along and we get all the cost, the expense and the delay of the court; you must act at once and you must act at once by putting the company into voluntary liquidation".

In voluntary liquidation there is less expense to the state. The voluntary liquidation is controlled by the creditors. It is said in the Cork Report, and the Government accept it, that, generally speaking, it is desirable that a company should be wound up at the behest of the creditors, rather than by the company. If your Lordships' Committee rejects Clause 7 as at present set down, it will be rejecting the opportunity to point the finger at directors and give them instructions that they must from time to time consider the position of the company, saying that if they wish to avoid being deprived of the privilege of being a director of any company, they must act in time under subsection (6).

At the same time perhaps I may draw attention to the second requirement of Clause 7, which is in subsection (5)(c). First of all, if a director wishes to avoid automatic disqualification, he must come along and show that he has given a notice under subsection (6). But then in addition he must show that he has acted for a requisite period, in a manner which, in the circumstances, was in the best interests of the company's creditors". If that subsection stands, there has to be an application by the director and he will presumably put in an affidavit. The official receiver will presumably also have to put in the facts. Of course, a well meaning director will probably be content to rely on his own affidavit and on what the official receiver puts in. But one must recognise—we have frequently come across it in the courts—that the most obstinate director is the most ignorant. It is the obstinate director who will come along and attempt to prove under subsection (5)(c); he will say that he wants to cross-examine the official receiver; that it was all the fault of his bank manager; and he will extend the proceedings ad infinitum.

I wonder whether the Government would consider deleting subsection (5)(c) and making subsection (6) the sole requirement for a director who wishes to show that he is not automatically to be disqualified. He will come along with his notice, prove that he was in favour of the company going into voluntary liquidation, and show that he failed to prevail with his other directors. That ought to be a complete defence to automatic disqualification. It will not cost the court any time. It will not cost the impecunious company any money. It will be automatic.

If a director does come along with such a notice, he is not automatically absolved. He is absolved from automatic disqualification, but he can still be caught under Clauses 9 and 11 if he has done something really rather wrong. I suggest to the Government and to the Committee that there is no defence in subsection (7). And if it be said that, shorn of subsection (5)(c) how unfair it is that there should be automatic disqualification, then I should answer this: I would say to the noble Lord who said that there was no fault that there is always fault.

If a director does not recognise within one month of a winding up petition being presented that there is something wrong with his company, then he is either fraudulent or so ignorant that he ought not to remain a director. That is why disqualification ought to be automatic. The director does not have to put the company right; all he has to do is recognise that the dangers are dangers not to him (because of the limited liability) but to the creditors. He ought then to put the company into voluntary liquidation.

If he does not put the company into voluntary liquidation, and if within a mere month there comes rattling through the company's door a winding up petition, how can he turn round and exclaim, "How surprised I am! I have been a director of this company for months (or years). I know that I have responsibilities. But to my very great surprise, I thought everything was fine, but here is a winding up petition which will result in the court making a compulsory order".

I would say that if a director does not within a year suspect that a company is in a rocky position and does not take advice accordingly, without necessarily going into liquidation—because he ought to have a feeling about how his company is progressing—and then does not know what the situation is within a month, then to my mind his incompetence has been proved and he should be automatically disqualified. His defence would be, "I did consider the matter. I did come to the right conclusion. I served a notice under subsection (6), but my directors would not tolerate it".

I shall now say á few words about Clauses 9 and 11—

Lord Marsh

Before the noble and learned Lord does so, on the point concerning the serving of a notice on fellow directors, does he not believe that in those circumstances the director concerned would have no alternative but to resign immediately, and that the company would in reality find itself in liquidation forthwith as a result of that?

Lord Templeman

A company does not go into liquidation because a director resigns; that is the answer to the noble Lord's question. A company can go into liquidation only if there is a resolution of the creditors at a meeting properly called, or if there is an order of the court under the presentation.

That question takes away from my main argument that there is merit in subsection (7). To the argument that it is unfair to have automatic disqualification I point the finger at every director who gets within a month of the presentation of a compulsory winding up order and has the impudence to turn round and say "I didn't know. I thought that everything in the garden was lovely". Either he knew and the company should have gone into voluntary liquidation, or he ought to have known. There can be no escape from that.

Turning to Clause 9, this provides for the disqualification of unfit directors. It has this difficulty: it requires the official receiver, the Secretary of State, or the liquidator or former liquidator of a company, to take action. Mostly, the companies concerned have no money, or they would not be the subject of compulsory liquidation. No liquidator could take proceedings unless he was financed by the creditors, and it is doubtful whether they would finance him. I wonder whether Clause 9 is necessary when, Under Clause 11, there is a procedure whereby a director who has been guilty of carrying on a company that has no reasonable prospect of success can be made liable personally and can also be disqualified. I suggest to the Government that Clause 11 by itself is quite sufficient.

There is an incentive in Clause 11 for a liquidator to take proceedings because under that clause a defaulting director can be made personally liable. Therefore, so long as the defaulting director is worth powder and shot, and even if he is not, then proceedings can be brought against him under Clause 11.

There is one point on which I would like some clarification. Clause 11 provides in subsection (1) that the court, may, if it thinks it proper to do so, declare that person to be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company". I am not sure whether that is intended to saddle a defaulting director with all the debts.

Take this case: a company is £100,000 in the red. A director comes along and the court comes to the conclusion that that director has been to blame. But perhaps he has not been to blame for the whole loss; perhaps others have been more responsible for it than he has been. Perhaps he came into the company at a later stage. Under this subsection, is it competent for a judge to say, "I consider that you ought to be made personally liable, but in all the circumstances, and having heard all the evidence, the limit of your liability ought to be £10,000", or that it ought to be £20,000, or whatever? In other words, can the court temper the wind to the shorn lamb? Directors' incompetence and bad habits vary from company to company and from director to director. I should like to suggest that the court be given discretion and that it should not be, as it appears to be in Clause 11, all or nothing.

6.45 p.m.

My second observation on Clause 11 is to question whether subsection (4)(b) should not be deleted. I take the point raised by my noble friend Lord Benson, when he said it was unfair that there should be two standards applied to two different directors. There is the standard in subsection (4)(a) that the director will be expected to use the general skill and experience which, in effect, directors ought generally to employ. That is the objective test. I suggest that subsection (4)(b) should be deleted and that as between, for example, one director who is a skilled accountant and ought to have known better and a bookmaker who perhaps did not, it could be left to the judge under Clause 11(1) to say at his discretion. "I consider that one director, in all the circumstances, ought to be liable for all the debts, but that the other director I should make liable only for a particular sum". Those are the only suggestions I make.

So far as the amendments are concerned, the test in Clause 11 as it stands for the liability of a director is that he knew or ought to have concluded that there was no reasonable prospect of the company not going into insolvent liquidation. I can see that that is a test which the court can satisfy; it can make up its mind. Some of the tests laid down in the amendments—I will not go into detail—talk about being just and equitable and introduce various phrases which are much more vague than the existing wording.

One does not want to saddle the court. Under Clause 11 it will be difficult enough anyway. The test must be fairly sure; otherwise the work of the Companies Court will be taken up in litigation and long arguments about the precise meaning of the expressions in the Bill. There ought to be some simple test. If I may say so, the test which the Government are proposing in subsection (2) seems to be near the point. No doubt this matter can be looked at again, because it is very important that if liability is to be visited on a director, then the test on which that director is to be judged by the court should be certain. I say no more.

Lord Harmar-Nicholls

On the basis of the noble and learned Lord's own example of where it has been adjudged that one director ought to be made liable for the whole of the debt because of his particular discrepancies is he suggesting that the other directors should then be automatically discharged under the clause as it now stands? Under those circumstances would not the noble and learned Lord agree that the situation ought to be either provisional or permanent?

Lord Templeman

With great respect, that is a confusion of thought. Clause 7 is the clause which concerns automatic disqualification, and Clause 7 has nothing to do with the differences between one director and another. Clause 7 says this: whether you are an accountant or a bookmaker, or whatever you know, if you take on the responsibilities of a director and you do not know within a month of a compulsory order that that company is on the rocks, then either you are fraudulent or you are incompetent—probably incompetent. Therefore it is not under Clause 7 that one needs to differentiate among directors. All directors ought to know in how sorry a state a company is within a month of its being killed off by the Companies Court. If they do not, they have no right to be directors.

Clause 11 is entirely different. It fixes personal liability. Under Clause 11 it is very important to know the difference between directors and to see those who are more culpable than others. But in my submission the issue does not arise under Clause 7 which starts with the principle that no director should be surprised if a winding-up petition arrives on his desk.

Lord McIntosh of Haringey

Faced with the serried ranks of solicitors, barristers, accountants and others with experience of big business, I quail, and I particularly quail after hearing the noble and learned Lord and feeling myself held with his glittering eye. However, perhaps I may be permitted a very short story. I am the kind of person who your Lordships are all talking about. I am the director of small private companies. If I may be permitted to say something personal from this Dispatch Box, perhaps it may bring some of this discussion to a personal level.

For 20 years I have run a private company of which I am the major shareholder, which I hasten to say is in no danger whatsoever of insolvency and which has provided advice to other companies on marketing matters. A couple of years ago my company provided advice to a group of people who proposed to form a company. When the advice was favourable and this looked like a good prospect, they asked me whether I would join the board of the company. It seemed to me that I had a duty to put my money where my mouth was and to take some continuing responsibility for the professional advice that I had been giving. I hasten to say that I have not received a penny from my directorship of this company.

At the same time it is relevant I think that the active directors of the company have been rushing around like mad, buying machinery and making arrangements for the production and marketing of their product, and they have failed in several more than just technical respects in terms of financial reporting. I have written a letter to the secretary of the company which has been drafted for me by my legal advisers in the light of this Insolvency Bill among other things.

I must say that when I first saw Clause 7 of the Bill and the complexity of the letter that I had to write in order to protect my position, I realised that if the Bill had been on the statute book a year ago when I became a director of this company, I should simply never have become involved at all. If anything like Clause 7 is enacted as part of this legislation, I shall immediately resign from the directorship of the company.

My experience may not seem relevant to many other noble Lords. It may be that the contribution that I make to this company is very minor. But the point that has been made, notably by the noble Lord, Lord Marsh, about the importance of having outside directors with particular experience which cannot be available to the executive directors is relevant here and I believe supports the case for either Amendment No. 15 or Amendment No. 16.

Lord Taylor of Gryfe

Time is moving on, and I wonder whether the Minister will be a little forthcoming about his attitude to the matters that have been raised. He indicated at the outset that he was prepared to be less rigid than is normally the case. The case against the clause has been well and truly stated. Quite apart from what has been said in the debate in this Committee, he must, I am sure, take cognisance of the considerable representations that have been made by bodies such as the CBI, the Institute of Chartered Accountants, the Law Society, and so on. With all that weight of opinion which is critical of Clause 7, perhaps he could indicate to the Committee that in the light of this afternoon's discussion he is prepared to look at the matter again and thereby avoid the necessity of voting. We all share the concern of the noble Lord to do something about the situation. If he were to act accordingly, I think that it would be with the consensus and support of the Committee.

Lord Mottistone

I should briefly like to add to the discussion. My name is on Amendment No. 16. I think that it is fair to say to my noble friend Lord Lucas that except for the noble and learned Lord on the Cross-Benches who spoke one from last, with whom I do not agree a bit from practical experience, I think that all of us have made it quite clear that the general tenor of Amendments Nos. 15 and 16 is much more what we would want to see.

My reason for that is that I think that there are three things which need to be done when a company is in difficulty. The first is to save the position of the creditors if one possibly can. The second is to make sure that the existing directors, when they are working into trouble, do not inadvertently and expeditiously go into voluntary liquidation so as to escape trouble, but try to fight the battle as well as they possibly can for so long as they possibly can. The third thing is that, if they find somebody expert to assist them in this battle to survive, they can get a decent chap and he is not put off.

I think that all noble Lords who have spoken—and I believe some who have not—would agree that those are the three priorities behind which Clauses 7 to 12 need to be constructed. I do not think that those clauses, as they are at the moment, are constructed with those priorities. There are other priorities of which my noble friend gave us a thought when he spoke earlier. I think that the noble Lord, Lord Benson, when moving Amendment No. 16 was working on the best lines that we have heard so far. I do not believe that any of the amendments are perfect and they will require re-writing.

However, when my noble friend Lord Lucas spoke earlier, he said that this part of the Bill was not cast in stone and that the Government would look at it in the light of this debate. I do not think that that is quite good enough. If he cannot say something more than that—for instance, "I have heard what noble Lords have said and we shall give serious thought to this with the intention of putting down on Report a Government amendment that embodies the thoughts of this debate"—I would recommend to my noble friend Lord Benson (if I may so describe him as I am supporting this amendment with him) to go to a Division on Amendment No. 16. I think that there is enough thought in the Committee to support it. I hope very much that my noble friend the Minister will be able to give us the undertaking that I have indicated.

Earl De La Warr

I should like to support my noble friend Lord Mottistone in what he has just said. The reason is this. I am quite sure that my noble friend Lord Lucas will find himself in considerable difficulty with his department. He has shown himself to be commendably understanding of our point of view; but we cannot possibly run the risk that we withdraw the amendment and he comes up with something which the department has written for him and which is totally inadequate, when we might then find it very difficult under the rules of this House to return to the matter. Therefore, I agree with my noble friend Lord Mottistone that we must ask him to be specific when he comes to reply now.

7 p.m.

Lord Noel-Buxton

I wholeheartedly agree with my noble friends who have just spoken. My difficulty is something of a procedural one, too. I have yet another alternative to Clause 7, which is really its deletion, and an amended Clause 9. But, I suppose strictly speaking that I should only speak on whether Clause 7 shall stand part of the Bill. I do not really want to oppose that—though I do not want the clause to stand part—if my noble friend Lord Lucas would assure me that the Government will satisfy what I understand to be the feeling of the Committee, which is that Clause 7, as drafted, will not do.

Lord Lucas of Chilworth

We have had a very long, deep, serious and to me most instructive debate this evening over what is probably one of the most important parts of the Bill before us. With due respect to the noble Lord, Lord Benson, and others, may I separate the two issues—that of disqualification and that of wrongful trading—because I believe that most of this afternoon or this evening we have concerned ourselves with the aspect of disqualification.

I believe that the noble Lord, Lord Bruce of Donington, will commend me for doing this: I have abandoned my brief. I want to respond as I see the situation not as an accountant or a lawyer but as a businessman. Perhaps at the end of my response I shall say how I see it as a member of the Government.

The first situation which I think I have failed to describe accurately is the description which we are going to attach to a director whose company is compulsorily wound up without his having taken any action other than to sit and watch it happen. We are not saying that he is a criminal. We are not necessarily saying he is grossly incompetent, a cheat, a fraudster. What we are saying is that his company of which he was a director—perhaps one of many—has been wound up; creditors have become tired of hearing the same story; he is unable to meet the company's liabilities; a petition has been made, the court has granted a petition and the official receiver—the state—has had to come to attend to the affairs of the company. There is a prima facie case here that that director was not fit. I believe that this is exactly what the noble and learned Lord, Lord Templeman, said. It is here that we start with a company going "bust" and somebody else having to come in compulsorily to wind it up. The directors have done nothing; they have sat around. As at that moment a director cannot be fit to be a director and there follows an automatic disqualification.

We have set down in the Bill quite specific grounds that enable him to seek relief. I accept that it may be the wish of some members of the Committee to enlarge those grounds of relief. I have no quarrel with that. That would be one of the areas which I should be content to take away with the real intention—if I may address that to my noble friend Lord Mottistone—of meeting the objections that the Committee have made. However, I have to start with this presumption: that because the company has gone into compulsory liquidation there is a prima facie case of the directors not being fit. They have other opportunities in which to demonstrate their fitness. They are set down in the Bill.

The noble and learned Lord, Lord Templeman, drew attention to the appropriate subsection in the Bill. He read it out. May I add to what he said? He did not underline the other alternative which is available to a director who sees his company going into difficulties. This director wants to avoid a liquidation of the company. He certainly wants to avoid a compulsory wind-up. He wants also to avoid rushing headlong into a voluntary wind-up. He thinks there is a slender chance of a rescue. He has the other procedure open to him which is that of applying to the court for an administrator. It may well be that were the court to grant that administration order, that director may be required by the administrator to resign the directorship. Almost undoubtedly that administrator would take over as the chief executive. But if an administrator is appointed the administrator enjoys the benefit of a 12 months' moratorium. The effect of that order is to bring about a complete moratorium on creditors' rights for 12 months.

I think this answers the point made by the noble Lord, Lord Marsh, when he said, "Here is a situation that has arisen. The great problem is to decide what to do about it". Frankly, I agree with him in the way that he saw the problem. I think he said his solution was to talk to the creditors in confidence and seek their support. They may not give him support. He said that it is not always a question of just obtaining money.

Lord Marsh

I hesitate to interrupt the noble Lord and I am grateful to him. That is a misunderstanding. It was certainly not my suggestion that if a company was in serious difficulties you should call all the creditors together and ask what to do next. I think that would be self-fulfilling very rapidly.

Lord Lucas of Chilworth

Perhaps I wrongly inferred that. If the noble Lord will forgive me, I shall certainly read exactly what he said. He said that very frequently what one wants is time. If one does apply for the administrator procedure one receives time: it is a period of 12 months. If there is not a pull-round in 12 months I fear that there is little that anybody could do.

I was upset that the noble Lord, Lord Benson, should find the provisions of Clause 7 offensive. He said, "Here is a disqualification, compulsory and immediate". It is a provisional disqualification. There is a fundamental difference because there are the grounds set out in the Bill for setting it aside. I believe that the procedures, if one applies for those specific forms of relief, are not going to be so time-consuming or, indeed, costly. The concept in this Amendment No. 16 of what directors can and cannot do, I can accept. I acknowledge exactly what the noble Lord said with regard to the individual and the collective responsibility of directors. Again, in the case that he raised, the noble Lord, Lord McIntosh of Haringey took an individual director's view of the state of that company. He advised the company that they were buying machinery with abandon, or words to that effect. He saw trouble looming and took the right and proper action to protect himself. He could, of course, had he wished to stay with the company, have taken other action.

The noble Lord, Lord Seebohm, suggested a provision to the effect that meaningful accounts should be a statutory requirement. That is another point to which I would be happy to give serious consideration. However, I suggest with some seriousness that an opposing lobby may well say, "Oh, dear—yet further burdens being imposed in law on a small company!" The noble and learned Lord, Lord Denning, had, I thought, some sympathy for the general intent of the Government in the Bill. The noble and learned Lord said, however, that he had more sympathy for leaving out the clause altogether because he did not like automaticity. It was wrong, he said, that there should be a presumption of guilt. I find it quite extraordinary that the noble and learned Lord should use that term. We are not presuming a guilt of any kind. I return to my opening remarks. What we are saying is that where there is a prima facie case because the company has collapsed and because the court is seeking a compulsory wind up, there is ground to suppose that there has been an element of unfitness of the director.

I noted what my noble friend Lord Harmar-Nicholls had to say about Amendment No. 16 in regard to Clause 7. There are, however, a number of problems in a technical sense. I do not think that it would help the Committee if I outlined them here. I followed my noble friend Lord Colville of Culross through his earlier remarks about wrongful trading being a separate issue, about fraud being a separate issue, and also about the issues contained in the Companies Act. My noble friend said that disqualification is delayed. He asked me specifically what is the logic in Clause 7 as it stands.

The logic is that if a company fails by virtue of a compulsory wind up, if no steps have been taken either by administrative procedure or by voluntary wind up, or through the individual action that the director himself can take, if the court has had to step in and if the company has failed, there is a degree of unfitness of the directors who, at that time, were directing the company which led to that situation. It would seem to me, therefore, that it would logically follow that it would be in the best interests of the creditors of other companies in which that man may be a director if he were provisionally disqualified. He can then go for relief in the way that I have described. That is a perfectly logical way of dealing with the problem that we currently face.

I have, I think, dealt with the points made by the noble and learned Lord, Lord Templeman, in the earlier part of his remarks. In response to his suggestion that we might delete subsection (5)(c) and rest on subsection (6), I would be most happy to consider that to see where it might lead us elsewhere. He also put suggestions in relation to Clause 11. We can consider those suggestions arising from the stage that we reach in our wider consideration, particularly the subsection (4) element.

7.15 p.m.

As to the test of liability on a director, yes, I agree. The noble and learned Lord, while criticising and commenting adversely on what the Government have put down, has provided us with some real suggestions that I can take away. I hope that my noble friends, Lord Mottistone and Lord Noel-Buxton are not going to take the action that they have partially suggested. If we were to do so, I believe that we would not be able, in your Lordships' House, to do properly that which, on the one hand, we want to do—that is to get this Bill right—and, on the other, to do our duty as a revising chamber, because we should leave, in my view, a great mishmash to go down the corridor.

I gave an assurance in my opening remarks. I have told the Committee how I think we could take advantage of this debate and the suggestions that have been made. I make a further offer to any noble Lord who wishes to talk with me and with my officials on this matter, or indeed with the Parliamentary Under—Secretary in my department, before further drafting is considered. That offer is open. I shall be very pleased if noble Lords take advantage of it. I ask the noble Lord, Lord Bruce, and the noble Lord, Lord Benson, if they will withdraw their amendments on the assurances I have given.

Viscount Caldecote

My noble friend Lord Lucas is very persuasive. I understand the important point that he has made about the prima facie incompetence of a director of an insolvent company. However, with great regret, I do not believe that my noble friend has gone far enough to satisfy those of us who support the amendment moved by the noble Lord, Lord Benson. I have no wish to protect incompetent, irresponsible and idle directors, but I believe that the point is covered adequately in the amendment that I hope the noble Lord, Lord Benson, will press.

It is also right, as other noble Lords have made clear, to encourage and not to deter responsible directors to join and to remain with ailing companies, to do their best to bring those companies through their difficulties and to restore them to health. We have seen this in hundreds of cases in Investors in Industry, where we have investments in thousands of small companies. This is important if the necessary risk taking and innovation are to take place in the economy of this country.

With great regret, I do not think that my noble friend Lord Lucas has given sufficient weight to that very important point. I hope very much that the noble Lord, Lord Benson, will press his amendment. In fact, I encourage him to do so. It is a great improvement, even though it may need further amendment at a later stage, perhaps, to strengthen it or to improve it in other ways.

Lord Bruce of Donington

I have listened to the observations that have been made by so many of your Lordships on the vexed questions raised by Clause 7 and, indeed, my own suggested amendment to it. I must confess that I am a little apprehensive about the absolute certainty with which the noble and learned Lord, Lord Templeman, approached the subject, more particularly in view of the fact that the noble and learned Lord, Lord Denning, was not quite as definite as he.

If we were moving in an area of certainty of legal interpretation—there are very often conflicting views from the Bench, even in the Companies Division, on various interpretations of the law—we should probably be all right. But my experience has been—I have listened in person to many judgments which have been delivered by noble and learned Lords—that matters are not always quite as certain as they appear. In this particular clause we are dealing with what is essentially the best commercial judgment, sometimes intuitive, of people who are not themselves of the precise mind of the law but are administrators or entrepreneurs—people who are accustomed to taking risks, people who have to balance judgments very finely indeed. Sometimes the pros and cons of taking one particular course of action are very closely balanced. So although I think that the noble and learned Lord, Lord Templeman, moved essentially in support of the clause as it stands, I myself remain very considerably in dissent.

Perhaps I may draw your Lordships' Committee's particular attention to one ground for automatic suspension that is in the Bill. It is from line 5 onwards, to line 9. It says: for the purposes of this subsection the court may assume that every person who in accordance with the rules is named in the petition as having been a director … on a particular day was such a director on that day". I cannot help thinking, on reflection, that many of your Lordships will not disagree with the concept of this particular part of the clause as a blackmailer's charter, because as soon as he gets a petition the petitioner may say to the director or the person concerned, "Pay out of your own pocket or I will get you disqualified and put you to the cost of getting yourself disqualified". The person who is named in the petition may not have been a director at all, according to these five lines of subsection (2).

It is true enough that he may ultimately rehabilitate himself, because he will undoubtedly be able to prove in court that he was not in fact a director. But consider all the trouble and hassle that he is being put to in order to establish this. Why should he, for the sake of legal tidiness, be put to this personal endeavour, and why should he have the expense of it? It is all very well to say, "Well, if in 28 days he cannot do this, why shouldn't he be held to be unfit?" You need only two days of being dubbed as provisionally disqualified in the City of London to have your reputation ruined. It takes only 48 hours for that to happen; it does not take 28 days. I think that possibly sometimes one is a little sheltered from the impression and the social and other consequences which would eventuate if a person was provisionally disqualified. People do not always make these fine differences between "provisional" and "disqualified". They say, "It's sufficient; therefore there must be something wrong with this chap".

I do not like the clause. There is one thing I want to make quite clear. I am very much impressed by, and warmly appreciate, the co-operative attitude in this matter of the noble Lord, Lord Lucas of Chilworth. I am bound to say, as one who has had talks with him, sometimes unofficially, over a large number of days, that he has invariably shown himself very sensitive indeed to the various misgivings which have emanated from various parts of your Lordships' Committee. I deeply appreciate that, and I trust that through the remaining stages of the Bill this co-operative attitude, in what is essentially a non-party matter, will continue.

At the appropriate time I shall ask the Committee's permission to withdraw Amendment No. 15, but at the same time, as and when Amendment No. 16 is put to your Lordships, I shall most certainly support it. Bearing in mind the goodwill that has been shown to the noble Lord by not only noble Lords but also the Committee, I think it would be a better way of proceeding if Amendment No. 16 were now incorporated in the Bill, in Committee, and then the noble Lord and the Government, after further consultation, can seek to amend that on Report—in other words, the onus is put the other way around—so that finally we can get at what we want. I sincerely hope that that will commend itself to the noble Lord. In the meantime, I ask the leave of the Committee to withdraw Amendment No. 15.

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees (Lord Murton of Lindisfarne)

We now come to Amendment No. 16. Lord Benson.

Lord Lucas of Chilworth

I wonder whether the noble Lord, Lord Benson, will forgive me—

Lord Ponsonby of Shulbrede

The amendment must first be moved; it has not been moved yet.

Lord Benson moved Amendment No. 16:

[Printed earlier: col. 594.]

The noble Lord said: I beg to move the amendment standing in my name.

Lord Lucas of Chilworth

I apologise to the Committee for being a little premature. I wonder whether the noble Lord, Lord Benson, will allow me just a moment or two. I am grateful to the noble Lord, Lord Bruce of Donington, for the kind remarks he has just made. I forbore during our earlier discussion from spending very much time on Amendment No. 16, tabled by the noble Lord, Lord Benson, and I do not want to do that now. Since I last spoke, and while sitting on the Bench and listening, and considering what has been said, I have been wondering whether I may invite the noble Lord, Lord Benson, to withdraw his amendment on the grounds that not only would I take back those matters of which I have spoken, but I would give an undertaking to take back the entire clause as it stands and see what we can do.

It is quite clear to me that noble Lords have not been persuaded as to the detailed points that I have offered. I believe that, were we to adopt the suggestion of the noble Lord, Lord Bruce of Donington, and amend this, we should be in a very unhappy state, because the amendment by the noble Lord, Lord Benson, goes over two separate issues which I do not believe could be conveniently separated by amending his amendment. The noble Lord will at Report stage have procedurally all the opportunities that he has today if I or my colleagues fail to satisfy him.

Lord Benson

I have listened intently, but I am not quite clear about what the noble Lord, Lord Lucas of Chilworth, wants me to do. Does he wish me not to divide the Committee on the amendment? Sadly, I cannot do that. I listened with immense care and attention to what the noble Lord, Lord Lucas, said and I made it clear to him outside the confines of this House that I did not want to press the matter to a Division if it were possible not to do so. But there was not the ring of conviction in what he said to the Committee which would allow me to feel that he was going to comply with the clear expression of opinion as I hear it from the members of the Committee. Under those conditions I feel that the Committee must divide.

7.31 p.m.

On Question, Whether the said Amendment (No. 16) shall be agreed to?

Their Lordships divided: Contents, 95; Not-Contents, 47.

Airedale, L. Craigmyle, L.
Alexander of Tunis, E. David, B.
Attlee, E. Davidson, V.
Aylesford, E. Dean of Beswick, L.
Benson, L. [Teller.] De La Warr, E.
Boyd-Carpenter, L. Diamond, L.
Brockway, L. Elwyn-Jones, L.
Brooks of Tremorfa, L. Evans of Claughton, L.
Bruce of Donington, L. Foot, L.
Buckinghamshire, E. Gallacher, L.
Caldecote, V. Galpern, L.
Carmichael of Kelvingrove, L. Gisborough, L.
Chelwood, L. Graham of Edmonton, L.
Cledwyn of Penrhos, L. Greenhill of Harrow, L.
Collison, L. Greenway, L.
Colville of Culross, V. Grey, E.
Craigavon, V. Hampton, L.
Hanworth, V. Mountevans, L.
Harmar-Nicholls, L. Munster, E.
Harris of Greenwich, L. Napier and Ettrick, L.
Hayter, L. Noel-Buxton, L.
Henderson of Brompton, L. Northfield, L.
Hooson, L. Ogmore, L.
Houghton of Sowerby, L. Oram, L.
Hylton-Foster, B. Pender, L.
Inglewood, L. Perry of Walton, L.
Ingrow, L. Pitt of Hampstead, L.
Jeger, B. Polwarth, L.
John-Mackie, L. Ponsonby of Shulbrede, L.
Kagan, L. Prys-Davies, L.
Kilbracken, L. Rochester, L.
Kilmarnock, L. Rodney, L.
Kinloss, Ly. Seebohm, L. [Teller.]
Kintore, E. Selkirk, E.
Lauderdale, E. Simon, V.
Lock, L. Stewart of Fulham, L.
McGregor of Durris, L. Stoddart of Swindon, L.
McIntosh of Haringey, L. Strathclyde, L.
McNair, L. Taylor of Gryfe, L.
Mar, C. Teynham, L.
Marsh, L. Underhill, L.
Merrivale, L. Vaux of Harrowden, L.
Meston, L. Whaddon, L.
Milne, L. White, B.
Milner of Leeds, L. Wilson of Langside, L.
Monson, L. Winstanley, L.
Montgomery of Alamein, V. Winterbottom, L.
Mottistone, L.
Auckland, L. Lothian, M.
Avon, E. Lucas of Chilworth, L.
Bauer, L. Margadale, L.
Belstead, L. Marley, L.
Brabazon of Tara, L. Mersey, V.
Brookeborough, V. Middleton, L.
Broxbourne, L. Molson, L.
Caithness, E. Morris, L.
Cameron of Lochbroom, L. Murton of Lindisfarne, L.
Campbell of Alloway, L. Orkney, E.
Coleraine, L. Portland, D.
Denham, L. [Teller.] Renton, L.
Elton, L. Rochdale, V.
Faithfull, B. St. Aldwyn, E.
Ferrier, L. Skelmersdale, L.
Glanusk, L. Stodart of Leaston, L.
Gray of Contin, L. Templeman, L.
Hailsham of Saint Marylebone, L. Teviot, L.
Tranmire, L.
Henley, L. Trefgarne, L.
Holderness, L. Trumpington, B.
Kilmany, L. Ullswater, V.
Lane-Fox, B. Vickers, B.
Long, V. [Teller.] Whitelaw, V.

Resolved in the affirmative, and amendment agreed to accordingly.

Lord Skelmersdale

I think that this might be an appropriate moment to break. I beg to move that the House do now resume.

Moved, That the House do now resume.—(Lord Skelmersdale.)

Lord Ponsonby of Shulbrede

Before the House resumes, can the noble Lord perhaps give an indication that we shall not return to this business before 8.40 p.m.?

Lord Denham

Eight-forty p.m. is absolutely right.

On Question, Motion agreed to.

House resumed.