§ 7.45 p.m.
§ Lord Lucas of Chilworth
My Lords, I beg to move that the House do now resolve itself into a Committee upon the Bill in respect of Clauses 7 to 14 and paragraphs 1 to 4 of Schedule 4.
§ Moved, That the House do now resolve itself into Committee.—(Lord Lucas of Chilworth.)
§ On Question, Motion agreed to.
§ House in Committee accordingly.
§ [The LORD RENTON in the Chair.]
§ Clause 7 [Disqualification and liability of directors]:
§ On Question, Whether Clause 7 shall stand part of the Bill?
§ Lord Lucas of Chilworth
In moving the proposition standing in my name on the Marshalled List—that of having given notice of my intention to oppose the Question that Clause 7 stand part of the Bill—I think the Committee will have realised from all the amendments tabled in my name that the Government have decided not to pursue their proposals to disqualify automatically the directors of companies which are wound up compulsorily by the court, and it follows therefore that they intend no longer to seek to make a distinction between voluntary and compulsory liquidation.
Having decided not to bring in what I can call the old Clause 7, I should like to explain to the Committee why the Government feel that the Bill should not proceed with the amended Clause 7 which was carried on 29th January. Before doing so, it is only right that I should pay tribute to the contribution that, by virtue of his proposals, the noble Lord, Lord Benson, sought to make to help the Government achieve their objectives in this part of the Bill, and I so do. I should also like to thank other noble Lords who have contributed considerably to our consideration of this chapter of the Bill since the end of January.
It is my understanding that Lord Benson's Clause 7, as standing in the Bill this evening, is intended also to replace the provisions of Clauses 8 to 12. It contains a number of major defects and would have been less effective than the Government's original proposals for both disqualification of directors and the imposition of personal liability upon them. An undesirable effect of this concentration is that the clause provides for a single order which would both disqualify a person and, at one and the same time, declare him to be personally liable for the company's debts. We believe that this is not only wrong in principle, but could have the effect of deterring the court from making an order in circumstances where to impose both a period of disqualification and personal liability would be somewhat draconian. The Government do not wish 712 the courts to be inhibited in considering applications for disqualification by reactions of this kind.
Clause 7 as it stands in the Bill provides in subsection (2)(a) for the directors to be individually and collectively responsible for the management of the company. This itself could be taken to be altering the existing law on the responsibilities of directors. In the first instance it would seem to fix a director's personal liability for losses suffered by the creditors of the company solely because of his membership of the board. That is not the position today and I am suggesting to the Committee that the Insolvency Bill is not the right Bill in which to make a change which effects radical alteration in the legal structure of companies. Subsection (3) allows application for disqualification orders and for declarations of personal liability to be made by 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. For reasons which I shall elaborate when we are dealing with Clauses 9 and 11 the Government believe that applications for disqualification orders should only be made by, or on the directions of, the Secretary of State and that applications for declarations of personal liability should be made only by the liquidator. I suggest that the result could be one of duplication of effort in the same case by the Office of Fair Trading, the Official Receiver, or the liquidator or quite possibly a number of creditors, all seeking to have the same director disqualified or made personally liable. I need hardly add that the court's time would also be wasted in arranging co-ordination and consolidation of several proceedings against the director.
The proper course for a creditor—or for the Director-General of Fair Trading, if he was so minded—is to seek to persuade the Secretary of State, the Official Receiver or the liquidator that an application should be made. I want to make the point that the Bill is not and never was intended to be used for a witch hunt by anybody seeking to use the slightest transgression by a director to have him disqualified or made personally liable for the debts of a company. The true purpose of this part of the Bill is to encourage directors to take a proper interest in the financial affairs of their companies and to make personally liable those who fail to do so and to make it easier for the courts to disqualify those whose conduct as directors has shown them to be unfit to be concerned in the management of a company.
Subsection (4) of this amended Clause 7 provides that applications must be made not later than one year after the relevant date. The whole thrust of our proposals is that applications for disqualification should be made as speedily as possible. Most applications should be made within 12 months, but I suggest that it would be unfortunate if, because of the imposition of a very tight timetable, a rogue was allowed to slip through the net. Subsection (5) of the amended clause of the noble Lord, Lord Benson, provides that this will only apply to directors or those who act as directors who were in office within one year before the commencement of the liquidation. It will not therefore catch shadow directors who, by definition, do not act as directors but who effectively control the conduct of the company. It will be open to 713 abuse by those who resign office and manage successfully to keep the company out of liquidation for 12 months.
Subsection (6) creates an undesirable combination of civil and criminal features which in our view should be considered separately and it makes no distinction between the grounds for disqualification and those for personal liability. Disqualification is intended to protect the public from the future activities of an individual while personal liability provisions are designed to give some financial recompense to creditors who have suffered from that individual's past action.
Subsection (6)(a) is covered by existing legislation—Section 630 of the Companies Act 1985, formerly Section 332 of the 1948 Companies Act. The existing law goes further as regards the persons who are subject to its provisions. I should like to read to your Lordships what the Cork Report has to say on the subject of Section 332. I am quoting the Cork Report, page 398, paragraph 1776:Section 332 not only creates a civil and personal liability, it also creates a criminal offence. The constituent elements of the two are identical. As a result the courts have consistently refused to entertain a claim to civil liability in the absence of dishonesty and, moreover, have insisted upon a strict standard of proof. It is the general experience of those concerned with the administration of the affairs of insolvent companies that the difficulty of establishing dishonesty has deterred the issue of proceedings in many cases where a strong case has existed for recovering compensation from the directors or others involved".It was for this reason that the Cork Report recommended that the whole of Section 332 of the 1948 Act should be repealed so far as it provides a civil remedy, and that it should be replaced by an entirely new section under which civil personal liability could arise first without proof of fraud or dishonesty; and, secondly, without requiring the criminal standard of proof. I think those arguments still hold good and that the courts would have great difficulty in making orders under this subsection. I should add that the consolidation of past company legislation in the Companies Act 1985 separates the civil and criminal elements of the old Section 332 by enacting the criminal provisions on its own as Section 458. Section 630 of the 1985 Act (formerly Section 332 of the 1948 Act) deals solely with the civil side of the matter. Taken with Clause 11 of this Bill on wrongful trading the new arrangement for fraudulent trading goes, in my view, a long way to enabling the courts to deal effectively with all aspects of directors' mismanagement of their companies' affairs where the appropriate penalty is a declaration of personal liability.
Subsection (6)(c) of the noble Lord's clause would, by virtue of subsections 3(a) and (b) allow the courts to make both a disqualification order and a declaration of personal liability against the directors if the company had failed to present management accounts or financial statements at regular intervals. I would suggest that these requirements introduce a new concept of obligatory management accounts, a new departure, raising new problems. I understand that the noble Lord, Lord Benson, has some strong feelings with regard to this obligation for the provision of management accounts. I assure the Committee that, having already suggested that this new concept is not 714 perhaps entirely desirable, I would want to hear exactly what noble Lords have to say on this matter.
Returning to my suggestion that this concept of obligatory management accounts would raise new problems, I am suggesting that perhaps the courts, for example, may have to be given guidance with which to determine what accounting interval was appropriate to the business. Again, I do not think the Insolvency Bill is the right place to effect this kind of change. It might also be considered inappropriate for the court, in the absence of any other criteria, to inflict two penalties on a director for what might be no more than a technical offence.
A further weakness inherent in this clause is in its imposition of individual and collective responsibility of the directors for the management of the company, and indeed the manner in which its business is conducted. In the Government's view, there is a danger that by introducing collective responsibility the court may decide that, if it is not satisfied that it can make orders against all the board members, it will not be able to make orders against any of them. This, I suggest, must be particularly the case where allegations of fraud or false pretences are concerned. Again, the imposition of over-harsh consequences may deter the court from taking any action at all.
As I said earlier, it is my understanding that the noble Lord's Clause 7 is intended also to replace the provisions of Clauses 8 to 12. I would now like, if I may, to turn to the effects of Clause 7 taken in conjunction with the other amendments to Chapter 1 of Part II which the noble Lord originally tabled. His proposed amendment to Clause 8 would have provided that the costs of successful applications would have to be borne by the Crown, and not only borne by the Crown but the Crown itself would be unable to recover its costs until all the creditors had been paid in full and all liabilities discharged. An effect of adopting such an amendment would be, for example, that if a company had a deficiency of £50,000 and the courts assessment of the wrongful trading liability was only £10,000 the creditors would never be paid in full. Therefore, the Crown would not be able to recover its costs. Surely this is a burden on the taxpayer which cannot be acceptable to the Committee.
The noble Lord, Lord Benson, and my noble friend Lord Mottistone refer to this element of the Bill in their Amendment 9. We may therefore have to return to it a little later this evening. As to the proposed opposition to Clause 9 of the Bill—when the noble Lord, Lord Benson, gave notice of his intention to oppose that Clause 9 stand part of the Bill—I am suggesting that this would have further weakened the Bill, because it would have meant that applications for disqualification orders against unfit directors would not come within the ambit of Clause 7 as it now stands. Section 300 of the Companies Act 1985 would stand unamended and disqualification of unfit directors would only be capable of being made after those individuals had been involved in two insolvent liquidations. The Government, of course, have proposed that such an application should be possible 715 after involvement in only one insolvent liquidation and this follows the Cork recommendation.
Finally, by opposing that Clause 10 stand part of the Bill, the noble Lord would have prevented the Secretary of State from being able to make an application for disqualification against an unfit person based on the report of an inspector. Paragraph 1819 on page 410 of the report is quite specific in this respect, in that the Cork recommendation was designed to enable the court to disqualify a person whose conduct made him unfit to be involved in the management of a company, but whose company is not in liquidation.
I am, of course, aware that the Committee was persuaded to adopt the amended Clause 7 because it was believed that the Government's automatic disqualification provisions were unjust. Having dealt with this element of automaticity in what I hope is a firm and determined manner, and having, I hope, demonstrated some of the weaknesses of Clause 7 as it is now drafted, I shall ask your Lordships to accept that Clause 7 should not stand part of the Bill but the Committee should rely on the amended Clauses 9 and 11 to deal with the disqualification and the personal liability of directors.
We have agreed the general principle underlying the disqualification of directors who are unfit to continue in the management and direction of companies. I do not believe there is any disagreement from the noble Lord, Lord Benson. I am sorry that I have had to explain to the Committee at some length why we do not feel that the noble Lord's new clause will take effect on those points where he wishes them to. I beg to move that the clause does not stand part of the Bill.
§ Lord Denning
I, too, would oppose the present Clause 7 being part of the Bill. When we had a discussion beforehand there were all the objections which we raised to the automatic disqualification and indeed to the burden of proof as it was originally. For that reason, I spoke and voted in favour of the present Clause 7. But now, having seen what has been proposed by my noble friend Lord Lucas of Chilworth in the subsequent sections, it seems to me that we can properly leave out Clause 7 because it has tried to bring everything together—wrongful trading and disqualification of directors all together in one clause.
It was a most courageous effort but it was contrary to the system which the Cork Committee recommended. They had two separate chapters, Chapter 44 on wrongful trading and Chapter 45 on delinquent directors. It is quite right that the two subject matters should be dealt with differently.
So far as delinquent directors are concerned, in principle the new clause, or the clause which will be in Clause 9 as amended, will, it seems to me, carry out a principal recommendation of the Cork Committee, namely, that when a director has been shown and proved to be unfit to be a director, there should be at all events a mandatory disqualification for two years. If he is shown to be unfit, let there be a mandatory disqualification for two years. That is the recommendation of the Cork Committee which I gather is now in the amended Clause 9 as it would be. That is on the question of disqualification. Other disqualifications can be discretionary.
716 But the other important clause which is in Clause 11 is aimed to deal with wrongful trading. If I may say so, I have read it through with great interest, and all the suggestions about the amendment. But, having considered them all, I think that the draft clause which is being proposed, not only by the Cork Committee, is quite the best that could be devised for wrongful trading. That is an amendment that has been suggested by my noble friend Lord Bruce of Donington.
So on matters of principle, I would agree that the present Clause 7 should be left out and replaced by, in substance, the new clause suggested by the Government, which indeed in principle corresponds largely with the recommendations of the Cork Committee, with this one variation. With this one variation. I would support the amendment suggested by my noble friend Lord Bruce of Donington. In other words, in principle I would support what my noble friend Lord Lucas of Chilworth is suggesting.
§ Lord Mottistone
In moving that we leave out Clause 7 my noble friend has covered a lot of the ground which will come up again in my Amendments Nos. 2 and 4, to which I propose to speak when they are reached, taking into account what my noble friend the Minister has already said in relation to several of the amendments in so far as I am able to remember it. What I would like to do at this stage, and not, therefore, repeat, is to congratulate the Government generally, and my noble friend Lord Lucas of Chilworth in particular, on the skill with which he has been able to reflect the main thrust of what we were seeking to achieve with Amendment No. 7, which we won so resoundingly at the Committee stage earlier. I think that my noble friend has done a jolly good job in achieving a very good balance to produce on the whole a solution which meets what we were after. I should like to put that on the record.
As I shall explain later, my Amendments Nos. 2, 4 and 9 are picking up the loose pieces, as they appear to me, out of Clause 7 which did not seem to me to be reflected in the Bill. I hope that we shall perhaps briefly be able to debate those loose pieces when we come to the relevant amendments.
Lord Bruce of Donington
We on this side of the Committee are grateful to the noble Lord for having explained so lucidly the reasons why Her Majesty's Government decided to abandon the very firm stance that they took at the outset on the automatic disqualification of directors of companies which go into compulsory liquidation. It is quite true that this change has been brought about by the acceptance by your Lordships of an amendment which was put forward by the noble Lord, Lord Benson—an amendment which the noble Lord, Lord Lucas of Chilworth, has subjected to a pretty detailed criticism in the course of his opening remarks.
I should prefer to think that the reason why Her Majesty's Government decided that automatic disqualification of directors was wrong is that they recognised that your Lordships, in supporting the amendment moved by the noble Lord, Lord Benson, at Clause 7 of the existing Bill, represented your 717 Lordships' Committee at its best as a revising Chamber. As a matter of record, it should be stated that some 46 of your Lordships belonging to the Conservative Party, together with one Cross-Bencher, voted in favour of maintaining this automatic disqualification. On the other hand, some 28 noble Lords belonging to my party, with 12 Liberal Peers, 11 SDP Peers and no fewer than 16 Members of your Lordships' House who sit on the Cross-Benches, together with 28 noble Lords who are members of the Conservative Party voted against it. The vote was completely across party divisions. I think that does reflect some credit on your Lordships' House and the way it goes about its business.
On going through the new clauses and, indeed, the complete change of direction of the Government on this matter, it is almost as though the new clauses are a new White Paper. We, for our part, as will be observed from today's Marshalled List, do not seek at this stage to make any amendments to the amendments put forward by the noble Lord, Lord Lucas of Chilworth. We reserve that right, and we must reserve that right, for the Report stage.
I have to inform your Lordships that the Report stage of this Bill is going to be something of a marathon. We are probably approaching the early stages of a marathon tonight; but when it comes to the Report stage, in the words of President Reagan, "You aint seen nuthin' yet". So far, at Report stage the Government themselves are to table over 200 amendments to the entire Bill, of which I have been able to trace some 159. We make no particular complaint about that. I am quite sure that it must be taken, in part at any rate, as the response of the Department of Trade and Industry to the questions that were raised by my noble friend Lord Mishcon in the earlier stages of the Bill.
According to a letter from the Department of Trade and Industry to my noble friend dated the 15th March, there are probably going to be amendments to Clauses 15, 16, 17, 18, 21, 22, 24, 30, perhaps 32, 33, 34, 35, 54, 67, 69, 72, 73 and 74, and also to the odd schedule here and there. This is following the remarks and the inquiries that were made by my noble friend at the Committee stage. But even at this re-committal stage, without wishing to detain your Lordships for longer than is necessary I do not think we should subject ourselves to undue haste in discussing very serious matters purely because the usual channels, as we have become accustomed to over the last fortnight, have got their times and tables all wrong. This should not deter us from examining all these matters with the same degree of calm inquiry as we exercised in the earlier stages of the Committee.
On the immediate issue, which is the question of being invited to express our views as to whether the clause now in the Bill should stand part, I am bound to say that we on these Benches entirely support her Majesty's Government. There will be no dispute among us on that. We on this side of the Committee took objection to the original clause on the ground that it put the onus of proof in a way which was repugnant to the whole tradition of British justice; namely, that a person was put into the position of having to prove 718 himself innocent, as distinct from the court having to determine whether his accusers had made out a case. I sincerely hope that if on any future occasion Her Majesty's Government try to introduce that principle in spheres different from that of insolvency or the Companies Acts—for example, in regard to trade union law—members of the party opposite, whom we have supported on this occasion in regard to insolvency, will feel themselves equally constrained, as a matter of honour, to stand on the same principle in different circumstances.
I must say, with all due respect, to the noble Lord, Lord Benson, who is infinitely more senior in the profession of accountancy than I am, that I concur with many of the strictures in regard to the amendment. The amendment tried to do too much all at one time, and that is quite obvious with the whole construction of Clause 7 itself which we are now invited to eliminate from the Bill.
I entirely agree that the concept as in the existing Clause 7 relating to management accounts is something in regard to which the judges of this country would have a field day. They would ask: "What are management accounts? How are they defined?" It would be a field day for the lawyers and we, at any rate in the modern accountancy profession, understand that very well indeed. Far better it would have been to re-emphasise the provisions already enshrined in Sections 221 and 222 of the consolidated Companies Act 1985, which relate to the keeping of proper books of account. This particular part of the present Clause 7 deals with the superstructure, represented by the management accounts, where the real sin and, in my view, the real crime occurs when a director does not take steps to ensure that the proper primary books of account, as defined in Sections 221 and 222 of the consolidated Act, are kept.
We realise that the elimination of Clause 7 as it now stands will result in an increase in Government expenditure, or rather it will result in there being less savings than there otherwise would have been. In case your Lordships are sensitive about matters of Government expenditure, perhaps I ought to remind you that the insolvency service of the DTI last year made a profit of £2,535,000. So there is a little scope here, despite the fact that the clause is to be abolished and that in succeeding clauses a much heavier onus is to be placed on the Government and on those who act on the Government's behalf.
We supported the amendment of the noble Lord, Lord Benson, and we supported the original Clause 7, not because we agreed with every detail of it, but because it was the one avenue open to us to bring pressure upon the Government to avoid automatic disqualification. That was the sole reason for it. We applaud the Government's present decision and we shall proceed in a constructive way to deal with the clauses set down hereafter by the noble Lord, relating to other matters.
§ Lord Meston
There were, indeed, many welcome features in what the noble Lord, Lord Lucas, had to say; but, having listened to the noble Lord, Lord Bruce, I wonder whether we should have brought our running shoes or our sleeping bags this evening. Your Lordships may well have been bewildered by the 719 numerous versions of the different parts of this Bill. He started with the authorised version in the Bill as originally printed. Then we were tempted with several revised versions and, indeed, we succumbed to the temptation in the amendment of the noble Lord, Lord Benson. We would not have got into this confusion had we stuck with the original text, by which I mean the recommendations of the Cork Committee.
On Second Reading I ventured to say that there was a heavy burden on the Government to justify any departures from the recommendations of the Cork Committee. If ever there was an area where Parliament, in producing reforming legislation, needed the guidance of experts, this was it; and, indeed, Parliament has had the guidance of experts—the members of this Committee, people who were truly experts, who defined the problems and produced the answers. The trouble was that the Government selected, tinkered with and, to some extent, distorted the recommendations of the Cork Committee, which otherwise were coherent, comprehensive and simple. And the Government really paid the price.
The whole process of this Bill has really called into question our machinery of law reform. The Government alternatives hitherto and, indeed, much of the rest of the Bill are prolix and complex. We should really be ashamed of producing a reforming statute of such complexity. How can ordinary people be expected to respect law they cannot understand? Even lawyers need the assistance of a wet towel and several stiff lemonades to understand much of this Bill. It—
§ Lord Mottistone
If I may intervene, it seems to me inappropriate, on Recommitment, to have a Second Reading speech.
§ Lord Meston
I take the noble Lord's point and I shall say no more, other than to add that if we are not to have automatic disqualification—and one can understand the arguments—it is all the more important that we should widen the discretion for disqualification and strengthen the provisions concerned with wrongful trading. I have listened with great interest to the proposals put by the noble Lord, Lord Lucas, and I await with interest the details of them.
§ Lord Noel-Buxton
I should like to record my thanks to the Government and to my noble friend Lord Lucas for what they have done with regard to Clauses 7, 8 and 9. I am particularly pleased because the proposals seem to reflect what I would have proposed by virtue of my amendments to Clause 9, which I put down on the last occasion and then, in the circumstances, withdrew.
§ Clause 7 negatived.
§ Clause 8 [Duty of court to disqualify in certain cases directors of companies in liquidation]:
§ On Question, Whether Clause 8 shall stand part of the Bill?
§ Lord Lucas of Chilworth
My Lords, this clause now serves no purpose. Its original purpose, of course, was 720 to enable the court to disqualify company directors whose names had not been included in the winding-up petition and who thus had escaped having a disqualification order made against them under the provisions of the original Clause 7. As a result of your Lordships' decision to remove Clause 7, Clause 8 now not only serves no useful purpose, but there are no circumstances in which it could have any effect, beneficial or otherwise.
Lord Bruce of Donington
I should like to support what the noble Lord said in regard to the clause. It is quite clear that Clause 8 now would serve no useful purpose. As the noble Lord said in his remarks earlier, the existing provisions that are proposed and which will be dealt with when we come to Clause 9 provide for an abolition of the distinction between compulsory and voluntary liquidation. I should like to say how very welcome it was to hear the Cork Report cited by the noble Lord—almost, if I may say so, for the first time. I sincerely hope that the noble Lord will bear that in mind when we come to discuss later amendments closely related to the Cork Report.
§ Clause 8 negatived.
§ Clause 9 [Duty of court to disqualify unfit directors of companies in liquidation]:
§ 8.30 p.m.
Lord Lucas of Chilworth moved Amendment No. 1:
Page 7, leave out lines 4 to 15 and insert—
The noble Lord said: With the leave of the Committee, I should like to speak to Amendments Nos. 3, 5, 6, 7 and 8 in moving Amendment No. 1, which stands in my name on the Marshalled List.
Amendment No. 3: Page 7, line 19. leave out subsections (3) and (4) and insert—
("(3) If it appears to he Secretary of State that it is expedient in the public interest that a disqualification order under this section should be made against any person, an application for the making of such an order against that person may be made—
(4) The Secretary of State or the official receiver may require the liquidator or former liquidator of a company—
Amendment No. 5: Page 7, line 37, leave out ("official receiver or as the case may be, the Secretary of State") and insert ("Secretary of State or, as the case may be, the official receiver").
Amendment No. 6: Page 7, line 42, leave out ("or shadow director").
Amendment No. 7: Page 8, line 2, leave out ("or shadow director").
Amendment No. 8: Page 8, line 6, at end insert—
("(7) In this section and sections 10 and 11 below "director" includes a shadow director within the meaning given by section 741(2) of the 1985 Act.
§ In carrying out their reappraisal of policy on the disqualification of directors, as we undertook to do when these clauses were earlier considered in January, the Government took into account not only the views expressed so strongly, and of which we have been reminded by the noble Lord, Lord Bruce of Donington, this evening, but also the views of those who have commented upon the Bill since it was published in December last year. We also re-examined the views of those who responded to the invitation to comment on the White Paper which was published in February last year.
§ First, we decided, as I have indicated, not to pursue the previous policy of automatic disqualification of directors who allow their companies to go into compulsory liquidation. It became apparent that the making of a disqualification order against a person is widely considered to be a criminal conviction, which in law it is not. The only criminal offence is in fact for a person to take part in the management of a company when a disqualification order is in force against that person. Nevertheless, feeling was strongly against any mechanism whereby a director had to justify his not being disqualified simply because of involvement in an insolvent liquidation.
§ It is, nevertheless, very important for the efficient functioning of the economy in this country that those whose past conduct is judged to make them unfit to be concerned in the management of a company are prevented from doing so as speedily as possible. This will avoid unnecessary loss being suffered by the creditors of further companies which might be mismanaged by these individuals.
§ Bearing in mind the importance of identifying and proceeding against the unfit director, the Government took the view that an application should be made in every case where the fitness of a director was in question, and that all relevant factors should be capable of being taken into account in arriving at the decision to make an application, and the Government have adopted the principle of considering each case on its merits.
§ This is not a new concept. Since Section 9 of the 1976 Insolvency Act—which is now Section 300 of the 1985 consolidating Act—came into force, it has been possible to disqualify a person on the grounds of unfit conduct, but at present a person needs to have been involved in two insolvent liquidations before an application can be made. Our proposals have also taken up the helpful amendment to Clause 9, which was tabled by my noble friend Lord Errol of Hale and by noble friend Lord Noel-Buxton, and that tabled by the noble Lord, Lord Meston; namely, that the liquidator or the Official Receiver should have a duty to report on a director's conduct to the Secretary of 722 State. What I said just now has some bearing on my noble friend Lord Mottistone's Amendments Nos. 2 and 4, in which he is joined by the noble Lord, Lord Benson, and possibly—though I hope not—they may wish to discuss further details when we reach those amendments. I want to repeat that this concept is not new. It has been possible to disqualify a person on the grounds of unfit conduct certainly since as long ago as 1976 under the Insolvency Act of that year.
§ This clause is designed to give the Secretary of State, whose function it is to consider the fitness of directors, the discretion to choose where resources should be deployed to maximum effect. It is for this reason that applications under this clause will be made only when the Secretary of State considers that it is expedient in the public interest to do so. Under this amendment, the Secretary of State, will either make the application himself or, if the person against whom the order is being sought is a director of a company which has gone into compulsory liquidation, he may direct the Official Receiver to make the application on his behalf.
§ I hope the Committee will note that only the Secretary of State can bring or direct applications under the clause as amended. We have done this particularly to avoid the possibility of the threat of an application for the disqualificaion of a director being used by a creditor or a liquidator to try to improve their bargaining position when seeking to recover moneys from him. I very much regret that my noble friend Lord Peyton is not in his place this evening. This is a point which he and a number of other noble Lords have raised in discussions over these last many weeks, and I should like to draw my noble friend's attention to what I have just said.
§ We fully recognise the importance of recovering moneys for creditors who have suffered from the activities of directors and Clause 11 is our provision for this aspect of insolvency. The prohibition of people acting as directors is, we consider, a matter for a body charged with the public interest. The two different functions are governed by different considerations. First, we do not wish to confer the public function on those who have no public finance with which to exercise it. Secondly, we do not wish to provide the means to use this essentially public function in support of private interests, as this would distort that function, reduce its effectiveness and place unfair burdens on directors. We should not under-estimate the role—sad though it is for me to say this—that malice and personal animosity might play in such matters.
§ Even if the court was to be required to give leave before such creditor or liquidator applications could be proceeded with, it would in our view place an unnecessary burden on the courts and add to an already overcrowded court list. In short, Clause 9, as amended, seeks to disqualify persons who in the general public interest should be disqualified and the task of implementing it should be carried out by a public body.
§ We recognise of course that liquidators become aware of conduct by a director which they consider makes him unfit to take part in the management of a limited company. Since Section 9 of the Insolvency Act 1976, to which I have already referred, came into force, it has been possible for voluntary liquidators to 723 report suspected unfit conduct to the Secretary of State, to enable him to decide whether or not to make an application for a disqualification order. In practice, very few liquidators have chosen to make their views known to the Secretary of State. Whether this was because of doubts about what was required or perhaps a reluctance to become involved in law and order issues, I do not know.
§ Whatever the reason, we propose to remedy this situation. If the Committee accepts this amendment, a voluntary liquidator and the Official Receiver will have a duty to report to the Secretary of State when they are satisfied that a person's conduct as a director of a company makes him unfit to be concerned in the management of the company. This duty to report to the Secretary of State is quite distinct from the voluntary liquidator's existing duty under Section 632 of the 1985 Act, which is a duty to report to the prosecuting authority, if it appears to him that any past or present officer of a company has been guilty of an offence in relation to the company for which he is criminally liable. In making his report, the liquidator or the Official Receiver will be able to take into consideration not only the person's conduct in the latest company, but also his conduct in any other company or companies. Such a provision will make it easier for applications to be made against the directors of so-called phoenix companies. I should add that the Government will ensure that the licensing arrangements for insolvency practitioners will contain provision for securing adequate reporting by liquidators. It is my understanding that practitioners are quite prepared to accept this new duty.
§ The Committee will note that for the avoidance of doubt subsection (7) of the amendment specifies the persons who will be considered to be directors of a company within the context of this clause and Clauses 10 and 11. It applies the definition of directors and shadow directors contained within Section 741 of the Companies Act 1985. Subsection (8) provides the definition of insolvent liquidation both for the purposes of this clause and for Clause 11.
§ I explained to the Committee earlier in this debate that we shall have a strong armoury of provisions to prevent undesirable individuals from taking part in the management of companies. These taken together with the ability to make directors personally liable for wrongful trading will in our view encourage directors to take a much closer interest in the affairs of their companies, which will bring benefits not only for creditors but for the trading community in general. I beg to move.
Lord Bruce of Donington
I am happy to inform the noble Lord that we on these Benches are in agreement with the general thrust of the clause that he proposes to amend. We substantially agree with the whole thrust of his amendments but of course there are still a number of matters that require elucidation. Depending on the answers that the noble Lord is able to provide this evening, it may well be that the process of putting down amendments at Report stage can be simplified; that may be so, the more informative the noble Lord is able to be now.
724 In referring to Amendment No. 1, by which we are invited, at page 7, to leave out lines 4 to 15 and insert two new subsections, may I draw the attention of the noble Lord and that of the Committee to paragraph (b) and in particular the word "conduct". Is the "conduct" referred to before the commencement of the winding up in question, or after, or both? Are the words "any other company", which are also in paragraph (b), to be interpreted necessarily as an associated company or an insolvent company? We should like a little clarification on that point if the noble Lord is able to give it.
I pass now to the word "unfit" which appears in the penultimate line of the new paragraph (b) which appears in the amendment. The noble Lord has informed the House that the word "unfit" has already appeared in the Act of 1976. I do not know whether he is able to say how many prosecutions have taken place under that section, but I would hazard a guess that there have not been very many and that they could most probably be numbered on the fingers of one hand.
The term "unfit" is very wide indeed. I am afraid that I cannot speak as a member of the learned legal profession and this evening, unfortunately, we are denied for the moment the presence of the noble and learned Lord, Lord Denning. But I would hazard a guess again that the term "unfit" is one which would provide lawyers with a very substantial living over a very large number of hearing days, complete with refreshers, and that the learned judge on the bench would probably apply the normal cautious test, which is quite proper in our law, of not putting a person in peril unless he is completely satisfied and would hesitate unless abundant evidence were produced to show beyond all reasonable doubt that unfitness was the correct way to describe the conduct of the directors concerned.
I am bound to pay some tribute to the noble Lords, Lord Mottistone and Lord Benson, for having attempted a solution in their amendment, because it is a matter for protection of individual directors. But it is absolutely essential in our view for there to be a kind of "highway code", to put it in the loosest possible term but one which is readily understandable, which the court should take into account in determining whether a director is unfit. There has to be a code of some kind. It is needed for a liquidator in making his initial appraisal. It is necessary from the point of view of the Secretary of State in deciding whether to apply or not. It is also necessary for the courts in order that consistent criteria are applied by the courts in cases that come before them.
The code, or the qualifications themselves which help to illuminate the real construction of the term "unfit", can be reproduced substantially, in the Act itself. This is of course what the noble Lords, Lord Mottistone and Lord Benson, are seeking to do in their amendment. Or, alternatively, it can be in a statutory instrument. Perhaps if it were incorporated in a statutory instrument it would have the merit that, as commercial practices change and as we advance to the new dawn, which still mysteriously seems to elude us, 725 it would make for a certain degree of flexibility, particularly in times of changing commercial standards. Or, alternatively, it could be incorporated in the rules.
Your Lordships' Committee is well aware that in the course of this Bill the rules appear on many occasions. They are very mysterious rules. We have not been informed of them yet; no one has given us a clue as to what the rules are going to be; and we wait in eager anticipation for when the Government are prepared to make them public. But if there are to be rules it might be considered as a third and less preferable alternative that this particular code could be incorporated in the rules.
Whatever mechanism is used, this code should provide for a presumption of unfitness together with a right of rebuttal by the director if he can give a reasonable excuse, in stated cases—for example, if a finding of wrongful trading has been made against him in a civil or commercial court. That should be the first consideration. The second is if he has failed to keep proper books of account. I most certainly invite the support of the noble Lord, Lord Benson, in this. It has been the stand of the Institute of Chartered Accountants, and indeed of most of the professional bodies that are accredited for auditing purposes to use their best endeavours to insist that all companies keep proper primary books of account. If a director of a company fails to comply—I believe it came under the old Section 47 of the 1948 Act; it is Section 221 or 225 of the new consolidated Act—has failed to keep proper books of account, that should be one other factor to be taken into account.
We also think that if he has been a director of three or more companies which have failed in the preceding five years, that ought to be taken into account as well, as should any conviction for any serious offence under the Companies Act 1985. Those should be some of the criteria. There may be more. There is time between now and Report stage to determine what the criteria should be. These are very serious matters because the liquidator, the Department of Trade and the courts all should have some guidance and a code on which they can determine unfitness.
I now turn to the position of the liquidators under this clause. In the course of a press interview which he gave which was published on 14th March last, the noble Lord's right honourable friend made it quite clear that though compulsory automatic disqualification had been abandoned, and though he himself had to take on responsibilities as Secretary of State from which the automatic disqualification part of the Bill would have exempted him, he proposed to place a far greater responsibility on liquidators. This is what he was reported in the Financial Times on 15th March to have said:The effectiveness of the new proposals rests on the liquidators carrying out their duty to report to the DTI. Mr. Fletcher warned that in cases where the DTI receives complaints about directors and finds that the liquidator has failed to report 'we will go to the licensing body of the liquidator and look to it to discipline him'.Those seem to me to be quite unexceptionable comments. As a professional man myself, I fully accept, in common with others, the implications of them.
The noble Lord has, quite correctly, in assuming a greater burden himself, made it clear that the licensed 726 insolvency practitioners also now have to toe the line in the same way that the Secretary of State must do. That being the case, and with the undoubted necessity, as the noble Lord has pointed out, for dealing with less scrupulous liquidators and the phoenix companies, there are some requirements for the protection of the liquidators which I trust the noble Lord will not find unreasonable.
There should be a provision saying that any liquidator, like the Official Receiver, has absolute privilege in connection with his report to the Secretary of State on the fitness or unfitness of directors. I need not elaborate on that to the noble Lord, or to any lawyer, because he will know exactly the reason why absolute privilege is required in those circumstances.
Then there should be provision for mandatory reporting in all cases, again on the basis of absolute privilege. Such a report should say in the case of each director whether there is or is not a prima facie case under the particular code to which I have referred, however that code may be amended at Report stage as it passes through the House. This will enable the Secretary of State to apply for disqualification anyway if he has better information or believes that the liquidator is wrong, either accidentally or deliberately, in his evaluation.
There has to be also a clear time limit. If one examines the clause as now amended by the noble Lord's amendment, one finds that the liquidator must report forthwith. This is a little difficult. When introducing this amendment, the noble Lord used the words "when they are satisfied", or others to that effect. A liquidator, or anybody investigating the affairs of the directors or their suitability, cannot make a report forthwith. He has to make it when he is satisfied. Nor is this a mere quibble over words, because it can take months—and I can testify to this from personal experience—for a liquidator to form a sensible view. One is quite open here to any kind of argument or alternative proposal, but one would suggest that instead of the word "forthwith", there should be used the words,not later than three months from the resolution or order".Those are the safeguards which the adoption of the amendment, with which we concur in general terms, make it necessary to be considered for the protection of the liquidator, whoever he may be. I trust that I will carry the noble Lord, Lord Mottistone, and also the noble Lord, Lord Benson, with me on this since, either justly or unjustly, creditably or otherwise, they are reputed to speak on behalf of the Confederation of British Industry. I therefore commend this matter to their special attention because directors also have to be protected. One would have thought that somewhere in this clause, or later in the Bill—and the Minister may even consider introducing it at Report stage; if he does not, we probably will—the rights of a director need to be spelt out.
What rights does a director have if he believes that he is being reported by a liquidator to the Secretary of State? The answer has to be, none, in the absence of malice, the public interest being overriding at that point. However, the point I commend to the noble Lords is that the director should be informed of the report and be given a copy of it; otherwise, how will he 727 be in a position to defend himself? He should also be given no fewer than 21 days' notice of any application by the Secretary of State for his disqualification and a detailed statement of the grounds on which the Secretary of State proposes to rely.
This would seem elementary; nevertheless, I would have thought it was fair. The director should be entitled to give or to file evidence, to be represented by a solicitor and counsel, to receive legal aid if he qualifies by the normal criteria, and to receive costs from public funds if the Secretary of State fails in his application.
I wish to make a final point about the amendment as proposed and about the clause as it would appear if the Committee accepts this amendment, which we would entirely support. I refer to page 7, line 19. Surely if it appears to the Secretary of State that it is expedient in the public interest to apply, the requirement should be that he "shall" do so and not that he "may" do so. The real decision is the decision that it is expedient in the public interest. If the Secretary of State is satisfied, surely the word "may" that appears in Clause 9 on page 7, following the amendment of lines 4 to 15, should be replaced by the work "shall".
Those are the only observations we have to make on the amendment of the noble Lord. We shall ourselves give it a fair wind in its present form, but we should like the noble Lord's replies to the questions I have raised, because, as I have already indicated, we may have to return to these matters in considerable detail at Report stage.
§ 9 p.m.
§ Lord Meston
My Lords, on Amendment No. 1 I, too, had hoped that there would be some general guidance as to the considerations which would lead one to consider a director unfit. Having said that, I see from Amendment No. 4, in the name of the noble Lord, Lord Mottistone, that there are some very helpful guidelines set out. I hope that they, or something like them, will be accepted. I also hope that they are not so clear as to deprive me of too many refreshers.
As regards Amendment No. 3, to which the noble Lord, Lord Lucas, also spoke, I certainly support the preference of the noble Lord, Lord Bruce, for the word "shall" in place of the word "may". I also ask, in relation to the category of people who may apply, why it is necessary to limit and to complicate the categories of people who may apply for a disqualification order. Surely it is right that anyone with a legitimate interest—the Secretary of State, the liquidator, the official receiver, an administrator, a creditor or a contributor—should be able to apply. Of course, there may be certain categories of applicant who should have to go through a sifting process, as the noble Lord, Lord Lucas, indicated, to weed out the frivolous and the malicious and to deter the threatening application.
As to the duty on the liquidator, I would certainly prefer to see a much simpler, positive duty on a liquidator to consider the fitness of a director on an insolvent liquidation in every case and to report, 728 perhaps in a simplified form, in every case as to the fitness of the directors. The Institute of Directors itself suggested that to place a requirement on a qualified liquidator to give his opinion to the department on the fitness of every director involved in an insolvent liquidation does not seem an unduly onerous imposition.
I also support the proposals of the noble Lord. Lord Bruce, as to the actual procedure for those applications, with certain time limits to give people time to consider and to get their tackle in order. I have a final point on Amendment No. 3. I am sure that I will be corrected if I am wrong, but it seems to certain people who have made representations that Scottish liquidators might not be covered. Subject to that, basically these amendments are welcome.
§ Lord Mottistone
My Lords, I support Amendments Nos. 1, 3 and 5 to 8 so far as they go. The inadequacies that I saw in them are reflected in my Amendments Nos. 2 and 4, which we shall be dealing with next. I am sure that there must have been a few jewels buried in the speech of the noble Lord, Lord Bruce of Donington, but it was so long that I found it difficult to be sure. However, I shall look forward to reading it in due course, to see whether I can find a nugget or two which I even like. At this stage I cannot comment.
§ Lord Lucas of Chilworth
My Lords, I am grateful to the noble Lord, Lord Bruce of Donington, the noble Lord, Lord Meston, and my noble friend Lord Mottistone for their acceptance in principle of the series of amendments to which I have spoken. I want to deal with as many as I can of the points that have been raised during this short debate. In the light of what the noble Lord, Lord Bruce, said during the earlier part of our proceedings this evening—namely, "You ain't seen nothing to what you are going to see on Report"—I should prefer to clear as many points as I can now, even at the risk of detaining the Committee.
The noble Lord asked a number of questions on Amendment No. 1. I turn to paragraph (b) in the amendment, on which the noble Lord asked four questions. He asked whether the conduct of the director applied at any time or in consideration only of his conduct in that company. I can tell the noble Lord that the liquidator and the court will take into account his conduct wherever and in whatever company. The noble Lord asked whether "company or companies" meant associate or other different companies. I do not wish to be pedantic, but he will see that the amendment reads:either taken alone or taken together with his conduct as a director of any other company or companies".So it includes all companies.
The noble Lord spoke about a definition of "unfitness". I repeat, in a rather different form, what I said earlier. I draw the noble Lord's attention to Section 9(1)(b) of the Insolvency Act 1976, which states:that his conduct as a director of any of those companies makes him unfit to be concerned in the management of a company".These are the words we have used and it is a definition which has reasonably well stood the test. However, in answer to the noble Lord's last question in this regard, 729 about how many disqualifications there have been, I would say that he is right, that there have not been very many, though there have been rather more than could be counted on one hand. The reason for that is that there have been the difficulties to which I have referred on a number of occasions. The interesting thing is that most of the disqualifications under that Act have been by consent, so they do not register in quite the way in which the question was framed.
I am not sure whether I have all the noble Lord's questions in quite the right order. I am sure that he will forgive me if I have not. He asked about a liquidator being safeguarded. My understanding is that a liquidator will have qualified privilege in carrying out his reporting duties. He will lose that privilege only if he reports maliciously and untruthfully. That would appear to be adequate protection for the liquidator, but I shall study carefully the detail of the noble Lord's point.
The noble Lord raised a number of points, as did the noble Lord, Lord Meston, on the question of the guidelines. We are not proposing, certainly at this stage, to introduce into the Bill a catalogue of guidelines. As I suggested earlier, we have to see exactly how the Bill's provisions work when it is enacted, and it may he necessary to revise, alter, add to or possibly delete from the guidelines. But I take note of the points that the noble Lord kindly made as indications of the areas which he, and I think the noble Lord, Lord Meston, and my noble friend, Lord Mottistone, I am quite sure, would expect to be in the guidelines.
I turn to the point that the noble Lord, Lord Bruce, made in connection with my Amendment No. 3. He was having a little debate. I am not sure whether it was with me or with himself. The words in the amendment are:If … it appears to the official receiver, that the conditions mentioned in subsection (1) above are satisfied … the official receiver shall forthwith report".That seems fairly clear as to exactly where the official receiver's duty lies. If it appears to him that the conditions are satisfied, he shall, without delay, forthwith report the matter.
I suggest that it would be wrong to put a specific time element into the Bill because that would be somewhat restrictive. I am reminded by my noble and learned friend that it would in fact be unjust. If a time scale was put in, there could be unnecessary delays which in itself would be unjust. I think that I have answered the points that have been raised. I shall look at the issue very carefully. Rather than leave matters to a later probing amendment, I should prefer to deal with them in conversation. If that is not satisfactory, of course the noble Lord has his remedy.
Lord Bruce of Donington
I have only one further small question. It relates to a matter which escaped the noble Lord's attention in his reply, perhaps due to the way in which I originally put it. In subsection (3) in Amendment No. 3 the word "may" appears. If the Secretary of State has already decided that it is expedient in the public interest that a disqualification under the provision should be made against a person, why not put "shall". "Shall" almost exactly follows if the Secretary of State considers it expedient.
§ Lord Lucas of Chilworth
I recall on a number of occasions on different Bills and from a different position in your Lordships' Chamber asking exactly the same kind of question. Perhaps I have never been totally happy about it. I should like to look at this matter in the light of the Bill but also in relation to the custom that has evolved, which of course the parliamentary draftsmen are rather more responsible for than I am.
§ On Question, amendment agreed to.
§ 9.15 p.m.
Lord Mottistone moved Amendment No. 2:
Page 7, line 16, leave out subsection (2) and insert—
("( ) The period specified as the period of the disqualification order made under this section shall not exceed five years.
( ) No application may be brought under this section later than one year after the relevant date.
( ) No person shall be the subject of any order under this section, 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.
( ) In this section "relevant date" means the date upon which there is a resolution to wind up a company or as the case may be the date upon which a winding up order has been made by a court.").
The noble Lord said: We now turn to Amendment No. 2. With the permission of the Committee, I should like also to discuss Amendment No. 4.
Amendment No. 4: Page 7, line 34, at end insert—
("(4A) In determining whether a person is unfit to be concerned in the management of a company on the ground that his conduct as a director of that company (either taken alone or taken together with his conduct as a director of any other company or companies) makes him unfit to be concerned in the management of a company, the court shall consider the matters listed in subsection (4B) below.
(4B) Matters to be considered under subsection (4A) above include—
(4C) Notwithstanding that the court may be satisfied as to any of the matters described in subsection (4B) above, 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.").
§ On considering the amendments of the noble Lord the Minister, I also then looked at what has recently been struck out as Clause 7 of the Bill, which was the amendment of the noble Lord, Lord Benson, to see whether all the points that were in Lord Benson's amendment as it was had re-appeared in the Bill. It seemed to me that certain parts of it had not. They are the subject matter of Amendments Nos. 2 and 4. I should like to speak to those two amendments separately because they deal with different parts of the previous Clause 7. I should make the point that some 731 of the points about which I shall be talking have already been answered by my noble friend the Minister in his argument for leaving out Clause 7 as it has hitherto stood. I shall refer to those in passing.
The first point relates to this period of the disqualification which, in Clause 7, to which your Lordships can still turn because it is in the Bill, was different from Clause 9(2), in that Clause 9(2) bluntly told the court that the period of disqualification
shall not be less than two years".
It seemed to me, and I think also to my noble friend—although he can speak for himself because he follows—that this was a bit too specific and that perhaps the court might require to have a degree of flexibility in applying a disqualification which might in some cases be less than two years and in some cases more but, as the amendment is framed, should never be more than five years.
§ My noble friend talked about the next part of it, that the application may be brought later than one year after the relevant date. I shall not pursue that at this stage. At a later date I shall read what he said in regard to leaving out Clause 7. He talked about the fact that the next part, which relates to "held the office of director", would leave out the coverage of shadow directors. But of course now that we have agreed to Amendment No. 8 because it was taken together with Amendment No. 1 the Bill itself would automatically define directors as covering shadow directors. Therefore, what would have been the case under the old Clause 7 is not the case under the third part of my Amendment No. 2. I hope that that is not too complicated for the Committee.
§ The final and fourth part of Amendment No. 2 brings in another provision to describe the relevant date, which is the subject matter of the earlier ones. I think I have an answer from my noble friend to the minor points in this matter, but I should appreciate it if he can explain to us why he thinks that a blunt two year disqualification, as in the present Clause 9(2), is better than the more flexible "not exceed five years". I appreciate that the noble Lord, Lord Denning, in his useful but unfortunately brief contribution, fimly said that he thought that "not less than two years" was a very good thing. In fact, I am not sure that he would not have had it as, "not less than three". So that is a point to be taken into account.
§ I now turn to Amendment No. 4. The opening remarks of this amendment are meant in effect to refer to what will be the new subsection (1)(b) when Amendment No. 1 is incorporated in the Bill. It is rather more lengthy than it otherwise would be because that amendment was not in the Bill when I tabled my amendment. However, it refers to that. It then brings in this question of certain guidelines for the court to take into consideration when arriving at a decision of unfitness in the terms of the new subsection (1)(b). My noble friend has commented—referring to the Companies Act, in the process—on paragraphs (a) and (b) of my new subsection (4B). I should like to look at what he said before we decide whether to proceed any further on those. With regard to paragraph (c), I was delighted to hear him suggest that the noble Lord, Lord Benson, who we all know is 732 particularly keen on this facet of these points, should be given the opportunity to argue a strong case for its rentention somewhere in the Bill.
§ Having heard the talk about guidelines, which were discussed on the earlier amendment, I think there are some things which need to go into the Bill and some things which need to be guidelines. I take the point my noble friend made about guidelines perhaps having to develop from practice, but I think some things really ought to be in at the beginning. I think personally that this business of financial statements being provided from the beginning, and properly, is a fundamental point which really ought to appear somewhere in the Bill. It would seem to me that somewhere in Clause 9 is the right place for it. I hope the noble Lord, Lord Benson, will be able to give us some guidance on that.
§ I did not hear my noble friend comment on paragraph (d) and the new subsection (4C). They were at the top of page 6; that is, paragraph (d) and subsection (7) of the old Clause 7. I do not know quite what he thinks about that matter, but I should have thought it was important to have these provisions in the Bill. I hope, therefore, that my noble friend can comment on paragraph (d) and subsection (4C), which is in effect a defence. We have the situation—this has been raised, I think, by the noble Lord, Lord Bruce, in another respect—that it seems reasonable that the accused (if you can so describe him) should have some defence that he can use under the circumstances of this clause. It is something that it is justified to have in the Bill. I should be grateful if my noble friend could tell me either why he thinks it is taken care of elsewhere or that he has a good reason for not wanting it. I beg to move.
§ Lord Benson
I wonder whether I, too, may express my thanks to the Government. They have already been thanked this evening for having withdrawn what I call the original Clauses 7 and 8. Those clauses were not very satisfactory. We are particularly glad that the Government have not sought to tinker with them but have removed them altogether. It is a matter of great satisfaction to the critics on the last occasion.
All of us support the principle that the court should have power to disqualify directors: that is not in doubt. But there is one point on which I hope the Government will be able to give us further help. The noble Lord, Lord Bruce, and other noble Lords have already referred to the criteria which should be adopted for determining unfitness. This is a serious matter. Directors are entitled to know where they stand. Their livelihood depends upon it, and I suggest the matter should not be left at large by the use of the single word "unfit".
The noble Lord, Lord Lucas of Chilworth, has drawn our attention to an earlier Act. But the relevant section of that Act has not been very effective, and I see no reason why a bad section in an earlier Act should be repeated in this Bill. I look at it this way. In the many months which have gone into drawing up this Bill in the first place, a huge concourse of people must have been thinking about it—officials, parliamentary draftsmen and Ministers. They must have formed an opinion as to what is the meaning of "unfit"; it could not have been outside their knowledge or thinking. I wonder whether we can be told what is meant by 733 "unfit", because directors are particularly anxious to know. If it is not defined, what will happen is that "unfit" will be determined by barristers and judges on a case by case basis, spread over a long term of years, and in consequence we shall get some very extraordinary judgments.
Therefore, I ask that the Government should define what they mean by "unfit" and should see that it is incorporated in some shape or form either in the Bill itself or in the guidelines. As for myself, I am in rather a muddle about guidelines because I do not quite know how they will come before your Lordships' House, how they will be made into law, or how they will be made effective. I hope that perhaps we might have a little more explanation on that point in order to assist us.
The criteria which have been suggested in Amendment No. 4 may or may not be the best ones, but they are an attempt to give some idea of the criteria which should be adopted. I should like to point out that the criteria contained in the proposed new subsection (4B) (a) which says:that the person knew, or in the circumstances ought reasonably to have known",and so on, is repeated almost verbatim in Clause 11(2) (b). I do not see why, if it is included in Clause 11, it should not also be included in Clause 9.
I now turn to the particular clause which, as has been pointed out, happens to be a hobby-horse of mine, and that is the new subsection (4B) (c) which says:that the company failed to present management accounts or financial statements, at regular intervals appropriate to the business",and so on. The reason for this is that the existing legislation, formerly in the 1948 Act, later in the 1976 Act but now in the consolidation Act, is quite inadequate for the purpose. Those clauses, which were drawn up many years ago, are not effective, and they do not conform to modern practice in company administration. What is needed is a new look at this subject.
As I mentioned on an earlier occasion when we considered this matter in Committee, every failure that has taken place in the last 15 years has been due, to a greater or lesser degree, to the fact that the information which is necessary to run the business has not been available to the board of directors as a whole. That is primarily the reason why so many of these companies have gone wrong. What is more, not only has that information not been available to the boards, but it has not been availale to the banks, and again and again the banks have granted credit facilities without having the vital information before them. That is one of the reasons why these failures continue to take place.
I am not a unique animal in this respect. Everybody in this Committee knows that you cannot run a business unless up-to-date information is available. That is known to every member of my profession, even to the student. It is known to every banker who grants credit facilities; it is known to every institutional investor when he makes his investment; and it is known and put into practice by every competent board of directors, anyway.
734 In this Bill we are dealing with the incompetent directors or the miscreants. We want to make provision so that they have this information available, and in that way not only prevent a great many of the failures but also enable businesses to be run a great deal more effectively. In my view—and I say this, I think, without risk of contradiction—if this single clause were to be incorporated it would do more to raise the standard of company administration than any other part of the Bill. I request the Government to be kind enough to give this point consideration to see whether they can do something about it, and also something generally on the subject of criteria.
I have only one other point to raise, and that is that nobody wants to featherbed directors: that has never been the intention of anyone in any part of this Committee. But directors should not be harassed unduly. There should be some saving clause so that if they behave honestly and reasonably they should not be subjected to the penalty of disqualification. That is the reason for the inclusion of subsection (4C) in Amendment No. 4. Here, again, I cannot see why this should be contested, because practically exactly the same provision is contained in Clause 11. If it is in Clause 11, I cannot see why it should not be incorporated in Clause 9.
For the same reason that directors should not be unduly harassed, I hope that the Government will look at the time penalties which are drawn attention to in Amendment No. 2. It puts directors under a difficult hardship if they have hanging over their heads for long periods a doubt as to whether they will be subjected to legal actions of which they do not know the outcome and which may cost them a great deal of money. There ought to be some time limit which prevents them suffering from that hardship. There is a suggestion here of one year after liquidation. It has to be approved by the Secretary of State within one year. That may or may not be the right period, but some limit should be fixed.
In exactly the same way there should be some limit to the period before liquidation, which excludes directors so that it does not go back into the mists of time. For all these reasons, it would be helpful if the noble Lord, Lord Lucas, would indicate the Government's thinking in order to improve this Bill on the lines suggested in these amendments, and have indeed been suggested by the noble Lord, Lord Bruce of Donington.
Lord Bruce of Donington
We on this side appreciate the general sentiments which lie behind the amendments moved by the noble Lord, Lord Mottistone, and spoken to by the noble Lord, Lord Benson. We should however like an opportunity of studying them further. We agree with the Minister that under subsection (4B) of Amendment No. 4, paragraphs (a) and (b) are already covered specifically in Section 630 of the Companies Consolidation (Consequential Provisions) Act 1985, and the criminal side of it has been taken out of the original Section 332 of the Act and put into Section 458 of the new Act. In any event, paragraphs (a) and (b) of subsection (4B) are already redundant because they are elsewhere.
735 I would not join issue in the slightest with the remarks of the noble Lord, Lord Benson, when he, in referring to paragraph (c) of subsection (4B), deals with the question of management accounts. It is true that with most of these companies which go into liquidation either compulsorily or voluntarily you can find in case after case that the directors of the company have not had adequate information about the state of the affairs of their company.
I of course have reverted to the original Companies Act 1948 referring to the prime books of account as being absolutely necessary in any event, because if there are no prime books of account and if proper record of the ordinary transactions has not been kept, it is impossible to erect the superstructure of management accounts upon them. Therefore I am still adamant on the retention and the validity of the original Section 47 of the 1948 Act as repeated in 1967 and confirmed in the consolidation Act.
However, I agree with the noble Lord, Lord Benson, that if additionally a form of words can be found which would bring management accounts within it—bearing in mind the exigencies of the small and medium sized firms which operate under slightly different conditions from the larger firms to whom management accounts are almost mandatory—and which would make it easy for both the Bar and the Bench to assimilate what management accounts are, then I would be only too willing to support any Government amendment on those lines, and indeed any amendment put forward by the noble Lord, Lord Benson, at a later stage if one can be devised. Subject to that, we agree substantially with the approach of the Government on this particular clause as put forward by the noble Lord in his initial remarks on the Question that Clause 7 shall stand part of the Bill.
§ Lord Meston
Briefly, I have only one observation to make related to Amendment No. 2 concerning the proposed upper time limit for disqualification. All these time limits are inevitably arbitrary but I recollect that the Cork Committee recommended an upper limit of 15 years. I accept that that would be wholly exceptional and would only deal with the very small hard core of people who were not fit to be let back into the commercial ring for a very long time. They would not be prevented from trading but they would be prevented from trading behind a corporate veil.
I entirely support Amendment No. 4. It has the merit of not providing an exclusive and exhaustive catalogue of considerations, but simply inclusive guidelines and gives room for fresh circumstances to be taken into consideration. Like the noble Lord, Lord Bruce, I should prefer to see reference to the primary books of account. I hope your Lordships will understand that I would also prefer to see specific reference to the abuse of consumer prepayments and deposits. But subject to that, Amendment No. 4 is entirely welcome.
As to the defence clause, which is new subsection (4C) at the end, that too seems most acceptable subject to the comment that it might be better if the word 736 "all" were inserted between the words "took" and "such" so that it reads:that he took all such steps as were reasonably open to him".Subject to that, I support the amendment.
§ Lord Lucas of Chilworth
I am obliged to my noble friend Lord Mottistone for the courteous way in which he moved these amendments. I am rather sorry that he was not totally persuaded by what I said during our debate on the deletion of Clause 7. I invite him, if I may (I believe he made the offer) to study carefully what I said because I feel that the substance of what he is asking for was met in my earlier contribution.
I should just touch on some of the more pertinent points that have been raised by your Lordships' Committee. The clause suggested by my noble friend would not catch directors who had resigned 12 months before the commencement of the liquidation, nor would it catch the shadow directors. The period of 12 months is purely arbitrary and I think it will let off a number of people that we might wish to disqualify. It would also restrict the period of disqualification to five years. As the noble Lord, Lord Meston, has reminded us, at present it is 15, but that is a maximum. I believe that the Committee would want the court to have that kind of flexibility. One must recall that we are dealing not as my noble friend suggested with an accused person, but with a new tier, a civil tier of unfitness as distinct from fraud and the more criminal activity normally associated in this sphere of insolvency.
I remind the Committee that in his earlier remarks the noble and learned Lord, Lord Denning, was supportive of the Government's suggestion that a minimum period might be two years with a maximum of 15. The noble and learned Lord has a wealth of experience behind him to make that comment. On applications that have to be made within one year of the commencement of liquidation, which was a point raised by my noble friend, the whole thrust of our policy is to have speedy applications. There may well be circumstances particularly where possible fraud is concerned where it would be impossible to set the application down in that time. Again, I would ask the Committee to reject the concept of fixing too rigid a timetable.
So far as the guidelines are concerned, relating to subsection (4B) of my noble friend's amendment, I have said quite a bit about this already. Let me just reiterate my understanding that if one sets down in law particular guidelines, particular pieces of information on which a court should satisfy itself, it is implicit that those items which are not set down therefore cannot be considered by a court. I explained that we had a new area in which we have to work over the next few years. It would be better if this matter was quite flexible.
I assure the Committee that we will certainly consult on the question of guidelines for determining what constitutes unfit conduct. But as for including the full facts that the noble Lord has included in his amendment in the clause in advance of the outcome of that consultation on the question of guidelines, I would prefer that he left that provision out.
I would also point out to the Committee that only paragraph (c) of this new subsection (4B) is a guideline. The other three matters which are raised in the 737 amendment are already, or certainly will be, grounds for the making of a disqualification order.
The noble Lord, Lord Benson, raised a number of points. May I turn first to the point he made in relation to the provisions of the Government's Clause 11(4) not being included in Clause 9 which we are discussing. If I might explain, Clause 9 concerns fitness to manage a company. It is implicit, therefore, that this test is whether the director's behaviour comes up to the objective standards of competence. So there is no need to specify in Clause 9 that the standards are those which may reasonably be expected, according to an objective test of how directors should behave.
Clause 11, on the other hand, involves a test about the state of mind of the director: what did he know or what should he have known at the time? It is therefore useful, I think, to spell out, as we have done in Clause 11(4), that this state of mind is to be judged by an objective standard: what can be reasonably expected of a director who carries out the same sort of functions as the director in question did under particular circumstances?
§ Lord Benson
I wonder whether there has been some confusion. I am referring to Clause 11(2)(b) and not to (4A) or (4B). That is the one. I think that Clause 11(2)(b) is compatible with (4B)(d). That is where the compatibility lies; it does not lie under Clause 11(4).
§ 9.45 p.m.
§ Lord Lucas of Chilworth
If I have misunderstood the noble Lord, Lord Benson, I apologise. I think I shall have to take another note of what he has been suggesting and perhaps I could pick up that point a little later.
He raised this question of accounts and information. I bow to his very long and valued experience in these matters. The noble Lord, Lord Bruce of Donington, reminded us of the provisions in existing legislation, in Sections 221 and 222 of the 1985 Act, under which directors are required to have prepared a profit and loss account and a balance sheet is to be presented to the members every year. I want to spell out some of this because it may well be helpful. Under that legislation, directors are also required to ensure that the company keeps accounting records which are sufficient to show and explain the company's transactions and able to disclose with reasonable accuracy the financial position of the company at any time. These records must contain day-to-day details of all sums of money received and expended by the company, details of the assets and liabilities of the company, a statement of stock held by the company at each year end, a statement of all goods sold and purchased sufficient to identify buyers and sellers. This is well known, of course, to noble Lords who have been taking part in this debate, but I thought it necessary to spell it out. That is the requirement.
For a small private company which has perhaps nobody with particular accounting skills, the production of what I understand, and what I think other noble Lords understand, as management accounts and management information would be expensive—although that should not be the only reason why their preparation should not be encouraged. I wonder whether the preparation of the accounts would not be pointless because, in so many 738 instances, those people who do not provide this kind of information and accounts for their own benefit have little ability to interpret information and accounts which are provided for them. This may be an argument for their not being a director of a company, but it is not an argument which I should want to pursue tonight.
I think that on balance it would be inappropriate to legislate for companies to keep management accounts. Even were it so, I think at this moment that an Insolvency Bill would not perhaps be the right vehicle in which to include such a requirement. Every noble Lord who has taken part in this short debate has stressed the need for an inclusion of this kind. I should not like to reject out of hand tonight the suggestions that have been made. May I give an assurance to the Committee that I will look carefully into what has been said and see whether there is a way in which we can find a definition which might meet the concern of noble Lords. I have to say that I am not really willing to promise or to commit myself to being successful in that. What I promise is that I shall try to be successful.
The noble Lord, Lord Benson, raised another particular point. That was on the question of applications to be brought in in one year. In another part of our discussion, I think I answered this, but perhaps I could underline it by saying that, while I agree—and the Bill encourages applications to be brought as speedily as possible—I should not like to lay down a specific period because there may be very good reasons why an application could not be made. Investigations might be lengthy; the individuals might be away and I should not like a timescale to be the umbrella under which an unfit director may shelter. With those explanations, I invite my noble friend to withdraw his amendment.
Lord Bruce of Donington
Before the noble Lord sits down, may I press him to clarify one point? Did I understand him to say, in connection with the suggestion that there should be a code to which the court might pay attention, that if there were a code or a series of definitions of unfitness which the court ought to take into account then the existence of those criteria would prevent the court from taking other matters into account? Did I understand him correctly, and, if so, may I please invite him to take advice again on that matter?
§ Lord Lucas of Chilworth
I do not think I said exactly that. I am not a legal man, but my understanding is that if one puts it into law that certain criteria shall be for the consideration of a court, it can be held that, by virtue of that, other criteria are excluded. Now I—
§ Lord Meston
Will the noble Lord permit me to make one point clear? I thought I had made it clear that the beauty of Clause 4 is that it does not do that. It says that the court "shall consider the matters listed," and that the "Matters to be considered … [shall] include". That does not preclude the consideration of any other relevant matter.
§ Lord Lucas of Chilworth
I do not think the noble Lord, Lord Meston, is totally correct. As I have 739 understood this, certainly from the parliamentary draftsman, there are difficulties over inclusions which expressly exclude certain matters. In fact, I am quite happy to look at this again, and if I am wrong I will certainly apologise to noble Lords. Nevertheless, it does not affect our general thinking with regard to including in the Bill "points" (I think that was the word used by the noble Lord, Lord Bruce, in his earlier comments) or "guidelines" (and there have been other descriptions). We would want the court to take into account anything that the insolvency practitioner—and one has to bear in mind that he is now to be a licensed practitioner and a man of considerably more experience than perhaps liquidators may have been in the past—would consider to have a bearing on the fitness or otherwise of a director. I am sorry if I cannot completely satisfy the noble Lord, Lord Bruce, but in fact I do not think we are greatly at odds with each other on our intention that the courts should have an indication of exactly what points they should take into account.
That rather takes me to something which I wanted to mention to the noble Lord, Lord Benson, who was saying that these criteria should be set down so that a director would know where he was. I have been a director of a number of companies, and I have never thought that I would ever have any confusion in my mind as to whether I was fit or unfit. I do not think that a director needs to have spelt out for him the criteria that a court may take into acount in asking him to demonstrate his fitness. He knows; and, frankly, if he does not know, he should not be a director.
§ Lord Benson
I am puzzled by that remark, because it does not seem to me to fit with the proposal that there are to be guidelines. Are there or are there not to be guidelines indicating what definitions or criteria are to be applied? If it is really to be said that we need not say what "fit" or "unfit" means, what is the purpose of talking about guidelines? I am really very puzzled about the comment that has just been made.
The suggestion has been put to the Committee that it would be wrong to require directors to produce management accounts in smaller businesses, because they would not be able to interpret them. This, again, is to me wholly incomprehensible. If directors want the privilege of limited liability, to say that they should be allowed to continue in business without being able to interpret the information on which the business is run and on which credit is obtained, is totally unacceptable. It cannot stand the basic test of common sense.
§ Lord Lucas of Chilworth
I listen very carefully to what the noble Lord, Lord Benson, says on these matters. I am not totally sure that I agree with him. I think I prefer to let my argument rest where it is, underlining it with the assurance I gave him that I shall consider very carefully what he has said in relation to the amendments to which my noble friend has spoken, which are in his name and in that of the noble Lord, and see whether there is anything in my amendments and in his where we can find some more common ground.
§ Lord Mottistone
I thank my noble friend for his somewhat curate's egg-like answer to us. Of course, we shall study very carefully what he has said. Maybe, if he does not feel that he can match what we then find is still a gap, he will allow us to put down on Report amendments which seek to fill the gap for him. I hope very much that he will take on board—which I think he has already said he will do—subsection (4B)(c) as being an essential part of this.
I am slightly hurt by the noble Lords, Lord Bruce of Donington and Lord Meston, shooting my fox in what they said about my very careful use in the beginning of subsection (4B) of the word "include", specifically so that these criteria should not exclude any that are not mentioned. So I would direct my noble friend's attention to that. He can read that afterwards. He can go on looking after his papers in the meantime.
§ Lord Mottistone
I deliberately put in the word "include" just for that purpose. There may be some terrible legal, weaseling argument which shows that the word "include" is inappropriate in the circumstances, but I hope not. It is a fairly common English word. It is not fair to say that when a director starts to play with the law he knows what he is about or he ought not to be a director—to paraphrase very briefly what my noble friend has said. When you are starting to do these things, it is quite important that the key points—and that is what the noble Lord, Lord Benson, has been telling us—are laid before the court. It also ipso facto means that they are laid before the director, so he knows where to put his priorities. I should have thought that something on these lines was necessary.
As for saying that guidelines exclude things, I must say that we have had guidelines in all kinds of legislation, particularly labour legislation. Sometimes the guidelines are published as an order and sometimes they are in a schedule to an Act. But they are given, and it is ridiculous to suggest that they are somehow exclusive and are not suitable for this type of legislation.
So I hope that my noble friend will—I know he will, because he said so—take on board all that we have said, and we will do the same. I trust that at Report stage, which is not far enough away, we shall come up with something a little better just to fill these gaps. Having said that, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
§ 10 p.m.
§ Lord Lucas of Chilworth moved Amendment No. 3:
§ [Printed earlier: col. 720.]
§ The noble Lord said: I have already spoken to this amendment with Amendment No. 1. I beg to move.
§ On Question, amendment agreed to.
§ [Amendment No. 4 not moved.]741
§ Lord Lucas of Chilworth moved Amendments Nos. 5 to 8:
§ [Printed earlier: col. 721.]
§ The noble Lord said: I have already spoken to these amendments. I beg to move.
§ On Question, amendments agreed to.
§ Clause 9, as amended, agreed to.
Lord Mottistone moved Amendment No. 9:
After Clause 9, insert the following new clause:
("Costs in cases of insufficient funds.
. The costs of any successful application under section 9 to disqualify a person, or where it is determined by the court that a person is personally liable for all or any of the debts, shall be borne by the Crown in the event of there being insufficient funds from the assets of the company concerned, after all creditors have been paid and all liabilities discharged.").
§ The noble Lord said: This amendment was one which was to take the place of the old Clause 8 which the noble Lord, Lord Benson, had down in his own name and was persuaded to withdraw after we had won the Division on Clause 7. I have put it on the Marshalled List again because it was not at that stage debated. Perhaps I may ask the noble Lord, Lord Benson, to speak to this amendment and explain it to the Committee.
§ Lord Benson
I do not think there is any need to pursue Amendment No. 9. As the noble Lord, Lord Mottistone, has explained, the original intention of this amendment was to try to relieve insolvent companies of the expense of pursuing miscreants. It was felt that that burden should fall upon the state and should not rest on the creditors' money to incur that expense. But as I read the Bill in its present form, all the applications must be made by the Secretary of State himself, and therefore the cost must fall on the Secretary of State. I think that that is the interpretation. If the noble Lord, Lord Lucas of Chilworth, will confirm that that is so, I would, with the leave of the Committee, beg leave to withdraw the amendment straight away.
§ Lord Lucas of Chilworth
The noble Lord, Lord Benson, is quite correct. Since Clause 7 has been deleted from the Bill, applications under this clause would be the responsibility of the Secretary of State and the cost of these applications would therefore not be a charge against the assets of the company. Therefore the first part of the amendment is unnecessary. I explained when we were dealing with Clause 7 why it is inappropriate for the Crown or the taxpayer to have to bear the costs of collecting on behalf of the creditors of a company a debt arising from a declaration of personal liability. I do not think it would assist the Committee for me to repeat those arguments but I think that my first response meets the point that the noble Lord was seeking.
§ Lord Benson
With the consent of the Committee, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
742 Clause 10 [Disqualification after investigation of company]:
Lord Lucas of Chilworth moved Amendment No. 10:
Page 8, line 11, leave out ("or shadow director").
The noble Lord said: I should like at the same time to speak to Amendment No. 11 attaching to Clause 11
Amendment No. 11: Clause 11, page 8, line 22, leave out ("or shadow director").
§ In the Committee's consideration of Clause 9 it has already been agreed that the term "director" should include a shadow director for the purpose of Clauses 10 and 11. The phrase, "or shadow director" is therefore superfluous. I beg to move.
§ On Question, amendment agreed to.
§ Clause 10, as amended, agreed to.
§ Clause 11 [Responsibility of individuals for company's wrongful trading]:
§ Lord Lucas of Chilworth moved Amendment No. 12:
§ [Printed above.]
§ On Question, amendment agreed to.
Lord Lucas of Chilworth moved amendment No. 12:
Page 8, line 23, leave out from ("may") to end of line 26 and insert ("declare that that person is to be liable to make such contribution (if any) to the company's assets as the court thinks proper.").
The noble Lord said: With this amendment I should like to move Amendments Nos. 14, 16, 19, 20, 21, 23, 24, 25, 26, 27 and 28.
Amendment No. 14: Page 8, line 34, leave out ("or shadow director").
Amendment No. 16: Page 9, line 2, leave out ("or shadow director").
Amendment No. 19: Page 9, line 9, leave out ("or shadow director").
Amendment No. 20: Page 9, line 12, leave out ("or shadow director").
Amendment No. 21: Page 9, line 14, leave out ("or shadow director").
Amendment No. 23: Page 9, line 18, leave out subsections (6) and (7).
Amendment No. 24: Page 9, line 24, leave out ("(4)") and insert ("(3)").
Amendment No. 25: Page 9, line 25, leave out ("of individuals").
Amendment No. 26: Page 9, line 26, leave out ("direction") and insert ("declaration").
Amendment No. 27: Page 9, line 27, leave out ("direction") and insert ("declaration").
§ Lord Lucas of Chilworth
I beg the noble Lord's pardon. The purpose of Amendment No. 12 is to make it clear that a person who is responsible for a company's wrongful trading is personally liable to make such contribution as the court thinks proper to the company's assets. These amendments are intended, certainly in part, to satisfy demands that the wording be simplified. There are some technical amendments to the clause, mainly to remove the reference to "shadow directors" to which I have just referred.
743 The important change is to the wording of subsection (1), which makes it clear that if the court makes a declaration against a person, it will be that he—that is, such a person—is liable to make such contribution (if any) as the court thinks proper to the company's assets available for distribution to the creditors proving in the liquidation. There has been some confusion about the wording of this clause and there were those who thought that the reference to all or any other of the debts or other liabilities of the company meant that the court would identify particular debts or liabilities and make the person responsible to pay that amount to the liquidator or even directly to the creditor concerned. I am pleased that the draftsmen have been able to alter the wording of this subsection without destroying its effect because I, with them, had some difficulty in appreciating the significance of the words that have now been deleted.
Having explained the purpose of the amendment, it may assist the Committee if I explain the Government's thinking behind our proposals in general. We do not wish to follow the concept of wrongful trading whereby directors are made liable for identifiable debts incurred while the company is trading wrongfully. Nor were we able to adopt the draft wrongful trading clause in the Cork Report. As the noble Lord, Lord Bruce of Donington, has tabled Amendment No. 28—and I again apologise to him for including it in my earlier remarks—which, if it is accepted will introduce the Cork wrongful trading concept into the Bill, perhaps it will assist the Committee in its deliberations if I explain why we were unable to accept that clause. Let me say at once that the provisions in the draft Cork clause had obviously been considered very carefully, and they proved to be of much assistance in formulating our proposals. However, we have a number of basic objections to the draft clause.
For instance, the draft clause would allow the court to have the utmost flexibility about who should be paid any money recovered under the declaration. In our view this will create difficulties for the court if it attempts to distinguish between creditors who have lost money under different circumstances. It is obviously tempting to say that the creditors who should get the money are those whose debts have been incurred during the period of wrongful trading. On the other hand, if that trading had not taken place, the assets of the company might have been greater than they finally prove to be because of trading losses, and, therefore pre-wrongful trading creditors will have lost money.
In order to attempt to do justice between the various classes of creditors, the court would probably have to hear arguments put by various creditors or classes of creditors. In our view any money recovered should become part of the general assets available to creditors distributed pari passu among them all.
It is also for this reason that we consider that only the liquidator should be capable of making applications for declarations of personal liability, as he will be the only person in a position to decide whether there is prima facie evidence of wrongful trading. In our view the proper course for a creditor, if he thinks there has been wrongful trading, is to persuade the liquidator to 744 make the application. In any event, even if a creditor did have sufficient information to allow him to pursue his claim, we consider that it would be undesirable because directors could be placed under pressure to settle out of court to avoid legal costs; and even if that did not happen, there would inevitably be a scramble by creditors to pursue their claims before the directors' assets were dissipated
Lord Bruce of Donington
Is the noble Lord, in referring to Amendment No. 28, which we have not yet reached, dealing with the draft clause as incorporated in the Cork Report itself, or the actual amendment I have put down? If the noble Lord will refer to subsection (3) of my amendment, he will find that I have varied the draft in the Cork Report exactly to satisfy his point. The amendment reads:to make such contribution (if any) to the company's assets as the court thinks proper".I have amended the original Cork draft to include the phrase on which the noble Lord has placed such stress. It would appear that he is speaking on the assumption that my amendment is identical to the draft amendment in the Cork Report; it is not. It is exactly in line with the noble Lord's thinking.
§ Lord Lucas of Chilworth
I appreciate the point made by the noble Lord. I felt that it might be rather more helpful to the Committee if I explained the purpose and effect of the amendments in my name as it had a bearing in relation to what Cork suggested. It follows, therefore, that I am obliged to discuss, in part, the amendment of the noble Lord, Lord Bruce of Donington. I shall also have something further to say after I have heard his remarks.
I apologise to the Committee that this may appear to be a rather lengthy way round of proceeding, since my explanation is, I fear, quite long. I felt that in considering the matter this would be the easiest way of dealing with the subject, particularly since I knew that we were not going to be dealing with it at the earliest hour of the day and it would give a greater opportunity for noble Lords to give it the proper consideration that they would wish while we were in Committee, preparatory to moving on to the Report stage.
I was about to say that we were unable to accept that power be given to the court to declare that within certain guidelines future trading would not be wrongful. There would seem to be great difficulty in making this provision work. In respect of applications for anticipatory relief the court would have power to declare that, however matters turned out later, future trading of the kind sanctioned should not be capable of giving rise to any claims. The applications would be heard in chambers, and Cork gave examples of the declarations which the court would be able to make. These examples are in paragraph 1798, on Page 402, of the report. In these circumstances, the court would be expected to grant unlimited relief and make a commercial judgment based only on facts supplied and undertakings given by an interested party.
There would, we felt, be wide scope for the less scrupulous director to mislead the court, and even if the directors present the facts honestly, there will 745 always be circumstances when with the benefit of argument the court would have made a different decision. For obvious reasons the hearings would not be advertised and the court would be unable to take the views of creditors into account. It could be argued that the court already makes a commercial judgment when it deals with applications under Section 522 of the 1985 Act to allow the beneficial disposition of the property of a company after the commencement of the winding-up but before the winding-up order is made. In such applications, however, the court has the benefit of also hearing the views of the petitioner on the merits of the application and there is usually a limited period of time before the effect of the transaction is independently assessed by the official receiver or the liquidator.
We do not think that the Cork test of wrongful trading goes far enough in that it is restricted to the incurring of liabilities or other debts when the company is insolvent or unable to pay its debts as they fall due. We consider that the penalty should be for having allowed the company to continue to trade when a person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. In our view, to do otherwise will allow to go unpenalised the person who lets the company's assets become depleted—usually for his own benefit by means of, for example, excessive directors fees—without incurring further debts, so further loss is suffered by the existing creditors.
Finally, we consider that it is throwing the net too wide to allow wrongful trading to be extended to any person—not necessarily an officer of the company; it could be a clerk or a storeman, for example—who was party to the company trading wrongfully. Banks and others who will have detailed knowledge of a company's financial position, particularly when a rescue operation for the company is being mounted, may well fear that for them to supply money for the continued trading of the company, together with that knowledge, will make them parties to the company trading wrongfully if it subsequently goes into liquidation. This may well discourage them from assisting the company.
The position is different when fraudulent trading is concerned. The essence of the matter then is that the directors are involved in a fraudulent and dishonest scheme, and parties to carrying on business are participants in it. It is well established law—and I refer to Section 630 of the 1985 Act—that if a third party participates with the directors in a dishonest and fraudulent design, he will be liable with them as a constructive trustee. Section 630 gives statutory expression to this principle in a particular context and for particular purposes. Wrongful trading does not necessarily involve actual dishonesty, but is concerned more with carelessness and incompetence, and different considerations apply to third parties in the circumstances. I have apologised, and I do so again, for that somewhat lengthy explanation.
We decided that, if the imposition of personal liability for wrongful trading was to be effective, it was essential that it should cover not only the incurring of debts but also the dissipating of assets and that the extent of the wrongful trading should be assessed by 746 the deficiency in relation to the claims of those proving in the liquidation.
There are two important subsections in Clause 11, the significance of which, I think, appears to have been missed, certainly by the opponents of our wrongful trading policy. Subsection (3) gives protection to directors if, as soon as they knew the company had no reasonable prospect of avoiding going into insolvent liquidation, they had sought to minimise the loss to creditors by taking an appropriate action. For instance, they could have taken immediate steps for the appointment of an administrator, or for putting the company into voluntary liquidation, or persuading the debenture holder to appoint an administrative receiver. That would mean that the court could not make a declaration even if the liquidator was minded to make such an application.
The second subsection of significance is subsection 2(b). This provides that wrongful trading will only commence when a person knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation. It is important in this clause that one should recognise when the person knew that there was no reasonable prospect of the company avoiding going into insolvent liquidation.
I am aware that there has been real concern—it has been expressed—that with the benefit of hindsight what was reasonable at the time will be thought not to be so by the liquidator and indeed possibly by the court. I recognise also that some liquidators may be pressurised by creditors, particularly where the sums involved are large and the directors are men of substance. They may be pressurised to make applications for wrongful trading declarations perhaps in the expectation that the directors will be prepared to reach a compromise rather than risk a court hearing.
However, the courts have much experience of dealing with problems of this nature. In every negligence action, for example, the court has to apply the appropriate standard of care to determine whether the defendant's conduct was careless in relation to that standard. Did his conduct fall short of the standard required from reasonable people in the circumstances?
I understand that a recent text book on the subject points out that the question of whether he fell short of the standards is treated mainly as being a question of fact to be determined according to common sense in each particular situation. Situations in which the court must decide whether conduct fell short of the standard can range from the split-second decisions required of an airline pilot or driver to the drawing up over a long period of time of the plans of a building, for example, or a bridge.
In substance it is this familiar process that we are asking the courts to apply to the decisions taken by directors in the running of their companies. We give the courts specific guidance in subsection (4) as to the way in which they are to determine the standard to be observed by the reasonable director in any circumstances. I have no doubt that with the help of expert evidence the courts will develop case law with useful guidelines as to what conduct is acceptable, taking into account current views of what is expected of directors.
747 I am sure that one effect of this clause will be to ensure that in future decisions made by directors, particularly where there are any doubts about the solvency of the company, will be fully and properly documented, and probably taken with the benefit of professional advisers, in order to show that an adequate standard of conduct has been observed. If that is the case, our efforts will not have been wasted. I beg to move.
§ On Question, amendment agreed to.
Lord Noel-Buxton moved Amendment No. 13:
Page 8, line 30, leave out ("ought to") and insert ("would on due consideration in the circumstances then prevailing").
The noble Lord said: I think it would be convenient, if I may, to speak to this amendment and also to Amendments Nos. 15, 17, 18 and 22.
Amendment No. 15: Page 8, line 39, after ("step") insert ("reasonably available to him").
Amendment No. 17: Page 9, line 3, after ("ascertain,") insert ("the consideration due from him,").
Amendment No. 18: Page 9, line 5, after ("by") insert ("or due from").
Amendment No. 22: Page 9, line 17, at end insert ("by the company.").
§ I should like first to confirm that I am wholeheartedly behind the intention of the Government, by this Clause 11, to make directors, including shadow directors, personally liable if they act carelessly or recklessly by doing nothing or very little to prevent further losses to creditors when there is no reasonable prospect that the company can avoid going into liquidation.
I am also most grateful to my noble friend the Minister for the extensive remarks he has made on this clause, and at this stage. I do, however, object to the test of imputed knowledge, in paragraph (b) of Clause 11(2), implicit in the phrase, "ought to have concluded"; which phrase is also, in my view, unacceptably vague. This test caused great injustice in the analogous Section 152(4) of the Social Security Act 1975. Clause 203 and Schedule 9 to this Bill would repeal that section. I should not like to see the injustices of Section 152(4), which the Government have thus recognised, perpetrated again on a wider scale by virtue of Clause 11 of this Bill. We need a more straightforward, just test, which I have tried to convey by the phrase,
would on due consideration … have concluded".
This test is one based on how the directors concerned acted, not on how they thought and felt, or ought to have thought and felt. The addition of the phrase,
in the circumstances then prevailing",
makes it clear that the directors' conduct should be judged in the light of the information available to them at the time and not in the light of the inhuman wisdom of hindsight. Without a fair and more just test in Clause 11(2)(b), as I have suggested, I should be deeply concerned about the operation of the clause in relation to all directors and shadow directors.
§ I should also still be concerned about the circumstances in which a holding company, if held to be a shadow director, would become liable for the 748 debts of an insolvent subsidiary. Of course I accept the assurance which my noble friend the Minister kindly gave me the last time I raised the point. The Bill does not necessarily make a holding company liable for the debts of an insolvent subsidiary. It treats the holding company in much the same way as any other person having a substantial influence over the company. I agree with and support that, but how would the phrase "ought to have concluded" be construed in relation to a holding company in the context of Clause 11? However, I think any real concern of mine would fall if the test in Clause 11(2)(b) was recast as suggested by this amendment.
§ I should now like to address myself to Amendment No. 15. Surely it is impossible for most directors to take every step they ought to take. For example, a director may be quite unable to afford personally the cost of necessary investigations or professional advice which the company is unwilling to make or take, or is unable or unwilling to pay for. Although the courts might construe the Bill, as drafted, in line with this amendment, there is every point in making Parliament's intentions clear from the outset. Amendments Nos. 17 and 18 are consequential on my Amendment No. 15.
§ In regard to Amendment No. 22, the addition of the words "by the company" is designed to protect the position of an alternate director who may have had functions entrusted to him by his appointing director but who never discharged them because his appointing director was always able to act. In those circumstances an alternative director could be caught only if the company has entrusted functions to him. I beg to move Amendment No. 13.
§ Lord Meston
as regards Amendment No. 13, surely the noble Lord is realy proposing a distinction without a difference? The expression "ought to" is familiar to lawyers and the noble Lord, Lord Lucas, drew the correct analogy with the law of negligence. If I "ought to" have seen the bus which ran me over, then surely also I,would on due consideration in the circumstances then prevailinghave avoided the bus which ran me over.
§ 10.30 p.m.
§ Lord Lucas of Chilworth
I am greatly obliged to the noble Lord, Lord Meston, who really has answered my noble friend. I listened carefully to what my noble friend Lord Noel-Buxton had to say about this series of amendments, but I really cannot see how the amendments would improve the clause as drafted. I shall not repeat the point which the noble Lord, Lord Meston, made with such clarity.
I appreciate that the remainder of the amendments which my noble friend has proposed are intended to assist the court in deciding on the merits of the application. However, I do not believe that the amendments would achieve that objective. As I understand it, the court is being required to consider not only the conclusions which the director reached as compared with a reasonably diligent person, but also what consideration he gave to the facts available to him. In other words, what were his thinking processes at the time he reached his conclusion?
749 I admitted earlier that I am not a legal man, but I believe that it would be very difficult for the liquidator to produce that type of evidence. If that is so, I do not see how the court would ever be able to satisfy itself on the matter. The court has to consider whether he reached a conclusion different from the conclusion which a reasonable man would have reached. The thought processes in reaching the decision are, in a sense, irrelevant.
If the Committee accepted these amendments, it would only make the possibility of obtaining a declaration of personal liability more difficult. We shall certainly look at the points which my noble friend made with regard to the holding companies and alternative directors, but I ask my noble friend to forgive me for not commenting upon that matter tonight. However, having given him that assurance and bearing in mind what I have said about the comments of the noble Lord, Lord Meston, I ask my noble friend to withdraw his amendment.
§ Lord Noel-Buxton
I am very much obliged to my noble friend for what he has just said. I must admit that what the noble Lord, Lord Meston, said did rather hit home. I am sure that there is very little between my noble friend the Minister and myself as regards what we are trying to do. I fear that we are rather dropping into semantics. Let us leave the matter at that for the moment. I thank my noble friend the Minister for his assurances on the two subsidiary points that I made. On that basis I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Lord Lucas of Chilworth moved Amendment No. 14:
§ [Printed earlier: col. 742.]
§ The noble Lord said: I spoke to this amendment when discussing Amendment No. 12. I beg to move.
§ On Question, amendment agreed to.
§ [Amendment No. 15 not moved.]
§ Lord Lucas of Chilworth moved Amendment No. 16:
§ [Printed earlier: col. 742.]
§ On Question amendment agreed to.
§ [Amendments Nos. 17 and 18 not moved.]
§ Lord Lucas of Chilworth moved Amendments Nos. 19 to 21
§ [Printed earlier: col. 742.]
§ The noble Lord said: I spoke to Amendments Nos. 19, 20, and 21 at an earlier stage in our proceedings. I beg to move these three amendments.
§ On Question, amendments agreed to.
§ [Amendment No. 22 not moved.]
§ Lord Lucas of Chilworth moved Amendment Nos. 23 to 27:
§ [Printed earlier: col. 742.]
§ The noble Lord said: I beg to move Amendments Nos. 23 to 27, to which I spoke when moving Amendment No. 12. I beg to move.
§ On Question, amendments agreed to.750
Lord Bruce of Donington moved Amendment No. 28:
Leave out Clause 11 and insert the following new clause:
11.—(1) A company shall be trading wrongfully within the meaning of this section if—
(2) Save for declarations made under subsection (6), declarations may be made by the court in respect of wrongful trading by a company on the application of the official receiver, its liquidator, its administrative receiver or administrator or a creditor or contributory thereof but only if—
(3) The court, on any such application, may declare that any person party to the carrying on of the business of the company shall be personally responsible, without any limitation of liability, to make such contribution (if any) to the company's assets as the court thinks proper, if it appears that such person—
(4) Where the court makes any such declaration, it may give such further directions as it thinks proper for the purpose of giving effect to that declaration, and in particular may—
(a) make provision for making the liability of any such person under the declaration a charge on any debt or obligation due from the company to him, or on any mortgage or charge or any interest in any mortgage or charge on any assets of the company held by or vested in him or any company or person on his behalf, or any person claiming as assignee from or through the person liable or any company or person acting on his behalf, and may from time to time make such further order as may be necessary for the purpose of enforcing any charge imposed under this subsection.
For the purpose of this paragraph the expression "assignee" includes any person to whom or in whose favour, by the directions of the person liable, the debt, obligation, mortgage or charge was created, issued or transferred or the interest created, but does not include an assignee for money or money's worth given in good faith and without notice of the matters which constituted the trading wrongful; and
(b) provide that sums recovered under this section shall be paid to such persons or classes of persons, for such purposes, in such amounts or proportions at such time or times and in such respective priorities inter se such declaration shall specify.
(5) The provisions of this section shall have effect notwithstanding that the person concerned may be criminally liable in respect of the matters on the ground of which the declaration is to be made.
(6) Any company and (if with the company's consent) any person party to or interested in becoming party to the carrying on of the business of the company, may apply to the court in chambers to determine whether all or any of the trading of the company at and after such application would be wrongful and on any such application the court may, on or subject to such terms and conditions and generally as in its discretion it may think fit, declare that any such trading of the company for any such period or periods or in any such events as should then be specified should not be wrongful and on any such application the relief granted
may include such provisions as to the court shall seem fit for the best ensuring the confidentiality of or publicity for the declaration made thereon or the terms and conditions thereof or any part or parts of them or either of them.
(7) If in relation to any application under subsection (6) any persons wilfully makes a statement which is false in any material particular, either knowing it to be false or being reckless as to the truth or falsity, he shall on such being declared by the court, be disentitled to any benefit from the order made on such application and shall be guilty of a misdemeanour and, shall be liable on conviction in Scotland on indictment and for imprisonment for a term not exceeding two years, and be liable on summary conviction in England or Scotland to imprisonment for a term not exceeding four months, and in either case to a fine not exceeding £5,000 in lieu of or in addition to such imprisonment; provided that:—
(8) For the purposes of this section the express "officer" shall include any person in accordance with whose directions or instruction the directors of a company have been accustomed to act.
(9) Nothing in this section shall give rise to any liability for wrongful trading except as provided by this section or shall preclude any liability whatsoever arising independently of this section.
(10) This section shall apply to the carrying on of the business of the company whether in England and Wales or not and whether before or after the commencement of this Act.").
§ The noble Lord said: I purposely refrained from speaking to the series of amendments covering Clause 1 I moved by the noble Lord, Lord Lucas, because the amendment which I have put down asks the Committee to replace Clause 1 I altogether by a new clause. In my judgment, and with all respect to those Members of the Committee who have had the fortitude and interest to remain, I do not think that this important matter ought to be left to the detailed discussion of such a small, if distinguished, number of your Lordships. It merits wider ventilation; and should the occasion on Report be convenient I would particularly welcome hearing the opinions of the noble and learned Lord, Lord Denning, upon this particular clause.
§ I am content for the moment that Amendment No. 28 (which I take it will be reproduced in its entirety as it now stands in Hansard) can be read in conjunction with the speech delivered by the noble Lord, Lord Lucas of Chilworth, on his own clause. As I listened to him I rubbed my eyes and thought to myself, "He must be speaking in support of my amendment". He was dealing with the question of the personal liability of the director, or directors, in quesion as though the amendment I had put down would make the position of the liquidator weaker in the sense that he would not have any control of the company's assets if this declaration of unlimited liability, or liabilities, as originally put in whole, or in part, was separately stated in the form that it was in the draft clause of the Cork Report, which I carefully altered at subsection (3) of Amendment No. 28, lines 4, 5, and 6, exactly to deal with the point that he complained my amendment did not deal with.
§ If he will recall, I quesioned him at the time as to whether he was talking to the draft amendment in the Cork Report or the amendment on the Marshalled List. I have listened carefully to the arguments put forward by the noble Lord, but I am bound to say that 752 so far the purpose of having wrongful trading stated completely separately from the various kinds of offences which are dealt with under the fraudulent section has not been made clear.
May I quote paragraph 1782 of the Cork Report? This should make the purpose of the amendment that I have before the Committee abundantly clear. It reads:
Our proposals introduce, and are intended to introduce, a radical extension of those aspects of section 332"—
which now becomes Section 630 of the 1985 Act—
which relate to civil liability, under section 332"—
now Section 630 with the exclusion of subsection (3), which is now put in Section 458 of the 1985 Act—
an honest director cannot be made personally liable for his company's debts, however recklessly or unreasonably he may have behaved. Even if, knowing his company to be insolvent, he causes it to carry on trading and incuring fresh liabilities, he will escape liability if he can persuade the Court that, however unreasonably, he honestly believed that 'there was light at the end of the tunnel' and that 'the dark clouds had a silver lining'. The test is subjective".
Indeed, the whole purpose of Amendment No. 28 is to deal with the non-fraudulent cases, already dealt with in other parts, and to bring a more precise definition into what constitutes wrongful trading which, although not criminal, exposes the director (or whoever is concerned in the affair) to some degree of personal liability though he is not dishonest but possible merely reckless or incompetent. That is the whole purpose of Amendment No. 28.
§ I will not enlarge on this any further, but I am quite confident that at a later stage, when the remainder of the amendments have been carried into the Bill which will reach us at Report stage—in that context, when the text of the Bill as amended in Committee is before the House—I can convince the House that Amendment No. 28 represents a far more satisfactory, far more watertight and, indeed, far more stringent version of wrongful trading than that provided by Clause 11 as amended by the amendments of the noble Lord earlier this evening. The noble Lord may or may not wish to reply to what I have just said, but I should tell him in advance that at the conclusion of any further deliberation on Amendment No. 28 I shall ask in due time, when it is proper for me to do so, to withdraw the amendment. I beg to move.
§ Lord Lucas of Chilworth
In answer to the question which the noble Lord, Lord Bruce of Donington, raised in his opening remarks, as to whether the whole of his new clause would appear in Hansard, I understand that it will. That means that it can be considered alongside the remarks that I made in moving the Government's amendments in this area.
In the light of what the noble Lord, Lord Bruce of Donington, has said—notably, that when noble Lords or other readers of Hansard have had the opportunity to consider his suggested new clause alongside the remarks I made he will find no difficulty in persuading your Lordships, who would then be out of Committee, that his new clause was a better method of dealing with the problem than the Government's way—I would respond to him tonight, rather than by picking out a number of defects which we find evident in his clause and in the Cork proposals, that I have no hesitation in suggesting to the Committee that I shall have no 753 difficulty in persuading your Lordships' House on that occasion that the Government's proposals are better than those of the noble Lord, Lord Bruce of Donington.
§ Lord Meston
Perhaps I should indicate that when this matter does come forward again we on these Benches—at last I can use that expression—will support the amendment.
Lord Bruce of Donington
I am grateful for the malevolent indication given by the noble Lord, even at this late hour! May I respond by saying that I will very much look forward to the disputation which is undoubtedly postponed and will take place on the Report stage in equally agreeable circumstances. I beg leave to withdraw the amendment.
§ Amendment, by leave, withdrawn.
§ Clause 11, as amended, agreed to.
§ Clause 12 [Disqualification of persons held to be personally responsible for company's debts or liabilities]:
Lord Lucas of Chilworth moved Amendment No. 29:
Page 9, line 32, leave out from beginning to ("then") in line 33 and insert ("liable to make a contribution to a company's assets,").
§ The noble Lord said: I beg to move Amendment No. 29 standing in my name. The Committee has agreed, in consideration of Clause 11, that the drafting should be amended to make it clear that a person who is responsible for a company's wrongful trading is liable to make such contribution as the court thinks proper to the company's assets available for distribution to the general body of creditors in the liquidation and is not liable to individual creditors for particular debts or liabilities incurred by the company at particular times. The Committee will shortly consider in relation to Schedule 4 a similar amendment to Section 630 of the Companies Act 1985 which provides for responsibility of individuals for a company's fraudulent trading.
§ The purpose of Clause 12 as a whole is to enable the court, where it makes a declaration in regard to wrongful trading under Clause 11 or in regard to fraudulent trading under Section 630 of the 1985 Act, to make a disqualification order against the person to whom the declaration relates. Clearly it is necessary that the drafting of Clause 12 should be consistent with the provisions to which it relates, and that is the purpose of this amendment, which I beg to move.
§ On Question, amendment agreed to.
§ Clause 12, as amended, agreed to.
§ Clauses 13 and 14 agreed to.754
§ Schedule 4 [Amendments of 1985 Act]:
Lord Lucas of Chilworth moved Amendment No. 30:
Page 162, line 10, at end insert—
("3A. In section 507(1) (meaning of "contributory") after the words "wound up" there shall be inserted the words "(other than a person so liable by virtue of a declaration under section 630 below or section 11 of the Insolvency Act 1985)".
3B.—(1) For subsection (2) of section 630 (responsibility for company's fraudulent trading) there shall be substituted the following subsection—
(2) The court, on the application of the liquidator, may declare that any persons who were knowingly parties to the carrying on of the business in the manner above mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper".
(2) In subsection (3) of that section for the words "the official receiver or the liquidator (as the case may be)" there shall be substituted the words "the liquidator".")
§ The noble Lord said: The main purpose of this amendment is to achieve consistency between the wrongful trading provisions of this Bill and the fraudulent trading provisions of the Companies Act 1985. It ensures that the proceeds of successful fraudulent trading applications should be available for distribution to the general body of creditors and that the making of such applications should be confined to the liquidator of the company. The arguments are precisely the same as those which your Lordships have just accepted in relation to the closely analogous wrongful trading provisions of Clause 11 of this Bill. I do not think I need repeat them now.
§ The amendment will also have the effect of refining the definition of "contributory" to make it clear that persons who have been declared liable to contribute to an insolvent company's assets as a result of a wrongful or fraudulent trading application should not be regarded as contributories. This is necessary as the persons who are liable to contribute to an insolvent company's assets on winding up under the 1985 Act are the past and present members and certain directors having unlimited liability for a company's debts under its Memorandum of Association, by virtue of Section 306 of the 1985 Act, who are treated as members under Section 503. Special provision as to liability to contribute of such persons apply, including certain limitations on the liability, and it is not intended that these provisions should apply to the different case of persons liable for wrongful and fraudulent trading. I beg to move.
§ On Question, amendment agreed to.
§ House resumed: Bill reported (in respect of Clauses 7–14 and paragraphs 1–4 of Schedule 4) with amendments.
§ House adjourned at nine minutes before eleven o'clock.