AMENDMENT TO COMMONS AMENDMENT No. 210 (Hansard, 23 October 1985)

§ Lord Mishcon
My Lords, perhaps I may immediately thank the noble Lord the Minister for his courtesy in the way in which he referred to Amendment 210A, which now appears before the House. I shall not use this analogy again, I promise, for the House will get fed up with it; but in his repertoire 1237 he certainly has courtesy and understanding on some amendments and, indeed, he had it on this occasion.
I now move 210ZA. I know the noble Lord the Minister and the House will greet this amendment with the amount of respect that it deserves, not because it is moved by me, but because it is inspired by the Law Society's company law committee after considerable correspondence and courteous discussions with the noble Lord the Minister's department. The purpose of this amendment is to give the court the discretion which lawyers feel—I ought to say "some lawyers feel", in case there is any difference of opinion that the noble Lord the Minister is going to express as a result of advice he has received—that the court is not given by the present wording.
The word here is "shall". Your Lordships will see that the court shall make an order to put things right in the case of fraudulent preference or transactions at undervalue; or the court shall not make an order. The operative word at the present time is, of course, "shall". Just in case there is any doubt about this in your Lordships' reading of the whole of the Bill, may I make the point very quickly that Clause 9—and of course I am referring always to No. 127 when I talk about the Bill—when dealing with responsibility for wrongful trading, in regard to the court, uses the word "may" and not "shall". Clause 12, when dealing with the summary remedy against delinquent directors and liquidators, uses the word "may" and not "shall". Clause 13, which concerns the power to make an administration order, contains the word "may" and not "shall". Also, in Clause 191, transactions defrauding creditors, the word used is "may" and not "shall".
It is particularly desirable that the court should have a discretion under Clause 84. Where the transaction involves a person who is connected with the company, the onus of proof under the Bill is reversed and the connected person has to prove, in the case of an undervalue transaction, that the company was not insolvent at the time of the transaction and, in the case of a preference, that the company was not influenced by a desire to prefer.
There is in Clause 91(6) an extremely wide definition of "person connected". It relates to, but is wider than, the definition of "an associate" in Clause 207, and the onus of proof may be reversed in the case of a significant number of people who had little actual connection with the company, and who may have little evidence available to them with which to rebut the assumption. It is very important to remember that the court, in circumstances like these and in others, that I and the House can well envisage, may wish to be lenient towards certain defendants in that position.
I could quote, though I will not at this hour, certain correspondence which has taken place with the Department of Trade and Industry. Indeed, there is a letter—and I am sure that your Lordships and the Minister will take this from me—in which the department acknowledges that the court should have a discretion. The real issue is that the department seems to feel, in spite of the word "shall", that the court has a discretion. There are a number of lawyers who take the view that it certainly has not, by virtue of the word "shall". This amendment makes it absolutely clear 1238 that the court has a discretion. The court should have it and I hope that the amendment suggested by the Company Law Committee of the Law Society will be agreed to. I beg to move.

§ Lord Lucas of Chilworth
My Lords, I am very grateful for the remarks of the noble Lord, Lord Mischon. Certainly the Law Society have made a number of points in connection with these clauses and we have been able to accommodate some of their points through amendments; but I have to say that there are some points on which we are still unable to agree, and I have to say that this is one of them.
With Amendment No. 210 to Clause 84, I think it is clear that subsection (3) exempts a very wide range of transactions, and that anything which is still caught by the provisions should be made the subject of a court order under this clause. I should emphasise that in considering what order to make, the court can take extenuating circumstances into account and may make an order varying from full restitution, on the one hand, to what amounts, on the other, to a nominal acknowledgement that a transaction at an undervalue has taken place.
With regard to preferences, these are absolutely void under the present law and are liable to be repaid whether or not the recipient was a completely innocent party. Under Clause 84, the court has a similar discretion in relation to transactions at an under value, in that it can adjust the amount of restitution ordered to suit the circumstances of the case.
10.30 p.m.
It remains our view that if the court finds that there has been a preference or a transaction at an undervalue which is not exempted under the defences contained in Clauses 84 and 85, this should be acknowledged by the court making an order to that effect, even if the court orders only nominal restitution. It may be important in establishing the conduct of the directors, as the giving of preferences and entering into transactions at an undervalue are matters to be taken into account when considering the potential unfitness of directors to take part in company management. Your Lordships may wish to refer to the new schedule added to the Bill by Commons Amendment No. 415.
If a director has caused the company to give preferences or enter into undervalue transactions for an ulterior motive unknown to the recipient, this could also amount to misfeasance on the part of the directors and any claim launched against him by the liquidator may rest on whether or not such preferences were given or transactions entered into, even if the recipients were wholly innocent and the restitution is purely nominal.
I am not a lawyer. That is the advice that I have been given. I understand that the Law Society would prefer it if the court had an absolute discretion not to make an order under the clause, but we do not agree here and we do not agree that the court, on finding a preference or an undervalue transaction proved, should have the option of making no order at all unless one of the specific exemptions provided by the clause applies. With that explanation I hope that the noble Lord, Lord Mishcon, may feel that the views expressed 1239 in his amendment have been properly considered, but this I have to say is the outcome of the consideration.

§ Lord Mishcon
My Lords, I hesitate to keep the House at this hour by further argument but I do want to make a plea to the noble Lord the Minister. He realises that he is dealing with respresentations made by a very responsible body who have taken a very leading part in the discussions on this Bill and who have been indulging in very helpful conversations with the noble Lord's department, which has very often availed itself of the advice tendered by the Law Society.
With great respect, the noble Lord has not answered the point. He has not dealt with the fact that discretion, in spite of all the other serious matters that I mentioned, had been given to the court. But worse than that, he says that there is definitely a discretion for the court to take the view that it need not restore the company to precisely the position in which it would have been; it has a discretion to make a nominal order or something of that kind. I would ask the Minister as a layman in these matters, if I may respectfully so call him, to follow me in this because it only needs a layman's common sense; it does not need a lawyer's specialised knowledge. Will he kindly look with me at Clause 84(1)(b), the very subsection to which he referred. I ask him not as judicial authority but as a layman to read the words with me: the court shall, on such an application, make such order as it thinks fit"—— to do what? for restoring the position to what it would have been if the company had not entered into that transaction or, as the case may be, had not given that preference". What does that mean? It means that the court must in fact make an order—it can do it in such terms as it thinks fit—which has the effect of putting the company in the position in which it would have been if the company had not entered into the transaction or, as the case may be, had not given that preference.
This is the problem. The Minister says, "I am willing to give the court the discretion to make a halfway order, or a quarter-way order, or a nominal order", but there is a body of lawyers which says that the court does not have that discretion. My amendment clearly gives the court that discretion. If the Minister is advised that it is proper that the court should have the discretion to go half-way, quarter-way, or nominally, but there is a body of lawyers which for very good reasons—the noble Lord has followed me as I read the subsection—takes the view that the court is limited, if it finds that the exceptions do not apply, to putting the company back into the same position without being able to go half-way, quarter-way or a nominal way, what possible answer can there be for refusing the amendment?

§ Lord Lucas of Chilworth
My Lords, the noble Lord, Lord Mishcon, quite properly described me as a layman in these matters. He also stated that there was a body of lawyers who felt that the court did not have discretion. I am advised by a body of lawyers, and I am assured that the court does have that discretion. I have sought to explain to your Lordships how we view the position.
1240 I have to say that I cannot depart from that understanding. I have to say that we feel that we are maintaining the current position in law. The court shall only make such an order if it thinks fit. It may not order a total restoration of the position if it does not see fit so to do.
My understanding as a layman is that that provision gives the court all the option that it requires. I ask the noble Lord to accept that the advice I have received, although it may be different from that which he obtained, is equally good advice. There are always two sides when two lawyers come to consider a situation. We believe that the advice we have received is correct in this context.

§ Lord Mishcon
My Lords, if two lawyers give a different opinion their aim is a common aim and usually a compromise is reached. I regret that the noble Lord the Minister has presumably been advised not to accept a compromise which obviously affects the very intention that he has expressed. I hope that the Minister's department—and I say this with very great respect—will not come to regret, as the result of a judicial statement at some future time, that at twenty-two minutes to eleven at night the Minister was not able to accommodate the Law Society on this amendment. I hope that situation does not arise. If it does, I hope that the noble Lord's memory will reflect the discussion that has taken place on this amendment.

§ The Deputy Speaker (Lord Airedale)
My Lords, does the noble Lord seek to withdraw his amendment?

§ Lord Mishcon
My Lords, I do not seek to withdraw it but I have no alternative.

§ Lord Lucas of Chilworth
My Lords, I beg to move Amendment No. 210, as amended by Amendment No. 210A, to which I spoke earlier.