AMENDMENT TO COMMONS AMENDMENT No. 34 (Hansard, 23 October 1985)

Lord Bruce of Donington
My Lords, I beg to move Amendment No. 34A. On this amendment I refer to the new clause set out in Amendment No. 34 and to subsection (4) thereof which at the moment reads: The Secretary of State may by order modify any of the provisions of Schedule (Malters for determining unfitness of directors to this Act; and such an order may contain such transitional provisions as may appear to the Secretary of State necessary or expedient. My amendment seeks to tighten up this particular subsection in order that the Secretary of State may modify the situation set out in the schedule only to the extent necessary to accomplish transitional provisions. As I say, the purpose of the amendment is restrictive.
If the House will turn to the new schedule, which, for convenience, is set out in the new Bill—I shall not refer to the specific amendment itself but to Sehedule No. 2 to the Bill, which is on page 194 of Bill No. 240—your Lordships will find there set out the "Matters for determining unfitness of directors". There are two Parts. Part I is headed "Matters applicable in all cases"; Part II "Matters applicable where company has become insolvent". The purpose of this amendment is to restrict the right of the Secretary of State to modify the provisions of Schedule No. 1 unless they are for the purpose of accomplishing the transitional arrangements, which will be necessary in this case.
The reason for this is very clear. If the noble Lord will refer to Schedule 2 he will find at paragraph 4 that one of the matters for determining unfitness of directors to which the courts must have regard—and undoubtedly it is one of the matters to which any liquidator must have regard in reporting to the Secretary of State—is: The extent of the director's responsibility for any failure by the company to comply with any of the following provisions of the 1985 Act, namely— (a) section 221 (companies to keep accounting records)'' I regard this as one of the most important matters that the court should consider. My view, which I think is shared by most of my profession, is that it ought to be insisted upon.
Section 221 of the Companies Act is a most comprehensive section. On the basis of my experience over 40 years I would tell the house that had companies complied with this particular section, which has been in existence ever since the 1948 Act, 1131 had they obeyed the law and kept within the provisions of Section 221, which has been enacted on several occasions—in the 1948 Act, and in the 1976 Act, Section 12 for example—many liquidations would not have taken place at all. The failure of companies and their directors to keep proper books of accounts, in compliance with the conditions laid down in the Companies Act itself, is one of the prime causes of a good number of liquidations. I do not wish to read Section 221 to the House because it would be unduly time-consuming, but I solemnly advise all directors, whether they are executive or non-executive directors, who will undoubtedly come under the consideration of the Insolvency Bill and its new provisions, to read Section 221 very carefully. It specifies precisely—and the requirements are not unduly onerous—the records that companies ought to keep and that directors ought to insist that their companies keep, on penalty of resigning unless proper accounts are in fact kept.
My reason for trying to restrict the provision is this. The noble Lord, Lord Young of Graffham, has recently undertaken the onerous task of relieving burdens on business, and among the reliefs that are under consideration by the noble Lord, Lord Young of Graffham, and his Department, is the relaxation of certain accounting requirements, in particular those relating to auditing. I should like to have from the noble Lord an assurance that so far as concerns Her Majesty's Government there will be no tampering with Section 221 of the Companies Act, however much the noble Lord, Lord Young of Graffham, may think that keeping to the requirements of the Companies Act, Section 221, is too onerous a burden and that business ought to be relieved of the responsibility. In my view, nothing could be more destructive of the general disciplines that all good businesses should apply, whether they are small, medium or large, that the weakening of this particular section.
If I may, I want to go a little further. The original Act as it was presented to your Lordships involved the automatic disqualification of directors, as a streamlining process, and the House rejected this, though of course it was far less time-consuming. New disciplines have been substituted for directors which are incorporated in Schedule 2 of the Bill as it stands and which are already incorporated in other sections of the Bill in regard to liquidators. Disciplines have been laid upon liquidators, insolvency practitioners and directors, and now what we need are disciplines upon the Government.
If noble Lords will refer to col. 213 of Hansard of 22nd January they will find there listed, in response to a question of mine, the number of proceedings brought against persons in respect of failing to keep proper accounting records. In the past four years the total number of proceedings was 36 and I fancy that since 1948 there have probably not been 100 prosecutions brought in respect of breaches of this particular provision of the Companies Act. I am not blaming this Government. All governments, even governments which I have supported, have taken exactly the same attitude. I can assure the noble Lord, that Section 221 of the Companies Act is more honoured in its breach than in its observance.
I should like an undertaking from the Government that in future, even though it means increasing their 1132 staffs very significantly indeed, this Section 221 will be thoroughly and rigorously enforced. They will do for the entire business community a very great service. They will certainly be safeguarding the interests of creditors, promoting the health of all businesses and protecting the interests of directors.
If I may use this occasion, I advise any director of any company who cannot obtain the assurance that Section 221 of the Companies Act 1985 will be complied with to present his company with a seven-day notice of resignation unless the defect is remedied in the shortest possible time. That is the reason I wish to have this amendment to restrict the right of the Secretary of State to amend the matters which have to be taken account of and which are set out at Schedule 2.
If they are to be amended, they should be amended by statute. I do not want any weakening of the provisions or any pressure by the noble Lord, Lord Young, for example, to water down paragraph 4(a) of Schedule 2. That would be a grave blow to company disciplines which the noble Lord, Lord Lucas, seems to be anxious to enforce—as is reflected in the Bill. I beg to move.

§ Lord Lucas of Chilworth
My Lords, the noble Lord has explained his amendment in a good deal of detail. I understand the fear underlying it, but it restricts the order-making power of the Secretary of State to making transitional provisions in relation to the matters now in the schedule. If your Lordships carried the amendment, it would defeat an essential purpose of the amendment provided in another place. In another place there was virtual unanimity—and this view was shared by the noble Lord and others—that the Bill should give guidance on matters to be taken into account in determining unfitness. There was general agreement also that the Bill should enable the Secretary of State to vary that guidance from time to time, as necessary in the light of experience gained from the operation of this Bill and obviously to reflect the evolution of commercial practice and standards. That is the very point to which the noble Lord referred in dealing with the Companies Act.
During recommitment the noble Lord was persuasive when he urged upon us the very flexibility which Amendment No. 34 provides and which his proposed amendment would remove. I cannot be persuaded by the noble Lord but I can give him this assurance. We have no plans to seek modifications to the schedule at this time, though we have said all along that the guidelines have to be sufficiently flexible to meet contingencies and to have regard to experience gained. I cannot go back on that, and neither would your Lordships expect me to. I cannot at the same time give the assurance that he seeks that the guidelines are set in concrete. They cannot be. I cannot at the same time prejudge what my noble friend Lord Young may propose in future legislation which may affect this or any other Act of Parliament. I think perhaps on reflection the noble Lord will realise that. It will at that time be for him to argue the point if such hypothetical legislation impinges upon matters which we are discussing today.

Lord Bruce of Donington
My Lords, I am most grateful to the noble Lord, but he troubles me. What he is saying is this. The noble Lord, Lord Young, could go to his right honourable friend and say, "Section 221 of the Companies Act 1985 lays down certain standards for the keeping of proper company records. In my view, that is inhibiting businesses from developing. It is all part of the red tape that I am there to try to ease". Incidentally, that would be despite the fact that in research that his department undertook only about 2 per cent. of those in the survey made any complaint about audit or accounting requirements, and then only after prompting. But the noble Lord's right honourable friend might be persuaded.
It is essential that the requirements of the Companies Act (particularly of Section 221) which are quite unambiguous, should not be flexible. They are fundamental to the control of any business, to the proper security of creditors, to interests of shareholders and ultimately to the success or failure of any business.
I am sorry that the noble Lord cannot give me the assurance that by order paragraph 4(a) will not be eliminated at a stroke by the Secretary of State's laying an order. The noble Lord, Lord Lucas, knows quite well, because he is a parliamentarian, that one of the advantages of having an order laid before the House. whether it be under the negative or the positive procedure, is that it cannot be amended. The House has either to accept it as a whole or reject it. If the noble Lord, Lord Young, is given the licence which the Commons amendment as at present drafted would give him, he is quite capable of putting in that order seven matters to which no objection whatsoever could be taken and one vital one to cover this point. The House would be left with the choice to accept the order as a whole or to reject it.
I am all for flexibility, but this matter has stood the test of time since the 1948 Act and probably some time prior to that, as noble and learned Lords may know. It has remained absolutely fixed and unchanged, and I want it to be immutable. I hope that even at this late stage the noble Lord will agree. First, Schedule 2 has been drafted after consultation with all the learned professions, as he indicated. Secondly, if it is to be amended, particularly in the vital regard to which I have referred, the matter should come before Parliament as part of an amending Act. It should not be left to the discretion of the Secretary of State, who might, for all I know, succumb to the blandishments and charm for which the noble Lord, Lord Young, is well known and be persuaded to do something contrary to the spirit of the insolvency legislation before your Lordships.

§ Lord Lucas of Chilworth
My Lords, the noble Lord has followed every single word that has been said on the Bill in this House. I am surprised that he should think that we would depart from what is absolutely fundamental. Why should he bring forward at this stage a hypothetical situation which, indeed, might apply to his own side? He shakes his head; I shake mine also. I know of no intention to remove from the schedule the requirement to keep books of account. I delete the word "proper" which he put in. The 1134 schedule does not use that word. I turn to page 194.I quote: Schedule 2—"Matters for Determining Unfitness of Directors. paragraph 4(a) section 221 (companies to keep accounting records)". It is necessary, and I cannot foresee why we would want to remove that requirement. But I am not going to undertake that other legislators, whether in this Government or in any other Government, may not seek to achieve other aims to introduce legislation which may have an impact. We would have to deal with that at that stage. Certainly we cannot deal with it at this stage and I invite your Lordships to reject this amendment.

Lord Bruce of Donington
My Lords, the noble Lord, Lord Lucas of Chilworth, has gone on record quite sufficiently for the limited purposes I had in mind in moving this amendment. I hope he likes what he sees when he reads the report of the debate, and I hope the professions and in particular all directors will take note. In those circumstances, I ask the leave of the House to withdraw the amendment.