HL Deb 06 April 1989 vol 505 cc1209-54

4.15 p.m.

Consideration of amendments on Report resumed.

The Deputy Speaker (The Earl of Listowel)

My Lords, before I call the next amendment I should point out to the House that if it is agreed to I cannot call Amendment No. 140.

Clause 81 [The companies' changes register]:

Lord Strathclyde moved Amendment No. 139C:

Page 76, line 6, leave out from ("seal") to end of line 7 and insert— ("(4A) The certificate shall be conclusive evidence that the specified particulars or other information were delivered to the registrar no later than the date stated in the certificate; and it shall be presumed unless the contrary is proved that they were not delivered earlier than that date.").

The noble Lord said: My Lords, the amendment fulfils a commitment made in Committee. It would produce a certificate that would be conclusive that particulars were delivered no later than the date shown. The certificate would not be conclusive that the particulars themselves were accurate or complete. It would fall to the chargee to ensure that they were. It would fall to prospective assignees to check the particulars for accuracy against the instrument if they wanted to be confident that the charge being offered to them was fully effective. But the certificate would provide all the protection to the chargee that he needs in respect of conclusivity as to the date of delivery. Moreover, the chargee would have the additional benefit of being able to show that he had delivered his particulars earlier if he has the evidence to do so.

The amendment tabled in the names of the noble Lord, Lord Lloyd of Kilgerran, and my noble friend Lord Mottistone would go a little further than the Government amendment but not much. It would provide a certificate that was conclusive of the facts stated; namely that specified particulars were delivered on the dates stated in the certificate. So while the Government amendment allows a challenge on the grounds that the particulars were delivered earlier, the other amendment does not. Therefore the difference of effect between the amendments is solely that that tabled by the noble Lords would not allow the chargee to prove that, in spite of the assertion of a registrar, his particulars were delivered on time and his charge is therefore valid.

I suspect, however, that in the light of the discussion in Committee on this subject, the intention of the amendment tabled by the noble Lords is somewhat different. They may wish to argue that the certificate should be conclusive not only of the date of the delivery but also that all other requirements of registration have been met. I dealt with this argument at some length in Committee. Rather than repeat what was said then, I believe that it is best to hear what is said in support of the other amendments. All that I say at this stage is that I believe that the Government's amendment is preferable to the other one for the reasons that I have given. It will afford the chargee the right to prove that he delivered his particulars on time. We believe that the chargee should have that right.

Lord Mottistone

My Lords, the amendment is grouped with my Amendment No. 140. It is the same as that tabled by the noble Lord, Lord Lloyd of Kilgerran, in Committee. The amendment which I then tabled was heard in conjunction with it. This general matter must be taken in the round as between the various answers.

I appreciate that the Minister has taken the steps which in Committee he said he would and has considered the matter and come back with an amendment. He has made some concession toward the viewpoint which was expressed in Committee. However—and I listened as carefully as I could to what my noble friend said—I do not believe that his amendment meets the point. It really does not go far enough. Therefore, I believe that my Amendment No. 140 is more on the right track.

Amendment No. 139C does not make any provision for the legal status of the certificate other than the date on which the charge was delivered. I suggest to my noble friend that it is important that it should make provision for the text of the certificate as well as for the date, and I do not understand, notwithstanding what my noble friend said, why he does not seek to do that.

I believe that perhaps this could be thought of as part of a piecemeal alteration to the constructive notice, the duties of the registrar and the conclusiveness of the charge certificate. I should like to suggest—and I remind your Lordships that I am advised by the CBI on what I say and I believe that the Law Society has a similar view—that we do not take this matter to a conclusion at this stage but that the whole matter should be considered as part of a coherent whole when the Diamond Report is reviewed. In the meantime perhaps my noble friend will accept my amendment as being the best approach at present, with which I believe noble Lords opposite agree, although that may be asking too much of him, or give me an undertaking that he will consider the matter further in view of what I say now and what I suspect other noble Lords will say. Perhaps he will either come forward with another amendment or reconsider our amendment at the next stage of the Bill in this House or he will give a firm enough undertaking to assure us that the matter will be resolved in the right direction when the Bill goes to another place.

I am sorry to repeat myself. However, the main point is that I do not believe that my noble friend's answer showed sufficient understanding of the need for the comprehensive nature of this particular clause in relation to its subject and the fact that his amendment only does half and not the whole job. I hope that when my noble friend has heard what other noble Lords have said, he will come up with something which is encouraging.

Lord Carter

My Lords, in speaking to these two amendments perhaps I may first thank the Minister for his kind remarks about my involvement with the Bill. I am sure he will agree with me that there could be no happier or more enjoyable part of the Bill to deal with than Part IV dealing with the registration of company charges.

Lord Hacking

My Lords, or more complicated.

Lord Carter

My Lords, as the noble Lord said when he spoke to his amendment and the noble Lord opposite said, concern was expressed in Committee about the uncertainty. Everybody concerned with the Bill agrees that legal certainty must be paramount in the operation of the register of company charges. In Committee my noble friend Lord Mishcon pointed out that it is absolutely necessary to have the registrar's certificate as conclusive evidence. Anybody dealing with commerical law will appreciate that at once.

Perhaps I may deal with the point raised by the noble Lord, Lord Mottistone, about the particulars of the charge. One must have certainty of transactions in, for example, the assignment of charges or the issue of debentures secured by a charge and generally avoid liquidators and administrators having to challenge validity as against another charge on the ground that the date appearing on its face is a later date then the date of its creation. The Minister undertook to return on Report with an amendment which makes the certificate conclusive evidence that particulars were delivered no later than the date stated. Therefore, the argument seems to turn on the word "conclusive".

In the dictionary "conclusive" is defined as decisive and "conclusion" is to come or bring to an end; it is the final point. The amendment standing in the names of the noble Lords, Lord Lloyd of Kilgerran and Lord Mottistone, makes the certainty clear beyond any doubt. There is no presuming to the contrary or anything of that sort. Their amendment inserts the word "conclusive" full stop. That could not be clearer. When the Minister spoke to his amendment he said that he did not think that the amendment in the name of the other noble Lords went much further than the government amendment. However, it surely does. It is conclusive both as to the date and particulars of the charge. For that reason, on this side of the House, we support the amendment in the name of the two noble Lords.

Lord Lloyd of Kilgerran

My Lords, the Minister welcomed the noble Lord, Lord Carter, to the Front Bench to deal with these matters. It now falls upon me, as a matter of courtesy, to congratulate him on his maiden speech in a position in which the noble Lord, Lord Williams, and myself have found ourselves for such a long time, trying sometimes to move what is almost an immoveable object in relation to company law matters. I hope that the Minister will not misunderstand me but we have pressed a large number of amendments. We have had some success and I am sure that the presence of the noble Lord, Lord Carter, will increase our chances of success.

Perhaps I may remind your Lordships that we are now dealing with Clause 81 where it is laid down that: The registrar shall keep for each company a register, in such form as he thinks fit, of charges in the property of the company". In Committee this was considered at great length on 14th February. As the noble Lord, Lord Mottistone, said, it was emphasised on behalf of the CBI and the Law Society how necessary it was to have certainty. Therefore, the amendment in my name and that of the noble Lord, Lord Mottistone, introduces that certainty by saying that one should omit from government Amendment No. 139C that something shall be presumed to be correct unless the contrary is proved, giving an air of uncertainty, and insert instead the word "conclusive". Once that has been done it is not a question of proving anything further. That is taken as conclusive.

The noble Lord said in Committee that he would take away the amendment and prepare another amendment, and in some respects this is a change in the original form in the Bill. However, perhaps the Minister will have regard to the views of so many noble Lords in this House and also those who advise them. The Minister says that, as he promised in Committee, he has gone a long way in his amendment but that the difference between his amendment and our Amendment No. 140 is not much. Can he not go just that "not much" further, particularly having regard to the views of the CBI and the Law Society which really know what they are talking about on this particular matter. They realise that certainty is very important in dealing with these questions relating to the register.

Lord Strathclyde

My Lords, I am grateful to my noble friend Lord Mottistone and the noble Lord, Lord Lloyd of Kilgerran, for explaining the intention behind their amendment, although I am sorry that neither accepted what I said in my opening remarks concerning my amendment. Without going into the matter at the same length as I did in Committee, I will explain to the House the reasons the Government do not believe that a certificate that is conclusive of all matters is desirable. I think this will answer the questions put by the noble Lord, Lord Carter.

The first point is that such a certificate would not be possible under the new system in Part IV of the Bill. Part IV allows for the possibility of errors and omissions in particulars delivered. There are therefore no comprehensive requirements in relation to the validity of a charge upon which the certificate could be conclusive.

There are, however, more important arguments of principle against a fully conclusive certificate. Where a certificate is issued in respect of incorrect particulars due to clerical oversight at Companies House, the chargee is nevertheless protected to the detriment of third parties who are misled when searching the register. The holder of a fully conclusive certificate has no incentive whatsoever to update the register to reflect any changes to the terms of the charge. This is the fundamental flaw of the present system. It results in a register that is frozen in time and is therefore unreliable. Moreover, both the Jenkins Company Law Committee in 1962 and Professor Diamond in his recent report have said that the duty of issuing a fully conclusive certificate places an unreasonable burden on the registrar. Both recommended that the certificate should be dispensed with.

The Government are not convinced by the argument that there is a need for a fully conclusive certificate in order to ensure the legal certainty and thereby marketability of charges. Those to whom a charge is being assigned need only check the particulars that have been delivered against the instrument of the charge. What the noble Lords are suggesting is that the registrar should continue to carry out this activity on behalf of the commercial world. Therefore, it is hardly surprising that the CBI should want this done. In summary, the fully conclusive certificate renders the register of charges incomplete and out of date.

4.30 p.m.

Lord Lloyd of Kilgerran

My Lords, I thank the noble Lord for giving way. He says that I am proposing an amendment which is concerned only with commercial matters. Is he just throwing aside the powerful views of the CBI and the Law Society in practical matters of a commercial nature?

Lord Strathclyde

No, my Lords; of course not. I should point out, however, that those most recent words were dealing with only one point. I have dealt at considerable length with a whole range of other points raised by the noble Lord. Although I said that ostensibly there is not much between the two amendments now before us there is a fundamental gap between what the Government propose and what my noble friend and the noble Lord, Lord Lloyd of Kilgerran, propose.

In summary, the fully conclusive certificate renders the register of charges incomplete and out of date. It imposes a task on the registrar that the commercial world should undertake and it is inequitable in that it protects chargees from their own failings while making innocent third parties suffer. I would ask noble Lords to consider these arguments carefully. I would also add that officials have discussed this matter with the Law Society, which expressed concern in its memorandum on the Bill. It appears that it is not suggesting that the certificate should be conclusive in all matters. Its concern is that it should not be possible to challenge the date of creation as stated on the charge instrument. This is a separate matter which we are considering. I believe that with the government amendment we are going as far as is right in order to meet the concerns of noble Lords.

Lord Williams of Elvel

My Lords, before the noble Lord sits down, perhaps I may be allowed to ask him three questions on the substance of what he has said. First, is it the case that the whole of Part IV would have to be altered, as he seemed to imply, if the certificate were made conclusive in the way that the amendment of the noble Lords, Lord Mottistone and Lord Lloyd of Kilgerran, propose? Secondly, is it just a question of clerical oversight—the word used by the Minister—if the register is wrong in some way and that this is a problem that damages the certificate? Thirdly, is it right to say that business will be prejudiced just because there is an unreasonable burden on the registrar? After all, the registrar is a publicly funded body which exists to help business. Is that what the noble Lord is really saying?

Lord Strathclyde

My Lords, I indicated not so much that Part IV would have to be rewritten but that if conclusivity was required of the certificate it would not be possible under the new system in Part IV. Therefore, the basic premise that the noble Lord makes is right in that it would have to be entirely rewritten. Secondly, on the aspect of clerical oversight, the point is that if there is a clerical oversight innocent third parties would be in trouble because the chargee would be protected under the terms of existing law. The certificate does not allow the register to be updated and therefore it is not just a matter of clerical oversight.

Lord Mottistone

My Lords, before my noble friend sits down, in view of the fact that if his amendment is accepted my amendment cannot be called perhaps I may make a concluding remark about my reading of it, having heard what my noble friend had to say. I do not think that the matter is resolved. I do not like my noble friend's amendment but my inclination is to let it ride with the firm intention of coming back to amend it at the next stage of the Bill, having taken into account all that has been said.

4.37 p.m.

On Question, Whether the said amendment (No. 139C) shall be agreed to?

Their Lordships divided: Contents,105; Not-Contents, 64.

DIVISION NO. 1
CONTENTS
Abinger, L. Jenkin of Roding, L.
Airey of Abingdon, B. Johnston of Rockport, L.
Aldenham, L. Joseph, L.
Allenby of Megiddo, V. Long, V.
Ampthill, L. Lucas of Chilworth, L.
Arran, E. McAlpine of Moffat, L.
Ashbourne, L. Mackay of Clashfern, L.
Balfour, E. Macleod of Borve, B.
Beaverbrook, L. Marley, L.
Belhaven and Stenton, L. Maude of Stratford-upon-Avon, L.
Beloff, L.
Belstead, L. Melville, V.
Bessborough, E. Mersey, V.
Birdwood, L. Milverton, L.
Blatch, B. Morris, L.
Boyd-Carpenter, L. Munster, E.
Brabazon of Tara, L. Murton of Lindisfarne, L.
Brougham and Vaux, L. Nelson, E.
Caithness, E. Norfolk, D.
Campbell of Alloway, L. Norrie, L.
Campbell of Croy, L. Nugent of Guildford, L.
Carnock, L. O'Brien of Lothbury, L.
Cathcart, E. Onslow, E.
Clitheroe, L. Orkney, E.
Coleraine, L. Oxfuird, V.
Constantine of Stanmore, L Pennock, L.
Cottesloe, L. Peyton of Yeovil, L.
Crickhowell, L. Porritt, L.
Cullen of Ashbourne, L. Reay, L.
Davidson, V. [Teller.] Renton, L.
Denham, L. [Teller.] Renwick, L.
Dundee, E. Rodney, L.
Elles, B. Saint Brides, L.
Elliot of Harwood, B. St. Davids, V.
Erne, E. St. John of Fawsley, L.
Faithfull, B. Saltoun of Abernethy, Ly.
Fortescue, E. Shannon, E.
Fraser of Carmyllie, L. Sharples, B.
Fraser of Kilmorack, L. Skelmersdale, L.
Gardner of Parkes, B. Stockton, E.
Gibson-Watt, L. Strathclyde, L.
Greenway, L. Swansea, L.
Haig, E. Teviot, L.
Hailsham of Saint Marylebone, L. Thomas of Gwydir, L.
Thomas of Swynnerton, L.
Halsbury, E. Trafford, L.
Havers, L. Trefgarne, L.
Hemphill, L. Trumpington, B.
Henley, L. Ullswater, V.
Hesketh, L. Vaux of Harrowden, L.
Hives, L. Westbury, L.
Home of the Hirsel, L. Wise, L.
Hooper, B. Yarborough, E.
Hylton-Foster, B.
NOT-CONTENTS
Addington, L. Chitnis, L.
Airedale, L. Cledwyn of Penrhos, L.
Amherst, E. Cocks of Hartcliffe, L.
Ardwick, L. David, B.
Aylestone, L. Diamond, L.
Blease, L. Dormand of Easington, L
Bonham-Carter, L. Elwyn-Jones, L.
Brain, L. Ennals, L.
Briginshaw, L. Ewart-Biggs, B.
Carmichael of Kelvingrove, L. Ezra, L.
Falkland, V.
Carter, L. Gallacher, L. [Teller.]
Galpern, L. Molloy, L.
Gladwyn, L. Mottistone, L.
Graham of Edmonton, L. [Teller.] Mulley, L.
Murray of Epping Forest, L.
Grantchester, L. Ponsonby of Shulbrede, L.
Grey, E. Rochester, L.
Hacking, L. Seear, B.
Hampton, L. Serota, B.
Harris of Greenwich, L. Shackleton, L.
Hatch of Lusby, L. Shepherd. L.
Hayter, L. Stallard, L.
Hutchinson of Lullington, L. Stedman, B.
Kirkhill, L. Stoddart of Swindon, L.
Listowel, E. Strabolgi, L.
Llewelyn-Davies of Hastoe, B. Tordoff, L.
Turner of Camden, B.
Lloyd of Kilgerran, L. Underhill, L.
Lockwood, B. Wallace of Coslany, L.
Lovell-Davis, L. Wedderburn of Charlton, L.
Macaulay of Bragar, L. Williams of Elvel, L.
McNair, L. Winchilsea and Nottingham, E.
Mishcon, L.

Resolved in the affirmative, and amendment agreed to accordingly.

4.46 p.m.

[Amendment No. 140 not moved.]

Lord Strathclyde moved Amendment No. 140A:

Page 76, leave out lines 8 to 13 and insert— ("(5) A person shall for any purpose connected with a company's property be taken to have notice of any matter disclosed on the register if he ought for that purpose to have inspected the register; and a person who for value acquires a charge over a company's property ought to inspect the register immediately before the charge is acquired. This is without prejudice to the operation of section 198 of the Law of Property Act 1925 as it applies by virtue of section 3(7) of the Land Charges Act 1972 (under which the registration under this Act of certain land charges is deemed to constitute actual notice for all purposes connected with the land affected).").

The noble Lord said: My Lords, when we discussed new Section 397(5) in Committee, I said that we intended to omit it on Report because of the more general provision that is now in Clause 101. Since then, however, we have come to the view that the same effect can be more clearly achieved by retaining and amending Section 397(5).

New Section 397(5) and Clause 101 amend the doctrine of notice as it applies to the register of charges and to all documents disclosed by the registrar and companies. There is a prevailing view that such disclosure amounts to notice to the whole world of the information disclosed. The two provisions in the Bill will narrow that, so that only those who ought reasonably to inspect the register or the documents are to be taken to have notice.

The reasons for retaining and amending new Section 397(5) is that it is important that there should be no doubt that a person who acquires security over a company's property should be taken to have notice of information on the register of charges. In almost all cases it is likely that the courts would decide that such a person ought reasonably to have searched the register and should, therefore, be fixed with notice, but it is desirable that there should be certainty on this matter. In particular, it is necessary if negative pledge clauses in floating charges are to be effective as against subsequent charges. The question of negative pledges was one upon which the noble Lord, Lord Williams, tabled an amendment in Committee, which he withdrew when I assured him that the Government would be meeting his concerns on that matter. Without the amendment to new Section 397(5), some subsequent chargees might not have notice of the existence of negative pledge clauses disclosed in the prescribed particulars and, therefore, on the register. The clause would not be effective against them as a result. I beg to move.

Lord Hacking

My Lords, mention has already been made this afternoon of the work of the company law committee of the Law Society. So far during the Bill's passage I am afraid that I have not done justice to that committee's work. It did, as the Minister and noble Lords on the other side of the House will know, an immense amount of work in preparing detailed memoranda which it presented to all those who were concerned in the shaping of the Bill's provisions. More than that, the committee presented subsequent memoranda and attended a number of meetings in a full effort to co-operate, if I may say so, with the Minister's officials.

One of the memoranda it recently presented concerned Section 397(5) of the Companies Act 1985. It presented that memorandum recently (on 22nd March of this year) and commented in it on the earlier draft of this amendment. As a result the Government have picked up some of the points of concern of the Law Society. I should like therefore to express my gratitude to the Government for doing so. However, there is still concern in the Law Society about the drafting of this subsection of new Section 397. The subject is very technical but I shall try to explain why the Law Society is still concerned about the drafting.

New Section 397(5) has the effect of reversing the well established principle that while a person is to be deemed to have notice of the existence of a charge which has been registered by the registar of companies, he is not deemed to have notice of any special restrictions imposed by the charge on the ability of the chargor to deal with its property: for example, a negative pledge imposed by the charge, which was a point taken by the noble Lord, Lord Williams, in Committee. This has been a well established principle of law since the early part of this century. It arose in the case of Wilson v. Kelland. The Government are perfectly entitled to take a different view and to reverse this well established principle. Indeed the Law Society is expressly not opposed to a change in this principle and has actually expressed support for the Government's proposal, based on a recommendation of Professor Diamond, that negative pledges should be registrable at the companies registry.

The Law Society is concerned about the extent of the change to be introduced by the proposed new subsection (5). The Law Society has recommended that the only person who should be treated as having notice of a negative pledge, which appears on the companies charges register at the companies registry, is a person who takes a subsequent charge over the company's property, being, of course, a charge which is itself registrable with the registrar of companies. Someone who takes a subsequent charge which is not so registrable may well not think to make a search at the Companies Registry before he takes his security. This is particularly so in the case of a person lending money or providing credit against the security of a pledge—for example, where the lender takes physical possession of goods or a document of title to goods by way of security. If the security taken by such a person could be defeated by the holder of a prior floating charge which prohibits the creation of a subsequent charge—but which in practice leaves the chargor free to deal with the goods as he so wishes—this could create commercial confusion.

The problem also revolves around the definition of "charge" in subsection (2) introduced by Clause 80 of the Bill. The question could be put in this way. Does the expression "charge" in new Section 397(5) mean a charge which is registrable under Part XII of the Companies Act 1985 or is it intended to cover all charges, other than charges arising by operation of law which are excluded by new Section 396(3)? This is a complicated matter. I shall raise only one further point of concern.

The proposed Section 397(5) says that a person who for value acquires a charge over a company's property shall be taken to have notice of, any matter disclosed on the register". I quote from the Minister's amendment. Unless a limit is imposed on what restrictions can be registered—this is apparently to be dealt with by statutory instrument—it may lead to all kinds of restrictions being registered, not just those affecting property already charged by the company, in the hope that the restriction could be enforced by an action for inducement to breach of contract against, first, a subsequent chargee by virtue of his having constructive notice of the restriction; and, secondly, against anyone else who searches the register and who acquires actual notice of the restriction. This would seem to go beyond the protection which ought to be provided by a public register of company charges.

It is impractical for a person about to take a charge over a company's property to inspect the register immediately before the charge is acquired. This will create uncertainty and could result in a delay between taking a charge and advancing money on the security of the charge because it will encourage lenders to take a charge, then search and then lend rather than to risk advancing money at the time of the creation of the charge. It is never satisfactory to try to draft a clause on the Floor of the House. However, if the Minister were prepared to consider replacing the words "acquires" and "acquired" by the words "takes" and "taken", we would go some way to meet the concern of the Law Society.

The Minister can take a number of different courses at this stage. In view of the complications which I have tried to explain I wonder whether it would not be more sensible for the noble Lord to take away the amendment and to have further discussions with persons from, for example, the Law Society, upon the reality of the commercial implications of these proposals. I invite the Minister to take that course.

Lord Carter

My Lords, I have little to add to the remarks of the noble Lord, Lord Hacking. That is hardly surprising because both of us received the same brief from the Law Society. I have two questions and one or two points on drafting. In what form will the right to register negative pledges be restricted? It is only to permit the registration of undertakings by the chargor to restrict its right to create a further charge over the same property as that which is charged under the charge which contains the restriction. In what form will this be done?

Is it correct that the proposed new Section 397(5) will ensure that any charge created after the creation of a floating charge containing a negative pledge will be subject to and therefore rank behind a floating charge in an insolvency? Perhaps I could add to the point made by the noble Lord, Lord Hacking, about the definition of a charge. I emphasise the importance of obtaining an answer to the question. Does the expression "charge" in new Section 397(5) mean a charge which is registrable under Part XII of the Companies Act 1985, or is it intended to cover all charges other than those charges arising by the operation of law which are now excluded by new Section 396(3)?

I have a final point on the drafting of the amended clause. It is curious that it is in two parts. The first part is clear. It says: A person shall for any purpose connected with a company's property be taken to have notice of any matter disclosed on the register if he ought for that purpose to have inspected the register". That is clear enough. It continues: and a person who for value acquires a charge over a company's property ought to inspect the register immediately. That is legislation by admonition. It seems a curious way to draft the clause although I understand the intention behind it. It is up to the Minister to meet the concerns expressed by the Law Society and to be prepared to take this amended clause away and come back at the next stage of the Bill.

Lord Lloyd of Kilgerran

My Lords, I was involved with this amendment in Committee and it seems that the noble Lords, Lord Hacking and Lord Carter, are better instructed than I am. I have in my hands a letter from the Law Society dated 31st March which says that the society has had discussions with the Minister's department and hopes to be able to persuade it that the amendment should be changed as suggested in the paper. Failing that it proposed to put forward an amendment and ask a Member of the House of Lords to put down an amendment. I have not seen an amendment to this effect. Therefore when I found attached to my papers a copy of the amendment which is now put forward by the Government I was prepared to say that I accept it.

Lord Strathclyde

My Lords, both the noble Lords, Lord Hacking and Lord Carter, mentioned the definition of "charge". "Charge" is defined in new Section 395(2) as a registrable charge. Furthermore, the negative pledges, about which the noble Lord, Lord Carter, was worried, will be registered by way of the prescribed particulars. The effect of this combined with the rule on notice is that subsequent charges would rank behind in priority to the floating charges.

Lord Williams of Elvel

My Lords, perhaps I may clarify one point. If the registrar's certificate is not to be conclusive on particulars, how do we know whether the negative pledge is properly registered?

Lord Strathclyde

My Lords, perhaps I may come to that point in a moment. In the majority of cases it would be reasonable to expect those taking security over a company's property to inspect the register. They would therefore, even without the amendment, be fixed with notice except where they can reasonably be expected to have searched the register for some other purpose. The Government agree that those who acquire security that arises by operation of law should not be taken to have notice. It is possible that the amendment does not deal with that point adequately and it is something which we continue to discuss with the Law Society, as the noble Lord, Lord Lloyd of Kilgerran, said.

It has also been argued that those who acquire other types of security, such as pledges, or who take charges which are not registrable should not be deemed to have notice. The Government are not yet persuaded about that argument, but naturally we shall consider the point.

The Government are aware that the question of notice is a highly complex one which has to date been determined under common law. During previous discussions in Committee, noble Lords expressed concern about the drafting of the new Section 397(5). As I have already said, and indeed as the noble Lord, Lord Hacking, also said, there have been substantial representations from the Law Society. Moreover, we continue to have discussions with the society. It is vitally important that we should get the drafting of the provisions right, so I shall be happy to look at the comments which have been made today and to consider them in the context of our discussions with the Law Society. With that assurance, I hope that the House will feel able to accept the amendment, although, as I said, we shall continue to look closely at the situation.

5 p.m.

Lord Williams of Elvel

My Lords, before the noble Lord sits down, can he say whether his assurance includes an undertaking to bring forward something better on Third Reading?

Lord Strathclyde

My Lords, I must say that we have no definitive plans to put forward any further amendment on Third Reading. The timetable for discussions with the Law Society would not enable us to prepare an amendment in time. However, this is indeed a complex area of the law and we are prepared to be persuaded that we have not as yet got the matter right. It is therefore important that we take the time to prepare proper amendments, should they be needed.

Lord Hacking

My Lords, before the Minister sits down, would he perhaps consider the matter the other way around? Would he be prepared, for example, to receive an amendment drafted by the Law Society and tabled by a noble Lord for Third Reading?

Lord Strathclyde

My Lords, it is up to any noble Lord to move whatever amendment he may receive from the Law Society. I think that I have made the Government's position quite plain. We continue to hold discussions with the Law Society on the point and we are more than happy to continue such discussions. When the discussions have been concluded, we shall do whatever needs to be done.

Lord Carter

My Lords, I am sorry to intervene, but before the noble Lord sits down can he say whether he has tried to deal with the last point made by the noble Lord, Lord Hacking, about the changing of the words "acquires" and "acquired" to "takes" and "taken"? It seems to me that that is the sort of undertaking which he could give now.

Lord Strathclyde

No, my Lords. I am not willing to give any undertaking other than the one which I have already given. I have said that we are continuing to discuss the situation. My wish is that the amendment put forward by the Government should be accepted, on the basis that we are still considering what the Law Society is proposing.

Lord Hacking

My Lords, I am sorry to intervene yet again, but what is proposed— —

Lord Mottistone

My Lords, it should be remembered that this is the Report stage; we have not yet reached the Committee stage.

On Question, amendment agreed to.

Clause 82 [Duty to deliver particulars for registration]:

Lord Strathclyde moved Amendment No. 140B:

Page 77, line 4, leave out ("on") and insert ("over").

The noble Lord said: My Lords, in moving Amendment No. 140B I shall speak also to Amendment No. 140C. These amendments improve the drafting of new Sections 399 and 400. It is more correct to talk of security over a company's property rather than security on a company's property. The amendments do not change the effect of the new sections. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 140C:

Page 77, line 36, leave out ("on") and insert ("over").

On Question, amendment agreed to.

Clause 83 [Delivery of further particulars]

Lord Strathclyde moved Amendment No. 140D:

Page 78, line 35, leave out from ("registration") to end of line 38 and insert (", then, if—

  1. (a) they appear to him to be duly signed, or
  2. (b) they are accompanied by an office copy of a court order authorising their delivery without a person's signature and appear to him to be otherwise duly signed,

The noble Lord said: My Lords, under new Sections 401 and 403, further particulars and memoranda of satisfaction or release may be delivered only if signed on behalf of both the company and the chargee. Alternatively, if either person refuses to sign, cannot be found, or, in the case of a body corporate, has been dissolved, the court may order delivery in the absence of his signature. At present, the new sections are vague as to the duties of the registrar when he receives further particulars or memoranda. The amendments make it clear that he shall file them only when they appear to be properly signed or when he receives an office copy of a court order authorising delivery. I beg to move.

Lord Carter

My Lords, I should just like to say that we on this side of the House feel that the contents of the amendment are clearer than those in the Bill. We understand the reasoning behind the amendment and it is something which we welcome.

On Question, amendment agreed to.

Clause 84 [Effect of errors and omissions in particulars delivered]:

Lord Strathclyde moved Amendment No. 140E:

Page 79, line 35, after ("in") insert ("or right over").

The noble Lord said: My Lords, this amendment is part of a group of amendments agreed in Committee which made an incorrectly registered charge void against those with rights over property as well as those with an interest in it. That was necessary to preserve the effect of the 1985 Act. We omitted, however, to table a similar amendment to new Section 402, where the change is also necessary. The current amendment puts right the omission. I beg to move.

On Question, amendment agreed to.

Lord Lloyd of Kilgerran moved Amendment No. 140F:

Page 80, line 5, leave out ("mis-stating") and insert ("mis-spelling").

The noble Lord said: My Lords, we now turn to consider Clause 84, which is concerned with the effect of omissions and errors in particulars delivered. It is a long clause consisting of a whole page which states what can be done to deal with errors and omissions in the particulars delivered. Subsection (6)(b) is rather extraordinary because it says: References to the particulars being complete are to their including all the prescribed particulars, but particulars shall not be regarded as incomplete or inaccurate by reason only of their omitting or mis-stating the name of the chargee". There was therefore a considerable amount of discussion on the matter in that if you m is-state the name of the chargee it is a fundamental matter. For instance, if the name of the chargee is put down as Carter where it should have been Lloyd, surely it is then a matter of fundamental importance. Consequently, in the course of the discussions, I suggested that instead of having the word "mis-stating" we should have the word "mis-spelling", or a word to that effect.

However, if there was just an error whereby half my name and half Lord Carter's name was put down, then we could understand such confusion. Indeed, if it were the mis-spelling of a name then it would be a different matter. But it seems to me that we cannot accept this clause without suggesting that the word "mis-stating" should be removed and replaced by another word such as "mis-spelling". I beg to move.

Lord Carter

My Lords, as the noble Lord, Lord Lloyd of Kilgerran, said, there was considerable debate on this matter in Committee. Members of the Committee clearly felt then that there was a material difference between mis-stating the name of the chargee and mis-spelling it. Indeed, I had intended to use the example given by the noble Lord. If, for example, the name of the chargee is Carter and the particulars quote the name of Strathclyde, I would regard that as a serious mis-statement.

On the other hand, if the name of the chargee was given as Brown without an "e", whereas the correct name was Browne, then that is clearly a mis-spelling. Another example would be Smith with an "i" instead of Smythe. In my view there is a serious point at issue here. It is not just a question of semantics. I see that in Committee on 14th February the Minister said (at col. 154 of Hansard): The result of this is that a charge will not become void as a result of either an error in identifying the chargee in the original particulars or a change in the identity of the chargee after the particulars have been delivered". Of course one can understand that. The Minister went on: Without this exception, the whole charge might become void because of a simple and possibly quite minor mistake in respect of the chargee's name in the original particulars". A minor mistake in the chargee's name, to call him Mr. Smith instead of Mr. Brown, is not just a mis-statement. It is a serious error. The suggestion that the word should be "mis-spelling" to make the intention of the clause entirely clear is a good one.

Lord Morris

My Lords, I believe that the amendment is unnecessary. Surely, "mis-stating" embraces "mis-spelling". It also gives rise to a difficult problem; namely, the common law with regard to a name. As I understand it the correctness in law of a name is the name by which that person is known. Thus it can be different according to different people in different circumstances and for different purposes. The merit of the drafting of the Bill is that "mis-stating" would in fact embrace all these extremely difficult and rather arcane matters.

Lord Strathclyde

My Lords, I do not believe that there is a great deal of difference between what noble Lords opposite want and what the Government want. However, I believe that there is a fundamental misunderstanding of what the Government are doing here. The Government have looked carefully at the arguments made by noble Lords opposite in Committee with regard to the application of the avoidance sanction where the name of the chargee is omitted or mis-stated. First, it was suggested that a charge might be invalid if it was not executed by the chargee. There are all sorts of reasons why a charge might be defective, though that is not one of them. But the question of whether the charge is ineffective for some other reason has nothing to do with the extent to which it should be void because of an error in the particulars delivered to Companies House.

Secondly, it was argued that the status of the chargee was an important item of information. The suggestion was that a searcher of the register would attribute more importance to a charge taken by the Bank of England than by the lowest citizen of the land. But the financial stability of the lender has nothing to do with the validity of the charge. The law is not cut according to the pocket of the litigant.

As I said in Committee, the identity of the chargee is not a matter which affects the nature and extent of the rights conferred by a charge. The identity is relevant to a prospective creditor only for the administrative purpose of ascertaining details which are not required to be disclosed in the registrable particulars, such as the amount of the debt outstanding, or (at present) whether a floating charge has crystallised. Since, therefore, the identity of the chargee does not affect the rights conferred by the charge, the mis-statement of this information should not have the effect of invalidating the rights conferred by the charge. In principle, therefore, the Government disagree with the argument that the avoidance sanction should apply where the name of the chargee is mis-stated. It would be an inappropriate sanction in the circumstances.

Even if we did, however, wish to apply the sanction to mis-statements but not to mis-spellings, as envisaged by the proposed amendment, we do not think that the distinction can be made, as I think my noble friend Lord Morris explained. It is not feasible to draw a clear line between a spelling mistake (or a misprint) and a mis-statement of the identity of the chargee. Both noble Lords opposite gave clear examples of substantial changes, but, of course, chargees are most often companies themselves. Company names, and in particular names of companies in the same group, are too similar for it to be practicable to apply the distinction. What is in fact a spelling mistake would often result in a wholly different person being mis-stated as the chargee. Mis-spelling and mis-statement will often be one and the same thing.

On balance, therefore, the Government disagree with both the principle and the practical effect of this amendment. We are not arguing that the identity of the chargee is entirely unimportant. New Section 398 requires the company to deliver correct particulars. It will, therefore, be subject to a criminal sanction if it deliberately mis-states the name of the chargee. There is, therefore, a sanction in the Bill that deals with this matter in respect of original particulars. But the identity of the chargee is important for reasons that do not affect the rights of the chargee nor of subsequent chargees. It would be inappropriate, therefore, to invalidate the rights of the former as a sanction for mis-statement or omission. It is best to rely instead on the criminal sanction. I hope that that explanation will be acceptable to noble Lords.

Lord Lloyd of Kilgerran

My Lords, I am grateful to the noble Lord for the care that he has taken in dealing with this comparatively minor matter. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

5.15 p.m.

Clause 85 [Memorandum of satisfaction or release]:

Lord Strathclyde moved Amendment No. 140G:

Page 80. line 34, leave out from ("registration") to end of line 36 and insert (", then, if—

  1. (a) it appears to him to be duly signed, or
  2. (b) it is accompanied by an office copy of a court order authorising its delivery without a person's signature and appears to him to be otherwise duly signed,
he shall file the memorandum in the register, together with any such office copy, and shall note, in such form as he thinks fit, the date on which it was delivered to him.").

The noble Lord said: My Lords, I spoke to this amendment in moving Amendment No. 140D. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 140H:

Page 80, line 45, after ("is") insert (", so far as it confers any security over the company's property").

The noble Lord said: My Lords, this amendment corrects an omission in the drafting of new Section 403(5). I beg to move.

On Question, amendment agreed to.

Clause 86 [Additional particulars to be delivered]:

Lord Lloyd of Kilgerran moved Amendment No. 140J:

Page 82, leave out lines 8 to 11.

The noble Lord said: My Lords, we are concerned in particular in Clause 86 with Section 406 of the Companies Act 1985 which deals with the notice of crystallisation or attachment of a floating charge, etc. The purpose of my amendment is to delete from that section subsection (1)(a). As I indicated in Committee the lender would appear to be obliged to give public notice of an event and would be entitled to crystallise a floating charge whether or not he exercised the entitlement. I am advised therefore that this could be damaging to the commercial lending process as well as being virtually impossible in practice.

I am not going into the pages of discussion that went on about these matters. However, the Minister said on 14th February at col. 161: In view of the concern expressed by noble Lords, I am prepared to look at this point again and report back. I cannot promise a solution, but we shall look carefully at the arguments put forward by both noble Lords". The purpose of my putting down this amendment again is to ask the Minister what reasons he has for not producing an amendment in view of the concern expressed. I beg to move.

Lord Carter

My Lords, I do not wish to add a great deal to what was said by the noble Lord, Lord Lloyd of Kilgerran, in moving the amendment There was considerable discussion at Committee stage regarding the important commercial effects of crystallising a floating charge. The effect of the substituted Section 406 is that the Secretary of State will have the power to make regulations to require a notice to be given of the crystallisation of a floating charge. This occurs when, in accordance with the terms of a charge, an event occurs that enables the lender to declare a charge to be a fixed charge on the specified assets.

This is an important issue of principle and it raises the question of the powers of the Secretary of State. It is clear from the way that the Bill has been presented to us that the Government do not accept the powerful arguments advanced at Committee stage—the possibility of the triggering of cross-default arrangements, and the rest of it—and I shall be interested to hear the reasons that the Minister gives for this.

Lord Strathclyde

My Lords, as both noble Lords have said, we discussed this amendment in Committee when I said that I would consider the points made. The concern is that new Section 406(1)(a) would permit the Secretary of State to require the notification of an event that entitled the chargee to crystallise a floating charge even though he did not exercise that entitlement. The Government believe that this concern is misplaced. Such an event could not be said to affect the nature of the security under a floating charge. Chargees will at any time have a number of rights, contingent or otherwise, to crystallise a floating charge. The transformation of a contingent right to an actual right would not amount to a change in the nature of the security. Such a change will only have taken place when the right is actually exercised and the charge crystallises, changing its nature by attaching to specific property as a fixed charge.

The point at which the charge crystallises will in part depend on the terms of the charge. A charge which is expressed to crystallise on the chargee taking certain actions in certain events will not crystallise unless and until these actions are taken. A charge which is expressed to crystallise automatically in certain events, which are unrelated to any intervention by the chargee, will crystallise without any action being take by the chargee in exercise of his right to enforce the charge. For example, the charge may be expressed to crystallise in the event of any act of execution over the company's property being taken by another creditor; or there may be events in which it crystallises by operation of law, such as the company's cessation of business or the disposal of its entire undertaking. Some of these events will be known to the chargee; some will be known to the company; some will be known to both parties; and some may be known to neither. Our intention is only to prescribe such events as are known to the party on whom the obligation of notification is imposed.

We are not therefore talking of events (such as a default under a loan agreement) which do not cause a floating charge to crystallise by operation of law and which are expressed to have that effect by the terms of the charge. It is only when the event in question results in crystallisation that that event will have to be notified. Consequently, the regulations that the Secretary of State may make are in fact quite narrowly prescribed and he will not have the power to do what the noble Lord fears.

The fact is that, as I said in Committee, there is a growing commercial practice to include clauses in charge agreements that automatically crystallise the charge without the need for the chargee to take any further action. There has been some disquiet about the use of these clauses, which change the nature of the charge clandestinely. It is events under these clauses that the subsection is designed to catch, not those described by the noble Lord. I think that some confusion has arisen about the meaning of the word "nature", which is in fact much narrower than that supposed by the amendment. I hope that this allays the concern of the noble Lord and that he will feel able to withdraw the amendment.

Lord Lloyd of Kilgerran

My Lords, again, I must express my gratitude to the Minister for clarifying the position in the way he has done. In the circumstances, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 88 [Copies of instruments and register to be kept by company]:

Lord Strathclyde moved Amendments No.s 140K to 140M:

Page 84, line 5, leave out from ("open") to ("to") in line 9.

Page 84, line 12, leave out from beginning to end of line 13 and insert ("as may be prescribed").

Page 84, line 21, leave out from ("of") to end of line 23 and insert ("such fee as may be prescribed").

The noble Lord said: My Lords, I should like to speak to these three amendments together. In Committee your Lordships agreed to a new clause (now Clause 102) which gives the Secretary of State the power to make regulations defining the nature of a company's obligations where the Act requires that the register, index or document be available for inspection or copying. The Secretary of State also proposed to prescribe such obligations in respect of the company's own register of charges at the same time as doing so with respect to the other registers.

The amendments to the new Section 409 bring the provisions on the company's register of charges into line with those agreed by the Committee in Clause 102. Instead of obligations such as these being laid down, they are left to be prescribed by the regulations. Therefore the point of principle underlying these amendments has already been accepted. I beg to move.

On Question, amendments agreed to.

Clause 89 [Charges on property of oversea company]:

Lord Strathclyde moved Amendment No. 140N:

Page 85, leave out lines 24 and 25 and insert— ("(3) Section 397(3) to (5) (registrar's certificate and circumstances in which person has notice as a result of registration) apply in relation to the registration of any particulars or other information under this Chapter.").

The noble Lord said: My Lords, in moving this amendment I should like to speak also to Amendments Nos. 140Q and 140R. These three amendments make small drafting improvements to Clause 89, which contains the provisions on registration of charges created by oversea companies. I beg to move.

On Question, amendment agreed to.

Lord Lloyd of Kilgerran moved Amendment No. 140P:

Page 86, line 29, leave out ("400 and 402") and insert ("and 400").

The noble Lord said: My Lords, in moving this amendment I must confess at once to the sin of plagiarism because this is an amendment that was put down initially at Committee stage by the noble Lord, Lord Williams. I put it down and forgot to tell the noble Lord, Lord Williams, that it was his amendment that I was putting down; and he forgot that I had put it down or that he should have put it down.

It deals with a highly technical matter. The noble Lord, Lord Hacking, who is not in his place at the moment, made a most useful contribution at Committee stage when he pressed the Government very hard to note that the Law Society considered this amendment to be a very important one. The amendment is to subsection (2) of Section 703D of the Companies Act 1985. It says in effect that Sections 399, 400 and 402, which deal with failure to deliver and late delivery of particulars and the effect of errors and omissions in particulars delivered, should be reduced to the fact that only Sections 399 and 400 should be relevant and that Section 402 should be omitted. I am sorry that is rather complicated.

The noble Lord, Lord Hacking, emphasised the importance of this matter and here again the noble Lord, Lord Strathclyde, was quasi-sympathetic, if I may say so, to the representations that were made. I wondered what his reasons were for not having returned at Report stage with another amendment. I beg to move.

Lord Williams of Elvel

My Lords, the noble Lord, Lord Lloyd of Kilgerran, is quite right in pointing out that it was a lapse of memory on my part that I failed to move this amendment again on Report—an amendment I had moved in Committee. I am most grateful to the noble Lord for correcting me on that point and indeed confessing to plagiarism, which is a rare event. In supporting the noble Lord, I would just point out that there is a printing error in line 31 on page 86 of the Bill. Perhaps that could be corrected when the Bill is reprinted.

Lord Strathclyde

My Lords, I am glad to hear that the noble Lord, Lord Lloyd of Kilgerran, was confessing and that the noble Lord, Lord Williams, was saying that he had made a mistake: also a confession. I am afraid that so far I have nothing to confess, but if your Lordships will bear with me I am sure that as we continue with this Bill there will be many things I shall have to confess.

During the Committee discussion noble Lords urged the Government to consider the points made in the memorandum, and we have done so. In addition, officials from the DTI have met representatives of the Law Society to discuss, among other things, the treatment of oversea companies. On this topic, however, I am afraid that the Government are not able to agree with the views contained in the Law Society's memorandum, for reasons that I shall give.

Under the existing arrangements in the 1985 Act only minimal special provision is made to deal with the specific circumstances of oversea companies. In general, they are subject to the same regime as domestic companies. This has given rise to some anomalies, which Clause 89 of the Bill is designed to address. There is no dispute therefore about the fact that something must be done to provide for oversea companies. The debate is about how much should be done. At present, charges created by oversea companies are subject to an obligation to register charges which is not adapted to accommodate the particular considerations which apply to them. But where that obligation continues to apply, it is right that it should be supported by the same sanction as that which applies to domestic companies. The Law Society, and noble Lords who support its representations, argued that we should go very much further and disapply the avoidance sanction altogether. The Government cannot agree with that view.

There is a fundamental principle at stake here. Where security is created by an oversea company over property that is located within the United Kingdom, notice of that security should appear on the register at Companies House. Failure to register the security should, as for domestic companies, render the charge void. This is necessary to protect subsequent chargees and to ensure that there is an effective incentive for registration. It is entirely right and proper that persons who are resident in other countries should have their security subject to our laws when taking over property located here. If not, those resident in the UK who are offered security over the same property will not be able to take it with any confidence.

Given that argument of principle the question is: what is a practicable and equitable system for registration of charges created by oversea companies that is consistent with the law for domestic companies? The Law Society said in its memorandum that there were three aspects in which Clause 89 caused difficulties. Since discussing these points with officials from the DTI, I understand, however, that The Law Society has been satisfied that its concerns on these aspects are in fact met by Clause 89 as it stands. I hope therefore that in view of what I have said the noble Lord will be able to agree that we are in this case taking the right course.

5.30 p.m.

Lord Carter

My Lords, before the noble Lord sits down, is he saying that he is now satisfied that the Bill as drafted gives protection to prospective creditors of oversea companies which they are entitled to expect? I think that that was the gravamen of the argument at Committee stage. That was the concern expressed.

If I may remind the noble Lord, it was also pointed out at Committee stage that varying the times and dates on the various documents could give rise to considerable technical difficulties for oversea companies. That is, I believe, a point with which the noble Lord has not dealt.

Lord Strathclyde

My Lords, I am sorry if anything remains that I have not dealt with. Perhaps I could say a little more.

The Law Society originally criticised the requirement to deliver particulars of a charge within 21 days of its creation if the property subject to the charge is situated in Great Britain on the 21st Day. The Government continue to take the view that there is no great difficulty caused by the fact that a company or a chargee will not know whether there is a requirement to register until the 21-day period has elapsed. We have adopted this approach in order to preclude the need to register a charge when property is in Great Britain on the date of creation but is taken out of the country before the end of the 21 days. It would be anomalous to require registration in those circumstances.

Companies and chargees will not have to wait until the last day of the 21-day period before delivering particulars. They may do so at any time during that period. So their position is no different in practice from that of domestic companies. They will only face difficulties if they choose to wait until the last minute to see if there is a requirement to register. I believe that this is a point now accepted by the Law Society.

The noble Lord, Lord Carter, mentioned a specific point. It is of course a question of balancing the rights of oversea creditors with those of people searching the register.

Lord Morris

My Lords, while we are on the subject of errors and omissions, the noble Lord, Lord Williams of Elvel, referred to a spelling mistake in line 29 which I still cannot see. I am sorry; I misunderstood. I thought that he was referring to "oversea company", rather than "overseas company". I believe that "oversea" is more correct than "overseas".

Lord Lloyd of Kilgerran

My Lords, for my part, having heard what the Ministers said about the position of the Law Society, I feel I should now withdraw my amendment. However, having confessed to the sin of plagiarism, I might be in breach of copyright in relation to the noble Lord, Lord Williams. He asserted his property rights in this matter here in the House. I wonder whether I may have his consent in some unseen form before I finally withdraw the amendment. I have received that consent. The noble Lord nods in favour of my withdrawing the amendment and sitting down as quickly as possible. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 140Q:

Page 87, line 1, leave out ("further") and insert ("additional").

The noble Lord said: My Lords, I spoke to this amendment in moving Amendment No. 140N. I beg to move.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 140R:

Page 87, line 3, leave out ("charge of which particulars") and insert ("registrable charge particulars of which").

On Question, amendment agreed to.

Clause 91 [Consequential amendments]:

Lord Strathclyde moved Amendment No. 140S:

Page 88, line 21, after ("(1)") insert— ("In section 3 of the Land Charges Act 1972 (registration of land charges)—

  1. (a) in subsection (7) (registration in companies charges register to have same effect as registration under the Act), for "any of the enactments mentioned in subsection (8) below" substitute "Part XII, or Chapter III of Part XXIII, of the Companies Act 1985 (or corresponding earlier enactments)"; and
  2. (b) in subsection (8) for "The enactments" substitute "The corresponding earlier enactments" and at the end insert "as originally enacted".

(2)").

The noble Lord said: My Lords, this amendment inserts a new subsection into Clause 91. It has no substantive effect because under Section 17(2)(a) of the Interpretation Act 1978, the references to the earlier Acts are to be construed on references to the Companies Act 1985 for the purpose of charges registered under the 1985 Act. It merely makes the modern reference express. I beg to move.

On Question, amendment agreed to.

5.39 p.m.

Lord Strathclyde

My Lords, I beg to move, pursuant to the Resolution of the House of Tuesday last, that the House do now resolve itself into a Committee upon the Bill in respect of Part V.

Moved, That the House do now resolve itself into a Committee upon the Bill in respect of Part V.—(Lord Strathclyde.)

Lord Williams of Elvel

I am grateful to the Government for assenting to recommitment of Part V. I have believed for some time that the ultra vires amendments to which we are about to come needed much greater discussion than they were able to receive at the Committee stage of the Bill and that the new amendments tabled after Clause 96 by the Government needed detailed examination on a Committee basis.

However, I must point out that the Government have tabled no fewer than 14 pages of amendments on Part VII of the Bill. While agreeing to the recommitment of Part V, I make the point that Part VII, when we come to it, may well need some very detailed scrutiny on a basis which I cannot forecast at the moment.

Lord Lloyd of Kilgerran

I very much agree with what the noble Lord, Lord Williams, has just said. It seems to me rather hard that on a Bill of such importance to industry we should be given very short notice of important amendments which the Government desire to put down at this late stage. Perhaps it may be necessary to bring a motion to which I hope the Government will agree to have another recommitment in relation to Part VII. However, we shall deal with that matter in due course.

Lord Strathclyde

I thank both noble Lords who have spoken. I hope that in dealing with the recommitment of Part V we shall be able, as far as possible, to treat our remarks on clauses which we have already discussed in Committee as though this were a Report stage. I hope we shall be able to look more closely at the new clauses which we have brought forward. As for the criticism that the noble Lord, Lord Williams of Elvel, levelled against the Government on the new amendments to Part VII, I should like to point out to the Chamber that although these amendments are very lengthy they are substantially grouped, and only include a total of about a dozen full discussions. Therefore, I do not think there is the substantial problem that the noble Lord, Lord Williams, made out.

Lord Williams of Elvel

My Lords, I am most grateful to the noble Lord for explaining that the amendments that have been tabled, which comprise 14 pages of the Marshalled List, include only a few minor debates. Nevertheless, the Opposition, the noble Lord, Lord Lloyd of Kilgerran, and our advisers will have to look at these matters. We cannot simply nod them through.

On Question, Motion agreed to.

House in Committee (on Recommitment) accordingly.

[The Principal Deputy Chairman of Committees (BARONESS SEROTA) in the Chair.]

Clause 92 [A company's objects and the power of the directors to bind it]:

Lord Wedderburn of Charlton moved Amendment No. C1:

Page 88, line 47, at end insert ("done within the powers of the board of directors or a person authorised by it").

The noble Lord said: The new sections to be put into the Companies Act 1985 by Clause 92 were described by the noble Lord, Lord Strathclyde, as important, and indeed they are. On 21st February the noble Lord, Lord Strathclyde, said that these matters involved: the capacity of a company …the authority of the board of directors and the rights of shareholders".—[Official Report, 21.2.89; col. 509]. We would add the interests of creditors and employees. The Minister continued at col. 509: These issues go to the heart of the operation of the limited liability company … The clauses are therefore of no little importance to commercial life in this country. They also happen to be difficult, technical clauses". These new principles at the heart of our commercial law therefore need very full examination. The ultra vires doctrine on legal capacity for companies is to be abolished. We await with interest the Government's Bill to abolish it for other bodies such as building societies and trade unions. We agree that the doctrine has come, as my noble friend Lord Williams put it, to a full stop; that it is an inadequate protection for companies and, at times, an arbitrary limit upon reasonable commercial expectations. But its reform has long been advocated by the Cohen Committee in 1945, by the Jenkins Committee in 1962 and by the report of Dr. Prentice in 1987, not to speak of that excellent Companies Bill of 1973, which was a rare reason to mourn the fall of the Conservative Government of 1974.

It was, therefore, a disappointment that the proposals in Clause 92 were not ready when the Bill was published last December, and that they were produced only six days before, on 21st November, and then received only three-quarters of an hour's debate. It is right—this is the reason for my prefatory remarks—that we should look at them much more carefully now. In these linked amendments, the first of our amendments goes to the limitation of the right of the shareholder to bring an action in respect of transactions outside the objects of the company.

At the heart of the law on limited liability companies is a balance. Although it has become a defective instrument, the ultra vires doctrine was meant to be part of that balance in order to ensure some guarantee to investors, creditors, customers, and indeed employees that the assets of the company would not be used for purposes other than those for which they were raised.

Our amendments on new Section 35 and new Section 35A, as I shall refer to them for convenience, question whether the Government's new scheme at the heart of company law tilts the balance too far against protection of the interests of shareholders, creditors and employees, and of the company itself, in favour of the third party, and sometimes in favour of the unscrupulous third party. I say immediately that it is our view that the new scheme goes much further than is required by the first directive of 1968 of the European Community. Indeed, in a later amendment we shall question whether some of the provisions do not take us further away from the scheme in the first directive.

The ultra viresdoctrine is to be abolished by new Section 35, but the new section then preserves the right of the minority shareholder to sue in respect of acts outside the company's objects, or at least to restrain it. It then abolishes that right to take proceedings wherever the ultra viresact is to be done, as is stated in subsection (2): in fulfilment of a legal obligation arising out of a previous act binding on the company.

We are not arguing that merely because the shareholder has had this right since 1860 to stop transactions and, as I shall later argue, to bring an action in a derivative action to recover compensation for the company where those acts are outside the objects, that should be a reason for keeping it. However, the change here is dramatic. Any previous act which creates a legal obligation prevents the company, and now the shareholder, from bringing an action on the ground that the matter is beyond the objects. That, in our view, means one needs to look at this matter again.

Let me take one example. I shall try to take only one example in each amendment for brevity's sake. These are rather fundamental matters. Suppose that the directors of a company enter into a contract, which is binding within their normal authority, to sell a substantial part of the enterprise and close it down. They believe that they are acting in the best interests of the company, but it turns out the transaction is outside the objects clause of the memorandum. Suppose that the third party buyer induced those directors to enter the transaction by fraudulent misrepresentation—one might put this as a clear case of wrongdoing—which gives the company a right to rescind the contract, but the directors in their discretion, using their management powers, say they will not rescind the contract. The new section states that this cannot now be in any way questioned in proceedings by the shareholder. It is true that the new section states that the shareholder cannot do so where the ground is lack of capacity, but that is exactly the case. It is a legal obligation, albeit that the contract is voidable, because while the contract exists there is the legal obligation until it is avoided, and he has no power to avoid it. There are many such examples where the fact of a legal obligation may not be exactly the right line to draw between his ability and non-ability to bring an action on the company's behalf by a derivative action to challenge such a transaction. One can take even more complicated and worse examples. However, it seems to us that a transaction which is outside the powers of the directors would be even worse, but there is on this a curiosity in the Bill. When we come to new Section 35A(3), where the third party is in good faith, he can enforce a transaction, but, under subsection (3), the member of the company can bring an action to restrain an act which is: beyond the powers of the directors". He can do so without the limitation that his right of action falls when a legal obligation has been entered into. That is very odd. There is a curiosity in the middle of the Bill, so I must ask the Minister in relation to this amendment whether it is the case that the shareholder can recover under new Section 35A(3) when he has just lost his right of action under new Section 35(2). Our amendment would be a start towards sorting out this matter. It would state that the ultra vires doctrine would go, but where the transaction was not only ultra vires but wholly unauthorised, one begins from the proposition that the shareholder's right to bring proceedings is preserved. One would then need to go on to new Section 35A to look at the position of third parties. However, that is the subject of later amendments.

I ask the Minister in responding to this amendment to tell us, first, why that should not be the rather closer cutoff point. Secondly, if it is not to be accepted, what is the relationship between new Section 35A(2) and new Section 35A(3)? I beg to move.

The Lord Advocate (Lord Fraser of Carmyllie)

I shall follow the noble Lord and preface my remarks with a few more general observations about these provisions for just the reasons that he has set out.

The provisions aim to remove the uncertainties which remain for persons dealing with a company as a result of the lingering operation of the ultra vires rule. We have sought to put right the difficulties which have been found in the present Section 35 of the Companies Act, and to bring our law into line with the European Community First Company Law Directive. We have also sought to retain what I may describe as the internal operation of the ultra vires rule, namely the effect of the limitation of capacity on the fiduciary duties of the directors to the company and its shareholders as a whole. I shall have more to say on these points as the various amendments are considered, but it seems to me that the noble Lord's amendment threatens those basic objectives.

Although those objectives can be simply stated, drafting provisions to give effect to them is by no means an easy task. We do not necessarily regard the present draft as our last word, and we shall be grateful for any suggestions as to how the provisions might be improved. Officials have already had fruitful discussions with the Law Society and as a result the Government intend to bring forward a number of drafting amendments at a later stage.

Turning to Amendment No. CI, I suggest that if the amendment were to be accepted it would bring about an unnecessary and unfortunate degree of uncertainty for persons dealing with a company. Our basic aim has been to remove this uncertainty in so far as it springs from limits on the capacity of the company and the authority of the directors under the company's constitution.

The effect of the amendment would be to allow a member of a company in certain circumstances to bring proceedings to restrain the performance of an ultra vires act which is in fulfilment of a legal obligation arising from a previous act of the company. The circumstances are that the previous act was carried out outside the powers of the board of directors or persons authorised by the board.

The noble Lord, Lord Wedderburn of Charlton, gave an example, which I shall come to shortly. However, I should like to put an example to the noble Lord which seems to me to necessitate the provision as it is presently drafted.

Suppose a company has entered into a contract to buy a piece of land from another company, but the conveyance has not been completed. Such a contract might involve a substantial sum of money. If the provision which the noble Lord has suggested is included, there is a risk that the second company will, before entering into the contract, feel obliged to check on the authority of the other company's board of directors under its constitution. That might involve discovering and then seeking to construe an elaborate objects clause. That would be a bureaucratic and wasteful activity in a modern commercial environment.

The provisions in this section are to be considered alongside those further provisions to be found in Section 35A. The particular example which the noble Lord gave seems to me to be covered by the provisions of Section 35A. That is not accidental; it is intended that it should be covered in that way. As I understood the noble Lord's example, in that particular context the third party would have been a wrongdoer. He would not have been acting in good faith within the meaning of Section 35A. On that basis, the transaction could be challenged on the grounds of a lack of authority and not on the grounds of capacity. In such circumstances, while the matter might be approached in a different manner from that suggested by the noble Lord, nevertheless it would provide a route whereby the shareholder would be able to achieve the result that the noble Lord seeks.

Actions in excess of the powers conferred on the directors by the company's constitution ought not, merely for that reason, to be a matter for an honest third party: they are a matter for the directors and the shareholders. The proposed amendment would have effect whether or not the third party had notice of the lack of authority. In that respect it is worse than the existing Section 35. Morever it is not in accordance with the first directive.

With that explanation, I hope that the noble Lord will withdraw his amendment.

Lord Lloyd of Kilgerran

Before the noble and learned Lord the Lord Advocate sits down, perhaps I may welcome him and congratulate him on his maiden speech in relation to the Companies Bill. It is always a good thing to have the fresh air provided by experts on the law of Scotland.

Lord Fraser of Carmyllie

I am grateful to the noble Lord, Lord Lloyd of Kilgerran, for those remarks. I am not sure whether my noble friend Lord Strathclyde will consider them quite as flattering.

Lord Wedderburn of Charlton

I hope that the noble and learned Lord will believe me when I say that it was my intention to offer the same felicitations. However, I felt that I ought not to do so before he had spoken in case anything happened. The noble and learned Lord has been kind enough to deal with my example and to give two of his own. Both he and I appear to be suggesting that these two clauses could keep us here for a very long time, partly because they are interlinked. The noble and learned Lord was correct to say that they are interlinked. The reason why I refrained from going into detail on Section 35A was because I have points to make in relation to that section later.

I should like to make three points in relation to what the Minister said. First, all the uncertainties that he cures could be cured by the existing Section 35A. He does not need Section 35 for any single one of the points which he made. Secondly, he is right that my example concerns a purchaser—or was he a vendor?—who does not fall within the terms of Section 35A because he is acting fraudulently. That is true. However, I gave the example not precisely in relation to my amendments but as an example of whether directors have acted with authority, and to illustrate how unfair Section 35(2) is at the moment. The mere fact that fraudulent misrepresentation has induced the contract makes the contract only voidable—at least in England and Wales. I would not venture to suggest what the position is elsewhere The contract would exist and the legal obligation would exist. That is the whole point. Many such examples could arise.

Lastly, perhaps I could wrap those two points into one general proposition. It is an important point for the purpose of these debates. I hope that the Government will not rely on Section 35A to justify the terms of their Section 35. The noble and learned Lord mentioned no defect in the existing section—which for clarity I shall call the 1972 section since that was the section which was introduced when we entered the Common Market, in accordance with the first directive. The 1972 section has defects but none of them relates to this particular point. Therefore, when discussing Section 35, the Government have to justify the terms of that section in its own right and not in relation to Section 35A.

I leave the noble and learned Lord with this thought. As he said, the lingering operations are ultra vires. Albeit that ultra vires will be abolished in relation to its external application—a policy which we support—the so-called retention for internal puposes is more apparent than real. The entire set of interests which might on occasion be protected—the interests of creditors, shareholders and employees—interests which are reflected in the shareholders' minority action, are not it seems to us protected under Section 35. The balance is a new one, and I hope that the Government will look at Section 35(2) again very carefully. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6 p.m.

Lord Wedderburn of Charlton moved Amendment No. C2:

Page 88, line 47, at end insert— ("(2A) Nothing in this section affects any liability arising from section 14 of this Act.").

The noble Lord said: This amendment and the next are an attempt to follow the same train of thought. As the ultra vires doctrine is to be abolished, what happens in other areas of company law? This matter may affect a company, large or small, any day of the week. These are not the arid matters that the words ultra vires suggest. What happens to the other matters of company law that are affected?

This amendment concerns Section 14 of the Act which, in summary, states that, subject to the provisions of the Act, the memorandum and articles bind the company and its members as a contract. The exact words are, as if they [the memorandum and articles] respectively had been signed and sealed by each member". But, as Mr. Justice Slade said in 1978, it is a legitimate and indeed necessary inference that the company is to be treated as under a contractual obligation to its members". That has been proved for many years.

The contractual obligation on both sides includes the obligation not to proceed outside the objects of the company. That is a particular obligation on the company's side. The point is of particular importance to the shareholder in situations where there are procedures within the articles that allow him, even more easily, to stop an action going outside the objects of the company; for example, where certain transactions may not take place without the consent of a director who is perhaps on the board to represent a particular interest. In a case in 1988, Mr. Justice Harman said that, in such a case, where the articles are broken, it is plainly wrong that the company's affairs be conducted in a manner which is wholly unauthorised"— unauthorised by the memorandum and articles— and a shareholder in my view has a right to bring an action to restrain the company from so conducting itself. The Government may say that Section 14 is not affected for two reasons. First, it states that the measure is subject to the provisions of the Act. So, when the new Section 35 is implemented, it will be subject to whatever Section 35 states. Secondly, Section 35 prevents proceedings on the grounds of lack of capacity. Plainly, those two grounds—lack of capacity and preventing the company from acting otherwise than in accordance with its memorandum or articles—may overlap. Is it to rest as a fortuitous circumstance of drafting whether the shareholder has a case for preventing his company entering into what may be a disastrous transaction? That will depend on whether the articles are drafted so as to make it look as though the procedure is not a matter of capacity or related to the objects. The unfortunate draftsman who made it look as though it did would fall under the scope of Section 35(2) whenever any kind of legal obligation, however voidable, had arisen from a previous act.

If that is the intention, our first point is that it must be spelt out. I must tell the Minister that I have tried to keep up with the rapid developments in the Bill. I apologise if I have missed some reform of Section 14 in a revision of a schedule, but I do not believe that there has been any such reform. There must surely be a clear statement in the Bill about the effect of Section 35 on the contract under Section 14. As I have said, that point concerns many day-to-day matters and affects every shareholder and the directors who run the company.

Perhaps I may make a subsidiary point. The noble and learned Lord did not answer my point before, but I shall continue to press it because it is one of the interaction points. Section 35A(3), in what I might call the "third party section", refers to the ability of the shareholder to sue which is not affected where he wants, to bring proceedings to restrain the doing of an act which is beyond the powers of the directors", whether or not, it seems, a legal obligation has arisen on the company from a previous transaction. In that connection, it is important to know whether the shareholder can always rely on that point. If he can, he has an easy way round any problems under the old Section 35(2). I beg to move.

Lord Fraser of Carmyllie

I first wish to thank the noble Lord for his kind words. As one who did his company law poring over a famous set of articles written by him in 1957 in the Cambridge Law Journal, it is a matter of some anxiety to have to go into the great detail of these provisions of company law with him.

Perhaps I might say, with regard to Section 14, that our aim is to abolish what I have already called the external consequences of the ultra vires rule; namely, its operation as between the company and the world in general. We do not intend to affect the consequences of the rule for the relationship between the members, the company and its directors. We believe that we have achieved that goal, but, as I said on the last amendment, we recognise that this is a complex area of law and, if it is in any respect wrong, we shall certainly consider it very carefully to establish that we have done nothing that unhappily alters that arrangement.

There is a difficult relationship between the two clauses. As the noble Lord has already encountered, there are difficulties in keeping the two separate. I should perhaps have told him that we are considering further the position under Section 35A(3). The difference at the moment is that the challenge is more likely to arise under Section 35(2), as the personal right of the shareholder. If one were to proceed under Section 35(3), that would have to be a derivative action. In that respect, we are looking further at the provision.

The noble Lord prefaced his remarks by asking why we were relying on the clause at all when we have new Section 35A in any event. The short answer is one that he will appreciate: it is because we have Article 9(1) of the first directive. It may be that, in some respects, our policy approach to Article 9(1) may not meet wholly with his approval. I nevertheless hope that he will appreciate that, given the policy approach and the necessity to comply with the first directive, the clause must be contained within the Bill. I hope that I have answered the noble Lord's question.

Lord Wedderburn of Charlton

I am grateful for the words of the noble and learned Lord, but I am not very happy with them. In fact, I am rather alarmed that the Government are again looking at Section 35A(3) because the longer we go on, the more the argument always turns upon enforcing a transaction in favour of the third party. We shall deal with that matter when we come to Section 35A. With great respect to the noble and learned Lord, he does not need Section 35 to put into effect the first directive. I believe that there are defects in Section 35A. That is another matter. I believe that those defects make it less likely that we shall be brought into conformity with the first directive than would have been the case with the old 1972 section.

If we went off for a drink, we could find a form of words between us that did not do so badly, but Section 35 concerns the abolition of the ultra vires rule. The first directive does not require one to abolish that rule. It requires one to protect third parties in respect of acts done by the organs of the company. Not to have the limitations of the organs of the company would defeat transactions for third parties. I take that to be why the Government have taken this dichotomy between "internal" and "external". They were abolishing it for external purposes and keeping it for internal purposes. These amendments are aimed to prod, so to speak, at the difficulty, to which I do not think the Government have faced up for a moment, about finding that line between what is external to the company and what is internal to it.

However, we shall come to the first directive later. It would not be right for me to go in the direction in which the noble and learned Lord is pointing on this matter. I am happy to admit that it is my view too that none of the articles that I have ever written has solved any of these problems. That may be of some use to the noble and learned Lord. I happily beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Wedderburn of Charlton moved Amendment No. C3:

Page 88, line 47, at end insert— ("(2B) this section does not affect the right of any member of the company to bring proceedings in the form of a derivative action.").

The noble Lord said: In view of the comments of the noble and learned Lord the Lord Advocate I shall move this amendment quickly in the hope of receiving a favourable response. I understand it to be the kind of thing that the noble Lord, Lord Strathclyde, mentioned (the reference in Hansard is to the debate on 21st February at col. 517), when he agreed that one paragraph in the Bill might be said to be strictly unnecessary. He went on to say: However, in our view it provides a useful pointer to the operation of the section". I had intended to say that the derivative action mentioned by the noble and learned Lord was put at its narrowest most recently by Mr. Justice Knox in a very famous judgment as at least comprising those situations where the wrongdoers who are in control of the company have caused it to suffer loss. As he put it: Where what is sought is compensation for the company for loss caused by ultra vires transactions the wrong … is a wrong to the company, which has the substantive right to redress". That can be found in Smith v. Croft (No. 2).

The shareholder has that right of action in the sense that he can bring it on the company's behalf. He loses it under Section 35(2) wherever there is a legal obligation—or that is how the Bill appears at the moment. I was hoping that that was not so and that the derivative action would be kept on a wider basis. It is not the most common remedy in the world but it is the residual line of defence against acts which are right outside the purposes of the company, whoever has committed them.

Perhaps I may interpose a remark and say that many of the examples involve directors who have done something wrong because those are the easiest examples to give; it does not in any way suggest that that would always be so. But where the directors have acted wrongly and ultra vires then the derivative action provides some residual line of defence. What the noble and learned Lord said led me to believe that the Government thought perhaps that that form of action should not be affected by the section. With those comments, I beg to move.

Lord Lloyd of Kilgerran

I interject briefly to ask the noble Lord, Lord Wedderburn, to be kind enough to repeat the reference he gave to the Committee stage of the Bill on 21st February when he mentioned the noble Lord, Lord Strathclyde. I did not quite catch what he said. Would he tell me the relevant page in Hansard?

Lord Wedderburn of Charlton

I apologise to the noble Lord. I mentioned the words of the noble Lord, Lord Strathclyde, at col. 517.

Lord Lloyd of Kilgerran

I am much obliged to the noble Lord.

Lord Fraser of Carmyllie

I have to say to the noble Lord, Lord Wedderburn, that far from its receiving a favourable response from me I consider this to be a wholly undesirable amendment. It is undesirable because it would conflict with the basic objective to the new Section 35 of giving protection to third parties dealing with a company from the operation of the ultra vires rules. Although he seems to have some disagreement with me over this, I also assert that it is undesirable because it would conflict with the United Kingdom's Community obligations.

As I understand it, the purpose and effect of the amendment would be to allow a member of a company to bring proceedings in the form of a derivative action seeking to set an act aside on the grounds that is ultra vires. There are only certain circumstances in which a derivative action can be brought, the most important for present purposes being where there is a fraud on the minority by those in control of the company. There is no reason to think that a third party would know that those circumstances would apply, and in any case we wish to end the uncertainty which arises in commercial transactions from the operation of the ultra vires rule and to protect third parties. Breaches of the ultra vires rule, as I said before and doubtless will repeat before we finish this chapter of amendments, should be a matter for the directors and shareholders and not for third parties.

Those are the very basic propositions which lie behind new Section 35, and this amendment runs counter to them. Minority shareholders will remain able to bring a derivative action against the company's directors for breach of their fiduciary duties. Moreover, they have a remedy under Section 459, which we have amended so as to ensure that it is an effective protection. As the noble Lord will certainly appreciate, minority shareholders may use their personal right, which is indeed preserved by subsection (2) to restrain proposed ultra vires acts.

I indicated that as I saw it the amendment also conflicted with our Community obligations. Article 9 of the first directive provides that the acts of a company are to be binding on it even if they are not within the objects, subject to a member state's option to provide that knowledge of the objects by the third party renders a transaction with him which is beyond the objects. By allowing ultra vires acts to be rendered void where a derivative action succeeds, without introducing an element of knowledge on the part of the third party, this amendment would be contrary to that article.

Although this is still part of the complicated area to which the noble Lord has drawn our attention, I hope that I have answered the queries that he raised.

6.15 p.m.

Lord Wedderburn of Charlton

I am grateful to the noble and learned Lord. In response, I should like to raise two issues. This amendment takes one a little further down a road that may be described simply as follows: the Government wish to uphold transactions with third parties even though they are outside the objects of the company. They must do that because of Article 9 of the first directive so long as the acts are done by the organs. We shall come to that point in a moment. That is what Section 35A states. Anything outside the constitution of the company in terms of the powers of those who are to be designated as the organs can be en forced by the third party if he acts in good faith. That is enough, subject to the other sub-clauses, to satisfy the first directive.

What the Government wish to do—rightly, we think—is to go further than that. The first directive does not require the abolition of the ultra vires doctrine but the Government wish to do so. We agree with that, subject to a balance being struck on the internal interests. When one comes to the internal interests, one finds that the shareholder can no longer bring his derivative action. One finds that his personal right to bring proceedings is said to exist, but as soon as any legal obligation is entered into he loses that personal right. In other words, the shareholder's action of whatever kind is cut off in practice at a very early stage.

The very fact that it is cut off by a legal obligation in all the examples that the noble and learned Lord has given shows—to put it briefly—that it is the third party in Section 35A who steps backwards into Section 35(2) in order to create the legal obligation to defeat the shareholder's action. The two sections are interlinked. There is a sense in which one would not need anything at all in Section 35 for that argument except to say that it was binding in favour of the third party. One might also wish to say that it affected Section 14. I hope that the Government want to do that and will do so now. If that is what they mean, perhaps they will state it on the face of the Bill. Otherwise there will be litigation about this point.

We shall come later to matters in which the 1972 section did not spell out what the Act meant, partly because no one understood what it meant. However, we understand it now because there has been litigation over it. There will be litigation on these matters but just how far it will affect Section 14 as regards derivative actions and so on we shall not know unless the Government spell it out. From the remarks of the noble and learned Lord I do not think that I shall like it when it is spelt out.

There it is. We have tried our best. At least let the matter be clear and certain and not left to litigation. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Wedderburn of Charlton moved Amendment No. C4:

Page 88, line 49, after ("them") insert ("or any liability incurred by any person as a constructive trustee.").

The noble Lord said: This amendment concerns what might be called a very important internal matter relating to acts committed outside the objects of the company. I take it from what the Government have said in subsection (3) of the new Section 35 that it is common ground that the liability incurred by the directors, or by any of them, is to be retained in that very important circumstance in which they become constructive trustees.

As Mr. Justice Ungoed-Thomas said in the Selangor rubber case in 1968, their duty was to apply the company property to specified circumstances for others beneficially; that is, to hold it on trust for the company. He continued: That is why a misapplication of it is equally in each case"— as in the case of settlement trustees— a breach of trust Cases from the 19th century have made clear that the foundation of the fiduciary obligation of the directors in terms of their control of corporate property and their control of their corporate powers is that of the high level of trustee. Cases in the last two years have illustrated this very well. It does not depend even upon honesty although of course—and we debate the matter on this footing—under the Companies Act 1985, as under previous Acts, the court has power to excuse, where it is reasonable and fairly should be done, the director who acted honestly and reasonably. That is of course perfectly right. But the consequence of directors being trustees is that the third party who acquires property or benefit from their breach of duty himself becomes a constructive trustee.

There is a little uncertainty about the level of knowledge that is required. However, it is now fairly clear that the third party—either with knowledge or wilfully shutting his eyes, or with what is sometimes called Nelsonian knowledge—will fall into that category.

The 1972 Act ignored this problem. It said that directors could bind the company to third parties even when they had no authority or it was ultra vires. It said nothing about constructive trust. That had to be litigated in the case of International Sales and Agencies Ltd. v. Marcus in 1982. Understandably in my view, Mr. Justice Lawson held that the doctine of constructive trust was not in any way affected by the new obligation in our law to bind the company to transactions which were outside its objects.

Inferentially that appears to be the Government's view again. I should like to have it confirmed. I should like to have it confirmed with the words in the amendment, not merely for directors, who are the only people who are dealt with in subsection (3) of the new Section 35, but also for any person who falls under that obligation. The Government cannot have it both ways in terms of drafting. They cannot say that it is unnecessary to mention any other person who becomes a constructive trustee, or indeed is under any other liability when they have mentioned the directors themselves; they may criticise my amendment as being too narrow. Either the liabilities are there for everybody or they are not. I am sure that they do not have such situations in Scotland, but occasionally one comes across them in England and Wales. As the clause is drafted at the moment, a perverse tribunal might take the view that only the directors were to be liable and not the third parties because they had been left out, and might so construe the section.

This is a very important area. It has long seemed to me that there are too many people who wish to get rid of the fiduciary obligations of directors whereas they are in fact the one bulwark of business ethics which stands in our company law. It is therefore very important indeed in my view not to allow any uncertainty on this matter. I hope that, now we are dealing with just an internal matter relating to abolition of ultra vires, the noble and learned Lord and I will be able to find more common ground than before. I beg to move.

Lord Fraser of Carmyllie

I think that there is at least partially a common ground between the noble Lord and myself. We are at one in believing that as a matter of policy the new Section 35(1) should not prevent a constructive trusteeship arising in cases where a third party is aware that the directors are engaging in a fraud or misfeasance. We believe that in those cases the courts would hold that a constructive trusteeship arose.

However, there is a particular case of a breach of fiduciary duty where we think that the courts would not so hold, and we are concerned that they should not. The noble Lord made reference to the case of Selangor United Rubber Estates in 1968. As I understand the law in that case, in the absence of a statutory provision, if a third party dealing with the company knew no more than that the directors were exceeding their powers or were causing their companies to enter into an ultra vires transaction with him, he would seem to be liable as a constructive trustee. It would be apparent that this would confound the purpose of new Section 35(1) for it would in effect be saying that knowledge of the fact that an act is beyond the capacity of the company—and I stress that in relation to Section 35, as he will appreciate, it is a question of capacity—is to prejudice the position of a third party. I would not wish to uphold the constructive trusteeship principle to the extent that it is set out in the Selangor rubber case. I suggest to the noble Lord that to do so would mean that in terms of Article 9(1) and (2) to allow that extended principle of constructive trusteeship to continue would be to run contrary to it.

I do not agree with the noble Lord that what we have done is to increase uncertainty. Section 35 is concerned only with validating transactions. It does not affect the internal operation of the objects clause.

The provisions that we are now discussing have been discussed with the Law Society and others. They have not expressed any serious worries to us, only on points of detail and emphasis. While we are sympathetic to those, and are still considering them, we shall consider very carefully what he has said. There is a difficult line to be drawn between setting out every nuance of legislation and relying on the courts to fill in the detail. At the moment we believe that we have the balance right. However, we shall read what the noble Lord has said. If there are continuing difficulties to be addressed, we shall do so.

The noble Lord has mentioned the judgment of Mr. Justice Lawson, as he then was, in the International Sales case. I agree with what he has said about that. Clearly what he had to say, and the stress that he placed on the use of the word "dealing' in that case may be to some extent affected by the changes that are being proposed in Section 35A. I seek to emphasise that where a third party knows that there is some additional wrongdoing—more than a lack of authority—he would be caught by the new Section 35A. But where he is simply a constructive trustee, as in the example of the Selangor rubber case—possible simply through knowlege although I accept what the noble Lord said about a Nelsonian blind eye, if I may adopt his wording from a well known textbook—it would seem that such a person needs to know something of a dishonest design. It is not a matter of simple knowledge. However, I believe that he understands the set of circumstances that we seek to exclude from constructive trusteeship. There is a degree of common understanding between the two of us on this. I trust that I have explained the Government's position.

6.30 p.m.

Lord Grantchester

I am induced to speak because I spent some 60-plus days in the hearing of the Selangor Rubber case. Do these amendments have the effect in the Selangor case of allowing the bankers, who were found liable as constructive trustees, no longer to be liable in those kinds of circumstances? The case concerned gentlemen in the City who thought up a scheme to buy company shares out of the company's own funds. They procured bankers—that bank now no longer exists—to take part in meetings and, by passing cheques through accounts, to use company money to buy the company's own shares. In those circumstances, the banker as constructive trustee was held to be held liable to make good to the people who suffered the loss. Is this amendment such that in those circumstances the bankers would now escape?

Lord Fraser of Carmyllie

I am not sure whether to congratulate or whether to commiserate with the noble Lord for having to spend so much time on this matter. I do not know whether he was on cases one. two or three or possibly all three. What concerns the Government, given the structure and the approach we take to Clause 35, is that if one takes the logic of what was the decision in the third case, that would mean that a third party dealing with the company who knew no more than that the directors were exceeding their powers and was not involved in any way further, then it would be simply a matter of knowledge. I indicated to the noble Lord, Lord Wedderburn of Charlton, that it is possibly a somewhat grey area, but if it was only a matter of knowledge there is at least the risk that he would be liable as constructive trustee.

Having regard to that structure of Clause 35, and what is seen as an important discharge of duties under the European directive, the Government would not want the full extent of the Selangor Rubber Company case, particularly the principle that I have enunciated concerning the number three case, to be implemented and it would be sought to be excluded by the present provisions.

Lord Wedderburn of Charlton

I must admit that I have sat here in a state of increasing terror because of what we are prising open. With no disrespect to the noble and learned Lord, I believe that this is the first time that the Government have committed themselves to this in public. I have riot been party to any consultations. We see that where directors act—I would not say outside their authority—in the case we have, outside the powers or objectives of the company, which is the highest or the lowest breach that directors can commit, that is to remain internally within the company and is still something for which they are liable to the company, but the shareholder may bring a derivative action. I shall not argue with the noble and learned Lord about exactly when that could be done, but in some situations plainly it can be done. But that which is internal, as we have seen on every previous amendment, can become external. I had thought that when the externality was a third party who had sufficient knowledge—I agree with the noble and learned Lord and am not defending very word in those long Selangor judgments—by and large we know that there must be some dishonest designs, as was said in Barnes v. Addy, with sufficient knowledge, or Nelsonian knowledge, of the breach of duty. It is no good speaking about the breach of authority because it is a breach of duty which is central.

In those situations surely the third party in our law should remain liable as a constructive trustee. One might argue whether he would be able to use new Section 35A because he might not be in good faith. The noble and learned Lord runs into that point immediately, that if he thinks has third party, (who has Nelsonian knowledge of a breach of duty of directors acting ultra vires) can then use the new Section 35A, it can be argued that it is not in good faith. Yet the Government seem determined that every time there is a clash of interests the third party should win.

It is not required by the first directive, Article 9, that in that situation constructive trust cannot operate. I was not relying on the Marcus judgment of Mr. Justice Lawson for points relating to the word "dealing". I agree that that is a different matter. But I was relying and do rely upon the argument which he made succinctly and clearly that a constructive trust in the third party who became liable as a constructive trustee under our law in fiduciary areas remained and was not required to be expelled by the first directive. I believe that that is correct.

The idea seems to be that the Government in this clause are to give a charter to unscrupulous third parties who will not be liable for constructive trust. If they do not mean that they should say, "Yes, constructive trustees will remain constructive trustees. Let us put your words into the Bill". Those are my words, and that is why I moved the amendment. We want to see that those who act unscrupulously remain under trustee-like obligations. We want to see that those who act in good faith have their transactions enforced. That seems to us to be correct. I thought that these few words would make that clear, but the noble and learned Lord has told us that the Government intend to alter the law and to reverse the Marcus decision. If I have misunderstood him I give way.

Lord Fraser of Carmyllie

Obviously I did not express myself very clearly. There is a circumstance in the Selangor case which the noble Lord first set out upon which concerned an extreme case where a little more than knowledge is required. I want to stress to him that the Government's view is that if that third party which so concerns him knows more than that, simply the directors are exceeding their powers and causing the company to enter into ultra vires acts—the third party knows, for example, that they are benefiting themselves from the property or otherwise and are not acting in the company's interests—it is our view that in such circumstances the courts would have no hesitation in imposing a constructive trust. I hope with that explanation I have satisfied him that the gulf he seemed to see yawning between us is no gulf at all. It is only a small matter as I sought to indicate at the outset in relation to the Selangor case that I could not accept his amendment.

Lord Wedderburn of Charlton

I am grateful to the noble and learned Lord. Clearly there will never be a gulf between us, but merely a division. I am grateful for those words because they help to clarify this. I must ask leave to withdraw this amendment; but in doing so, I ask him to consider subsection (3) very carefully in the light of what he has said and the emergent policy of the Government and the department upon this matter, and to ask themselves whether a court necessarily would decide what he has said it should decide in subsection (3). That is what the legislation is all about. It is not a matter of guessing. I do not believe that that is so. The court could hold many interpretations of subsection (3). I hope that they will be encouraged to take the wide interpretation on constructive trust. Even now the Government do not seem very keen on that, but I hope they will reconsider. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Wedderburn of Charlton moved Amendment No. C5:

Page 89, line 3, after ("or") insert ("expressly to").

The noble Lord said: We now come to the new Section 35A, in other words this is the clause which purports to satisfy the first directive and to replace the much criticised Section 9 in the 1972 Act, passed in rather a rush which was said to have defects, although in the courts it has held up pretty well. Although the amendment is small, we are seeing that these small amendments are throwing up fundamental issues of policy.

The new Section 35A begins by stating that in favour of a third party dealing with a company in good faith, the power of the board of directors shall be deemed to be free of limitations. That is a good beginning towards satisfying the directive. The section then states that the power of the board of directors to bind the company or authorise others is deemed to be free of limitation. We question whether that goes too wide and in the wrong direction.

There are two parts to the argument. The first concerns the first directive and the second concerns the doctrine of ostensible authority. I put the arguments in that way because the points relate to later amendments and if the argument is made now it need not be made twice.

Paragraphs (1) and (2) of Article 9 of the first directive, issued in 1968, make three points. They are that the acts done by the organs of the company are binding upon it, even if not within the objects. However, secondly, a state may provide that the company shall not be bound where such acts are outside the objects of the company if the third party knew that was so. Thirdly, paragraph (2) states that the limits on the powers of the organs of the company arising from the statutes—which I shall now call the memorandum and articles—or from a decision of a competent organ, may never be relied on as against third parties even if disclosed.

Third parties are to be protected within that structure. However, the structure has one fatal problem. I am astonished that the Government have not had the courage—which, as we saw earlier this afternoon, is so strong in respect of other matters—to deal with the matter. The problem is that most of the systems of member states either have, or have adopted, the concept of an organ of the company. An organ is very different from an agent. An organ can always represent you; an agent must act within his authority. That is the starting point.

Our directors are agents. Even our boards of directors are, in law, sets of agents. Therefore, we enter into the ghastly problem which already exists in connection with the previous amendments. It is where our law has attempted to adapt an agent into an organ without saying so.

This, together with the next amendment, which encourages the Government towards the direction of treating the directors as organs of the company, would bring us closer into accord not merely with the directive but also with the systems for company law in the other member states. Therefore, one would think that, even in 1992 terms, the Government would wish to go in that direction. The notion of an organ is familiar to German company law and to that of the Netherlands and Denmark. It has been adopted in France, Belgium and Italy and in 1973 was adopted in Ireland. I do not know whether the Government have looked at it, but the Irish precedent is interesting and might have been adopted.

Since 1972 when, in a famous communication, Sir Geoffrey Howe, as Solicitor-General, said that he thought it was reasonable to equate the organ of the company and the act of an organ to a transaction decided on by the directors, we have tried to use the directors as the organ of the company. It was the words "the directors" which got us into trouble in the 1972 section. However, the trouble was two-fold. I should like to ask a direct question of which I gave the Minister's noble friend notice this morning. It was late and may not have reached him, but I should like to put forward the point. First we need to identify an organ of the company to satisfy the directive properly. Secondly, under Article 2(d) of the directive there is an obligation to register, The appointment, termination of office and particulars of persons who ‖ are authorised to represent the company in dealings with third parties and in legal proceedings". The article then provides that one must state whether those persons are authorised to represent the company alone or jointly.

Those two points have not been answered in the Bill. Our amendments are small pressures towards proper fulfilment of the first directive. However, a fulfilment, if it was eventually made, would make our system of company law very similar to almost all other systems. I understand that Greek company law has not yet been adjusted but most of the major systems in the Community would be similar. We do not satisfy in terms of what is an organ and we do not satisfy in terms of what should be registered under Article 2. I have combed the Bill and the amendments looking for amendments to Section 289 of the 1985 Companies Act, which would be the obvious place to put the new registration provision conforming with the European Court of Justice decisions. However, I have not found one and I shall be only too pleased if it exists.

The first directive point addresses the amendment for this reason. Under the section the board of directors binds the company irrespective of breaches of authority or objects. But, without limitation, it can also give authority to represent the company on any matter, anywhere and at any time, to some other person; Mr. A. N. Other. It might be the office boy. In this connection there is no limit in respect of ostensible authority—they can do it. The first directive does not require the company to permit, or even require, that the whole enterprise can be sold by the office boy. It requires organs to have complete authority and it requires one to register who the organs are.

Secondly, on 21st February the noble Lord, Lord Strathclyde, spoke twice about ostensible authority at cols. 512 and 520 of the Official Report. He did so once "off his own bat" and once in reply to a question put by my noble friend Lord Williams of Elvel. I shall not read the passages but I am sure that he will agree that he was categorical in saying that ostensible authority was included within the concept of authority where the directors have complete power to authorise others to bind the company on any matter free of any limitation.

That worries me for another reason. It takes us further away from the directive and from commercial sense. Ostensible authority normally has four elements. They are the representation that an agent has some authority, usually made by conduct; the representation made by someone who has actual authority to manage the business or conduct the particular matter; the representation which induces the third party and is relied on by him to make the transaction; and, in the companies case, the lack of any memorandum or articles.

In the circumstances of the organs of the company we must get rid of the fourth element; namely, limitations by memorandum and articles. They are not allowed. The Government do so but they also get rid of the second element; namely, that the principal must have actual authority to hold out the agent. I suggest that it also reduces and perhaps gets rid of the third element. Where the third party can say, "I relied upon the matter and the fact that I knew it was a breach of their duty does not matter", one should look at the new Section 35A(2)(b). Knowledge is not to stand against him.

What is left of ostensible authority is some appearance that the directors, who can do anything, possibly appear on reasonable grounds to have held out this person. No doubt the directors were negligent in that matter but every piece of slack negligence whereby the directors appear to have held someone out gives the possibility of the third party enforcing a transaction against the company. The new Section 35A(1) does not incorporate ostensible authority but it creates a new doctrine. There will be a new chapter in the books of non-existent apparent authority which will require nothing else than the appearance. Perhaps it will be called "ghost authority".

There are two points against the section which purports to indicate that. I really believe that, although those are extreme examples, in terms of commercial reality the prospect for a company which has any fear of major directors acting in a way which might hold out somebody else—and I have to press this point—just does not relate to the board because the board is there but it must be looked at without any limitation of authority. One limitation of authority is to have a quorum, but the board might be less than a quorum, only two out of 12 directors. The quorum in table A is two, but let us suppose that it was three and only two below the quorum came to the meeting and purported to act or to hold out somebody. That is a limitation which a third party can sweep aside under Section 35A(1).

Therefore, whereas before under Section 35 I questioned whether the abolition of ultra vires had been done in a way which perhaps tilted the balance towards a third party, Section 35A(1) enacts something which is nothing like the structure of the first directive and does not speak of organs but gives complete authority to anyone who is purporting to be an agent, refuses to allow any limitation of authority in that situation at which the first directive stopped short long ago, and then uses a notion of authority to add to it as though it was ostensible authority which turns out not to be obstensible authority at all.

In terms of certainty, if that subsection is enacted that will be a cause of major uncertainty in commercial transactions. Britain will be the one place where people say, "Oh dear, do you have authority to do that?" or "Will you find some way of binding the company?" Internally in the company there will be great worry about what can and cannot be done. You may say that shareholders take the risk when they elect their directors. In a sense that is a great vote of confidence in shareholder democracy, but the reality is that shareholders cannot know how the executive members of the board will behave. While 90 per cent. of members of such boards will be excellent, in the other 10 per cent. of cases some protection of the internal interests is worth putting into the formula in the form which the first directive does, because where you know who are the registered organs of the company, there you have much more certainty and clearer control. Therefore, this first amendment is small but it raises those issues. I beg to move.

Lord Fraser of Carmyllie

The noble Lord has certainly given me food for thought. However, when I look at the particular provisions in Section 35A(1) I am bound to say that on the face of it I have remarkably little difficulty with it because it states: In favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, shall be deemed to be free of any limitation under the company's constitution". If I wish to see how that is elaborated I see that subsection (2) gives me a definition of what is "dealing" and it also spells out in paragraph (b) that: a person shall not be regarded as acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors". Paragraph (c) spells out that: the limitations under a company's constitution include limitations deriving from a resolution of the company", and so on.

When the noble Lord speaks on such matters, one listens with great care but, with respect, it seems to me that he has adverted to matters which are illusory rather than immediately or commercially real. In answer to the specific matter as regards the obligation to register authority which he indicated, the view which the Government take is that the obligation to register names of directors at Companies House is a sufficient compliance with the directive.

Section 35A(1) is concerned with the authority of the board of directors and the authority of no other person. What is indicated here is that the effect of making the board the indisputable source of authority to bind the company is the centre of the subsection. We agree, nevertheless, that this subsection in part moves towards making directors an organ of the company in the way which the noble Lord suggests would bring us closer to compliance with the directive and a form which is closer to our European partners in their approach to company law.

As I understand it the intention of the amendment which he has tabled would be to remove a degree of protection from a third party who deals with a person who only has ostensible authority to bind the company. By only fully protecting a third party who was dealing with a person who had express authority from the board, the amendment would introduce an undesirable degree of uncertainty into a third party's dealings with a company, or else require the third party to check that there were no limitations on the authority of the board of directors to delegate their powers. In that respect we clearly approach this matter differently. The noble Lord sees that his amendment would reduce that uncertainty while I contend, as forcefully as I can, that it will have the opposite effect, certainly as regards a third party.

Modern business life is too fast moving to require a third party to check on the authority which may have expressly been given to a person, and it needs a degree of certainty in order to function. We need that in a modern, commercial world. A third party ought to be able to judge by appearances. That is to say, he ought to be able to rely on the managing director of a company having the authority that a person in that position is commonly regarded as having, and a senior manager having the authority that such a person is expected to have. This result is achieved by the doctrine, to which the noble Lord referred of ostensible authority. We believe that it is entirely suited to modern business life.

We do not believe that it will be open to third parties to abuse the doctrine. For example, it will not be open to a third party reasonably to assume that a non-executive director has authority to sell one of the company's major assets. Non-executive directors are not commonly regarded as having that authority, and a third party who relied on the presumption that they did without a very good reason—for example, evidence that that director had been given that authority by the board—would not be protected. Moreover, under the law of ostensible authority a person is only allowed to judge by appearances if he does not know, and it was reasonable for him not to have known, of the reality. Section 35A(1) does not alter this basic rule. Its purpose is rather different. It seeks to establish the board of directors, in favour of an honest third party, as the undisputable source of power to bind the company and to remove questions as to whether they are free under the company's constitution to delegate their powers.

The noble Lord appreciates that the courts have experience of the operation of the doctrine of ostensible authority. We believe that it provides a sensible basis for a degree of certainty in commercial dealings while still preventing abuse.

Lord Lloyd of Kilgerran

I hesitate to intervene in the very interesting dialogue which has been going on between the noble and learned Lord the Lord Advocate and the noble Lord, Lord Wedderburn. However, I did not understand the noble and learned Lord the Lord Advocate's argument when he referred to the question of certainty and harmonisation with the directives referred to.

He referred to paragraphs (a), (b) and (c) and said, "and so on". Did he mean to include in support of his argument subsection (4) of Clause 35A? Perhaps later I may raise an argument that I produced in Committee in this connection. I took the view that subsection (4)(b) was totally unnecessary. I put that forward as an amendment and I was supported by the noble and learned Lord, Lord Brightman, who said: I take exactly the same view as the noble Lord, Lord Lloyd of Kilgerran. On a brief reading it seems that the amendment is right".—[Official Report, 21/2/89; col. 516]. He goes on to justify that subsection (4)(b) should be removed from the Bill. If I have the opportunity I shall be asking later for any further reasons why they have disregarded the views of the noble and learned Lord, Lord Brightman; though it may be that this is irrelevant at this stage.

Lord Fraser of Carmyllie

What the noble Lord has to say is not irrelevant. I regret a failure on my part. I think I must have been growing weary of reciting the whole of the new Section 35A(2). Having gone all the way through subsections (2)(a) and (b) I attempted to summarise or shorten subsection (2)(c). I assure the noble Lord that I did not intend to encompass within "and so forth" subsections (3) and (4) and anything that follows. I apologise to the noble Lord if he thought that I intended to encompass them in that way. I did not. I appreciate that there are questions that both the noble Lord, Lord Lloyd of Kilgerran, and the noble Lord, Lord Wedderburn of Charlton, want to raise on subsequent amendments.

Lord Lloyd of Kilgerran

I am obliged to the noble and learned Lord for that explanation.

Lord Wedderburn of Charlton

It is necessary to respond briefly to what the noble and learned Lord kindly said. He said that third parties must be able to trust appearances. Curiously enough, that is precisely what was said in the Friedrich Haaga case, where the European Court of Justice pronounced on parts of this area. It was pronouncing on the need, indeed the obligation, to register under Article 2 the names of the organs which the noble and learned Lord says we do under the Companies Act, Section 289. With respect, that is not in any way a compliance with the directive, as the Commission said twice in 1977 in two communications. What the article requires is not merely the names but much more detail and a description of the circumstances in which they can act as organs, if I may so summarise it. The clause is therefore defective in that way.

Secondly, it seems to me that once again the Government are moving into a position where they must protect the third party in every example. I doubt whether that is reasonable. Every time the noble and learned Lord gives an example he must protect the third party. Where he is quite wrong about being required to protect the third party in one of his examples is where a sub-agent of the board, say, deals with the third party without any authority except that the board tells him to do so. Those persons are dealt with not by Article 9.1 but by Articles 9.3 and 3.5 where there is a perfectly clear provision in the directive dealing with other agents with general powers of representation who are not organs.

With respect to the noble and learned Lord, it will not wash to say that you must allow general power to all agents without any consideration of normal agency doctrines so far as concerns the position of the board of directors and to include purportedly ostensible authority. The Government are beginning to take some cognisance of the effects of their own drafts and I hope they will look again at some of them. For the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Strathclyde

This is a convenient moment to break until 7.45 p.m. I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.