HL Deb 06 April 1989 vol 505 cc1264-90

7.48 p.m.

House again in Committee (on recommitment) in respect of Part V, on Clause 92.

Lord Wedderburn of Charlton moved Amendment No. C6:

Page 89, line 3, leave out ("others") and insert ("one or more directors").

The noble Lord said: This amendment follows on the previous amendment. I may move it briefly by saying that I should like to incorporate the line of argument advanced on that amendment, but there are some particular points, and I shall put them quickly. Its effect would be that those on whom the third party could rely in order to bind the company as the organs of the company who could act irrespective of any question of authority would be the board or one or more of the directors. As I said in moving the last amendment, that is, or would be, similar to the position in many of the European member states of the Community. It would be very similar to Germany and not unlike Denmark: it would not be unlike France, which may have a rather narrower notion of organ now. So there is at any rate that presumption in its favour, rather than this vast expanse of others who can be given the character of organ under the Government's new Section 35A(1), if that is what it means.

The point on the directives, (if I may just recapitulate it) would be with this amendment to satisfy the first directive in Article 9, paragraphs 1 and 2; although, as we said earlier—and in view of the noble and learned Lord's response I must put the point again—we would still have to satisfy Article 2. But at least we would begin here with the directors: a known group and a registered group whose ability to act, when it came to individuals below the board, jointly or separately, could be placed upon the register just as is done in connection with the commercial register in the Federal Republic of Germany.

On the other hand, we would then have other agents who would be governed, in terms of the directive, by Article 9 sub-paragraph (3) and Article 3 sub-paragraph (5), and to most purposes by the law of agency. That is the structure that the directive suggests. This amendment would take us along that road. I say "along that road" because the Government appear to be under a number of misapprehensions. For example, during the debates on the 21st February (at col. 510 of Hansard) the noble Lord, Lord Strathclyde, said it was hoped that their proposals: would achieve substantially the same beneficial effects as Dr. Prentice's proposals but would avoid some of the pitfalls that had been identified with them. Then, at col. 512, he said: We believe that the application of the doctrine of ostensible authority sufficiently accords with commercial practice, without going further and conferring authority on individual directors". Our amendment would not—nor does the Prentice Report—go further. It would go in a slightly different direction and it may go slightly less far than the Government in protecting the third party. The only reason for that is that the Government's haste in protecting the third party unbalances the balance of other interests and produces uncertainty. Perhaps I might remind the Government that Dr. Prentice, in his reform of the ultra vires rule report to the Department of Trade and Industry, first of all identified the board as the principal organ—he deliberately uses that term—for conducting the business of the board, and then rightly says that the company will seldom act through its board in all transactions. Then in paragraph 31 he suggests: in the light of the contemporary role of the company director, it is proposed that the acts of an individual director be made binding on a company".

However, he makes clear that for other agents normally rules of agency would apply.

So Prentice was in accord with the structure of the directive and our amendment, although not being pure Prentice, is half Prentice in that it accepts the Government's clause in 35A(1) and says "Yes, the board of course and any other director who is authorised to act for the company" and we would wish to add—perhaps this could be a matter for Third Reading because it is, after all, compliance with Community obligations, as the Commissioners pointed out in 1977—of proper registration of their position in regard to representation under Article 2(1)(d)(1) of the directive.

That seems to us to be not only a necessary but a sensible situation. It is true that the company is then at risk of anything the directors do in regard to outsiders; but the shareholders elect the directors and if there is any control there it will be exercised. That seems to us to be a sensible and certain structure. I stress "certain" because, again as was said in the Haage case by the Advocate General in 1975, you can get certainty as a third party by looking at the register to see who is on it as one of the organs.

So I beg the Government to consider carefully what need they have to go beyond the structure of the directors being the organs, a practice adopted by almost all the member states. I believe that one or two who do not at present adopt the practice are moving towards it. It produces certainty, which is so highly valuable in commercial operations, and it produces a situation where the third party is properly protected and which is in accordance with the directive, not only in spirit but in actual legal structure. This amendment would not get us there completely, as I say; but if it were accepted, I believe that the other small bricks that would be needed for the complete structure could easily be added. I beg to move.

Lord Fraser of Carmyllie

While I note what the noble Lord has said about proposals of now a greater degree of European assimilation might be achieved, this amendment cuts down on the protection which third parties ought to have in dealing with a company. It would appear to me, in connection with the European comparisons made by the noble Lord, rather to hark back to the present Sect ion 35 of the Companies Act, which refers to acts: decided upon by the directors". I should have thought the noble Lord would agree that that section has not been regarded as a very happy provision.

If I may risk repeating briefly what was said in relation to the last amendment, Section 35A is concerned with the authority of the board of directors. It does not confer authority on anyone else. It is concerned with the limitations on the board's authority. We have not gone beyond the structure of the board of directors as being the organ of the company. Section 35A is concerned with the authority of that board.

It does not seem as though there is really a great deal between us on this. The Government's intention is that the law should correspond to commercial reality, with the company, as the noble Lord appreciates, seldom acting through its board: it normally acts rather through agents and officers. If the third party is only fully protected when he deals with the board or indeed with particular directors, either he will not often be protected or he will have to take the trouble on each occasion to check that the board has authority to delegate power to agents. The latter would be likely to hinder rather than help the workings of commerce.

In these circumstances, it is our view that a third party ought to be protected, provided always that he is honest and that the person with whom he is dealing has authority, actual or ostensible, from the board to enter into the transaction. The third party should not have to be concerned with the inner workings of the company and its constitution.

Lord Wedderburn of Charlton

I see that dinner has not improved matters. First, we are not arguing that third parties should look inside a company's constitution: of course not. The third party should be able, as was said in the Haage case, to rely upon appearances. Why did they say that? It was because the third party, if he wants to, can always see whether or not somebody is on the register as an organ of the company. That is the end of the matter. That point is about Article 2. Nobody is contesting that except perhaps the Government, and they will not put down an amendment to satisfy Article 2.

I say again that unless the commission has changed its view since 1977, we are not in contravention of Article 2. Maybe it has changed its view and the noble Lord will not tell us: pehaps he will tell us at Third Reading. Of course I see the point that it is the authority of the board of directors which is primarily an issue as the first part of Section 35A(1). We traversed that ground when we looked at the types of authority on the previous amendment. It is not just a question of actual delegation but of implied, apparent or ostensible authority. In among all those matters, if you extend it to all other persons who may then be the object of such types of authority, you get a much wider extension. I quite agree about that.

The lines of battle are drawn up like this. The Government say that the third party must be protected; and so do we. The Government say a third party can only be protected if the board of directors has complete authority, and that authority includes all forms of authority to any other person, whoever they may be, including the office boy. We say that is too wide. We say we want certainty because that is very uncertain. We want what the director says we ought to have; namely, a clearly stated number of people, wider than the directors, if one likes, who are registered as the organs of the company. Then the third party knows where he stands every single time. I cannot understand why the Government do not want to adopt the structure which—give or take cultural differences—is the structure in most commercial systems of law in Western Europe and the Community. However, we put it to them; I am sure that as always they will say that they will think again. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

The Deputy Chairman of Committees (Lord Murton of Lindisfarne)

The next amendment, Amendment No. C7, pre-empts Amendments Nos. C8 and C9. If it were to be agreed to I should not be able to call Amendments Nos. C8 and C9.

Lord Wedderburn of Charltonmoved Amendment No. C7:

Page 89, line 9, leave out from ("party;") to ("and") in line 12.

The noble Lord said: It would of course be a joyous moment if Amendment No. C7 were agreed to. I very much hope that the Government will do so. However, this amendment turns to the other matter, the other side of the coin in Section 35A, particularly subsection (2).

The other side of the coin is what the noble and learned Lord referred to just now as "provided the third party is honest". That becomes rather important because as we have picked our way crabwise through the sections we have found that at all points the third party is being protected. The interests of the shareholder and the internal interests of the company which include those of the employees are put aside at all points where there can be two views.

Now we come to the question: who is the third party who has this vast armoury of weapons to bind the company? I put it that way because that is the way to test it. We agree with the noble and learned Lord, "provided the third party is honest". I would add one other feature—that is, within what is allowed under the directive. I have relied on the directive, as I must, which does not allow the mere disclosure of the limits on the powers of the organs of the board of directors to estop a third party. That is in Article 9(2).

It obviously suggests that the third party is not to be put on inquiry. The Government have logically included Section 35B more or less to provide for that. We agree with it. However, the first directive does not require that a court must be instructed always to ignore the bad faith of a third party if the only evidence of his bad faith arises from his knowledge of the lack of authority. There is a clear distinction, if you like—a distinction which is found in more than one system—between the disclosure of the articles not being an estoppel and the knowledge on the third party's part being evidence of bad faith.

We may take various examples if need be but the point is obvious without them. The third party knows all about it. What can be made of his knowledge? The Government again in Section 35A(2)(b) have gone way beyond the directive, balancing out in the interests of the third party. This is a very delicate matter because as the clause stands the company can use the third party's knowledge in the other persons presumably authorised by the directors as sufficient evidence to persuade the court of his bad faith. All that paragraph (b) says is that the act is beyond the powers of the directors.

So as regards the other person the knowledge can be used as evidence and if necessary, complete evidence—whereas in regard to the board of directors, it cannot. That seems to be, first, rather illogical; and, secondly, very uncertain in its effects. In our submission, this oddity—and it is merely an oddity in drafting which the Government may wish to examine—discloses the way in which the knowledge of the third party is wrongly approached.

We say that the courts have the right approach at the moment. If the noble Lord tells me that there is a view that that is contrary to the directive, as I believe some people have said, I should wish to argue about it, I believe it is not. In the case of Barclays Bank Ltd. v. TOSG Trust Fund Ltd. Mr. Justice Nourse (as he then was) said in 1984: Notice and good faith, although two separate beings are often inseparable". Then he cites another judgment, and says: What it comes to is that a person who deals with a company in circumstances where he ought anyway to know that the company has no power to enter into the transaction will not necessarily act in good faith. Sometimes, perhaps often, he will not. And a fortiori where he actually knows". I stop there because I think the subsequent comment may not be one on which I would wish to rely. However, I rely upon that passage. The courts have applied it largely in that way, knowledge in the third party of lack of authority can be evidence of bad faith.

Here we are told, "If that's all you've got, you can never make out bad faith". Or to put it a better way perhaps, "If all you've got is complete knowledge in the third party"—let us imagine a case where the third party is the only person who knows what is going on. The directors and the agents have all made a mistake about the powers of the directors. The third party is allowed to enforce the transaction, no matter what qualitative assessment a court might put on that evidence which may continue for years in a complex and expensive transaction. We say, "That cannot be right, it is not what the directive says". We do not advance it merely for that reason, we say it is permissible to advance another view. The view is much more like that which was put by Mr. Justice Nourse in the TOSG case. It is certainly not one which should pre-empt and prohibit a court from examining that knowledge where it is the only evidence of bad faith. I beg to move.

Lord Fraser of Carmyllie

We need to provide some gloss to the meaning of "good faith" in terms of Clause 35A, otherwise—and I have to disagree with the noble Lord on this—we shall continue to be in breach of our Community obligations.

Perhaps I may explain it thus. The courts have interpreted the "good faith" test in Section 35 of the 1985 Act—and their arguments would seem to apply equally to the new Section 35A(1) if it were to stand alone—as meaning that merely if a person knows of any limitation on the authority of the board of directors to bind the company deriving from the company's constitution, he will not be protected. However, as I have explained, the first directive protects a third party from a limitation on the authority of the board of directors even when he knows of the limitation. At the risk of telling the noble Lord something which he already knows, perhaps I may remind him of what the first directive says in Article 9(2); namely: The limits on the powers of the organs of the company arising under the statutes or from the decision of the competent organs"— I stress this— may never be relied on as against third parties, even if they have been disclosed". The noble Lord will be aware that the preamble also states that the protection of third parties must be ensured by provisions which restrict to the greatest possible extent the grounds on which obligations entered into in the name of the company are not valid. As a result, Section 35 does not properly implement the first directive and we would not properly implement it if we deleted the new Section 35A(2)(b). While I appreciate from what the noble Lord said that he does not agree with the initial assertion that I made that to do otherwise would be in breach of Community obligations, nevertheless I have to say to the noble Lord that that is certainly the Government's view.

In view of what was said as we moved on to this amendment, perhaps I may suggest to the noble Lord that I might have something of a small treat in line for him when we reach the next amendment.

Lord Wedderburn of Charlton

I do not know whether to be afraid or pleased at that. However, I really cannot accept what the noble and learned Lord says. The Government should look at this matter again. It is rather amusing that when the Commission has told us twice that we are in breach of Article 2, there is not a peep from the Government as regards doing anything about that. However, on this occasion when they rely upon some unspecified dicta in the cases—I say that with great respect—and say we are in breach for the Government's own reasons, they insert a paragraph.

I quite agree with the noble and learned Lord that there are other cases and dicta upon which I did not rely, and that there are variations. If the noble and learned Lord wishes to clarify those cases, that is fine. However, if he takes a look at Mr. Justice Nourse and the judgment of the noble and learned Lord, Lord Wilberforce, in Midland Bank Trust Co. Ltd. v. Green which is cited by Mr. Justice Nourse he will find something rather different from the case he put before me without citation.

I agree that we do not wish to come to full citations, but it is not true that the courts have always interpreted knowledge of a limitation to be lack of good faith. That is just not the case. The courts have said that they are different things and 1hat notice may be evidence of lack of bad faith. That is a very different proposition. There may be a form of words between what the noble and learned Lord the Lord Advocate advocates and what I advocate, but I resist very strongly the notion that this form of words is required for Article 9.2 in the light even of the preamble, because that is not what Article 9.2 states. The article does not talk about lack of good faith always being derived from things other than a knowledge of the limits. One can look at the Italian situation in this regard. Laws were adopted in 1969 and have never been challenged. In the Italian situation, for agents outside the objects problem, the third party cannot rely upon the transaction if he has an intention to harm the company. Of course it may be good evidence of that that he knew about the limits. It may be very strong evidence of that, or even full evidence.

That is true also of the French code. Articles 98 and 113 show that the third party in the objects case on this occasion is someone who knew or should have known about the limits. It is strange that the Government want to insist upon this very extraordinary, strong prohibition. I am not in favour at all of uncertainty, and I am not in the least bit against third parties realising their reasonable legitimate expectations and throwing out the ultra vires principle to do that, and relying upon the directive to cut out lack of limitation of the directors being useful against the third party. That is all perfectly correct. However, I am against the unscrupulous third party who fraudulently uses an opportunity which everyone in the company, shareholders, directors, employees and everyone else, are mistaken about, and which does the company enormous damage. The third party knew that that opportunity was wrong and that everyone else was mistaken and that he would derive benefit from his action. The Government are saying that if the only evidence one can show is that knowledge, even though it be the evidence that absolutely pins it down, one cannot throw him out from the umbrella of good faith. I do not believe most people in this country would take that view of commercial reality or of commercial ethics. I do not believe the directive requires us to take that view. However, the noble and learned Lord has told me the Government's view. He has told me that there are better times to come and I can only hope for them.

Lord Lloyd of Kilgerran

Before the noble Lord decides what he is going to do about this important matter, I must say that I agree entirely with what I understand he has been saying. However, I should say to the noble and learned Lord the Lord Advocate that from time to time I have been trying to get into the Bill from the parameters of directives other than the first and second directives. I have been considering directives that have not yet been considered fully—for example the 13th directive. Was the noble and learned Lord the Lord Advocate saying when he referred to good faith that the construction in new Section 35A(2)(b) which states: acting in bad faith by reason only of his knowing that an act is beyond the powers of the directors", was contrary to Article 9.2 of the first directive? I understand that the noble Lord, Lord Wedderburn, agrees with my summary. If that is the case, we should consider this matter very carefully.

8.15 p.m.

Lord Fraser of Carmyllie

I am saying that, yes, we do require to include this provision if we are to comply with what is required of us in terms of our Community obligations. Without that provision, we are not complying with the terms of Article 9.2 of the directive, which I read out earlier in my original response to the noble Lord. I believe indeed that we must have this provision.

Lord Lloyd of Kilgerran

I am even more bewildered. I understand that the noble and learned Lord is therefore saying that the present provision in new Section 35A(2)(b) must be included because of Article 9.2. Is that the noble and learned Lord's submission?

Lord Wedderburn of Charlton

The point that has just been made is also my understanding of the submission of the noble and learned Lord the Lord Advocate. I take the point of the noble Lord, Lord Lloyd of Kilgerran, very strongly. Presumably, therefore, the noble and learned Lord the Lord Advocate and the Government would not mind reproducing instead of new Section 35A(2)(b), Article 9.2? So if I moved an amendment in the words of Article 9.2 the noble and learned Lord would accept it?

Lord Fraser of Carmyllie

I am saying that in terms of new Section 35A(2)(b) we comply with what is required of us in terms of Article 9.2. If it is accepted that that is a compliance, I do not quite follow why the noble Lord thinks it would be in any sense an improvement simply to adopt into the article— —

Lord Williams of Elvel

Before the noble and learned Lord replies to the submission of my noble friend, I should say that my noble friend is trying to say very clearly that the Government go beyond the directive. If we were to move an amendment on Report which sticks literally and closely to the directive, would the Government accept it?

Lord Fraser of Carmyllie

I should say that I would look at that proposal without commitment. However, I have some difficulty in accepting that what is laid down goes in any sense beyond what is presently required of us. It certainly would not be appropriate, as the noble Lord seemed to be suggesting, that the terms of Article 9.2 which I read out, could simply be lifted holus-bolus out of the article and incorporated as new Section 35A(2)(b). However, I believe there is a further amendment on this matter, and I may be able to expand on this a little further.

Lord Lloyd of Kilgerran

The noble and learned Lord the Lord Advocate has been most helpful about this matter. However, he mentioned taking hocus-pocus——

Noble Lords

Holus-bolus!

Lord Lloyd of Kilgerran

I apologise. My classical knowledge is very weak indeed. I am trying to be helpful. I wonder what the original directive stated in French as regards bad faith. Is there a translation here? I do not understand how the noble and learned Lord has come to use the English term. What is meant by the term "bad faith"? Is the term "bad faith" the difficulty?

Lord Wedderburn of Charlton

I do not wish to get the Government off the hook or out of the consequences of what, in view of the remark of the noble Lord, Lord Lloyd of Kilgerran, they have done in having bought a bit of a pig in a hocus-pocus. I believe that is what they have done here.

I am sure the noble and learned Lord the Lord Advocate would agree that the French text is still the authoritative text on a 1968 directive. The only difficulty with the French text is the word statut, meaning statute, which we would normally translate as memorandum and articles. Here it is translated as statutes. But other than that I think the translation is very good, especially as it talks about competent organs. However, I ask the Government to consider this matter very seriously. The purpose of my asking the Government whether they would incorporate Article 9.2 into the Bill rather than new Section 35A(2)(b) was not any kind of a trick; it was to draw attention to the fact that if the Government will not accept Article 9(2), other than for translation or literal reasons, they must be going slightly beyond its provisions, as my noble friend Lord Williams suggested. I believe that they have gone somewhat beyond the directive and further than most people would want to go. In view of tonight's debate I think that we would be entitled to come back to the matter at a later stage.

We urge the Government to look at the matter. It is a non-partisan point. It is simply a question of where one thinks good faith ends, subject to the requirements of the directive. I think that the Government have gone too far. This is another example of their drafting pushing away the interests of the third party and perhaps being somewhat indiscriminate. However, at this stage perhaps I may leave the matter there. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Wedderburn of Charltonmoved Amendment No. C8:

Page 89, line 12, after ("directors") insert ("under the company's constitution").

The noble Lord said: This is a mere point of drafting. The amendment would make the clause better. I beg to move.

Lord Fraser of Carmyllie

It is accepted.

On Question, amendment agreed to.

Lord Wedderburn of Charltonmoved Amendment No. C9:

Page 89, line 12, after ("directors") insert ("but shall be presumed not to be acting in good faith if it is shown that he knows, or must in the circumstances be aware, that such an act is beyond the objects of the company stated in the memorandum").

The noble Lord said: This is also a good amendment and would make the Bill a great deal better. That phrase seems to produce the effect one desires. In the light of the noble and learned Lord's earlier comment, I believe that I ought to restrict my remarks and be brief. The amendment is moved on the basis that where the excess in the act is an excess outside the objects of the company, the directive (under Article 9(2)) allows a member state to produce an exception such that the transaction is not binding if the third party knew or must in the circumstances have known that the act was such an excess outside those objects. That is the position in France, Belgium, the Netherlands, Denmark and the Republic of Ireland. It is not quite the position in Germany and Italy, although it almost is. I hope that it will be the position here. I beg to move.

Lord Fraser of Carmyllie

I recognise that the wording of this amendment is drawn from an option in Article 9(1) of the directive and that its adoption would not be contrary to our Community obligations. However, we have identified certain difficulties with this option which we have sought to overcome by the wording of new Section 35(2)(b).

I think that it is necessary for me to elaborate upon this to explain why I adopted the attitude I did towards Amendment No. 7. I should like to set out some of the circumstances which led us to the view that a person should not automatically be presumed to be acting in bad faith if it is shown that he knew, or in the circumstances must have been aware, that the act was beyond the objects of the company stated in the memorandum.

First, a person may know of the contents of a company's memorandum or articles of association but may have honestly—and, given the length of some objects clauses at the present day, not unreasonably—have failed to grasp the implications of the contents for his transaction with the company. New Section 35A(2)(b) makes it abundantly clear that he is not to be taken as having acted in bad faith solely for that reason.

Secondly, a corporate body may act through one agent in a transaction with a company who is ignorant of any limitations on the authority of the company's directors to enter into the transaction. Those limitations may, however, be well known to another agent of the body corporate who is unaware of the transaction. For example, if the body corporate is a bank, the knowledge may be held by one branch of the bank and not another. New Section 35A(2)(b) makes it clear that the body corporate will not be taken as acting in bad faith solely because the knowledge of the other agent is imputed to it.

Thirdly, a body corporate has what I might call an "institutional" memory. Like an elephant, it is regarded as never forgetting a fact. A limitation on the authority of a board of directors of a company may well have been known to the managing director of the body corporate ten years ago. However, he may have left or the file may have been mislaid, and the present managing director may honestly enter into a transaction with the company in ignorance of the limitation. New Section 35A(2)(b) makes it clear that the body corporate will not be regarded as having acted in bad faith solely because of this institutional memory.

The key word in new Section 35A(2)(b) is "only". Ultimately it will be a matter for the courts to balance the interests of shareholders and persons dealing with the company. The word "only" is inserted to assist the courts in this difficult task. The effect of the provision is just that notice is not to be automatically taken as amounting to bad faith. It will be up to the courts to establish whether bad faith is established by the surrounding circumstances.

We believe that the honest should be protected. We also believe that the policy of the directive in connection with authority—that knowledge of lack of authority itself, without more, is not to mean dishonesty—is right.

Lord Lloyd of Kilgerran

I listened very carefully to the presentation which the noble and learned Lord made from his brief, and I have tried to understand the three points he has in mind. I put my name to the amendment, but I wonder whether it might be better if it were to read, shall be presumed to be acting in bad faith if it is shown that he knows". There is some confusion between the words "good faith" and "bad faith" and whether bad faith is the opposite of good faith in the context of Article 9(2) of the directive. I shall study carefully what the noble and learned Lord has said and consider whether an appropriate amendment should be put forward at Report stage.

Lord Fraser of Carmyllie

I should be grateful if the noble Lord would read what I have said. I have sought to stress that the test exists by reason only of a person knowing. If that is appreciated I believe that the matter falls into the proper context.

Lord Lloyd of Kilgerran

I am obliged to the noble and learned Lord.

Lord Wedderburn of Charlton

The noble Lord, Lord Lloyd of Kilgerran, may have understood the noble and learned Lord. I am not sure that I did.

Lord Lloyd of Kilgerran

I did not say that I understood him. I said that I would read what the noble and learned Lord had said.

Lord Wedderburn of Charlton

The noble and learned Lord the Lord Advocate appears to have been attacking either Article 98 of the French code on companies or some other provision. He did not talk about our amendment. Our amendment does not say that anyone shall automatically be said to be acting in good faith. Leaving aside what we have just debated, which we hope that the Government will look at again because that would make this the substantive part of the paragraph, our amendment says that the third party, shall be presumed not to be acting in good faith if it is shown that he knows, or must in the circumstances be aware, that such an act is beyond the objects of the company". Those last words are taken almost verbatim from the directive. The noble and learned Lord and I are at one in agreeing that it is permitted—not only that it is permitted but that those are the words of the directive, with minor adjustments.

We propose taking that option from Article 9(2) of the directive. That has been adopted by six member states and incorporated in their commercial law. What is the argument against it? The noble and learned Lord says that the argument against it is that one should not say that people are automatically said to be acting in bad faith because they have certain knowledge. That is partly a result of what they insist on in paragraph (b). We shall let that go. However, we say that a presumption should arise if, within the terms of the directive, the third party is in that position. Then it is for the court to decide.

I cannot for the life of me see what commercial argument the Government are advancing. That is the legal argument. It is not only permitted by the directive but encouraged, if one looks at the preamble. It has nothing to do with two agents. The two agent problem is as old as the hills and will continue to exist. Any code of law has to deal with the problem of two agents within a corporate body, one knowing something and the other not knowing. However one drafts the Bill, that problem will arise. In relation to the question as to how a company forgets, I remember writing an article on that subject in the light of a judgment of Mr. Justice Megarry in 1984.

I do not see that those problems have anything to do with this matter. We say that, as the directive suggests, a third party who knows that it is beyond the objects shall be presumed not to be acting in good faith, but the court should decide. That is what the directive says, but the Government have no reply to that. I thought that the noble and learned Lord intended to give me good news about this amendment, but we are further apart than ever and that distresses me. I do not like to have to let this amendment go, and I ask the Government to look at it.

Lord Lloyd of Kilgerran

Before the noble Lord sits down, I must tell him that I did not quite catch what he said. He referred to an article that we should read before the Report stage. What is that article?

Lord Wedderburn of Charlton

The noble Lord presses me to full citations. I have to do them from memory. In 1984, there was a judgment by Mr. Justice Megarry in a case which I believe is called Stanfield against somebody or other, on which the noble Lord will find a note of not abysmal quality in the Modern Law Review of the same year. It is headed: "When does a company forget?"

Lord Lloyd of Kilgerran

Did the noble Lord write that article?

Lord Wedderburn of Charlton

Yes, I wrote the article. There is very little literature on the subject because it does not seem to come up very often. The noble and learned Lord raised it tonight so it is not my fault.

We must ask leave to withdraw the amendment, but I must say that the effect on paragraph (b) of not having this and insisting on the previous one should make anyone who is concerned with commercial morality and who is not an unscrupulous third party rather sag at the knees. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

8.30 p.m.

Lord Wedderburn of Charlton moved Amendment No. C10:

Page 89, line 20. after ("directors") insert ("or of any person to whom they have given, or have purported to give, authority to bind the company").

The noble Lord said: In moving Amendment No. 10 I shall speak also to Amendment No. 11. These are drafting amendments which I shall move with just a word of explanation. They are similar to the amendment that we moved concerning new Section 35. In each case there is a preservation of powers or liabilities in respect of directors. It would seem sensible that there should be mention of those other persons who have been authorised by them or to whom they have purported to give authority. If the noble and learned Lord wants a principle, which is perhaps more quoted in Scotland than in England these days, it would be: expressio unius exclusio alterius. It seems to me that it is arguable that a court could get into a problem if it applied that maxim here. We believe that these amendments would clear up the mess and, as with most of our amendments, bring about greater certainty. I beg to move.

Lord Fraser of Carmyllie

I should like to suggest that this amendment—indeed, Amendment Nos. C13 and C14—are wholly unnecessary and should be resisted on the grounds that they might cause confusion. As I understand it, the noble Lord has picked up this point because new Section 35A mentions persons authorised by the board of directors. Noble Lords may wish to ensure that the rights of members against such authorised persons——

Lord Williams of Elvel

I am sorry to interrupt the noble and learned Lord. Is he speaking to Amendments Nos. C10 and C11 only?

Lord Fraser of Carmyllie

I can assure the noble Lord that, as I understand it, I am speaking to the amendments that refer to page 89, line 20, and state certain words to be inserted after the word "directors".

Lord Williams of Elvel

I am sorry to interrupt the noble and learned Lord again. We are trying to get on with the Bill. The grouping that I agreed for the Opposition was Amendments Nos. C10 and C11 together.

Lord Fraser of Carmyllie

That is what I thought I was speaking to and I am sorry if I misled the noble Lord. I should have said that I was speaking to Amendments Nos. C10 and C11. I apologise for that.

Before I was corrected, I was saying that noble Lords may wish to ensure that the rights of members against such authorised persons are unaffected by the protection conferred by that new section. However, if one looks carefully at the new section, it is apparent that it is only the power of the board of directors that is to be deemed free of any limitation under the company's constitution. The new section speaks of the power of the board of directors to…authorise others to [bind the company]". Since it is only the power of the directors which is affected by new Section 35A(1), it follows that no qualification of the new section needs to be made in respect of members' rights arising from proposed acts of persons authorised by the board which exceed the authority conferred in them.

The same arguments apply to a large degree in relation to the second of these amendments, which is concerned with the liability of an authorised person or one who is purportedly authorised. Nothing in new Section 35A affects his liability where he has exceeded the authority given to him. It is, however, true that such an agent, other than a director, who knows only that a power delegated to him is beyond the powers of the board of directors, or that there is no power to delegate to him, is entitled to rely on new Section 35A(1) against the company if it is sought to make him liable for any loss. That is because he is entitled to assume that the directors must sort out the matter of their authority. But that is as it should be. Subsection (3) makes it clear, however, that an agent who is a director is not entitled to rely on subsection (1).

Lord Wedderburn of Charlton

I see that point as far as it goes. It is interesting that the noble and learned Lord's response again brings out—and in this case I do not think that I would argue against it—how insistent the Government are about preserving the rights of the third party, because we are here dealing with the sub-agent. The distinction that they draw between external and internal effects of ultra vires and the like is not sustained because here, as the noble and learned Lord said, the third party is in fact an internal party. He is the sub-agent of the board, but he is to be treated as a third party under subsection (1). It is for that reason that his liability is to be put aside.

That is a most important clarification which will no doubt hearten those who will be agents of boards without authority. Nevertheless, curiously enough, such a person will be in a better position than the agent of a board with authority in certain respects if he does anything in excess. That is a most important clarification and we are grateful for it.

I am not sure whether the noble and learned Lord answered the point relating to Amendment No. C 11. I shall not go through all the circumstances because that amendment concerns line 22 and relates to liability. There I think the expressio unius point is a valid one—I see that the noble and learned Lord may have answered the previous point—in the sense that this is a liability point and never mentions the directors. Why does it not mention those to whom authority is purportedly given, as that is the situation under subsection (1)? What about such matters as warranty of authority? Presumably the directors retain that liability of breach of warranty of authority, but does that apply to the sub-agent who is given reputed authority sufficient to bind the company under subsection (1)?

What about a third party who can rely only on that doctrine? Why exclude the third parties referred to in our second amendment? I see the point about the first amendment, but I cannot see how it relates to the second. Unless the noble and Darned Lord wishes to add anything, I shall leave him to perform that degree of cogitation on the matter that he thinks proper, and I hope that it will be profound. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. C11 and C12 not moved.]

Lord Wedderburn of Charlton moved Amendment No. C13:

Page 89, line 26, at end insert ("and that act does not cause any director to become a constructive trustee for the company").

The noble Lord said: I appreciate that Amendment No. C12 was grouped with Amendments Nos. C13 and C14. I hope that it does not inconvenience the noble and learned Lord if I move Amendment No. C13 and speak also to Amendment No. C14 because Amendment No. C12 has to some extent been overtaken by our debates.

The point in these amendments can be put very briefly. In a sense it has been made into one of the most important points that has come out of our debates on the new Section 35 and the rest of Section 35A, to the extent that they have shown that the constructive trusteeship doctrine is possibly to be cut down. We shall look very hard at those passages in Hansard. When we were considering earlier the amendment to the new subsection 35(3) it appeared that the constructive trusteeship of the directors would be limited in certain respects by the lack of derivative action, and that of third parties it seemed might well be limited a great deal.

That makes it all the more important that it should be absolutely clear under this section that, as we submit, there cannot be a ratification of an act, which I suppose, in colloquial terms, one could talk of as a misappropriation of corporate assets or opportunities. That would be the colloquial way to put it. We have put it in two forms: first, the narrow form in which the directors become constructive trustees; and secondly, adopting some words of Lord Davey in the famous case of Burland v. Earle, that the minority shareholder may sue where those in control have misappropriated money, property or advantages directly or indirectly (see 1902 Appeal Cases, page 93). That is a citation which I am sure is never far from the heart of the noble and learned Lord the Lord Advocate.

There are thus two ways of putting this matter: the constructive trustee way or a descriptive way. We believe that in those two situations if the Bill is enacted in this form it will not only cut down upon constructive trusteeship, which is at the root of company law in terms of the higher fiduciary duties—and I am not talking about negligence or a mere secret profit—which to my knowledge no one in any document anywhere has ever suggested should be cut down.

The reason why this matter would be serious is that there is a big difference between adopting a transaction and ratifying it. Ratification is a well-known doctrine. If I am the company in general meeting and I am allowed by whatever resolution to ratify that which the noble and learned Lord the Lord Advocate has done, then it is validated. It is true that there are long articles on this matter of just what ratification means. I could refer the noble Lord, Lord Lloyd of Kilgerran, to many of them later this evening if he so wishes; he says "not tonight", although they say that there is no time like the present. However, there is a difference and everyone knows it.

The Bill chooses ratification and I ask why in cases of this type. I quite see that where it is just a matter of a secret profit which the general meeting can ratify anyway it is quite sensible, and here what would have been the ultra virestransaction is to be ratified. But if it amounts to a constructive trustee misappropriation of corporate assets, then it is a very serious matter indeed to give a new power of ratification to the general meeting. It will not do to say, "Oh well, it does not matter too much because it can only be done by special resolution". There has been quite a wave of approval for the idea that the company could use a special resolution instead of a general resolution in adopting what would have been ultra vires transactions.

One must remember that in our law under the authorities as they have been since 1887 it is quite clear that the directors and those with the same interests can normally go into the general meeting and vote perfectly properly on that resolution. I have always rather been in favour of saying that if one is to have an enterprise company, one might as well have some enterprise about it and people should vote in their own interests at the general meeting. That is perfectly sensible. However, that is the situation, and it is no good saying that the directors and their interests can be excluded from the vote. One cannot do that.

So what we have is a breach of trust, as the courts always call it, by misappropriation which, if it is beyond the powers which flow from the objects of the company—and one could debate that precise formula but it is the one used in the Bill—can be ratified. If the word "adopted" had been in the Bill—and I deliberately did not move an amendment to replace the word "ratified" by "adopted" because it is a wider issue than a question of semantics— it would at least be better. Perhaps the Government would at any rate think about using the word, "adopted". If they will not do that, perhaps they will think of something even better, such as the wording of our amendments. I beg to move.

8.45 p.m.

Lord Fraser of Carmyllie

At the outset perhaps I may say to the noble Lord that, although at one point he seemed to have some difficulty in understanding the relationship between Section 35 and the new Section 35A, from his observations on this subsection it appears to me that he understands the relationship very well. As he said, Amendment No. C13 would prevent ratification if the act in question has caused the board to be liable as constructive trustees, while the third amendment—the second one referred to—would prevent ratification where the act amounts to a misappropriation or fraud, or misfeasance on the part of the directors.

In looking at the amendments tabled by the noble Lord, it has been assumed that his concern is essentially twofold and stems from the possibility that the courts might take ratification as being, of itself, sufficient to exonerate the directors from any liability for the act. If ratification does have that effect, then two questions of minority protection arise: firstly, where delinquent directors themselves are in control of the company; and secondly there is the further problem that the full facts may not be before the meeting at which the question of ratification arises.

I can assure the noble Lord—and the noble Lord, Lord Lloyd of Kilgerran, indicated to me earlier that this subsection was of particular interest to him—that it is not our intention that ratification of itself should exonerate directors from a breach of their duty. Shareholders should be able to decide that they wish to take the benefit of a transaction, but sue the directors for any loss arising from it.

The noble Lord made some play on the use of the word "ratification". I think I would have to accept that the present law on the effect of ratification is not altogether clear. However, there have been useful discussions with representatives of the Law Society at which, among other things, the effect of ratifi cation under this provision was discussed. I must say to the noble Lord that in the light of this discussion we are considering whether the intended effect of ratification under subsection (4) should be made clear and can be clarified without affecting, by implication, the general law as to the effect of ratification.

Given that indication of some further discussion, I hope that he will appreciate that the concerns he expressed are indeed understood. Clearly it is a very important matter. I trust that in those circumstances, and appreciating the linkage that there is between Section 35A and Section 459 of the 1985 Act, as I mentioned before, the noble Lord will be prepared to withdraw the amendments as they stand.

Lord Peyton of Yeovil

I should like to associate myself very briefly with the tribute paid by my noble friend to the noble Lord opposite when he referred to the interesting observations that the noble Lord had made. I have had the opportunity of hearing the noble Lord speak on many occasions in this Chamber but I do not think that I have ever heard him speak in a manner so penetrating, so profound, so stimulating or so entertaining as he has done tonight. I look forward to hearing him exceed those obvious talents that he has shown on many occasions.

Lord Wedderburn of Charlton

What can I say, except that I am very grateful to the noble Lord. He is very kind. However, I would rather win occasionally as well. As this is the last of this series of amendments, perhaps the noble and learned Lord the Lord Advocate will allow me to make a few remarks before with drawing the amendment as I obviously have to do.

The argument shows—if it were not the noble and learned Lord I should have used the words—how hollow is the distinction between external effects of ultra vires and internal effects. We have here something that is pre-eminently internal. It is the question of directors, and liability of directors inside the company. All kinds of efforts are made to change the law. Our position is that ratification should end the liability. The noble and learned Lord says that that is not the case. If so, why do they not alter the word "ratify" to "adopt"? He says that discussions are taking place. We look forward to the results. That is something that ought to be changed.

It occurred to me when I was listening to the noble and learned Lord the Lord Advocate, who is very stimulating, that subsection (3) ought to be changed. At the moment subsection (3) states that subsection (1) does not affect the liability of the directors. However, it ought to state that subsections (1) and (4) do not affect the liability of the directors if that is what is meant. Otherwise, no matter what word is used, even with the insertion of "adopt" the court could say, "if you adopt it in the light of subsection (3), in subsection (4) you must be adopting and curing the invalidity."

There is a big problem here. This is the last discussion on this clause. We do not want a long "stand part" debate. However, when we look back over these amendments we see that Section 35 and Section 35A hang together as a package. But it is a lopsided package. It is unbalanced. These sections always take the part of the third party even when he is not a nice chap; when he knows everything and has grabbed an opportunity. All the people around him are innocent but because they are within the company, and he is outside, he receives the benefit. That is unfair. I do not think that most people would regard it as sensible commerce.

It might have a greater impact if I talk in language concerning investment. If I tell someone who is going to set up a company that if he comes to Britain his company will have its opportunities snatched at unfairly and will be bound to all kinds of transactions, and then I show him the French code, I believe that he would go there, assuming these measures make any difference. Of course as lawyers we know that law does not sometimes make a great deal of difference. However, it is supposed to do so; otherwise we would not be debating the matter.

I believe that the noble and learned Lord should look with his advisers at the entire structure of this measure. To pick out one matter in the system of company law for him to consider—in both English and Scottish company law (because it is the Scottish precedents that make some of the best company law)—the fiduciary duty is the most precious part in terms of management and the directors. One could ask any French lawyer—I could quote a number—what they think they have lacked in their company law structure; it is the fiduciary duty. It is that that is being attacked at every point as vie come to it through the constructive trustee concept being whittled away. It is a terrible pity.

Lord Williams of Elvel

Before my noble friend decides what he does with this amendment, I think that the noble Lord, Lord Lloyd of Kilgerran, wishes to speak.

Lord Lloyd of Kilgerran

The noble and learned Lord the Lord Advocate referred to me in his recent speech and mentioned Article 4. In order to save time—as the noble Lord, Lord Wedderburn, has said, one does not wish to have a long harangue about "clause stand part", and I had not given notice about it—I should like to ask this question. There have been discussions as to what is meant by ratification. Subsection (4)(b) states: in the absence of such ratification". When the matter came up at Committee stage I moved an amendment that Section 35A(4)(b) should be deleted. I shall not give the arguments for that. However, the noble Lord, Lord Strathclyde, at the end of his first speech, asked me once more whether I would consider reflecting further in the light of what he had said. At this stage the noble and learned Lord, Lord Brightman, intervened to say at col. 516 of the Official Report on 21st February 1989: 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. Subsection (4)(b) is totally unnecessary. In the absence of the ratification set out in paragraph (a) I ask myself what else could happen except that, 'the above provisions of this section apply as in relation to any other limitation on the powers'. I believe that the amendment is correct and that paragraph (b) plays no useful part whatever". I fully realise that I have not given notice of this. I would have raised it at Committee stage on stand part, but I raise it now. I see that the noble and learned Lord is anxious to intervene.

Lord Fraser of Carmyllie

On the contrary, while the noble Lord is waxing eloquent I do not wish to stop him in mid-flow. However, it might be helpful if I indicate that the position that is indicated there remains much the same. We are indeed considering whether Section 35A(4)(b) might be deleted since, as he pointed out, and was indeed supported in that view, there is an argument that it is redundant.

Lord Williams of Elvel

Will the noble and learned Lord tell us what stage his considerations have reached since Committee?

Lord Fraser of Carmyllie

I do not think that I can elaborate beyond what I have said. The matter is being considered.

Lord Williams of Elvel

Perhaps the noble and learned Lord can tell us when his considerations will be completed?

Lord Fraser of Carmyllie

I do not think that I can give an immediate commitment to the noble Lord. I thought that it was nevertheless helpful—if not to him, then to the noble Lord, Lord Lloyd—to say that he need not elaborate on it. He apologised for having put down no amendment but wished to raise the subject again. I thought that it was only courteous and helpful to him to indicate that consideration was indeed under way. If the noble Lord considers our progress, and I know how anxious he is to move forward on this Bill, the likelihood is that it will be put down in the Commons.

Lord Lloyd of Kilgerran

At this stage it would be only courteous for me to say to the noble and learned Lord the Lord Advocate that I would not press him as hard as the noble Lord, Lord Williams, as to when this would be. I must apologise that I did not understand that this matter was under consideration; otherwise I would not have intervened at such length. I understand that it is under consideration and I look forward to the results of the consideration by the Government.

Lord Wedderburn of Charlton

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. C14 not moved.]

Clause 92, as amended, agreed to.

9 p.m.

Baroness Lockwood moved Amendment No. C15:

After Clause 92, insert the following new clause:

("Non-executive directors.

Every public company shall ensure that there is a fair representation of appropriate interests in the appointment of non-executive directors, including a fair representation of women").

The noble Baroness said: Amendment No. C15 takes us away from the rather detailed consideration and interpretation of words into the realm of the kind of procedures that might be necessary to cope with some of the social changes that are taking place in our society. If, as we are led to believe, we are moving into an era of democracy through wider shareholding, then we have to make sure that some of the wider interests of the wider group of shareholders are taken into consideration at boardroom level.

The question of widening the interests of those held by non-executive directors of the boards is not a new one. It is the kind of consideration that brought into existence the organisation Pro Ned, which has the support of institutions such as the CBI, the Bank of England, and so on. Perhaps it is worth pausing for a moment to consider some of the documentation that has been produced by Pro Ned. It emphasises the importance of a well balanced board. It recommends that non-executive directors should provide "detachment", "wide experience", "a fresh and impartial view", "an external objective view", "commonsense", and so on. Those attributes are not exclusive to people whose careers are focused on reaching the top of their industry or profession; nor indeed are they exclusive to men because women too possess these kinds of qualities.

It is on women that I want to concentrate. We all agree that women are in a minority in the boardroom. It is true that women are in the minority in all spheres of power, influence and decision-making, but changes are taking place in most institutions. Perhaps the changes that are taking place in the boardroom are not quite so fast as in other places. Women are moving into higher positions in industry and in higher education. Two professions which are popular in the boardroom are the law and accountancy. Women are to be found in almost equal numbers to men in the schools of these professions. A larger and increasing number of women are going into management, not just in the "manageress" sense of the old days, but the higher realms of management. We want to see more women moving up the ladder on the basis of their own abilities.

In the executive director field, women of ability are succeeding, but businessmen admit that it is still more difficult for a woman to reach the top and to be recognised. We need to take definite steps to bring about changes in attitude and to ensure that women are given an opportunity to progress to the top in both executive and non-executive spheres of business.

The position of non-executive directors is somewhat different to that of executive directors. Women are invisible in this sense because the appointment of non-executive directors is in effect on a patronage basis. I suggest that women do not feature very much on this patronage wagon. It was the feeling at one time that there had to be a statutory woman on the committees of public bodies. There is now a feeling in some boards that there needs to be a statutory woman director, but even so many boards do not have a woman director. There is no clear evidence on this issue. No statistics are published, but I have been told that the top 200 holding companies have about 2 per cent. of women directors. Beyond the holding companies there is no information about the subsidiary companies. The position there is probably worse, although subsidiary companies would form a good area for the appointment of women as the first stage.

My amendment suggests that there should be an obligation on companies to take this problem seriously and to give careful consideration to ensuring that more women are appointed as non-executive directors. Women can bring, to quote Pro Ned, a fresh and impartial view. They can also bring a deeper perception of some of the consumer needs important to the majority of boards. I suggest that women are used to taking hard decisions. Many women spend most of their lives taking hard decisions within the family. They have much to contribute. The nation is losing out by not ensuring that more women are appointed as directors. I hope that the Minister will look favourably on the amendment. I beg to move.

Baroness Seear

I should like briefly to support the amendment. I want to amplify one matter implied if not expressly stated in the speech of the noble Baroness, Lady Lockwood. I am sure that it needs to be made clear to the Committee that the noble Baroness is not asking for anything that could be regarded as a quota of women on boards. That is not the intention. We are arguing that there probably are, and may always have been, a large number of women who, either through professional or business training or through the kind of experience that women have had by being prominent members of county or district councils, are eminently qualified to fulfil the role of executive directors. It is obvious from the very small number of women appointed that it is not thought that women have the kind of experience and background that would be valuable. Companies are not drawing on the available talent because the idea of appointing a woman is still foreign to a great many of them.

We are not asking for a quota; we are asking for what in the term of art in this field is usually referred to as a "positive policy" of investigating whether there are not women with the qualities required—perhaps at a higher degree than the available men who might be appointed. With that in mind I wish to support the amendment.

Lord Mottistone

Putting an industry point of view, this amendment is very unwelcome. It brings non-executive directors into legislation and though industry is in favour of non-executive directors, it is not in favour of non-executive directors by statute. Certain companies need a balance of non-executive directors but others do not. It is important not to fetter companies too tightly in that general area.

In the case of this amendment, particularly as explained by the noble Baronesses, it is difficult to see how one can follow the normal practice which is to appoint directors, whether non-executive or executive, who have the appropriate and best skills to satisfy the needs of the company. That is the requirement. If special interests are to be represented, who is to say what is an appropriate interest? It could be widely interpreted and it is not appropriate for inclusion in statute.

One then comes to the question of fair representation. What is that? Fifty-two per cent. of the inhabitants of the country are women and, presumably, fair representation would mean that 52 per cent. of all non-executive directors must be women. It is not so much that that is seen to be an exaggeration of what the noble Baroness said but it is a question of what is fair representation.

The amendment would hamper the development of boards of directors. I do not wish to ramble on for too long but I hope that in reply my noble friend will join with me in asking the Committee to reject the amendment as strongly as possible.

Lord Williams of Elvel

From the Opposition Front Bench I should like to support the amendment tabled by my noble friend Lady Lockwood— —

Lord Mottistone

You would!

Lord Williams of Elvel

I am glad to hear the noble Lord, Lord Mottistone, who claims to be a spokesman for the CBI, criticising me as a spokesman of the Labour Party. The noble Lord said that industry does not like the amendment. He would, wouldn't he? Does he speak for industry? He speaks for the CBI. In this House he speaks for himself but, as the Government Chief Whip knows, on frequent occasions the noble Lord, Lord Mottistone, says that he speaks for the CBI.

Lord Denham

The noble Lord is most kind for giving way. Any noble Lord who speaks in this House speaks for himself and for no one else. Noble Lords may represent views which are also shared by other outside interests but any noble Lord speaks for himself alone and is responsible for what he says.

Lord Williams of Elvel

I am grateful to the noble Lord. I speak for the Opposition Front Bench. From time to time the noble Lord, Lord Mottistone, says that he speaks for the CBI. That may be right, or it may be wrong, but he does so.

Lord Mottistone

Perhaps the noble Lord will allow me to say that, having been well educated by the Government Chief Whip, I take great care not to say that I speak for the CBI. I say that the CBI advises me. That is a different matter because I speak for myself.

Lord Williams of Elvel

That is a better formulation than some I have heard. 'The noble Lord, Lord Mottistone, spoke of the appointment of directors. In my innocence I believed that directors were elected by shareholders rather than being appointed. That is not a minor issue.

The noble Lord, Lord Mottistone, asked about fair representation. I believe that my noble friend Lady Lockwood has made perfectly clear what she means by the words "fair representation". It is that there should be no bias against women who are equally qualified to men. It is perfectly clear from the response we have had from the noble Lord, Lord Mottistone, that we have had bias. That can be seen by anyone who works in any organisation, as do the noble Lord and I. It can be seen that properly qualified women do not have the same chance as properly qualified men.

As regards non-executive directors, at a later stage in our proceedings I shall try to define what non-executive directors should be. I know that a number of people in the CBI and a number of noble Lords opposite do not like the idea of defining a non-executive director. I shall seek a mechanism for doing so later. I say to the noble Lord, Lord Mottistone, and to the Government that we believe that there should be no bias. Although the noble Baroness, Lady Seear, does not like the expression I shall use it and say that there should be "positive discrimination"because— —

Baroness Seear

I cannot let the noble Lord get away with that. I am in favour of positive policies but I am against quotas. Do get it right!

Lord Williams of Elvel

I understand what the noble Baroness is saying. She is in favour of a positive policy. I am in favour of positive discrimination and I believe that it amounts to the same thing.

Baroness Seear

No, it does not. This is quite a serious point. Positive discrimination implies quotas. We are definitely not in favour of quotas. However, we are in favour of a deliberate policy to go out and find the women who have the necessary qualifications. That is something quite different and is a very important distinction.

Lord Williams of Elvel

Perhaps I may say to the noble Baroness that positive discrimination does not involve quotas but involves making sure that when there is a list of people, that one says, for example, "We want more people of an ethnic origin". We want more people like that if they are suitably qualified. I do not want to have so many ethnic directors in terms of quotas. However, I believe that we should have more people from ethnic origins on boards of directors of public companies. However, I believe that that is a problem of semantics and not the issue here.

We believe that there should be a removal of any bias against the appointment of people of ethnic origins or of a particular sex or whatever it might be. For that reason, I support my noble friend.

9.15 p.m.

Lord Peyton of Yeovil

The noble Lord opposite made extremely heavy weather of his support for the amendment. If anything was really required to convince me that this amendment would be misplaced if accepted, it was the speech made by the noble Lord from the Opposition Front Bench. He reminded us quite frequently and unnecessarily that he was speaking from the Opposition Front Bench. We may not be very observant but I have noticed that before.

What is meant by this business of positive discrimination of which he spoke? It would be so difficult to translate that into meaningful words on the statute book that I believe the noble Lord would end up by bringing in a quite unnecessary degree of confusion to an area where there is already sufficient doubt.

I should like to end on a serious note because I do not believe that the noble Lord's speech was all that serious. If there is prejudice—and I believe there is—then I believe that the last way to overcome that prejudice is to make silly provisions on the pages of the statute book.

Lord Williams of Elvel

The only notable thing about the speech of the noble Lord was part of his last sentence. Perhaps I may say that he was extremely sarcastic to my noble friend on the discussion of ultra vires. That is his privilege and he is entitled to be. However, I wish that just because we cannot reach his amendments in time this evening he would pay attention to the debate and take us a little more seriously than he obviously does at the moment.

Lord Peyton of Yeovil

I shall take the noble Lord seriously as and when he deserves it but not until.

Lord Tordoff

Perhaps we could just calm the atmosphere slightly. It seems to me that the case has been shown that there is bias, and I believe that there is general acceptance of that throughout the Committee. The question of how we should redress that bias may cause differences across the Committee. It seems to me that one of the best examples of bias in this situation is that I happen to be a non-executive director of a company and my noble friend Lady Seear is not a non-executive director of any company because, so far as I know, she has never been invited to be one. She is far better qualified than I to be a non-executive director of a company—and I say that quite seriously. I believe that that is the problem we face as regards non-executive directors.

Baroness Seear

Perhaps I may record the fact that I am now above the age.

Lord Strathclyde

Perhaps I may say that I am no happier replying to this amendment than I would have been if I had to reply to the amendments of the noble Lord, Lord Wedderburn. However, in that case I have my noble and learned friend the Lord Advocate to help me out. In this instance, I have to do it myself.

The first point I should like to make in relation to this amendment is that it is fundamental to company law that directors are not and should not be appointed to represent particular interests. They are appointed as individuals and have a common responsibility.

Lord Tordoff

I am sorry to interrupt the noble Lord but it is quite clear that this amendment is not designed to represent particular interests.

Lord Strathclyde

I only reached my second sentence. I have hardly started and I have quite a lot to say. I take the point that the amendment as drafted does not require representation of particular interests. However, it states that: Every public company shall ensure that there is a fair representation of appropriate interests". Therefore, I believe that it is fair that I should speak of particular interests. Of course, in this amendment that could lead to far wider issues.

Directors are appointed as individuals and have a common responsibility for the conduct of a company's affairs. They are accountable to the shareholders as a whole. When a company takes a decision to appoint non-executive directors, whether by co-option or by a vote of the shareholders, its aim should therefore be to appoint in their own right those individuals who have the most appropriate skills and experience for that task.

The noble Baronesses, Lady Lockwood and Lady Seear, and others, have argued that a woman can, by virtue of being a woman, bring certain special qualities to the membership of a board.

Baroness Seear

I am sorry to intervene, but at no point did I say that. I do not believe that women have special qualities. I said that there are many women who have the personal qualities that are required on boards of directors. That is all I am saying. I ask the noble Lord to get that clear.

Lord Strathclyde

I apologise to the noble Baroness if I have misunderstood what she said. I totally agree with her. There is no intention to particularly draw out women as having special qualities that perhaps men do not or could not have.

The contribution which non-executives make depends very largely on choosing the right people. Personal qualities are vital, as noble Lords know. They are as vital, as are knowledge and experience; not necessarily of the industry in which a company operates but of the wider environment in which it works—for example, markets, customers, management problems, financial situations, and so on. No one individual will have all those skills. What one should be looking for is a team of non-executives who jointly bring to a company the experience and wider outlook it needs to operate most effectively. Some companies may have a particular need to ensure that they are aware of women's interests and concerns where those may be different from men's. Retailers are the obvious example. However, it is vital to identify and choose the right person.

In so far as the noble Baroness may be concerned that in co-opting candidates to a board, or in nominating candidates for election, companies do not look beyond a narrow circle, it should be borne in mind that the shareholders have the right to put up alternatives. In making their choice of such alternatives the shareholders have the same freedom as the board to take into account whatever factors they consider relevant.

The Government are therefore opposed to this amendment primarily because we regard its central principle of representation of special interests as objectionable. I use the phrase "special interests" again because it is implicit in the amendment. Moreover, it is our view that acceptance of this amendment would give rise to a legislative obligation which would be wholly unenforceable because of the lack of any objective test of compliance. I am sure that the argument will not rest there. It has been an interesting debate and I am sorry that we have come to it so late and with a relatively thin Chamber, but I hope that the noble Baroness will feel able to withdraw her amendment.

Baroness Lockwood

I said that we were moving away from the interpretation of words, but that does not seem to have been the case. There has been some difference of emphasis on what we are seeking. I must say, having for the past 14 years been involved in this whole question of promoting equality of women alongside men, that I agree completely with the noble Baroness, Lady Seear. We are not seeking quotas. We are seeking a positive policy to promote opportunities for women.

I am sorry that the noble Lord, Lord Mottistone, said that the amendment was unwelcome. He seemed emphatic that it was unwelcome. I truss: that, as the Chief Whip indicated, the noble Lord was speaking for himself and not for industry. So far as I am aware it is now the policy of most companies within industry to seek to promote more women, not because they are women but because they can contribute to the success of companies.

It seems that it is agreed across the Chamber, first, that there is still some discrimination against women; and, secondly, that we need more women in those posts. However, we do not need' quotas and we do not want quotas.

Perhaps the wording of my amendment was not appropriate. I accept entirely what the Minister said about the responsibility of shareholders as individuals and not representatives. That is completely understood, but we want to ensure that there are more women in industry and that steps are taken, and an obligation is placed on industry, to look for more women; not to fetter it, as the noble Lord, Lord Mottistone, said, and to take positive steps to promote more women. It is in that sense that the amendment was moved. I shall not press it this evening. I am prepared to withdraw it and to look at its wording to see whether I can return on Third Reading with something that may be more acceptable to the Minister.

Amendment, by leave, withdrawn.

Clause 93 [Invalidity of certain transactions involving directors]:

[Amendments Nos. C16 and C17 not moved.]

Clause 93 agreed to.

Clauses 94 to 96 agreed to.

Lord Denham

I think that we have probably gone as far as we usefully can this evening. I beg to move that the House do now resume.

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

House resumed.