Lords Sitting of 14 February 1989

Preamble
The House met at half-past two of the clock: The CHAIRMAN OF COMMITTEES on the Woolsack.
Prayers—Read by the Lord Bishop of Southwark.

Universities Funding Council: Composition
Lord Hatch of Lusby Lord Hatch of Lusby asked Her Majesty's Government:
Whether they are satisfied that the composition of the Universities Funding Council is of such an academic stature as will uphold the university standards of this country.
Viscount Davidson: Yes, my Lords.
Lord Hatch of Lusby: My Lords, in the Answer to a Written Question which I put down before Christmas, the noble Viscount said that the Universities Funding Council would consist of six full-time university academics, one polytechnic director and six members with industrial or commercial experience. I was asked to put down this Question by one of the universities with which I am associated. Is the noble Viscount satisfied that the council will not be dominated by commercial interests? Secondly, how is it that no member of the council can rightly be classified as a social scientist?
Viscount Davidson: My Lords, I am not prepared to discuss the merits of individual appointments. However, the overall aim has been to achieve a reasonable balance and I believe we have achieved that.
Lord Hatch of Lusby: My Lords, will the noble Viscount answer my second question? Why is there no social scientist on this important body?
Viscount Davidson: My Lords, I have to give the same answer.
Lord Cledwyn of Penrhos: My Lords, while accepting that the list of members is a very distinguished one, I note that England and Scotland are very well represented but there is no university representative specifically from Wales. There is a well-known Welsh professor whom I greatly admire on the list of members but he is resident and stationed in England. Can the noble Viscount say why no Welsh representative has been appointed?
Viscount Davidson: My Lords, the UFC will have statutory advisory committees for Scotland and Wales, to be chaired by Sir Donald McCallum and Professor Gareth Roberts respectively.
Lord Cledwyn of Penrhos: My Lords, I am aware of that and I appreciate it. However, while there are eminent members of English and Scottish universities on the committee there is no comparable person from
62
the Welsh universities on it. Why is that? Why is Wales constantly neglected by the Government in this way?
Viscount Davidson: My Lords, I do not know. I have every sympathy with the noble Lord the Leader of the Opposition. But even if the council were much larger, some interests would doubtless still feel excluded. The council was deliberately kept to 15 members in order to help ensure effective working. This follows the recommendation of the committee chaired by the noble Lord, Lord Croham, and is now provided for in the Education Reform. Act which your Lordships spent so much time debating last summer.
Lord Cledwyn of Penrhos: My Lords, I appreciate that the noble Viscount is in a difficult position, but will he be good enough to have a word with his noble friend Lord Trefgarne?
Viscount Davidson: My Lords, I am always prepared to have a word with my noble friend Lord Trefgarne.
Lord Butterworth: My Lords, is the Minister aware that the Croham Committee envisaged that an executive committee should be set up under the council and that academic interests would be represented on it? The committee would be responsible for setting the recommendations on financial matters which we hope would encapsulate the highest academic standards.
Viscount Davidson: My Lords, I am most grateful to my noble friend Lord Butterworth. As vice-chairman of the Croham Committee he knows a; much as, if not more than, most of your Lordships on the subject. I think I can add that the council will be able to take as much expert and other advice as it wishes in deciding on grants allocations and in framing advice to the Government. It has explicit powers under the Act to establish committees which may include non-members.
Baroness David: My Lords, is there any overlap between the membership of the Universities Funding Council and the Polytechnics and Colleges Funding Council? It would seem sensible if each of those councils knew what the other was doing.
Viscount Davidson: My Lords, among the points taken into account when setting up the UFC were the need to balance academic disciplines in the area of non-academic expertise and the need for cross-membership with the polytechnics and colleges sector.
Lord Beloff: My Lords, does the Minister, in his confidence in the new council, agree that as a first step to establishing its confidence more widely it should stop the abuse of university time by sending round silly questionnaires? Those questionnaires are designed by people with no understanding of how universities operate and they take away time that should be devoted to teaching and research.
Viscount Davidson: My Lords, I do not think that is a question for me to answer. All I can say is that the Government have full confidence in the membership of the council to get to grips with the challenges it will face when it takes on its full responsibilities from 1st April.
Lord Molloy: My Lords, is the noble Viscount aware that many of the colleges of the University of Wales are concerned about this matter? Will he ask his right honourable friend whether he will be gracious enough to get in touch with the vice-chancellor of the University of Wales to see whether some help and provision can be provided along the lines outlined by my noble friend Lord Cledwyn?
Viscount Davidson: My Lords, I shall certainly pass on the question of the noble Lord.
Baroness White: My Lords, will the noble Viscount let us know what is the relationship of the two chairmen of the advisory committees for Scotland and for Wales respectively with the funding council? Will they be members thereof or will they have any right of audience or direct access?
Viscount Davidson: My Lords, I do not have the answer to that question, but I shall certainly write to the noble Baroness.
Lord Taylor of Blackburn: My Lords, regardless of the composition of the council, how independent will it be in giving advice from the Department of Education and Science or any other government department?
Viscount Davidson: My Lords, it will be quite independent.
Lord Peston: My Lords, the stupid questionnaires to which the noble Lord, Lord Beloff, referred have their origin in the Department of Education and Science. That department totally backs them as its system of staff appraisal. However, I ask the noble Viscount to return to the original Question. It is a serious matter when some quarter of all undergraduates study social studies and business but those subjects are not represented at all on the Universities Funding Council. Will the noble Viscount at least draw to the attention of his right honourable friend the Secretary of State the fact that that scale of omission is rather serious?
Viscount Davidson: My Lords, as I have already said, the council was limited to 15 members. It is always likely that some specialties will feel excluded. But its composition followed the recommendation of the committee chaired by the noble Lord, Lord Croham. That is how the legislation was drafted.
Lord Hatch of Lusby: My Lords, will the noble Viscount tell the House how many of the six representatives of commercial and industrial interests are members of companies which give subventions to the Conservative Party?
Viscount Davidson: My Lords, I think that is another question.
Baroness Seear: My Lords, the noble Viscount said that some specialties will be excluded. However, a speciality which covers no less than 25 per cent. of students is surely in a rather special position. For that number to be excluded is not acceptable.
Viscount Davidson: My Lords, all the representatives of the academics will be on the sub-committees. They will give advice to the council.
Lord Annan: My Lords, is it not a fact that this insistence upon representing every interest has led to the constitutions of universities being overloaded by vast committees which are then incapable of taking executive action?
Viscount Davidson: My Lords, the noble Lord has a very good point. I wish I had thought of that.

EC Budget: Frauds
2.47 p.m.
Lord Bruce of Donington Lord Bruce of Donington asked Her Majesty's Government:
Whether they will report on the discussions at the European Community's Economic and Finance Council on the frauds referred to in the Question asked by Lord Bruce of Donington and answered by Lord Young of Graffham on 20th January 1988 (H.L. Deb., cols. 206–207).
The Secretary of State for Trade and Industry (Lord Young of Graffham): My Lords, the Council discussed the 1987 Court of Auditors report in March 1988 and made a recommendation to the European Parliament on the discharge to be given to the Commission regarding the implementation of the 1986 EC budget. The Parliament voted to grant the discharge on 13th April 1988.
The Court's 1987 report was notable for devoting a specific chapter to fraud and irregularities. ECOFIN welcomed this and drew particular attention to the setting up of an anti-fraud unit in the Commission. The Paymaster General and officials have subsequently had detailed discussions with the head of the unit about his priorities.
Lord Bruce of Donington: My Lords, will the noble Lord be kind enough to explain why it was, despite the specific instances of fraud set out in the 1966 annual accounts and the report of the Court of Auditors thereon and despite the misgivings that were raised by me in your Lordships' House on 20th January, nevertheless the Council of Ministers recommended the discharge of the 1966 accounts when its only method of obtaining a further investigation into the matter was to refuse the discharge until an investigation had been made?
Is the noble Lord aware that recently the new chief of the Commission's anti-fraud team estimated in evidence given before a European Parliamentary

65
Committee that at the moment frauds are running at somewhere between 10 and 20 per cent. of the Commission's budget? In those circumstances will the noble Lord instruct or cause to be instructed the council representatives that we have on ECOFIN to decline to discharge the 1987 accounts?
Lord Young of Graffham: My Lords, at the European Parliament's budget control committee hearing on fraud which took place on 23rd to 25th January of this year, Herr Waechter, who is the head of the Commission's anti-fraud unit, reported that many people had said that fraud could amount to as much as 10 to 20 per cent. of the Community budget but that he considered that to be an area about which nothing definite could be said. Later in the hearing the chairman of the Parliament's budgetary control committee suggested a figure of 8 per cent. to 10 per cent.
The only figures which we have concerning irregularities, including fraud, in the period from 1980 to 1987 amount to approximately £130 million of which some £4 million relate to the United Kingdom. Those figures relate to detected fraud. We all know that there is probably a substantially larger amount of undetected fraud. That is a matter to which Commission officials are now giving their full attention.
Lord Jay: My Lords, since on any interpretation according to the Court of Auditors fraud amounts to at least tens of millions of pounds, a high proportion of which comes indirectly from the British taxpayer and is apparently caused by corruption and fraud in the distribution of export subsidies from the Commission, is it not time that the Government took more effective action to stop what is surely a scandalous misuse of British taxpayers' money?
Lord Young of Graffham: My Lords, the Prime Minister is of course very concerned about fraud within the Community and intends to raise the matter at the next European Council meeting. I believe that that is the correct forum in which the matter should be raised.
Lord Cockfield: My Lords, while one accepts that the question of fraud is of great importance and that measures ought to be taken to curb it, and also that fraud extends beyond the CAP into other areas, can my noble friend explain why proposals which I put forward in 1986 on behalf of the Commission to amend the mutual assistance directive to enable the Commission in collaboration with member states to conduct investigations into fraud were vetoed by the United Kingdom in conjunction with the Finance Ministers of the other eleven member states?
Lord Young of Graffham: My Lords, my noble friend was a Commissioner at the time and knows full well the answer to that question. I suspect that there must be rather more to the matter than that the veto was led by the United Kingdom, which is the impression that he has given to your Lordships' House. I shall certainly look into the matter and consult my colleagues.
Lord Elwyn-Jones: My Lords, will the Minister give the House the answer to the allegation of the noble Lord?
Lord Young of Graffham: No, my Lords. The noble and learned Lord will know that I am not a Finance Minister and was not present at the meeting in 1986. If my noble friend cares to put down a Question I shall of course provide an answer to your Lordships' House.
Lord Benson: My Lords, is the noble Lord aware that the Court of Auditors made a report on the 1987 accounts of the Community and, to use the gentlest words that one can, states that those accounts are misleading—in short, they are subject to grave irregularities? Will he tell the House what the Government intend to do about the accounts of the Community, which are full of irregularities?
Lord Young of Graffham: My Lords, I already told the House in an earlier answer that the Prime Minister is very concerned about fraud in the Community, and that includes the way in which the accounts are audited. She intends to raise the matter specifically at the next meeting of the European Council.
Lord Cledwyn of Penrhos: My Lords, the noble Lord, Lord Cockfield, asked an extremely serious and fundamental question. Thus far the Minister has failed to answer his noble friend. In the circumstances, and as a member of a Cabinet with collective responsibility, why is he unable to answer on behalf of his right honourable friend the Chancellor of the Exchequer? Will he consider very carefully before he answers this question? Will he now give his noble friend a proper answer as to why on that occasion Her Majesty's Government vetoed his proposal?
Lord Young of Graffham: My Lords, the noble Lord the Leader of the Opposition and all Members of your Lordships' House should know the procedures which the House has adopted for the convenience of noble Lords in respect to the answering of questions. If he cares to put down the Question I shall be happy to answer it. Surely not even the noble Lord could expect that I would have the sum of all knowledge of all events which have taken place in the European Council from time immemorial, or at least since 1979.
My noble friend referred to a specific incident a year or two ago at a meeting of Finance Ministers at which I was not present. Surely the noble Lord the Leader of the Opposition cannot expect that I should have instant recall and know the answer.
Lord Stoddart of Swindon: My Lords. does the noble Lord realise that his response to his noble friend's question has given the impression that he is complacent about the whole issue of fraud?
Noble Lords: No!
Lord Stoddart of Swindon: Perhaps he has not given that impression to his noble friends behind him, but he has certainly given it to noble Lords on this

67
side of the House. He did so earlier this year in his original reply to my noble friend Lord Bruce of Donington. Is the Minister aware that the public have now been informed that the amount of fraud could involve as much as £6 billion every year and that this country contributes about one-third of that sum? Will he tell the House whether the matter was raised yesterday by our own Minister of Agriculture in the Council of Agriculture Ministers as was promised? If it was raised, as it should have been, what was the outcome?
Lord Young of Graffham: My Lords, while I accept full responsibility for all events which concern my department, and indeed all events which transpire in government, I cannot be expected to accept responsibility for impressions which noble Lords opposite might draw from my behaviour. I thought that I was absolutely firm in answering the question about fraud. I think that it is important to put the matter into perspective.
I quoted the words of the member of the Court of Auditors in reporting to the head of the Commission's anti-fraud unit that many people had said that fraud could amount to as much as 10 per cent. to 20 per cent. of the Community budget. At the upper level, that figure would represent £6 billion. However, no one has suggested a figure as high as that. I disclosed that the entire cumulative figure of detected fraud for the period from 1980 to 1987 was a total of —130 million. I said that the Prime Minister intends to raise the matter at the very next meeting of the Council of Ministers. I do not believe that gives any impression of complacency. I merely cited the facts. It is important that we should not be led astray by wild speculation.
Viscount Whitelaw: My Lords, as one who shares collective responsibility with my noble friend for the matter at issue today, I do not know the answer any more than he does. Nor would I expect that he should know it. I cannot accept that, because he does not know the answer to a question of a very specialised nature put by my noble friend Lord Cockfield, that means that either he or I is in any way complacent about the matter. I should have thought that it would be far better if he were able to give a considered answer if my noble friend chooses to put down a Question.
Lord Young of Graffham: My Lords, I am very grateful to my noble friend.
Lord Cockfield: My Lords, as I have now been named by my noble friend Lord Whitelaw, perhaps I may say this.
A noble Lord: Question!
Lord Cockfield: I shall put it as a question if the noble Lord will kindly possess himself in patience. Is my noble friend aware that my right honourable friend the Prime Minister raised the matter, very properly indeed? Does he recall that I began by saying that this is an important subject which needs
68
to be addressed? In those circumstances, does he agree that it would have been not unreasonable for the Minister to have been provided by his officials with adequate background briefing? While I could give an explanation as to why Her Majesty's Government decided to veto that particular proposal, is he aware that it is not my function but his to explain the actions of Her Majesty's Government? Is he further aware—
Noble Lords: Order! Too long!
Lord Cockfield: Is the Minister further aware that this is a matter of substantial importance?
Lord Young of Graffham: My Lords, it is obviously some considerable time since my noble friend stood in my position answering questions on these matters in your Lordships' House and he has perhaps forgotten the formalities of this matter. If my noble friend would look at the Question to see precisely to what it relates, he would realise that, as in the ordinary course of events, we cannot expect to be armed with knowledge of every single occurrence in every possible area. If my noble friend will merely do as I ask and put down a Question on the Order Paper, I am absolutely certain that he will receive an Answer that will satisfy him and your Lordships' House.
Lord Bruce of Donington: My Lords, in order to assist him in replying to my noble friend Lord Stoddart, is the Minister aware that his right honourable friend the Minister of Agriculture yesterday elicited a promise from the Spanish President of the Council that the matter would come on to the agenda sometime in March or April? I do not in any way accuse the noble Lord of complacency in this matter, but may I draw his attention to the fact that that does not apply to his right honourable friend the Paymaster General, who published a summary of the Court of Auditors' report on 24th January which nowhere mentions fraud at all?
Lord Young of Graffham: My Lords, I am grateful for the assistance that the noble Lord, Lord Bruce of Donington, has given me and for the incidental information that he has given to your Lordships' House about the occurrences at the agriculture Ministers' meeting yesterday. However, I said that my right honourable friend the Prime Minister intended to put this matter to the next Council of Ministers' meeting in March. I believe that to be the proper place for this matter to be raised, and there it will be raised.

Social Security Payments: Uprating
3.12 p.m.
Baroness Jeger Baroness Jeger asked Her Majesty's Government:
Whether they will revise the social security uprating decisions, due to come into effect in April, to take account of the current and projected increase in the inflation rate since the upratings of 5.9 per cent. were agreed.
The Parliamentary Under-Secretary of State, Department of Social Security (Lord Skelmersdale): No, my Lords.
Baroness Jeger: My Lords, why not?
Lord Skelmersdale: My Lords, whatever method of uprating is in force, it has always, under all governments, taken six months between the announcement and its implementation. That is because a centrally issued order book runs for 20 weeks. As the lead time for printing and dispatching the books to post offices is three to four weeks, a minimum period of six months is needed between the setting of the new rate and the new rate coming into force.
Baroness Jeger: My Lords, in view of that answer, how can the noble Lord presume to fulfil the election manifesto of the Conservative Party, which stated quite clearly: "We will continue to maintain the value of the state retirement pension"? How can the Government say that they are doing that when they are proposing the 5.9 per cent. increase in April and when even the Chancellor of the Exchequer has warned that the increase in inflation is likely to be 7 per cent. and more? Why, at this point in time, are the poorest people suffering a fall in their standard of living which is contrary to the Conservative manifesto?
Lord Skelmersdale: My Lords, I do not think that it is contrary to the Conservative manifesto. Under the present system, recipients will always catch up in the longer term. On an annual basis, of course, they gain when inflation falls and they lose—this is the point made by the noble Baroness—when inflation rises. That is why a major factor in this Government's policy of keeping control of inflation reflects this major priority. The historic method of uprating ensures that changes in the rate of inflation are taken into account and benefits are thus fully protected against price increases.
Lord Carter: My Lords, will the Minister inform the House whether, besides uprating benefits, there is an intention to put right the many anomalies and injustices in the new social security system? For example, is he aware that, in the case of an elderly couple where one partner receives a severe disability premium, that couple receives a lower income by way of benefit than a person living alone who receives a severe disability premium? Do the Government believe that, in the case of disabled people, two can live more cheaply than one?
Lord Skelmersdale: My Lords, perhaps I may be allowed to paraphrase what I believe to have been the noble Lord's question: are the long-term sick and disabled being disadvantaged under the method that we have chosen? The answer is "No", because we have increased their benefits over and above inflation. Of course, there are occasionally —sometimes more often—very good reasons for favouring one group over and above another group. That is one of the factors that must be taken
70
into account in the annual calculations before the uprating of benefits.
Lord Boyd-Carpenter: My Lords, will my noble friend confirm that the uprating of the national insurance retirement pension is an enormous operation covering many millions of people, that it is quite impossible to alter it at the last minute and that any attempt to do so would only cause confusion and hardship?
Lord Skelmersdale: My Lords, yes; my noble friend is quite right. We are talking about around 11 million cases.
Lord Jenkin of Roding: My Lords, will my noble friend also confirm that, under the statutory arrangements which are now in force, any shortfall that may occur in one year will automatically be made up at the next uprating? If the noble Baroness, Lady Jeger, shakes her head, she is perhaps harking back to the time when her own Front Bench missed out the period of the peak months of inflation in the 1970s and never made it up at all.
Lord Skelmersdale: My Lords, in answer to my noble friend's first supplementary question, he put the matter much more succinctly than I did, but clearly we both agree.
As regards changing from the forecast to the historic method of accounting, it is in fact the case that, over a period of eight months, pensioners lost £1 billion in today's prices.
Lord Peston: My Lords, perhaps I may ask the Minister to clarify one matter which I raise in a totally non-partisan spirit and which has always troubled me. How can national newspapers, for example, produce 4 million copies overnight when the Government claim that the printing of small benefit books takes six months? Is our technology still so primitive that we cannot print these documents much more rapidly and could therefore update in a much more fine-tuned fashion?
Lord Skelmersdale: My Lords, I am sorry that the noble Lord finds it difficult to be non-partisan. However, the reason for his dilemma is that all 4 million newspapers are identical—4 million Guardian newspapers or 4 million Sun newspapers are virtually identical, although I accept that there are slight differences around the country. However, social security benefits are dealt with on an individual basis and that inevitably takes time.
Baroness Jeger: My Lords, will the Minister tell us when old-age pensioners, many of whom may well be dead before too long, will catch up on the 7 per cent. increase that the Chancellor has predicted? Will they have to wait another six months, for example, before there is another uprating that will help them?
Lord Skelmersdale: My Lords, the noble Baroness well knows that the next uprating will be announced next autumn and will come into effect in April next year. We must all hope and strive for a reduction in

71
the inflation rate, because that is the one thing that will most help pensioners and anyone else on benefit.
Lord Stallard: My Lords, will the noble Lord answer the Question? Can he assure us that the 5·9 per cent. will be raised to the present inflation rate as soon as possible? Does he recall, as we do, that in recent years pensioners were alleged to have been overpaid and that that money was clawed back by the noble Lord who spoke a few moments ago? Can he give us a guarantee that there will be uprating to bring this 5·9 per cent. up to the current rate of inflation?
Lord Skelmersdale: My Lords, since 1979, the increase given to pensioners has exceeded by several per cent. the total amount by which inflation has risen. As regards the noble Lord's primary supplementary question, of course the next uprating will take account of past inflation, as it did last year and the year before.
Lord Banks: My Lords, the noble Lord has said that when the rate of inflation is falling the present historic period of reference helps those on benefit and that when the rate of inflation is rising people on benefit suffer because they lag behind. In view of that fact, have the Government considered returning to a reference period half in the past and half in the future so that an estimate has to be made each year for, say, six months from November as to what the rate of inflation for the year will be? I do not necessarily advocate that system, but would it not allow likely future trends to be taken into account as well as past experience?
Lord Skelmersdale: My Lords, I believe that it would be damaging to people on benefit. History has proved that forecasting inflation, even if one forecasts only half the amount of inflation, is an unreliable method of uprating which was more often wrong than right. Even the government of the party opposite switched, as my noble friend Lord Jenkin reminded us, from the historic to the forecast method in 1976. They then promptly switched back again.

Commonwealth Governments: Advice to the Queen
3.11 p.m.
Lord Kennet Lord Kennet asked Her Majesty's Government:
What are the institutional arrangements by which Her Majesty the Queen seeks and receives advice from Commonwealth Prime Ministers other than the British.
The Minister of State, Foreign and Commonwealth Office (Lord Glenarthur): My Lords, it is for the government of each Commonwealth country of which the Queen is Head of State to make its own arrangements for proffering ministerial advice to Her Majesty. The question does not arise with Commonwealth countries of which the Queen is not Head of State.
Lord Kennet: My Lords, will the Government always bear in mind that it is no longer the British Commonwealth of Nations as it used to be but just the Commonwealth? Will they consider an extension of the practice whereby at Commonwealth Prime Ministers' meetings which are held in different places round the world the chair is taken by the Prime Minister of the host country for that meeting?
Lord Glenarthur: My Lords, the Queen is present at Commonwealth Heads of Government meetings as Head of the Commonwealth at the invitation of the host government.
Lord Cledwyn of Penrhos: My Lords, will the noble Lord enlighten the House on one point? When Commonwealth governments proffer advice to Her Majesty as Head of the Commonwealth, is that advice proffered directly to Her Majesty or is it filtered through No. 10 Downing Street?
Lord Glenarthur: My Lords, I understand that this might normally be from the Prime Minister concerned through the Governor General direct.
Lord Hatch of Lusby: My Lords, if that is the case, will the noble Lord tell the House how the findings of the recent Commonwealth Heads of Government meeting in Harare regarding sanctions on South Africa would be filtered through to Her Majesty? Do they come through No. 10 Downing Street? The Government were not represented in Harare and are known to be opposed to the findings of that meeting.
Lord Glenarthur: My Lords, the Question that was asked related to Commonwealth Heads of Government meetings, as I understood, that the Queen attends. In the next case the meeting will be in Malaysia in October. Questions concerning South Africa go rather wider than the Question on the Order Paper.

Business
3.14 p.m.
Viscount Davidson: My Lords, it may be for the convenience of the House if I announce that the Committee stage of the Companies Bill will be adjourned at approximately 7.30 p.m. for approximately one hour and that during this adjournment the Access to Personal Files (Social Services) Regulations 1989, the Access to Personal Files (Social Work) (Scotland) Regulations 1989, the Access to Personal Files (Housing) Regulations 1989, and the Local Authority Social Services (Designation of Functions) Order 1989 will be taken.

Tees (Newport) Bridge Bill [H.L.]
Read a second time, and committed to an Unopposed Bill Committee.
United Medical and Dental Schools Bill [H.L.]
Read a second time, and referred to the Examiners.
Vale of Glamorgan (Barry Harbour) Bill [H.L.]
Read a second time, and committed to an Unopposed Bill Committee.

Companies Bill [H.L.]
3.15 p.m.
Lord Strathclyde: My Lords, I beg to move that the House do now again resolve itself into Committee on this Bill.
Moved, That the House do now again resolve itself into Committee.—(Lord Strathclyde.)
On Question, Motion agreed to.
House in Committee accordingly.
[The LORD ABERDARE in the Chair.]
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(1):
Before Clause 50, insert the following new clause:
("Investigations which damage reputations.
.—(1) Whenever the Secretary of State or any competent authority initiates an investigation or enquiry under the provisions of any of the Acts amended by this Part of this Act, the Secretary of State or the competent authority shall have regard to the reputation of individuals who may be affected by the investigation or enquiry.
(2) Where no misconduct or malpractice is revealed by the investigation or enquiry referred to in subsection (1) above, and the existence of the investigation or the enquiry has become known to the public, the Secretary of State or the competent authority shall take all necessary steps to protect the reputation of the individuals affected.").
The noble Lord said: I beg to move Amendment No. 227Z(1) standing in my name and that of my noble friend Lord Peston. Members of the Committee will notice that the numbering on the Marshalled List is rather curious this afternoon. I think that I owe the Committee a word of explanation about that. We have been taking the Bill in different stages and, as the Secretary of State said on Second Reading, the Bill involves a number of different, quite discrete, parts. We have been tabling amendments from the Opposition on each part as it comes forward because it was extremely difficult for us to table amendments on the whole Bill at the outset of the Committee stage.
The result has been that the numbering on the original Marshalled List—which obviously has to stay as it is—has become slightly confused because of the fact that our amendments are tabled at a particular stage. The numbering being frozen, the Public Bill Office has to add these rather curious letters such as "Z(1)", and so on. If Members of the Committee will agree, I propose that in discussing amendments I shall refer only to the number (1), and so on, in brackets. I shall omit the numbers 227Z (or, as misprinted in subsequent pages of the Marshalled List, 272Z) for the purposes of the Committee's convenience. Therefore, with the permission of the
74
Committee I shall move Amendment No. (1) and speak to Amendments Nos. (3) and (24).
We are now embarking on a new section of the Bill which relates to investigations. The section sets out to amend a number of Acts which are in force. This part, and the subsequent part that the Committee will be discussing later this afternoon, are both rather technical. Nevertheless, they contain some fairly serious issues of principle. Amendment No. (1) is addressed to one of those.
In my Second Reading speech I mentioned that the announcement of an investigation by the Secretary of State, or indeed any other official authority which is entitled to conduct investigations, may well give rise to problems of individuals' reputations There is a general belief, which is perhaps reflected in some of the press comment on invesitgations when they are announced, that there is no smoke without fire. Therefore, if the Secretary of State announces an investigation it is generally assumed in the headlines that there is automatically something wrong. That may not be the case. The Secretary of State's investigators may find at the end of the day that there has been no malpractice or misconduct of any kind; and the investigation, though launched for good and bona fide reasons, may reveal that nothing has gone wrong. Under those circumstances it seems to us that there should be proper protection for the reputation of any individuals who may have been affected either by the original announcement or by the fact that the investigation may have been leaked in some way or have come to public notice.
Nothing that I am suggesting lessens the commitment from these Benches for the pursuit of misconduct or malpractice. I do not wish to make that suggestion. We are as anxious as the Government to make sure that any misconduct or malpractice should be discovered and properly dealt with. Nevertheless, there was an occasion—I referred to one case during my Second Reading speech although I referred to it anonymously and I hope that the Committee will accept that I do not mention names—when the chairman of a major public company, whose market capitalisation ran into several hundreds of millions of pounds, was the object of an investigation announced by the Secretary of State himself. He and the company were named and as a result he and the share price of the company came under rather severe pressure.
In the event, the inspectors reported to the Secretary of State that there was no misconduct or malpractice, that the investigation had been properly carried out and that the chairman of the company in question was free from all taint. As a result, the department issued a release which made that absolutely clear. However, a year or so had passed while that gentleman was under some sort of a cloud. When the announcement was made at the end of the day that nothing was wrong it appeared on about page 24 of some colour supplement somewhere; whereas the major story that the Secretary of State had announced the investigation appeared on page 1 of the business news of practically every financial newspaper in London.
It is the same when from time to time there are leaks about investigations, which are confidential

75
when the Secretary of State wishes them to be so—he is entitled to wish them to be so under the statute—but there are occasions when it gets out to the press that an investigation is taking place. The press is obviously very interested because it normally deals with figures who are in the public eye and the press, particularly in the City of London, is very interested in what is going on. It will seize on things and its members will interrogate people and indulge in what is known as investigative journalism. That is the job of the press and I have no particular complaint about that. But the people who are affected by the mere fact of an investigation will find themselves under a curious penumbral cloud until something is done to clear their names.
I make it clear that I am not suggesting that the amendment is anything other than a probing amendment to find out the Government's intention and their view of this problem. I do not intend to try to write this into the Bill because I accept that my drafting is undoubtedly defective. I accept that as it stands the amendment would give rise to all kinds of problems. Nevertheless, a major point of principle is involved to which I believe the Government should address their collective mind. After all when the police or Customs and Excise or other bodies launch inquiries it is very unusual for them to announce that they are to investigate whether Mr. Bloggs is guilty of smuggling heroin into this country. That would be very unusual. It is normally done as an undercover operation and is kept discreet and secret until such time as they are prepared to act on the basis of proven or substantiated evidence of malpractice or misconduct.
With investigations launched under any of the Acts with which this part deals, the announcement that an investigation is taking place puts the investigation into quite a different category from those I have mentioned that are launched by the police, the Customs and Excise or other authorities with the power and the duty to pursue criminal acts.
Nothing I have said lessens our commitment to the pursuit of any criminal or suggested criminal malpractice or misconduct. I wish, however, that the balance should be kept and the Government should recognise that there is a natural justice problem here. I hope very much that when the Secretary of State replies he will be able to give us some thoughts on how the Government propose to deal with the matter. I beg to move.
Lord Lloyd of Kilgerran: As the noble Lord, Lord Williams of Elvel, has indicated, this part of the Bill deals with investigation powers, but it also deals with powers to obtain information. Like the noble Lord, Lord Williams of Elvel, we on these Benches support the Government in every way to prevent malpractices and misconduct of all kinds. It may help if I were to say now that I shall be supporting many of the amendments put forward for this part, particularly those which improve access to information. However, like the noble Lord, Lord Williams, I am concerned with the basic principles of natural justice. In some cases it seems that the human rights of
76
individuals may be affected unless some of these amendments are accepted.
Amendments Nos. 227Z(1), (3) and (24) deal with an important matter relating to the damage that may arise to the reputation of people who are perfectly innocent of all these matters. Therefore, particularly as the Secretary of State is given some powers in this matter, I feel that it should be clarified in the Bill that the position of certain persons should be defended.
The usual slick answer to a question where individual rights are being affected that has often come from the Government Benches is that the individual concerned can go to court. It is a very expensive and difficult solution for a person to take action in the courts in many of these cases. Therefore it would be very helpful in dealing with questions of natural justice if there were embodied in the Bill some kind of protection, as is suggested by these amendments.
Lord Young of Graffham: I am sympathetic to the principles behind these amendments. I believe that we should and do have regard to the reputation of individuals (and for that matter, companies and firms) who may be affected by an investigation or inquiry. It is our policy to conduct investigations in a way which, so far as possible, does not unduly damage the business or other affairs of the persons or companies concerned. We recognise that damage can be caused simply by the announcement of my department's investigations which is why, as a matter of policy, Section 447 of the Companies Act and Sections 105 and 177 financial service investigations, which do not lead to a publishable report are not normally announced. The current policy is set out in my department's booklet Investigations: How they work, which was recently published and circulated widely. In the case of the new powers proposed by Clauses 50 and 73, which will not lead to a report, we propose that they should similarly not be announced.
It is natural that noble Lords should wish to defend the innocent and protect the rights of individuals. I do not, however, consider legislation to be necessary or appropriate in this particular instance. I should like to explain why. In the first place, when considering whether an investigation should be set in train, the Secretary of State—the holder of my office—is required to act fairly. Secondly, the Secretary of State's investigatory powers are there for a purpose: essentially to establish the facts in relation to matters of concern affecting companies, partnerships or individuals. That purpose should not be subverted by making the need to have regard to the reputation of an individual the primary consideration. That would be entirely wrong and I do not think for one moment that this is the wish or expectation of noble Lords opposite. Indeed the case to which I suspect the noble Lord, Lord Williams, referred concerned another matter, not this kind of investigation; it could have been an investigation involving insider dealing or other market-making opportunities, which is entirely different and on which policy since then has been changed.
I remind the Committee that the reputation of individuals is not the only issue to which we have to have regard when initiating and carrying out

77
investigations. We must also have regard (among other things) to the interests of shareholders, depositors, creditors and customers. We need to have regard to the efficient and fair operation of markets and to regulatory requirements. This is what the investigatory powers are there for. All of these issues however are subsumed into the general requirement to act fairly. Accordingly, subsection (1) of the first amendment is both unnecessary and inappropriate.
I accept that the noble Lord was not looking for details. However, subsection (2) of that amendment would have the effect of limiting the Secretary of State's discretion (or that of the competent authority) and would result in an approach which is not always to the advantage of the innocent. It is most difficult to fetter discretion to that extent on a statutory basis.
The effect of Amendment No. 227Z(3) would be to defeat the object of Clause 50, which is to speed up the investigation process in those cases where the underlying purpose of the investigation is to decide whether an offence has been committed or whether there are grounds for regulatory action. If the inspectors are appointed under the new provision, they will conduct their inquiry and draw up their report on the basis that it will not be for publication. The effect of this amendment would be that inspectors could never be certain that their report might not, at some future date, be published because their appointment had become public knowledge. They would be forced into the time-consuming exercise of producing a report for possible publication. It is inevitable in carrying out investigations that numerous individuals not under suspicion of any wrong doing will need to be questioned by inspectors so as to enable the inspectors to get at all the relevant facts in a case. In so doing it is unfortunately inevitable that the fact that an investigation is in progress will sometimes get into the public domain. I do not believe that the mere fact that there is a rumour, substantiated or not, that an investigation is in progress should be grounds for publishing a report.
Turning to Amendment No. 227Z(24), I should underline the fact that those exercising this power to require information are, as a matter of general law, required to act fairly and reasonably and can be expected to have regard to the rights of individuals in appropriate cases. It is however not immediately obvious that the privacy of individuals is much threatened by the investigation provision, which noble Lords seek to amend, since it concerns a power to require the books and papers of an insurance company.
I have given these amendments careful consideration, but I do not think that any of them are either necessary or desirable. I should say that where the existence of an investigation has become public, we are prepared at an appropriate stage to state either that particular action is being taken or that no further action is planned. Further than that, I believe each case should be taken on its own merits. An all-ornothing policy, which is proposed in the amendments by which we should always have to take steps to protect innocent individuals in cases where the investigation reveals no misconduct (but apparently not otherwise), would be unworkable and frankly
78
impossible. To begin with, investigations are conducted into the affairs of companies or businesses (be they investment or insurance) and only coincidentally into the affairs of individuals. We are looking into companies. The purpose of any investigation is to establish the facts in relation to the matters under inquiry. The results may point to the guilt or innocence of individuals most closely associated with those matters, but it is most unlikely that they could ever amount to positive clearance of everyone caught up in the inquiry.
In the case of investigations under the Companies Act—Sections 431, 432, 442 and 446—we publish the report of the inspectors wherever possible. It may assist the Committee if I read the guidance to the inspectors. It is in the following terms:
"Attention has already been drawn to the fact that inspectors are not called upon to conduct a trial of those associated with the company but to ascertain the facts and to make them available. For this reason, and because there is no appeal against the validity of any criticisms made by inspectors, it is most important that inspectors should exercise great restraint when making critical comment and should do so only to the extent unavoidable for the purpose of their reports."
It would be difficult for any Secretary of State to speak plainer than that without intruding on the inspectors' area of responsibility.
Nevertheless, I can assure the Committee that we shall continue to have regard to the reputation of individuals who may be affected by an investigation and that we shall in appropriate cases announce that no further action is planned. There are difficulties in going further than that as I have explained, and for that reason I must resist these particular amendments. I ask the noble Lord, Lord Williams, to withdraw them and reflect on the remarks that I have made.
Lord Peston: I should like to reiterate our view and then ask two additional questions. Where prima facie evidence of misconduct or malpractice exists, or might exist, we believe that the Secretary of State should pursue the matter vigorously and precisely in order to establish the facts. In anything that we say we do not wish to cause him to believe that he ought to hold back from doing so.
The noble Lord appeared to change his answer to my first question at different times. The amendment states:
"shall have regard to the reputation of individuals".
It does not provide that the reputation of individuals shall be paramount and all other matters shall be excluded. I thought that on several occasions I heard the noble Lord say, "Yes, that is exactly the case and in that sense the amendment is unnecessary". I thought that I heard him say that his department would have regard to the reputation of individuals, and that there are legal grounds for it having to have regard in any event. However, I do not speak as a legal expert.
Given that it is a probing amendment, I ask whether the simple answer is that there is no need to write the provision into the Act because it is already contained in the law generally and is his department's practice.

79
My second question relates to the second part of Amendment No. 227Z(1) which states:
"Where no misconduct or malpractice is revealed",
but there is public knowledge that an investigation has taken place. The form of words used can be of overwhelming importance. For example, the Secretary of State or the inspectors may say. "We have established that there is no misconduct or malpractice". That is a definite statement and would protect the reputation of the individual concerned. However, it might instead be said, "We have not established that there is no misconduct". That statement is in the negative and provides the small amount of smoke from which the fire begins to grow. If I were the individual concerned, I should be far less happy with that form of words. A further form of words is, "We have not been able to find any evidence". In other words, it has happened but it cannot be established.
One must distinguish between the different statements that may be made. Regarding the protection of the reputation of innocent individuals, they would wish the Secretary of State to declare, "We have established that there has been no misconduct or malpractice". However, we hope that such cases are rare.
Has the Secretary of State's department considered a possible form of words? Is it aware that if it chooses the wrong form of words, it can make the innocent look guilty in a sense that they were guilty but they did not get caught? That is a different outcome from that which would result from the statement, "We are quite clear that no malpractice occurred". We wish to have such cases investigated, but we are concerned with the innocent individual and would prefer the statement, "There was no misconduct or malpractice and that has been established".
Lord Young of Graffham: The difficulty arises in that there is a wide spectrum of cases. However, there is no need to write into any statute that we must act fairly, because I am labouring under a general duty to do so. That requirement exists and it is fundamental.
The problem arises in what is stated. We believe that it would be fairer not to publish a report. The noble Lord, Lord Peston, would lead us down an alternative road whereby there may be cases—one would hope the majority—where we could say unequivocally that nothing was found and there was total innocence. There may be a few cases in which we say nothing and which then go to the Serious Fraud Office or the DPP. One then comes to the grey area of cases where, on advice, there is insufficient evidence to take the matter further but where we cannot say that unequivocally. Yet those people are innocent because they have not been charged and one does not say anything about them at all. Therefore, the advantage of not publishing the report is that one is not drawn into that grey area which is very difficult.
The second stage is that as a general rule inspectors write a different report depending on whether it is to be published. Frankly, in this sort of case it is often more useful to the holder of my office to have a report which is not to be published since the inspector can
80
then be absolutely frank. Therefore, that is of the greatest utility to the holder of my office. Of course, if it is decided that the report is to be published, it has to be amended and agreed with a number of innocent parties who are mentioned in the report.
Therefore, on balance, having regard to all the circumstances, I hope that Members of the Committee opposite will realise that this is a difficult area and should not be confused with insider dealing cases, which come in a different category. My department's previous policy was to announce in the case of a person who is prominent in the market, because the longer an investigation continues the more rumours there are and there is then a great danger of an unfair market. However, recognising that that may not be the best method, we have changed our policy and we no longer investigate. Despite the risk of rumours we believe that that is fairer. Of course if in the future it were to become public and affect the market, we should have to contemplate making an announcement. However, as a general rule I believe that it is better not to announce because in the long run as difficult as it may be, it is fairer to the individual. I repeat that my responsibility and general duty are to be fair to the individual, and it is a duty which I am sure I and all my successors will discharge.
Lord Lloyd of Kilgerran: I accept that the Secretary of State will be fair to individuals, as will all his colleagues. However, at some stage he will say that no further action will be taken. I agree with the noble Lord, Lord Peston, that that is not adequate. Could he not indicate quite clearly that no malpractices or misconduct have been found which defame or go against the reputation of the individuals concerned?
Perhaps I may also suggest—and it may be that I am not familiar with all the procedures which take place with regard to all these investigations—that the names of individuals should not be disclosed as early as is sometimes done. Therefore the names of the individuals should not be disclosed at a very early stage.
Lord Young of Graffham: I fear that my explanation was not as clear as it should have been. We propose that we do not announce for that very good reason; namely, that we do not put people under a burden and then later on my department has to say that they are clear. There may well be cases in which we cannot say that for reasons of taking further proceedings, or there may be further cases where we cannot say that there is no evidence because there may be evidence but it is insufficient for further action to be taken. When all things are considered I hope that Members of the Committee will feel that this is fairer in a very difficult and imperfect world.
3.45 p.m.
Lord Williams of Elvel: I am grateful to the Secretary of State for what he has said. Perhaps I could briefly draw his attention to the fact that the amendment relates to all or any of the Acts amended by this part of the Bill so that we are dealing not just with this Bill but with the Insolvency Act, the Insurance Companies Act and of course the

81
Financial Services Act 1986, which contains investigatory powers of a very powerful nature. I deliberately framed the amendment in that way because I did not wish to restrict it to Companies Act investigations. I wished to widen it to deal with insider dealing Financial Services Act investigations. Perhaps the Minister could comment on that in the light of the explanation I have given of the amendment.
I recognise that the Secretary of State agrees that this is a very difficult area. I believe that it is common ground between us that this is not an easy matter to deal with and I accept that it is not easy to put into statute, which is why I moved this as a probing amendment. Nevertheless, as would be natural, my sympathies lie with the noble Lords, Lord Peston and Lord Lloyd of Kilgerran. I very much hope that on reflection the Government may conclude that for the protection of individuals it might be necessary to go just a bit further. Instead of saying that no further action is to be taken, it should be said that there is no evidence of malpractice or misconduct, or words to that effect. I am sure that something can be devised without tying the Secretary of State's hands too tightly.
Before deciding what to do with my amendment perhaps the Minister will comment on what I have said.
Lord Young of Graffham: I confess that I suffer occasional disappointment at the hands of the noble Lord, Lord Williams of Elvel, and the knowledge that his sympathies do not lie with this side of the Committee comes as a slight blow, but I shall learn to live with it.
Perhaps I may confirm that I misled the Committee slightly. I accept that this applies to all investigations, and that is part of the problem. All investigations are initiated on information which comes to us from a wide variety of different sources. It may be that dealing on a market has thrown up suspicion of insider dealing; that happens quite frequently. It is then looked at by my department and if the facts do not appear capable of simple explanation, we often quietly employ investigators to look at the matter, which may go a stage further and then a stage further.
At what point does the department have to announce that there is an investigation? We may then be in a difficult position of having to announce clearance, which may or may not be possible. I shall look at this, but I ask the noble Lord to take the amendment away because it is so broad. Of course I shall look to see whether there is anything which I can do. I assure the Committee that I am very conscious of the difficulty which this matter causes individuals in circumstances where they are publicly named, by rumour or otherwise, on matters which are not properly founded. I do not believe that there is anything that I can do because the alternative will lead us into greater difficulties.
Perhaps I may add that I do not believe that there is any reason to suppose that the discretionary system is not adequate. Indeed, I should have to be persuaded that there are serious and widespread problems—and I am willing to accept that there have
82
been some problems—before we could consider any amendment which inhibits flexibility and undermines the effect of investigations, largely because such a broad range of investigations are covered. We are in a world which changes very quickly. We find that new techniques and new methods arrive on the market and to return with new legislation in order to change our powers from time to time would be most difficult.
Lord Williams of Elvel: I am grateful to the Minister for saying that he will look at this and I understand that he will do so without any commitment to bring forward further amendments on Report. However, I hope he recognises that this is a matter of considerable concern and that rumours, announcements and leaks that investigations may be in the air are almost daily occurrences. It is not merely a problem of a one-off event per year but is something on which the market and the press live. I hope that the Minister will look at the matter in that light and arrive at a formulation which will be closer to the opinion of the noble Lords, Lord Lloyd of Kilgerran and Lord Peston, and myself. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(2):
Before Clause 50, insert the following new clause:
("Inspectors
.Inspectors appointed by the Secretary of State or a competent authority under the provisions of any of the Acts amended in this Part shall be fit and proper persons.").
The noble Lord said: Again, this is a probing amendment. As it stands, the legislation does not provide for inspectors to be other than those appointed by the Secretary of State. There seems to be a lacuna, because we should like to see some constraint on whom the Secretary of State appoints to be inspectors under the various Acts that are amended by this part of the Bill. The insider dealing and financial services powers of investigation are extremely robust. We approve of that and I am not trying to say that we do not. On the other hand, inspectors can march in and behave, as they have behaved on some occasions, with rather reckless brutality in the way they conduct their investigations.
I am reminded of a personal friend of mine, a Queen's Counsel, who told me when I was preparing this amendment that he and 12 colleagues who are senior members of the Bar signed a round robin to the noble Lord's predecessor Secretary of State, seeking the removal of an investigator from an investigation because of his behaviour. He had been appointed by the Secretary of State of the day. That seems to me an unfortunate thing to happen. I am sure that all Members of the Committee recognise that it is unfortunate if investigators behave in such a way as to attract that reaction.
Although I do not intend to press this amendment, because I do not think it is suitable for the Bill, I should like the Secretary of State and other noble Lords to reflect for a moment on what sort of people will be appointed as inspectors and whether there is to be any constraint on whom the Secretary of State can appoint. I beg to move.
Lord Young of Graffham: Perhaps I should first describe how decisions to appoint inspectors are taken. The practice of my department is to approach the persons considered to be the most suitable for a particular investigation, since investigations vary considerably. In the normal event a lawyer and accountant are appointed, although in many cases suitably qualified persons from other walks of life could be considered should the need arise. Lists are kept by the investigations division of the names of suitable legal and accounts candidates and those lists are regularly updated.
I fear that I am unaware of the round robin received by one of my predecessors. I shall certainly look into the matter but I have little doubt that the result was to ensure that the inspector concerned no longer figures on the list kept in my department. However, I shall certainly check.
Any approach to a legal candidate is then made by the department's solicitor and any approach to an accountancy candidate is made directly by my officials. We take the views on the suitability of possible appointees from the Attorney-General, the Institute of Chartered Accountants and from relevant professional bodies. Of course, professional qualifications are not required by statute, but the subject matter of the investigations almost invariably means that it is appropriate to appoint someone with relevant professional qualifications.
I am sure that there is no suggestion from the noble Lord, Lord Williams, that any of the inspectors appointed by me or my predecessors are not honest, competent or solvent. I accept that totally. The existing provisions which enable me or a competent authority to appoint competent inspectors have been in place for many years without ill effect—excluding the one case mentioned by the noble Lord. There was a provision for the appointment of competent persons as inspectors in Section 164 of the Companies Act 1948. Persons appointed as inspectors have to be properly qualified to undertake the investigation. In all those circumstances, unless the noble Lord can convince me that there is a problem I must ask him to withdraw the amendment. However, having said that, I shall certainly investigate the facts of the case he mentioned.
Lord Williams of Elvel: I am most grateful to the Secretary of State. In mentioning that particular case I was not seeking to draw attention to any one case which I wished him to investigate but merely using it to illustrate a point. I accept in general that all inspectors are the sort of people one would hope to be in charge of such work.
Nevertheless, it has been useful to have the exposition from the Secretary of State on how inspectors are appointed. It is now on the record and if any inspector deviates from the high standards to which we are accustomed from inspectors we shall be able to refer to what the noble Lord said today and take the necessary action, if action is required. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
The Chairman of Committees (Lord Aberdare): As mentioned by the noble Lord, Lord Williams of Elvel, there is a printer's error in the next amendment and on all the following amendments up to Amendment No. 227Z(81) on page 9. These should all read 227Z, followed by the relevant figure, and not 272Z. Therefore, the next amendment is Amendment No. 227Z(3).
Clause 50 (Investigations by inspectors not leading to published report):
(Amendment No. 227Z(3) not moved.)
Clause 50 agreed to.
Clause 51 [Production of documents and evidence to inspectors]:
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(4):
Page 52, line 18, at end insert ("and to meet the expenses thereof").
The noble Lord said: Clause 51 provides very properly that inspectors can require of officers many things. They can require the production of documents, and in this day and age they are usually photostat copies of documents and not the originals as they used to be. They can require that people attend before them, all very properly, and that in very broad terms the person so required is to give every assistance that the inspectors may reasonably require.
However, nowhere is the matter of expenses mentioned—at all events, in this clause. Obviously, the Committee will agree that if a party happens to be a guilty party, it would be proper when the award of expenses takes place that the inspectors should be able to say that the expenses shall be borne by the guilty party. If, however, the party happens to be perfectly innocent and is required to do all the things I have mentioned, again I believe the Committee will agree that it would be appropriate if the expense came out of the general expenses of the inspection itself and are repaid to the party concerned.
That is provided for in the old Companies Act 1985. Section 439(1) of that Act provides that the expenses of an incidental to an investigation shall be defrayed in the first instance by the inspectors, but the persons mentioned in certain subsections are liable to make repayment to the Secretary of State.
The reason for my amendment is purely to clarify the position, to ensure that there is not a lacuna in the Bill, and to provide in the first instance, if that is what the Secretary of State considers expedient, that it be an expense of the inspectors carrying out their work. There should be a power to ensure that those expenses are not paid by an innocent party. Therefore this amendment is moved for the puposes of clarification. I beg to move.
Lord Young of Graffham: The costs incurred by persons required to assist inspectors under Section 434 of the Companies Act have nearly always been met by the person so required on the principle that inspectors should not have to pay to receive evidence. This amendment seeks to clarify that situation. However, I must resist the amendment partly because I believe it is unnecessary and partly because it may cast doubt on the position in other cases where no

85
such express provision is made. For example, it could have an adverse impact on requirements made under Section 447 of the Companies Act and on requirements made under the Insurance Companies Act, the Financial Services Act, and even under the Insolvency Act.
Of course, exceptions are made on their merits. Exceptions are made by my department in cases of genuine hardship. Indeed, where a particular body is repeatedly required to produce copies of documents to inspectors—perhaps because of its function in the market, the kind of information it holds or to which it has access, and where the costs to that organisation might be high—I would be prepared to give consideration to the possibility of sharing the costs of that burden. However, I should emphasise that I would only envisage offsetting some of the costs incurred in meeting inspectors' requirements in very exceptional circumstances. In most cases I believe that the cost of producing documents should continue to fall to the producer whose duty it is to comply with any such reasonable requirements.
4 p.m.
Lord Mishcon: It is very rare that I have to say this of the noble Lord the Secretary of State, but there is some injustice arising from the remarks that he has made. In broad terms, I do not see why a perfectly innocent citizen of this land is required as an officer of a company (which also may be perfectly innocent) to produce copies for the benefit of the state acting through the inspectors and to attend before them as often as they require—it may be for days on end—without being given every assistance that he may reasonably require. I am not trying to defend any guilty party. By all means such a person should bear such expense. But why should the ordinary citizen not be covered by a provision in the Bill? I am not asking that it should be put in the Bill if he is proved innocent. Under the provisions of Section 439 it should be within the competence of the inspectors—and it should be the duty of the inspectors—to see that his costs are duly paid.
The noble Lord the Secretary of State said that this might apply as a result of the graciousness of his department to people who could prove that they were in some pecuniary need. I believe that most of us do not wish to be beholden in charity to the Secretary of State's department. Neither would we wish our fellow citizens to have to prove that they were impecunious before their proper expenses were paid. I believe that that kind of case would not be very frequent when one is dealing with officers of the company. I am pleading for justice and decency. I do not wish to press this amendment to a Division. I hope that the Secretary of State will come forward with something more reasonable than he did earlier before I leave this amendment.
Lord Young of Graffham: I am under a great deal of difficulty because the noble Lord speaks about justice and decency in terms that I find difficult to recognise. The costs incurred by persons required to produce books and documents to inspectors, and to attend before inspectors, under the terms of Section 434, have always been met by the person so required.
86
That is a principle of many of our dealings. We have an obligation to produce information, for example, to the Inland Revenue to establish our case concerning the amount of tax due on our income.
The noble Lord speaks in terms that the innocent should not pay but the guilty should. This is not a trial. Here we have cases where circumstances have arisen in which quite reasonably the holder of my office decides that inspectors should be appointed in order to ascertain the merits of the matter. It has been a principle for a long while that we should not pay for such evidence. I have said that in cases of genuine hardship we shall be quite prepared to look at the situation. If I were to do what the noble Lord asks me to do, at the end of an investigation I would have to judge whether the person was guilty or innocent, whatever that may mean. I would then have to decide whether all, part or none of the costs should be recovered out of public funds.
That would be giving a judgment on a report which in the vast majority of cases is not published. I believe that would put us in a very difficult position. I am well aware of the noble Lord's genuine and quite justified concern for the innocent. In this particular instance I ask that he withdraw his amendment. I hope that he will try very hard to understand my reasons.
Lord Mishcon: There is a great willingness to understand the Secretary of State's reasoning. I am finding it very difficult to do so. I believe that it is not a matter on which Members would expect us on this side, being as responsible as we are, to divide the Committee. I shall consider his remarks again in order to see whether there is a shred of equity in them. I shall do that between now and the Report stage. In those circumstances, and purely for the reasons that I have given, at this stage I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(5):
Page 52, line 21, after second ("oath") insert ("or affirmation").
The noble Lord said: This amendment is very simple. In addition to the word "oath", we wish to add the words "or affirmation" to the Bill. We cannot see any good reason why they should not be there. I beg to move.
Lord Strathclyde: The amendment appears to be unnecessary. By virtue of the Interpretation Act unless the contrary intention appears, the word "oath" when used in legislation includes "affirmation" and "declaration". Therefore I hope it was not an oversight on the part of the noble Lord. Perhaps he will withdraw the amendment.
Lord Williams of Elvel: I am very grateful to the noble Lord. I understand that the point he made is correct. It escaped my legal advisers at the time the amendment was put down. I beg leave to withdraw it.
Amendment, by leave, withdrawn.
[Amendment No. 227Z(6) not moved]
Clause 51 agreed to.

87
Clause 52[Duty of inspectors to report]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(7):
Page 52, line 40, after ("State") insert ("after consultation with the Director of Public Prosecutions").
The noble Lord said: In moving this amendment, it may be for the convenience of the Committee if I also speak to Amendment No. 227Z(8). These two amendments deal with the ability of the Secretary of State to direct inspectors to cancel investigations and to direct them to take no further steps. The problem arises under what circumstances may the Secretary of State so decide. A second problem is one that goes back to the matter that I raised regarding the first amendment; namely, what happens if the report contains material which should legitimately be published and the Secretary of State has technically closed down the investigation so that it cannot be reopened.
My Amendment No. 227Z(7) is framed quite simply:
"after consultation with the Director of Public Prosecutions".
That may be any other officer of the Crown or any other responsible authority. I wish to probe the Government as to whether they would be prepared to accept some qualification on the Secretary of State's own authority to close down an investigation. If the Secretary of State can satisfy me that there is some constraint or advice that he has to take or what is the procedure that he will adopt, that will go a long way to meeting the thrust of this amendment.
Amendment No. 227Z(8) concerns the second point that I raised. Is there any possibility under the Bill as drafted of reopening the investigation in order to publish the report? If not, should there be one? I beg to move.
Lord Young of Graham: Perhaps I may deal first with Amendment No. 227Z(7). In practice, we would expect to consult the relevant prosecuting authorities before directing inspectors to take no further steps as regards an investigation or such further steps as are specified in the direction under the provisions contained in Clause 52. It will not always be appropriate to consult the Director of Public Prosecutions. There may be cases where the suspected offence was within the jurisdiction of the Scottish courts and in those circumstances it would be more appropriate to consult the Lord Advocate rather than the Director of Public Prosecutions for England and Wales.
In any event, legislation is not required to ensure that the relevant prosecuting authorities are consulted in appropriate cases. It is a matter of practice of my department, and it would operate elsewhere. It would operate in the normal way. As regards Amendment No. 227Z(8) I believe that it will be difficult to reopen an investigation and to be seen to be reopening it simply because a prosecuting authority has found no grounds on which to prosecute.
I wonder whether the noble Lord can explain to me further why he thinks this should happen when in the normal event the holder of my office would look at a
88
report, decide whether there was a suitable case for taking it further and then send it to the prosecuting authority. The prosecuting authority would decide whether or not to prosecute. In the event of a decision that there was not sufficient evidence, should that not be the end of the matter?
Lord Williams of Elvel: I am grateful to the noble Lord for his response to Amendment No. 227Z(7). Is he saying that the Secretary of State, whoever he may be, will as a matter of course consult the prosecuting authority before deciding to direct the inspectors not to take further action, and that therefore my amendment, which I agree would put that imperfectly into the Bill, is a matter of course when the Secretary of State takes his decision? Perhaps the noble Lord will cover that point first.
Lord Young of Graffham: On looking at the report of inspectors, it is the responsibility of the holder of my office to decide whether or not to take any further action in the sense of forwarding the matter to the prosecuting authority. That is something which the holder of my office would normally do.
Lord Williams of Elvel: But this clause refers to the Secretary of State directing the inspectors,
"to take no further steps in the investigation or to take only such further steps as are specified in the direction".
In other words, this is before the final report of the inspectors has been produced. They are in the middle of an investigation and something happens. The Secretary of State decides that matters have come to light. Matters have been referred to the prosecuting authority but then he closes down that investigation. The prosecuting authority may or may not proceed. The prosecuting authority may proceed with an investigation but may decide in the end not to prefer charges. The inspectors are then left with an investigation that has been shut down. The party or parties concerned have not been charged with misconduct, malpractice or any criminal offence. In taking the decision to shut down the investigation, does the Secretary of State consult automatically with the prosecuting authority?
Lord Young of GraiTham: The holder of my office would always consult the prosecuting authority. If I may turn to the noble Lord's point, I should point out that the power to terminate or curtail an investigation would be exercisable only if it appeared to the then Secretary of State that matters had come to light during the course of the inspectors' investigation which suggested that a criminal offence had been committed and if those matters had been referred to the appropriate prosecuting authority. There is no provision for stopping or curtailing investigations for any other reason, so in those circumstances the investigation would continue.
Lord Williams of Elvel: I take the noble Lord's point. Indeed that is the point of the Bill as it is presently drafted. But let us suppose that, having referred those matters to the appropriate prosecuting authority, the authority decides not to prosecute. The investigation has been closed down, the matter has been passed to the prosecuting authority and the

89
prosecuting authority has decided not to prosecute. There is no mechanism for reopening the investigation if the Secretary of State so wishes.
4.15 p.m.
Lord Young of Graffham: If new information came to light after the investigation had been closed—the matter would go to the prosecuting authority only at the end of the investigation—and if it were in the public interest to reinvestigate the affairs of the company, then I or the holder of my office would consider appointing inspectors to carry out a new investigation. In those circumstances I suspect that that would be the more appropriate action.
Lord Williams of Elvel: We are now getting to what I regard as the meat of this problem. Instead of having to appoint new investigators to start the whole process rolling again, it might be appropriate to have a mechanism to reopen the investigation to avoid the rather cumbersome procedure which the noble Lord has just described.
Amendment No. 227Z(8) comes from the Institute of Chartered Secretaries and Administrators, which is concerned about this problem. It is appreciated that it is sometimes not in the public interest to publish a report, but, when the investigation has taken place and no prosecution is tendered against any individual or company, those individuals or companies who are the objects of the investigation should be given an opportunity to clear their names by having the report of the inspectors or at least the conclusions of it published. In the interests of individuals who are so affected, the Institute of Chartered Secretaries and Administrators puts forward this amendment. The noble Lord asked me to explain the reason for the amendment. That is the reason for Amendment No. 227Z(8).
Lord Young of Graffham: In those circumstances, which would be slightly extreme, it would be open to the holder of my office to reappoint the same persons as inspectors so that they could carry on. Perhaps I may explain how I see the existing power in the Bill operating. I would expect that an investigation would be stopped or curtailed only if there were no reason to go on with it once the matters suggesting a criminal offence had been uncovered and passed to the relevant prosecuting authority—in other words, it had come to the end of the road for the investigation. Because of that the subsequent decision not to prosecute would not alter the fact that there had been no good reason to continue with the investigation. Indeed, if it were reopened, it would only be for the purpose of going through the motions and would be a waste of both time and resources. The decision whether to have a report or to publish it is a separate matter.
By the time the matter goes to the prosecuting authority a considerable period may have passed. The real ground for reopening is if there are new facts. Then the holder of my office would have the alternatives either of appointing new inspectors or of reappointing the existing inspectors to carry out another specific investigation to look at the new facts that had arisen.
Lord Williams of Elvel: We have had a long discussion on the amendments. I shall read carefully what has been said and discuss it with the institute. It is an important point. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z(8) not moved.]
Clause 52 agreed to.
On Question, Whether Clause 53 shall stand part of the Bill?
Lord Williams of Elvel: I have two questions to ask on the Question, Whether Clause 53 shall stand part of the Bill? What exactly is the purport of the clause? Having read it through several times I cannot understand what it intends to do. My next question relates to the Companies Act 1985 as well as to this Bill. How does the Secretary of State interpret the public interest in deciding whether or not to take civil proceedings on behalf of companies?
Lord Young of Graffham: Clause 53 makes a minor amendment to Section 438 of the Companies Act 1985. Section 438 confers on the Secretary of State the power to bring civil proceedings on behalf of any body corporate if on the basis of the results of an investigation he thinks that there are grounds for doing so in the public interest.
The purpose of the clause is to ensure that the Secretary of State may act under Section 438 on the basis of any information obtained or report made under Part XIV of the Act and net simply on information obtained under Sections 447 and 448 of the Act or indeed reports made under Section 437. In particular, it enables action on the basis of information obtained under Section 444, which gives power to investigate share ownership without the appointment of inspectors, and Section 437(1)(a), which enables information to be given by or obtained from inspectors without a formal report being made under Section 437.
I am not aware of any logical reason why the Secretary of State should not be able to bring proceedings in the public interest on behalf of a body corporate when the relevant information is obtained under one section of Part XIV and not when it is obtained under another.
Public interest is a broad question and I am not sure that I could define it in the Bill. I shall certainly consider it if the noble Lord wishes to raise the point at a later stage of the Bill. I shall endeavour to do some further homework.
Lord Williams of Elvel: I am grateful to the Secretary of State. I shall raise the point later. I look forward with great anticipation to what the noble Lord will have to say about it.
Lord Young of Graffham: I do not.
Clause 53 agreed to.

91
Clause 54[Expenses of investigating a company's affairs]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(9):
Page 53, line 24, leave out ("staff costs and").
The noble Lord said: This is a simple and almost a drafting point. It is whether "staff costs and" are words that it is necessary to include in the Bill. It seems to us that general overheads cover "staff costs and". If they do not, are we to suppose that staff costs are in some way over and above whatever overheads may be allocated to the particular expenses to be charged? Is, for instance, the Secretary of State's salary part of the staff costs which have to be allocated, in which case the staff costs will be greatly inflated? I should be grateful if the noble Lord, Lord Strathclyde, who I understand will be dealing with the amendment, could explain why the draftsman felt it necessary to include those words as they seem to be subsumed in the expression "overheads". It may be for the convenience of the Committee if I speak also to Amendment No. 272Z(21), which covers the same ground. I beg to move.
Lord Strathclyde: I hope that I can put at rest the noble Lord's mind on the amendment. Where investigations are carried out by any officials, the main costs of the investigation are the staff costs. It would be odd therefore for outside investigators' fees to be recoverable but not the costs of official salaries. It is desirable that the question as to whether those costs are expenses and so recoverable should not be in any doubt. Such doubt could arise were the noble Lord's proposals to be accepted. I therefore ask him to withdraw the amendment.
Lord Peston: As an economist I too was extremely intrigued by this point. Surely "the expenses of an investigation"—if I may refer to a previous paragraph—refer to the expenses of an investigation whatever they happen to be. The whole of the paragraph that we wish to amend is irrelevant. As an economist—I give my advice freely to the department on this occasion—I believe that "expenses of investigation" is a well-defined concept. It means what it costs to undertake the investigation. The amendment is a drafting amendment and I do not wish to push it too much; but it seems to me that the department is unduly nervous at the use of the English language. The paragraph is not required. It is right that the expenses of the investigation should be recoverable.
Lord Strathclyde: I am sorry if I have not explained the point. It is that expenses tend to carry the sense of being disbursements. Lawyers are not economists and that may explain the difference.
Lord Williams of Elvel: I am grateful to the noble Lord for his reply. Speaking not as an economist but as a banker, I am afraid that expenses mean expenses whether incurred in-house, as they say, or out of house. Nevertheless, if the noble Lord insists upon the wording, we probably have to accept it for the time being. I hope that the department will think a
92
little about what is in the Bill because we do not want confusion on the issue. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 54 agreed to.
Clause 55 [Power of Secretary of State to present winding-up petition]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(10):
Page 54, line 19, leave out from ("up") to end of line 20.
The noble Lord said: On reading this amendment to the Insolvency Act, it seemed to me that, although the words appear in the Insolvency Act, as they appear in the Bill, some confusion may be read into them. It depends upon where one puts a mental comma when reading that paragraph. Perhaps I may read it twice and illustrate what I mean. If the Secretary of State thinks:
"that it is expedient in the public interest that a company should be wound up, he may present a petition for it to be wound up, if the court thinks it just and equitable for it to be so".
I shall read the subsection again with a different emphasis. If the Secretary of State thinks:
"that it is expedient in the public interest that a company should be wound up, he may present a petition for it to be wound up if the court thinks it just and equitable for it to be so".
There are two different interpretations depending upon how one reads the subsection. I was hoping that the draftsman might be able to clean it up a bit so that we can be certain as to which interpretation we are required to take. I beg to move.
Lord Young of Graffham: It is rather more than a third of a century since I last studied law. In those days it was always my impression that commas in legislation did not exist. The matter was one for interpretation by the courts.
Lord Williams of Elvel: Mental commas.
Lord Young of Graffham: Mental commas as well as physical commas. I hope that noble Lords opposite who still practise law will give me some support for that simple assertion.
It may help if I go a little wider and give the noble Lord some background to the clause. Clause 55 repeals Section 440 of the Companies Act and reenacts it with minor modifications in the Insolvency Act.
Section 440 enables the Secretary of State to apply to the court for a winding-up where on the basis of specified investigation results it appears to him to be expedient in the public interest for the company to be wound up if the court thinks it just and equitable. That provision is a re-enactment of a previous provision. It has not appeared to cause any interpretation problems over the years and it may not do so in the future.
Lord Williams of Elvel: We shall have to see whether that explanation is satisfactory. I hope that the Secretary of State understands that the point is serious and not frivolous. I understand that the

93
provision has caused no difficulty to date. Perhaps it has not been tested to date because the Insolvency Act is a recent Act. Nevertheless, we shall read what the Secretary of State said and perhaps return to the point at a later stage. In the meantime, if the draftsman would like to look at it to see whether any clarification can be introduced on Report, we should be happy to see that. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 55 agreed to.
Clause 56 agreed to.
Clause 57 [Investigation of company ownership]:
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(11):
Page 54, line 27, leave out from ("ownership") to end of line 28 and insert ("insert after subsection (4)—
"(5) Where an application for an investigation is made under subsection (3), section 431(4) applies.").
The noble Lord said: Parliament's time should not be wasted. That is the way in which I start to move the amendment. Parliament gave the greatest consideration to the Companies Bill which eventually became the Companies Act 1985. We thought that we then lived in the age of company predators. I suppose in dealing with the Companies Bill I could now say that we live in the age of predators unlimited.
It was therefore of great consequence, even in 1985, to have a section in the Act which provided that the Secretary of State, on the application of a sufficient number of shareholders in a company, should appoint inspectors to inquire into the true ownership of shares, a matter that is of the gravest of concern to many companies, especially—I do not say this out of any xenophobia—when it becomes apparent that shareholdings have changed and a foreign company may be involved. All sort of questions should then perhaps be addressed to the Secretary of State. It could, for example, be the Monopolies and Mergers Commission.
In the Bill which we considered in 1985 there was a provision that the Secretary of State could appoint inspectors if he saw fit to do so. That provision remains. When I say that I do not understand and do not welcome the deliberate omission now of the right of shareholders if there is a sufficient proportion of them to ask the Secretary of State to appoint inspectors to look into the true ownership of the shares, I hope that I shall not be given the answer that the Secretary of State can do that in any event if he sees fit. That was the position in 1985 and it is still the position now: he can, if he sees fit, do so. However, before the power and the right of shareholders in sufficient number to make this demand for inspectors to be appointed is removed, I think that Parliament ought to ask, "Why did you or your predecessor advise the inclusion of that power as recently as 1985?"
It occurred to those responsible for this amendment that one of the things that might be worrying the Secretary of State—and quite rightly so, with, I imagine, the Treasury as always on his heels—was that he would have to say, "That is all
94
very well, but if a sufficient proportion of shareholders demand this and I have to make the arrangements, who is going to pay?" That is why we provide in this amendment that the inquiry is indeed to be at the cost of the shareholders concerned. So there is no excuse, if I may say so, that an unjust financial burden will fall upon the Secretary of State's department, or on any other government department, if this clause remains.
I repeat: it is a clause that we passed as recently as 1985. We considered all aspects of company operations, the threats to them and the safeguards that there ought to be. I suggest that there is a heavy onus on the Secretary of State to prove the need for the omission of this section for which this Bill now provides.
4.30 p.m.
Lord Young of Graffham: I am grateful to the noble Lord, Lord Mishcon, who no doubt recalls far better than I that the 1985 Act was a consolidating measure and of course the provision was in place before that. Before addressing the effect of this amendment I should like briefly to explain our intention in bringing forward Clause 57. It is intended to give the Secretary of State more discretion on whether to appoint inspectors. The amendment would not change the current position where the Secretary of State is required to appoint inspectors and where the application is made under Section 442(3), unless he is satisfied that the application is vexatious.
It would also leave unchanged the limit of my discretion to define the scope of such an investigation, which is contained in Section 442(3)(b). If the noble Lord's intention is that the provisions of Section 442(3) should be consistent with the provisions contained in Section 431, this amendment would not achieve that aim. Applicants under Section 431 have to support their application with such evidence as the Secretary of State may require for the purpose of showing that they have good reason for the investigation. The Secretary of State has discretion as to whether or not to act on the application as well as being able to recover the costs of his investigation in whole or in part.
However, on reflection, I think that there may well be some merit in amending the provisions of Section 442(3) on lines similar to those of Section 431. However, conscious as I am of the desirability of not wasting the time of your Lordships' Commitee, if the noble Lord would care to withdraw his amendment we will consider this further and in all probability I shall come forward with government amendments at a later stage.
Lord Mishcon: I regard that as a most gracious speech from the Secretary of State, which I would ask him to repeat in reply to future amendments that come from this side. I accept the offering with gratitude and beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 57 agreed to.
Clause 58 agreed to.

95
Clause 59[Entry and search of premises]:
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(12):
Page 55, line 4, after ("premises") insert ("books and").
The noble Lord said: This amendment is intended to help the Secretary of State to get his house in order, and I hope I say that without any pomposity. However, some analysis has been used for the benefit of the Committee when dealing with this amendment to see what is happening, in spite of the fact that the noble Lord the Secretary of State said quite correctly that the 1985 Act was largely a consolidation Act and there were many Acts therefore that the draftsman had ready at hand before this Bill was drafted.
There is a most terrible muddle, to which I shall try to direct as respectfully as I can the attention of the Secretary of State when he deals with books and documents in this Bill. I shall tell him and the Committee what an analysis reveals. This clause and the existing Section 447 of the Companies Act use the phrase "books or papers". Section 434 of the 1985 Act uses the phrase "books and documents". "Books and papers" are defined in Section 444 and there is an obvious discrepancy as to whether the phrase is conjunctive or disjunctive. Then we come to a consideration of the use in the Bill and in the Act of the phrase "documents or papers".
In the proposed amendment to Section 448(1) the word "documents" alone is used. That of course is rather inconsistent with the phrases I have just mentioned: "books and documents" and "books or papers". A separate definition of "documents" is proposed to be added as subsection (10), which is to the same effect as the proposed new definition for Section 447, to be introduced by Clause 58.
The sole purpose of this amendment—and I hope not to waste the time of the Committee—is to put this on record so that before the Report stage the Secretary of State will have an opportunity, with the draftsman concerned, to look at the desirability of a uniform defined term for the purposes of at least this part of the Bill. In the meantime, as I say, we have "books and documents", "books or documents" and "documents" on their own, with a definition of one of them and not of others. The matter is in a slight degree of chaos, from which we on these Benches wish to rescue the Secretary of State. I beg to move.
Lord Young of Graffham: I am very grateful to the noble Lord, Lord Mishcon, and I particularly appreciate his desire to rescue me, although in this particular case I must look with some care at he who is throwing the line towards me. Certainly I have listened to the noble Lord with interest. Whether the Bill at this point refers to "documents" or to "books and documents" we do not consider to be of great consequence. It might help the noble Lord if I were to remind him that the word "documents" is defined in subsection (10) of the new Section 448 to include "information recorded in any form"; so it covers both. The other references are similarly defined. Of course definitions are already used for this purpose in Sections 105 and 177 of the Financial Services Act.
I am going to look at this again and I should be grateful if the noble Lord would withdraw this now.
96
I am sure he will understand if at a later stage of the Bill I come forward with a number of minor amendments really to ensure that the drafting is improved, when it goes to another place.
Lord Mishcon: The graciousness of the Secretary of State continues. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 59 [Entry and search of premises]:
Lord Mishconmoved Amendment No. 227Z(13):
Page 56, line 6, leave out ("a period of three months") and insert ("the period of an investigation by inspectors appointed under this Part").
The noble Lord said: I do not see why the inspectors are limited in the possession of the books and documents that they have taken, maybe properly, to a period of three months. Noble Lords may have thought that I would urge that companies should have back their documents with great rapidity. I am sure that the inspectors will exercise great care. Would it not be more sensible from a practical point of view to say that the period for which the books and documents may be held should be the period of investigation by inspectors appointed under this part of the Act? One has not the slightest doubt that it will save everyone from some difficulty if a strict period is laid down. I beg to move.
Lord Young of Graffham: As I am sure the noble Lord knows, it is not necessary for us to keep possession of books or papers of which possession is taken under the search and entry provisions of Section 448 of Companies Act for a period longer than three months unless criminal proceedings are commenced. I fear that if we were to do this it might be a burden for inspectors to have to store what will end up to be, although not a small mountain of paper, perhaps a considerable one. I can see little or no advantage in replacing the three-month period over which documents may be kept with an indefinite period linked to the life of an investigation. We have to balance the rights of those subject to investigations and the need to ensure the effectiveness of the investigations. It would be hard to justify holding on to the papers for the life of the investigation as it would only marginally improve the effectiveness of the investigation, if at all. It is of course possible for copies to be taken. If copies are taken and the originals returned, that does not in any way release the person from the duty to produce the documents again if required.
I ask the noble Lord in all graciousness to consider withdrawing the amendment.
Lord Mishcon: Reciprocal graciousness is obviously called for. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 59 agreed to.

97
Clause 60[Provision for security of information obtained]:
4.45 p.m.
Lord Peston Lord Peston moved Amendment No. 227Z(14):
Page 57, line 11, leave out paragraph (f).
The noble Lord said: In moving Amendment No. 14, I wish to speak also to Amendment No. 15.
Clause 60 amends Section 449 of the Companies Act 1985. Section 449 concerns the use of information obtained under Sections 447 and 448 of the 1985 Act. Section 449 says that care must be taken in the use of information obtained under Sections 447 and 448, and gives powers on occasion to use that information, which would otherwise be regarded as secret, privileged or restricted.
As I understand Clause 60, it appears to modify Section 449 in a particular direction that my noble friend Lord Williams of Elvel and I find disturbing. We believe that it raises a civil liberties issue on which we would like the Secretary of State to comment. We wish essentially to probe and to ask some questions as to the purpose of the clause.
One can see two possible purposes, and there may be more. First, in the course of investigations and in the course of all the activities taking place under Sections 447 and 448 information may arise that itself suggests that a public servant has failed in his or her duties—in other words, if we were discussing cases of malpractice, that public servants themselves were involved with this malpractice. One interpretation of the provisions to which we currently object is that the information obtained could be used to proceed further in dealing with such a public servant.
Two other possibilities arise, first, that what emerges has nothing to do with the case in hand in the investigation, but that evidence emerged suggesting that there was concern about the public servant doing something else. It would be that for which the information would be used. We ask whether that is what the clause has in mind.
Next—and this is the most worrying of all—it may be that disciplinary proceedings and investigations in connection with the public servant are taking place anyway on some quite different matter, but information deemed to be relevant somehow emerges from investigations in connection with Sections 447 and 448. It may be that that is what the Secretary of State has in mind in introducing the clause.
On the last matter, it seems to us that civil liberties questions arise. All this is happening separate from the public servant concerned as a by-product of investigations that prima facie are supposed to be concentrating on what the investigations were raised for in the first place. One has to ask whether there are not dangers in proceeding along these lines.
I reiterate—I think that I speak for my noble friends—that we do not favour malpractice on the part of civil servants. That is not the point at issue here at all. I for one am not keen on leaking or anything of that kind. On an earlier amendment we discussed the question of people being thought to be guilty when they are not. I can tell the Secretary of State that, when we were in power, whenever
98
anything went wrong I always felt guilty even though I knew for a fact that I was not remotely involved. In school I was the sort of boy who, if the headmaster said he would punish the guilty boy, always assumed it must be me even though I usually did not know what he was talking about.
We take the question of the proper behaviour of civil servants very seriously. Equally we do not believe—we are probing on this—that powers under this Act as a by-product ought to have almost uncontrollable consequences for public servants for which they were never intended. I may have put that more strongly than I meant to, but I am trying to get from the Secretary of State some clarification of the purpose of the provisions and how he thinks they might be used. I beg to move.
Lord Young of Graffham: I am grateful to the noble Lord for his admission of guilt in general, if not in the particular. On this matter we are agreed on both sides of the Committee that it is important that standards of integrity in public life are maintained. It is important that public bodies should be able to take disciplinary action against any member of staff who, for example, is found to have taken insufficient care to protect market-sensitive information. This is very much in the interests of maintaining the high standards of conduct and probity that the public expect of officials when they hold sensitive information in the course of their duties.
If I may give an example, the need to take disciplinary action against a public servant in any case could arise where an investigation under the Financial Services Act 1986 revealed that there was no evidence of an offence by the official or indeed that the evidence was not strong enough to take to court but there was a prima facie case of misconduct, breach of official instructions or even gross negligence. In the case of insider dealing, for example, the evidence might suggest that an official had taken insufficient care to protect market-sensitive information. In the case of investigations into companies there might be evidence to suggest corruption.
This provision and similar provisions contained in later clauses in this Act follow the precedent already in the Act. The provision which this amendment seeks to obstruct places public servants in a similar position to solicitors, auditors, accountants, valuers and actuaries. I think that Section 449(1)(f) inserted by the Financial Services Act 1986 deals with this. I believe that public servants should be incl acted in this list of special cases because of the high standard of probity which is rightly expected of officials with access to sensitive information. I hope that in the light of this explanation the noble Lords, Lord Peston and Lord Williams, will consider the matter and withdraw the amendment.
Lord Williams of Elvel: The noble Lord in his recitation of events that might lead to the triggering of this provision seemed to mix up, if I may say so, events that would properly be the subject of criminal charges like corruption and events that would not be the subject of criminal charges like negligence in keeping secrets secret. Under the Official Secrets Act,

99
depending on the extent of the negligence, even that could be a criminal charge.
I wonder whether the noble Lord could give us any example of other legislation in which these provisions—drawn widely as they are—have been used. That would give us a little more comfort. It seems to us that in putting these provisions in the Bill the noble Lord is trying to impose on public servants an obligation which they already have as a matter of general service to the Crown but which they do not have beyond that in respect of matters other than what is covered by these provisions. That is a rather tortuous sentence, I am afraid, but it seems to me that to introduce it here may be the thin end of the wedge.
Lord Young of Graffham: I should like to amplify my earlier remarks. If there is any question of criminal matters, that is outside this provision. We are talking only about disciplinary proceedings. I gave an example where an investigation under the Financial Services Act revealed that there was no evidence of an offence by the officials or that the evidence was not strong enough to take to court, but that there was a prima facie case of misconduct, breach of official instructions or gross negligence which could be caused by someone perhaps talking out of turn or leaving information where it should not be. That is not criminal in itself. But the public body should be able to take disciplinary action against any member of the staff who had taken insufficient care to protect market-sensitive information.
Lord Williams of Elvel: I apologise for intervening, but is that not possible anyway? Suppose a civil servant leaves documents in the train and somebody gets hold of them, is that not an object of disciplinary action anyway without something being written into the statute?
Lord Young of Graffham: I suppose that civil servants have been known to leave documents in trains—indeed Ministers have been known to leave documents in restaurants—and similar mistakes have been made. These things do happen.
We are now talking about an area of market-sensitive information. The provision seeks to place public servants in a similar position to solicitors, auditors, accountants, valuers and actuaries who have professional bodies and therefore are subject to discipline. The provision would cover some areas which are not involved in investigation, but I am conscious of the point made by the noble Lord. Perhaps I may ask him to withdraw the amendment and I shall undertake to consider the point very carefully and come back. I see what he is driving at and I am slightly concerned about it myself.
Lord Peston: In that case, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z (15) not moved.]
Clause 60 agreed to.
Clause 61 agreed to.
100
Clause 62 [Protection of banking information]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No: 227Z(16):
Page 59, line 3, leave out subsection (2).
The noble Lord said: We come now to a series of amendments dealing with banking secrecy. I am bound to say that when I tabled these amendments I expected a number of Members of the Committee to be present in the Chamber who would be supporting me on the matter—a number of chairmen of banks who normally speak on these subjects. I notice that I am on my own and I am not a chairman of a bank. Nevertheless I think there is an important point here which is a deviation from present practice.
The present practice is that a bank will divulge information about its clients and their financial affairs only on a court order. It may be for the convenience of the Committee to know that I am at the moment speaking to Amendments Nos. 227Z(16), (17) and (18). I warned the Government Whip's Office that this was a series of amendments and some of my remarks may well apply to later amendments on the Marshalled List. I hope that the noble Lord will forgive me if I range rather wider than the grouping agreed.
The present situation is that it must be a court order which compels a bank to divulge information about its clients' affairs. It is a very serious matter when we deviate from that general provision. If anybody can walk into a bank on the say-so of the Secretary of State without a court order, it lowers the confidence that clients of a bank will have in that institution.
Amendment No. 227Z(16) is generally designed to knock out the new situation. Amendment No. 227Z(17) is designed to ensure that the disclosure must be necessary for the purposes of the investigation which is under review and which is the object of the Secretary of State's attention at that time. The same argument carries through when we get to Clause 64, Amendment No. 227Z(18), where we are in a similar situation because they are investigations into collective investment schemes. Again they do not have as strong an obligation of confidentiality as a bank, but nevertheless they have some fiduciary obligation not simply to disclose to anybody who comes along whatever their investors may be doing.
Perhaps I may leave the matter there for the moment and listen to what the Secretary of State has to say on the three amendments which I have grouped together. Then perhaps I may come back to the subject of banking secrecy under the later amendments I have tabled. I beg to move.
Lord Young of Graffham: I listened very carefully to the noble Lord. I recognise that a proposal which seeks to limit or make exceptions to a protection in law or a privilege is one which needs to be justified. Perhaps I may now provide that justification. I am conscious that the relationship between a banker and his customer is important and that confidentiality is important in that relationship. I suspect that both the noble Lord and I had "banker" written on our

101
passport at some time in the past. As a customer, I should also be concerned if that confidentiality were undermined unnecessarily. But I do not believe that it has been in the provisions which these amendments seek to limit or throw out. As Secretary of State I must have regard to other matters as well as the particular duty of confidentiality between a banker and his client. I believe that these proposed powers achieve the right balance between the rights of the individual, on the one hand, and the need to ensure that investigations can be properly and effectively carried out, on the other.
Indeed, the provisions of the Bill continue to provide protection for banking information; that is to say, information which is the subject of an obligation of confidence by virtue of the carrying on of a banking business. The new provisions, however, set out some clearly defined exceptions to the general principle of confidentiality whereby inspectors may require information from a banker about a customer where it is for the purpose of helping the inspector with his investigations. Two of those provisions do not seem to cause the noble Lord, Lord Williams, any misgiving; that is, that the protection should not apply where the person,
"to whom the obligation of confidence is owed is the company or other body corporate",
or the person under investigation, or where,
"the person to whom the obligation of confidence is owed consents to the disclosure or production",
of documents.
The third exception, which the noble Lord proposes to amend, provides for the Secretary of State to override the protection so that it does not apply if the inspectors' requirements have been authorised by the Secretary of State. I am aware that this provision will not please everyone and that some may even accuse us of providing the means whereby the inspectors can go on fishing expeditions. That is far from the case. Under this provision, inspectors will only be able to impose a requirement on a bank, other than the company's bank, if they have the power to do so, apart from the special provisions, and where they have a specific authorisation to do so.
The need for formal authorisation should ensure adequate protection for customers. Under the current provisions in Section 452 of the Companies Act and Sections 94, 105, 106 and 177 of the Financial Services Act, a court order is not at the present time required in any event. It is not feasible to set down precise grounds on which authorisation should be given to inspectors to require documents. Each case is different and will have to be taken on its own merits. However, as a matter of good practice I envisage that we shall at least want to be satisfied that the information to be required can properly be so required, and further that the information is relevant to the investigation.
On the face of it, a requirement that the Secretary of State has to be satisfied that the disclosure is necessary for the purposes of the investigation may not seem unreasonable to the noble Lord. However, if that requirement is set down in legislation, as currently in the Financial Services Act, which we are seeking to amend in the Bill, it creates potential
102
problems in the exercise of powers. It is, I believe, too limiting.
A key problem with a requirement that the Secretary of State should decide whether disclosure is necessary for the purposes of an investigation is determining what he needs to know in order to be so satisfied. By definition, the information that the investigators seek cannot be specified in detail, simply because they have not as yet seen it. I hope the noble Lord will be satisfied with the position that we would want to be satisfied in each case that the information to be required can properly be so required, and that it is relevant to the investigation itself.
5 p.m.
Lord Lloyd of Kilgerran: I must apologise to the noble Lord, Lord Williams of Elvel, for missing the first minute of his presentation on these amendments. The Secretary of State said there would be problems in relation to the Financial Services Act 1986 if these amendments were accepted. In this part of the Bill one has to remind oneself that we are dealing, as stated in the preamble to Part III of the Bill, not only with the Companies Act but also with the Insolvency Act 1986 and the Financial Services Act 1986.
When the noble Lord says there are problems with accepting the amendments because of the terms of the Financial Services Act, is he in effect saying that for the insurance and companies Acts and the Insolvency Act these problems would not exist, and that therefore these amendments might be relevant to those Acts? I see that the noble Lord, Lord Peston, is nodding his head in agreement with me on this point. I am greatly encouraged that although I entered the Chamber a little late for the preamble of the speech of the noble Lord, Lord Williams, nevertheless I have the support of my noble friends on the Labour Front Bench.
Lord Young of Graffham: I should say to the noble Lord, Lord Lloyd of Kilgerran, that we consider the present provisions of the Companies Act 1985 and the Financial Services Act 1986 are insufficient for enabling inspectors to get at all the relevant facts in some cases. In a few cases the inadequacies of the present provisions have enabled those required to provide information or documents to delay and frustrate the progress of investigations. I shall give the Committee an example. At present there is a specific power in the Companies Act enabling inspectors appointed under that Act to require a director to provide information from his bank accounts. If those are out of the country or otherwise unobtainable, it appears there is little the inspectors can do to gain access to what might be crucial information in an investigation.
The new provision will clearly enable inspectors to obtain such information direct from banks. Inspectors appointed under the Financial Services Act already have the power to go to banks, but those powers are also being changed because of the limitation imposed by the necessary test.
Lord Peston: I am mystified because the Secretary of State gives a very good example of where additional powers may be required. However, he said

103
earlier that this was not intended to be the basis of justifying fishing expeditions. In other words, there would have to be good grounds for the Secretary of State to authorise any particular disclosure. That is precisely the nature of the amendment put down in my name and that of my noble friend Lord Williams. Its aim is to give the Secretary of State the additional powers which he says he needs for certain difficult cases. But it also would prevent him engaging in fishing expeditions.
It seems to me that this amendment is a genuine improvement to the Bill. I am slightly puzzled that the Secretary of State will not accept it. On his own logic, I should have thought he would welcome the amendment rather than say that it was unnecessary or undesirable.
Lord Williams of Elvel: I shall try quickly to satisfy the concerns of the Secretary of State. If at the end of my amendment he were to add the words, "or necessary to supply him with the information which he requires to express himself satisfied", that answers the only substantial point that he made in his reply.
Lord Young of Graffham: I can understand the concern that Members of the Committee may well have about possible fishing expeditions. However, I do not consider that the so-called necessary qualification is appropriate. Such a test may prevent investigators from gaining access to information which could be pivotal to their investigation but which at the time of their application for the Secretary of State to authorise a requirement on a bank cannot be shown to be really needed.
I believe that the so-called necessary test is potentially too limiting. However, I can assure the Committee that I have no intention of using the power to intervene in the affairs of banks and their customers without having good cause to do so. That is part of the difficulty we are under. The amendment would limit us unnecessarily.
Lord Williams of Elvel: I accept that the Secretary of State has no intention of using his powers in any way other than in a wholly honourable and honest manner. Nevertheless, I am afraid that the courts look at the statute. They do not look at what the Secretary of State may or may not have said during the debates as the statute was passing through the Chamber. I find it very odd, to say the least, that this very simple amendment, No. 227Z(17), is not acceptable. Nevertheless, if the noble Lord has resolutely set his face against any provision such as this, I shall certainly read what he has said. However, he may wish to say something further.
Lord Young of Graffham: I understand what the noble Lord, Lord Williams, has said. However, I should like to put on record that the wording of the current provision is based on that used in the Criminal Justice Act. To that extent we are not pushing back the frontiers of banking confidentiality beyond where they already exist in other legislative areas. I should like the noble Lord to bear that point in mind when he considers the matter.
Lord Lloyd of Kilgerran: I hesitate to intervene again, but surely the answer which the noble Lord has now given justifies the amendment. If the present provision comes from a current Act dealing with criminal matters, would it not be appropriate to include in the Bill wording similar to that proposed by the noble Lord, Lord Williams of Elvel?
Lord Williams of Elvel: I think that we shall have to consider the matter and read the report of the debate. We may wish to come back to the matter at a later stage. In the meantime I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z(17) not moved.]
Clause 62 agreed to.
Clause 63 agreed to.
Clause 64 [Investigations into collective investment schemes]:
[Amendment No. 227Z(18) not moved.]
Clause 64 agreed to.
Clause 65 [Investigations into affairs of persons carrying on investment business]:
[Amendments Nos. 227Z(19) to 227Z(22) not moved.]
Clause 65 agreed to.
Clause 66 [Investigations into insider dealing]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(23):
Page 61, leave out from beginning of line 19 to ("insert") in line 20 and insert ("Leave out subsection (2) and").
The noble Lord said: This is a drafting amendment. It seems to us that the superimposition of what is proposed in the Bill in relation to the Financial Services Act results in duplication. We move the amendment in an effort to avoid duplication in the resulting statute. I beg to move.
Lord Young of Graffham: Section 177 of the Financial Services Act enables me to appoint inspectors to investigate possible insider dealing offences. In contrast with other investigatory powers the express purpose of insider dealing investigations is to find out whether an offence of a specific category has been committed. I attach great importance to ensuring that such investigations are carried out as quickly as possible, consistent with their being carried out effectively and fairly. In such circumstances it can be advantageous to limit the duration of the investigation and to restrict the scope of the investigation (for example, dealing in certain shares between certain dates) in order to ensure that the investigation is targeted and that the possible insider dealing offence can be dealt with quickly.
The effect of the amendment would be that that could not be done until after the investigation had been started. I can see little purpose in removing the ability to set the time limits of the investigation in advance and to confine it to certain matters at the outset where that is appropriate.
Lord Williams of Elvel: I am grateful to the noble Lord, I understand what he has said. I am merely suggesting that there may be duplication in the drafting. Perhaps the Minister could insert into Section 177 of the Financial Services Act wording to permit the extension of the time limit. That section gives him power to limit but not to extend the period. I am afraid that I do not have my copy of the Act with me and I am speaking from memory. It would be much clearer if either the word "extend" were inserted in that section or the section were eliminated altogether and replaced by Section 2A as set out in this Bill. As it is I and my advisers believe that there is duplication in the Bill as presently drafted.
Lord Young of Graffham: I suspect that the noble Lord is more confident in dealing with that legislation from memory than I am in dealing with it in front of me. If he is prepared to withdrawn the amendment I shall consider the matter. There are a number of minor technical amendments which will have to be dealt with at a later stage, as I said to the noble Lord, Lord Mishcon, and I shall consider the matter in conjunction with those amendments.
Lord Williams of Elvel: If the noble Lord has the Financial Services Act in front of him perhaps he would look at the appropriate section—I thought that he said that he had it in front of him. I was speaking from memory of the Financial Services Act, which I do not have in front of me. I have the Bill in front of me.
If the Minister would care to look at the Act he will see that there is some duplication. I leave the matter there. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clauses 67 and 68 agreed to.
Clause 69 [Amendments of the Insurance Companies Act 1982]:
[Amendment No. 227Z(24) not moved.]
Clause 69 agreed to.
Clauses 70 and 71 agreed to.
5.15 p.m.
Clause 72 [Request for assistance by overseas regulatory authority]:
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(25):
Page 66, line 19, after ("purposes") insert ("and will only be used for the purpose of").
The noble Lord said: Again perfectly properly, Clause 73 of the Bill enables the Secretary of State to require people to attend before him; to insist upon information and documents being produced; and to examine a person on oath. The Committee may feel that, in regard to this part of the Bill, it is perfectly proper that he should have those powers However, the problem, which can easily be dealt with by this amendment, is that the previous clause, Clause 72, provides that those powers can be exercised at the request of an overseas regulatory authority.
That is acceptable provided we can be sure that the information will be used only for the
106
purposes of carrying out the functions of that overseas regulatory authority. That is why I propose that the words set out in the amendment should be inserted. Care has to be taken because a number of countries do not have legislation which operates against insider dealing. Havoc could be created if information requested by an overseas regulatory authority was not treated with sufficient care and price-sensitive information was divulged by that authority as a result. It must be made clear that the information is provided only for the purpose of its regulatory powers.
It may be asked what sanction could be exercised against an overseas regulatory authority which releases price sensitive information. One can act retrospectively and tell the authority that in future its requests for information will not be treated with the graciousness that they were previously.
It ought to be made abundantly clear by the proposed wording that where those draconian but very proper powers available to the Secretary of State are exercised for the benefit of overseas regulatory authorities, they are exercised only to allow those regulatory authorities to carry out their duties.
I should mention that this is not just my concern and that of my colleagues when moving this amendment; it is very much the concern of the Law Society and of the Institute of Chartered Secretaries and Administrators, both of which have asked that the amendment should have the serious consideration of the Committee and the Secretary of State's assent. I beg to move.
Lord Lloyd of Kilgerran: I entirely support the comments of the noble Lord, Lord Mishcon, because it seems to me that the principle of confidentiality has not been adequately addressed in drafting the new powers which are after all to assist the foreign regulatory bodies. It is for that purpose that this amendment has been tabled.
Lord Lucas of Chilworth: I do not want to dissent from anything that the noble Lords, Lord Mishcon and Lord Lloyd of Kilgerran, have said. Quite properly, the Secretary of State has certain powers in this clause and he can do exactly as the noble Lord, Lord Mishcon, said—that is, be less forthcoming next time if the outside regulatory authority breaches the confidence that such an exchange of:,information would normally bring about.
As I understood the amendment, and as the Securities Association to which it is also of great concern saw it, it imposes upon the Secretary of State just one further responsibility: without those words, there is no obligation upon the Secretary of State—my noble friend or any other Secretary of State—to observe the rule of confidentiality. The amendment imposes, as it were, a self-ordinance upon the Secretary of State when he discloses information to an overseas regulatory authority.
When we passed the Financial Services Act, this Chamber assented to very detailed restrictions on the gateways through which information collected under the powers of that Act could be passed. I hope that the Secretary of State will here be equally concerned

107
to ensure proper safeguards on the ways in which overseas authorities handle the information and the uses to which it is put. Therefore, if he starts from that basis, the necessity to be less forthcoming in the future if decorum is not undertaken is less likely to obtain.
Lord Young of Graffham: I hope that the noble Lord, Lord Mishcon, and all Members of the Committee will understand if I deal with this point, which I consider to be very important, at a little greater length than I would otherwise do, but I believe that, for the consideration of the Bill at all its stages, it would be as well to have these matters on the record.
The amendment would require the Secretary of State, or his successor, to satisfy himself not only, as proposed in the Bill, that the assistance required by the overseas regulatory authority was for the purposes of its regulatory functions, but also that it would be used by the overseas authority only for such a purpose. I understand that the aim of the amendment is to avoid disclosure by overseas regulators for other purposes, for example, possibly to assist overseas tax authorities, or any other body.
We share the concern which has already been expressed to us by, among others, the Law Society, the International Stock Exchange and indeed this Committee this afternoon that restricted information obtained under the new powers and passed to overseas regulators should be subject to proper safeguards.
I would of course not exercise the powers unless I believed that the requesting authority had made the request in good faith. I should also have to be satisfied (as the unamended subsection requires) that the assistance requested is for the purposes of its regulatory functions. When the investigation is completed, I shall then have to decide what, if any, information obtained by means of the new power should be passed on to the requesting authority. In order to ensure that the appropriate confidentiality is maintained, we envisage that restricted information will be passed to overseas regulators only in two cases: first, under arrangements such as our bilateral memorandum of understanding with the United States Securities and Exchange Commission covering the exchange of regulatory information, which contains provisions limiting disclosure and use by the requesting authority—in other words, in those cases where there are bilateral memoranda; and, secondly, where such arrangements do not exist or are not applicable, but subject to broadly similar conditions imposed on an ad hoc basis—in other words, in other areas, on the basis that there would be provisions limiting disclosures and use by the requesting authority.
Those conditions would certainly prohibit disclosure and use of restricted information other than for regulatory purposes, as defined in Clause 72(3), without our prior consent. If we had reason to suspect that such conditions would not be observed, the Secretary of State would have discretion on those grounds not to initiate an investigation or not to pass
108
on some or all of the information obtained during the investigation. In those circumstances, I therefore consider that there are adequate safeguards against the misuse of the information.
Let us consider the alternative approach suggested in the amendment. It suffers from at least two significant drawbacks. First, the amendment would preclude use of the powers if enforcement action, such as the institution of proceedings, might result from the overseas authority's inquiries. Such actions may in many cases be the responsibility of overseas bodies other than the requesting authority itself. In other words, another body may enforce the action. Generally, I would expect them to be the overseas regulatory authorities within the meaning of Clause 72(2) but, as they would not be the requesting authority, their action could not be considered to involve use for the purpose of the requesting authority's own regulatory functions. In other words, it might be requested by one authority and then enforcement would be sought by another authority, even if that authority came within the meaning of Clause 72(2).
Secondly, there could well be circumstances in which the assistance could be reasonably used or disclosed by the overseas regulator for purposes other than its regulatory functions. For instance, the assistance requested might include the provision of non-restricted information in the public domain. It might include information which the source and the person to whom it related had indicated that they were content to be used or disclosed for the particular non-regulatory purpose. Unless the Secretary of State were to place unreasonable prohibitions on the use of such non-restricted or derestricted information, he could again be precluded from exercising the powers because he could not be satisfied that the assistance would be used solely for the purpose of the requesting authority's regulatory function.
That is why the Government oppose the amendment. I have the discretion not to exercise my powers, or subsequently not to pass on information obtained, unless I am persuaded that adequate confidentiality will be maintained. As I have explained, disclosure for use or purposes other than the requesting authority's functions will not be made without our prior consent.
Lord Mishcon: I must confess that I see the force of the argument that the information passed on as a result of the Secretary of State exercising his powers under this Bill may be required by a body other than, strictly speaking, the regulatory authority for the purpose of initiating proceedings. I can well understand that argument.
It seems to me that there is absolutely nothing at present which would stop the Secretary of State granting permission that certain information which he supplied for one purpose only can be used by another body for an analogous purpose because the regulatory authority wishes to pass it on to another body.
I am interested in the original information. Under this amendment I am saying that it should be passed only to the overseas regulatory authority for the

109
purpose of its regulatory powers. Part of its regulatory powers must be to see that any person who is guilty of a crime or malpractice under its administration is duly punished or prosecuted by the analogous body—the allied body—to which the Secretary of State has referred. I therefore cannot see how this amendment in any way stops that from being done.
I see a far greater danger. Unless the Secretary of State can say that under statute I am bound to insist that this information that I am giving to this body is to be used only for the purpose of its regulatory powers—whether it be to punish, discipline or whatever—by any regulatory body, I return to the danger that I have mentioned to the Committee. This information could well be of a price-senstitive nature in a country where there is no legislation against insider dealing. It is only fairly recently that we have had such legislation. Many countries do not yet have it and may learn from our distress that it is a rather necessary piece of legislation.
Instead of continuing a debate that may be of interest to me but to no other Member of the Committee, except anyone who may wish to contribute further to the discussion, I shall ask the Secretary of State whether in his kindness he will carefully consider the concern that has been expressed by such responsible bodies as I have mentioned, and indeed that he has mentioned in addition. I ask him whether between now and Report stage he will communicate with me or any of my colleagues who are interested in this matter on whether he can admit this wording, or if not, propose some other safeguard in what is a very serious matter. If he will consider the matter from that point of view, I shall happily ask the leave of the Committee to withdraw the amendment.
Lord Lucas of Chilworth: Before the noble Lord, Lord Mishcon, decides exactly what he will do, perhaps I may add something. I understand what the Secretary of State has said with regard to the memorandum of understanding that obtained by virtue of bilateral arrangements, in particular with the SEC. My worry is when no such memorandum of understanding exists. I am sorry if I repeat the point of the noble Lord, Lord Mishcon—he used different words. I certainly wish to underline it. Where no such memorandum of understanding exists, because there is no bilateral or any other arrangement, the responsibility falls on the Secretary of State to make a judgment. I am not suggesting that he is unable to make such a judgment. I am seeking to ensure that he has the power to support that judgment.
I understand that there may well be some international firms dealing in the UK, subject to the rules of a number of regulatory organisations, which may at some time have less confidence in the system. We have built up a painstaking system in this country since the passing of the Financial Services Act. Were that to be destroyed, damaged or harmed in any way, it would set us back years. It is against that background that I repeat my concern at the way in which the clause is presently written.
Lord Young of Gratfham: I have listened very carefully to the noble Lord, Lord Mishcon, and to my
110
noble friend. I understand their anxiety. One of the difficulties is this. Let us consider the arrangements where a bilateral memorandum of understanding exists with the United States Securities and Exchange Commission. If a case of insider dealing became known to the SEC in the United States, it would not be the prosecuting authority. The prosecuting authorities would be other federal authorities. Therefore we would again have the difficulty that this clause discloses. I have listened very carefully to what would happen. Even then, the conditions would prohibit disclosure and use of restricted information other than for regulatory purposes—we define that in Clause 72(3)—without my prior consent.
I understand the reasons why the noble Lord is withdrawing the amendment at this stage. I shall consider the matter and communicate with the noble Lord or Members opposite.
Lord Mishcon: I am most grateful. I only one word. I may not have made myself very clear. I may not have the words precisely right. Obviously in the instance that was quoted by the Secretary of State it must be part of the regulatory body's duty to inquire whether or not certain transgressions have taken place. The fact that information is passed on for the purpose of enforcing that duty would not take the matter out of the wording that I have used which is "for the purpose of" the regulatory authority.
My anxiety is that the information should not be used for a purpose that the Secretary of State would never have allowed had he known that that would be the result. In the light of what the Secretary of State has been kind enough to say, I ask the Committee's leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 72 agreed to.
Clauses 73 to 76 agreed to.
Clause 77 [Exceptions from restrictions on disclosure]:
5.30 p.m.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(26):
Page 69, line 34, leave out paragraph (c).
The noble Lord said: I beg to move Amendment No. 227Z(26) standing in my name and that of the noble Lord, Lord Peston. Although these amendments were not officially grouped, perhaps Members of the Committee opposite will allow me to speak to Amendment No. 227Z(27) at the same time. These are relatively simple amendments and should not take much time to consider.
Amendment No. 227Z(26) addresses itself to a very simple problem. It is designed to pose a question to the Government as to whether the Treasury, in the words of the Bill, includes the Inland Revenue. If the Treasury includes the Inland Revenue, and disclosure of information that is obtained on behalf of an overseas authority can be disclosed to the Inland Revenue in the public interest, we ought to pause and ask whether it is what we wish to write into a United Kingdom Bill. The words of the amendment are

111
"leave out paragraph" in order to have the meaning absolutely clear on the record.
Perhaps I may briefly speak to Amendment No. 227Z(27). It is a question of whether information of this nature can be used in pursuance of any Community obligation. Should not the obligation be at least relevant to the information that has been disclosed? It may be an unnecessary point, but it is important to have the Government's response on the record. I beg to move.
Lord Young of Graffham: If I may, I shall deal first with Amendment No. 26. This amendment would remove the gateway for disclosure to the Treasury of restricted information obtained by virtue of the new powers of investigation.
The gateway permits disclosure of restricted information to the Treasury if the disclosure is made in the interests of investors or, once again, in the public interest. Similar gateways, for the record, apply for restricted information under the Companies Act 1985 (Section 449(3)), the Financial Services Act 1986 (Section 180(2)) and the Banking Act 1987 (Section 84(5)). Without such gateways, it would sometimes be impossible to pass such information to the Treasury when it was desirable to do so for purposes connected with investor protection, such as the prudential supervision of the banks, or for wider public interest purposes relating, for example, to the conduct or stability of financial markets.
I believe I can satisfy the noble Lord, Lord Williams of Elvel, that the gateway in Clause 77(1)(c) enables disclosure to the Treasury. It does not enable onward disclosure to any other body such as the Inland Revenue. I am glad to be able to put that on the record.
The noble Lord referred to Amendment No. 27, and I should perhaps, with the Committee's indulgence, deal with that.
The disclosure gateway in Clause 77(1)(g) permits disclosure of restricted information in pursuance of any Community obligation. Similar gateways exist in Section 180(1)(t) of the Financial Services Act 1986 and Section 85(1)(h) of the Banking Act 1987. The amendment would require the community obligation concerned to be "relevant". We assume that this is intended to limit the gateway, but we are not clear how.
The most likely context in which disclosure of restricted information might be necessary in pursuance of a Community obligation is in areas covered by Community directives relating to regulatory functions as defined in Clause 72(3). The proposed second banking directive and investment services directive, for example, both require regulators in one member state to disclose information to regulators in other member states in certain circumstances. A gateway is needed in case such information is obtained incidentally during the course of an investigation under the new powers.
We cannot readily think of specific examples, outside areas relating to regulatory functions as defined in Clause 72(3), in which Community
112
obligations might necessitate disclosure of restricted information likely to be obtained by virtue of the new powers. Such obligations would normally override the restriction on disclosure, but the point of this gateway is to avoid any possible conflict between our domestic law and Community law.
Lord Williams of Elvel: I am most grateful to the Secretary of State. As he is aware, my recall of the Financial Services Act and the Banking Act is extremely good as I was involved in debates in this Chamber on both Bills. I remember having exactly the same debates on these same two gateways during the passage of those Bills. We were given the assurance by the Government at that time about the Treasury and its relationship with the Revenue. I am glad to have that assurance again on the record. It is very important not only for this Committee but for people outside to know that that is the case.
The question of the relevant Community obligation at the time of the Banking Act gave us the opportunity for considerable discussion about this. It was in the context of banking information—and banking information has a certain degree of confidentiality, which under the provisions of Clause 72 and 73 it may not have; but, on the other hand, there are degrees of confidentiality—and it was of concern to me during debates on the Banking Act and the Financial Services Act that there should be some restraint on the communication of such confidential information in pursuit of any Community obligation. If the noble Lord were to challenge me for any example of how that might be offended against I could not give him an answer; but the general principle should remain that it should be relevant to what is under investigation.
I accept fully that it would be impossible to write that fully into legislation. It may be extremely difficult to write the concept of relevance in this sense into legislation so I believe we must be content with the debate that we have had. Unless the Secretary of State wishes to add anything further, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z(27) not moved.]
5.45 p.m.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(28):
Page 71, line 29, leave out subsections (5) and (6).
The noble Lord said: There are two points about this amendment. The first is that the Bill as drafted appears to allow the Secretary of State to amend the table in subsection (4); in fact, he can effectively amend the whole of Clause 77 by order. He may furthermore—this is my second point:
"impose conditions, subject to which, or otherwise restrict the circumstances in which, disclosure is permitted."
In other words, he can impose no conditions whatsoever under which disclosure is permitted. Here again we have an example of the Secretary of State being permitted by order to amend primary legislation. It might well be that we have a clause instead of Clause 77 saying that the Secretary of State may make an order which shall be subject to the

113
affirmative procedure which will define what Clause 77 is because that is what is being included in the Bill. We should he aware that the Bill is giving the Secretary of State unlimited power to reconstruct Clause 77 by order, which as we know even by the affirmative procedure in this Chamber is not voted against and is not amended. I beg to move.
Lord Young of Graffham: The amendment would remove the proposed power in subsection (5) for the Secretary of State to amend by order the table in subsection (4) of authorities and functions to which the disclosure gateway in subsection (1)(b) applies.
Similar order-making powers are contained in Section 449(1B) of the Companies Act 1985, Section 180(3) of the Financial Services Act 1986 and Section 84(2) of the Banking Act 1987.
These order-making powers are not novel, they are part of the accepted form. Indeed, without such powers primary legislation would be required to create a gateway whenever an anticipated need might occur.
It is clearly right that the disclosure gateways in provisions such as this should be drawn fairly tightly. The information obtained by virtue of the powers may in many cases be highly confidential, which is why these provisions carry criminal penalties. But flexibility is needed given that it is impossible to anticipate every circumstance in which disclosure may turn out to be necessary—often urgently—for example to help to protect investors.
Perhaps I might give some examples. Orders made under the analogous powers in existing legislation cover disclosure to, among others, the Director-General of Fair Trading, to the Monopolies and Mergers Commission and to the takeover panel. Indeed some of the fairly newsworthy recent cases that my department has had to deal with would not have taken place without the powers there, for example to refer for advice to the director general matters which would then go on to the Monopolies Commission.
Time, in these unanticipated cases, has often been of the essence: so the ability to create additional gateways quickly by order (which reliance on new primary legislation could not by its nature provide) is essential. As the Committee is only too well aware, primary legislation involves a long process and takes considerable time. One cannot always afford to wait a year or more in order to provide a suitable gateway by way of primary legislation. I give one example. It would have been impossible to pass information obtained by the Companies Act inspectors relating to House of Fraser to the Director-General of Fair Trading within the six months deadline for making a merger reference.
Lord Rippon of Hexham: I appreciate what the Secretary of State has said. However, I believe it ought to be placed on record—although this may not be the moment to debate it—that many people are deeply anxious about the way in which primary legislation, often in skeletal form, includes these clauses providing that the Minister may amend or even at times repeal not only the primary legislation by order but sometimes other Acts or even Private
114
Acts. Although precedents exist they are dangerous. We should be greatly concerned about the way in which it is increasingly taken for granted that there must be flexibility.
Lord Lloyd of Kilgerran: I should like to support what the noble Lord, Lord Rippon, said, particularly having regard to what I understood the Minister to say. It was that provisions such as subsection (5), which the amendment proposes to delete, are to be found in other Acts. I understood the Minister to say that similar powers exist in several other Acts and he referred to the Banking Act and the Companies Act.
They are draconian powers which are given to the Secretary of State enabling him to do many things but about which we are naturally suspicious. Why is it necessary to have such a provision in the Bill if the Government have powers in the other Bills to which the noble Lord referred?
Lord Young of Graffham: I say to my noble friend that I understand the reluctance with which Parliament quite rightly would give to Ministers the power to vary the orders and legislation. I say to the noble Lord, Lord Lloyd, that similar order-making powers exist in the Financial Services Act, the Companies Act and the Banking Act. However, they refer to specific matters covered in those Acts. Here, we are looking at the changes required for these gateways.
The difficulty is that when such needs arise—and I mentioned the case of the House of Fraser—I suspect that it would have appeared unfair to the parties to be told, for example, "We cannot refer this matter to the Director General of Fair Trading within the six months' deadline for referring it to the Monopolies Commission because we do not have specific powers". It would take about 18 months to pass a Bill through your Lordships' House.
In respect of such matters orders are laid at the Table. I hope that Members of the Committee will understand that the powers are not used often. However, because of the nature of the markets and the way in which they change, they are required from time to time.
Lord Williams of Elvel: We must be grateful to the Secretary of State. He mentioned other Acts in which similar provisions are enshrined. I debated some of the Acts when they were Bills before your Lordships' House and I made exactly the same point as I make today. If the Government bring forward such measures, then on every occasion I shall make the same point from this Dispatch Box; I am sure that the noble Lord, Lord Lloyd of Kilgerran, will make the same point from his Benches; and I hope that the noble Lord, Lord Rippon, will make the same point from the Conservative Benches. This will occur over and over again because we are not satisfied. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 77 agreed to.
Clause 78 agreed to.

115
Clause 79[Charges requiring registration]:
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(29):
Page 72, line I I, at end insert—
(" "book debts" means debts due or to become due to the company in respect of goods supplied or to be supplied or services rendered or to be rendered by the company in the course of the company's business, whether entered in a book or not").
The noble Lord said: The Committee will see that the amendment bravely defines "book debts". We have reached the stage in the Bill where we are dealing with registration of charges. It is an important if technical matter.
In the definition which we have been brave enough to put forward to the Committee—it is a necessary courage because there is no definition in the Bill and we submit that there must be—we have introduced the words:
"whether entered ir a book or not".
We have not done so because we believe them to be witty but because we believe their inclusion to be necessary.
Whenever book debts have been mentioned it has been customary to make perfectly clear the fact that they are debts, even though they do not occur by way of entry in any book. It is interesting to know that Mr. Justice Williams—I do not know whether he is an ancestor of my redoubtable colleague—commented on the matter in the case of Shipley v. Marshall which was reported in 1863. He said in so many words that it would be strange if a failure to enter certain debts in the books prevented those debts from being book debts. In the age of the computer it would be even more strange if book debts were limited to those which had been entered in books. The amendment is necessary.
Professor Diamond deserves to be mentioned at the commencement of any debate on the registration of charges. His learned Review of Security Interests in Property was obtained at the instance of the Department of Trade and Industry. It has been a great deal of use to the department and Professor Diamond is an honoured member of my profession. In his review he made clear the fact that a definition of "book debts" must occur in any Bill resulting from his Review of Security Interests in Property.
The amendment is the best we could achieve. It follows certain lines suggested by Professor Diamond in his review. I hope that the Government will recognise the fact that a definition is necessary and that our handiwork is worthy of approval. I beg to move.
Lord Strathclyde: I have some sympathy with the purpose of the noble Lord's amendments. As he has said, the definition of book debts provided by the amendment was proposed by Professor Diamond in Part II of his Review of Security Interests in Property. The noble Lord, Lord Mishcon, correctly referred to the review as being most learned and the Government totally agree. As a result of those views the DTI canvassed the possibility of adopting the definition in its consultative letter of 2nd September 1987.
It is certainly desirable that "book debts" be defined in some way, or perhaps replaced by a different concept. At present it is undefined in both
116
the Bill as drafted and in the 1985 Act. It forms an undefined residual category subject to a number of particular common law exclusions. But even the courts have not always been of one mind and the noble Lord mentioned a particular case. Professor Diamond has pointed out the doubt that has existed in the past as to whether a credit balance in a bank account is a book debt. So I do not dispute that, ideally, the right definition might be desirable.
However, the responses to our 1987 consultation raised a number of wider questions in relation to the definition of book debts proposed by Professor Diamond and now included in this amendment. The definition proposed would have the effect of narrowing the term, whereas some have argued that it should in fact be widened to cover all debts. Indeed Professor Diamond has supported this argument in Part II of his report where, under his proposed law on security interests, all debts due, including bank accounts, would fall within the new scheme.
As we said in a second consultation letter of July 1989, we do not therefore think it appropriate at this stage to include a definition of "book debts" in the primary legislation. This is an area where we shall be interested to assess the responses to Professor Diamond's report. Action in the light of those responses need not await any implementation of Part II of the report. We intend to use the new power conferred on the Secretary of State by new subsections 396(4) and (5) to amend the list of registrable charges. We think that that would be much the better way to proceed rather than to rush ahead now with a definition which did not attract conclusive support in our consultation. I hope, therefore, that the noble Lord will withdraw the amendment.
6 p.m.
Lord Mishcon: It is always pleasant in your Lordships' Chamber to be able to smile at a government reply, and one only smiles and in no way attempts to ridicule. We are legislating in regard to matters which are common in commerce every day and we are talking about registration of charges and how book debts will affect them and how they will affect book debts. When one endeavours to say, "Please let us have a definition of 'book debts' so that we know what we are talking about", the Government's reply presumably is that from 1863—which is the date I quoted as regards the learned Mr. Justice Williams—until now there has been doubt about what are book debts so it should perhaps be left to a brave Minister to issue some instrument or other to define them and the issue should not be confused by endeavouring to say what we are talking about when we are talking about "book debts".
That is a reductio ad absurdum which I do not believe this Committee will tolerate. I appreciate the Minister's difficulty if his brief—and I recognise that he is more than capable of speaking outside his brief—does not encourage Parliament to define the difficulty. I appreciate that he may need further consideration of the definition which we have given and, indeed, he may wish to improve on that definition. Therefore, I hope that he will not think I

117
am ungracious when I say to him that I have no intention of dividing the Committee on this issue. However, I should like him to appreciate that in my humble judgment the Committee will require a definition of "book debts". In the same way as Professor Diamond believes it necessary, we believe it necessary. I hope that by the next stage of the Bill such a decision will be made one way or the other. Perhaps the noble Lord could communicate with me in the meantime as to the stage he has reached in his considerations. I should appreciate that. My most sensible course at this moment, having rubbed the point home good and hard, is to ask leave to withdraw this specific amendment.
Amendment, by leave, withdrawn.
The Principal Deputy Chairman of Committees (Baroness Serota): In calling the next amendment I should inform the Committee that if this amendment is agreed to, I cannot call Amendment No. 227Z(31).
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(30):
Page 72, line 14, leave out from ("person") to end of line 16 and insert ("in whom the security rights are for the time being vested)".
The noble Lord said: I should like to be as brief as possible and not waste the time of the Committee. I see that the Government tabled Amendment No. 227Z(31) after we tabled our amendment. It may well be that the Government intend to accept the amendment by inserting the word "security", which is the point we seek. If the Minister will indicate whether that is the position—namely, that the amendment is accepted—I shall not have to weary the Committee with our reasons for moving it. I beg to move.
Lord Strathclyde: I thank the noble Lord, Lord Mishcon, for being brief. Both Amendments Nos. 227Z(30) and 227Z(31) make clear that a "chargee" is the person who is entitled to exercise the security rights conferred by a charge. The terms of a charge generally confer rights on all parties to the charge, including the chargor and any guarantor, and it is necessary to ensure that they are excluded from the definition.
The Opposition Amendment No. 227Z(30) goes further and replaces the term "entitled to exercise" with the formula:
"in whom the security rights are for the time being vested".
I understand why the noble Lords have suggested this wording, but I do not think that there is any ambiguity in the term "entitled to exercise". This obviously applies to any entitlement to exercise contingent rights when they become exercisable. I think the current wording is perfectly adequate in this respect and I hope the noble Lords will withdraw their amendment, and agree to government Amendment No. 227Z(31).
Lord Mishcon: I repeat that this is purely a question of semantics and I do not believe it goes any further. Unless I find on examination of the Official Report that I have missed something in what the Minister said and that it is still necessary to insist on my wording, since the principle is admitted, the quickest way is to agree to the government
118
amendment. On that basis I am prepared to ask leave to withdraw my amendment.
Amendment, by leave, withdrawn.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(31):
Page 72, line 15, after second ("the") insert ("security").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(32):
Page 72, leave out lines 22 and 23.
The noble Lord said: These amendments clarify what is intended when it is said that the situation of property subject to a charge is "immaterial'. The objective behind new Section 395(3), which is omitted by Amendment No. 227Z(32) is to ensure that charges created by companies over their property, wherever it is situated, are made registrable. In other words, charges over property outside Great Britain are registrable as well as those over property within Great Britain.
There is a slight awkwardness, however, in providing in the context of new Section 395 that it is immaterial for the purposes of this part where the property is situated. For example, the location of property in Scotland as opposed to England and Wales obviously is material in some respects where the part makes separate provision for the law of property as it applies in Scotland. Amendment No. 227Z(38) replaces the provision in Section 396(1) and applies it only to subsection (1). This makes it clear that it is only for the purposes of determining whether a charge is registrable that the location of the property is material. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(33):
Page 72, line 27, leave out ("deed") and insert ("instrument").
The noble Lord said: New Section No. 395(4)(a) follows the terminology of the 1985 Act in talking of the "deed" containing a charge for securing a series of debentures. The use of the term is no longer appropriate. The amendments replace it with the term "instrument" whch is used throughout the new Part XII to refer to written contracts that create charges. I beg to move.
Lord Williams of Elvel: That same point has been made to us by the Law Society. We were about to table an amendment when the Government tabled this amendment. We are happy that the two Front Benches think alike.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(34):
Page 72, line 29, leave out ("deed") and insert ("instrument").
On Question, amendment agreed to.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(35):
Page 72, line 33, leave out ("further proceedings are") and insert ("a further procedure is").
The noble Lord said: This is a minor, almost drafting amendment. It seems to the Law Society, which has advised us in part on this and indeed has made a submission to the Government on the wording of this Bill, that the word "proceedings" in the Bill as drafted has a legal implication which the word "procedure" in our amendment does not have. It is its view that the non-legal expression "procedure" is better than the legal expression "proceedings", which implies the involvement of a court. I beg to move.
Lord Strathclyde: I understand the intention behind the amendment and that the Law Society is keen on it. But the term "further proceedings" is taken from existing legislation and has served perfectly well to date. There is, of course, no reason why the Committee should not take the opportunity to amend any wording that has survived from the 1985 Act, but I think it best not to change familiar terms unless they have actually been shown to be inadequate. That is not the case. I hope, therefore, that the noble Lord will withdraw the amendment.
Lord Williams of Elvel: Can the noble Lord tell the Committee whether the wording has ever been tested, or has it simply appeared in the various Companies Acts and the consolidated Act of 1985 and never been brought before the courts? If it has been brought before the courts and tested in some way and has been shown to be the equivalent of what we suggest, I shall be perfectly happy. However, if it has not been tested I see no reason why we should not adopt the more sensible wording.
Lord Strathclyde: I cannot give examples in relation to foreign law. As for examples from the domestic context which may offer some sort of analogy, there are legal proceedings for the cancellation of a prior land charge on the Land Charges Register, for the rectification of the Land Charges Registry's Register, or specific performance of an agreement to grant a charge. Apart from that, I have to confirm that the wording has not been tested.
Lord Williams of Elvel: In that case, will the Government consider what seems to us and to the Law Society to be the more correct wording and, in spite of the fact that it has been in companies legislation for some time, introduce this small amendment to bring it up to date?
Lord Strathclyde: Perhaps I can say, without wishing to confuse the Committee, that to the Government it is clear that the amendment is unnecessary. There is no reason to interpret "proceedings" as necessarily only "legal proceedings", especially in this context where it is obvious that an administrative formality such as registration in another register is envisaged. Moreover, the term "procedure" is possibly ambiguous. It can be taken to mean only a necessary formality. The existing term is probably wider in its scope than is "procedure", which implies a wholly routine administrative process. The term
120
"proceedings" can be used just as aptly of a clerical process, a court battle or a board meeting. It includes not only necessary formalites but also proceedings that a person might commence of his own volition. Therefore, the amendment runs the risk of excluding certain proceedings which might be necessary to make a charge valid. I am sure that the noble Lord, Lord Williams, did not have that in mind.
Lord Peston: It is always a favourite subject of the Committee when we come to the meaning of words. I now find myself less able to understand than I did when we started. The very least we require, based on the noble Lord's statement, is that both "proceedings" and "procedure" are necessary because neither cover all that we have in mind. From my knowledge of the English language, "procedure" covers more of what the Government have in mind than does "proceedings". If it is meant to cover proceedings as well, meaning "legal proceedings" then perhaps the noble Lord will reflect on that and come back with an amendment which covers both definitions. Certainly my understanding of the word "procedure" is that it involves pretty well all the range of activities which the noble Lord said he thought the word "proceedings" covered, which in my view it does not. We do not want to bandy around these words all the time but there is a substantive point which the noble Lord's department might want to reconsider.
Lord Strathclyde: Generally speaking we are satisfied that we have covered that argument and perhaps I may suggest that the noble Lord reads Hansard tomorrow to confirm that. I too will read the proceedings carefully to see whether the noble Lord, Lord Peston, has said something which I have missed. I have attempted to explain the Government's view. It is obviously not a fundamental point and we will study what has been said.
Lord Williams of Elvel: I am grateful to the noble Lord for that small concession. I hope he will study what has been said with care and that he will be converted to our point of view by the time we come to the next stage of the Bill. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
6.15 p.m.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(36):
Page 73, line 27, leave out ("or").
The noble Lord said: This amendment is in my name and that of my noble friend Lord Peston. It may be for the convenience of the Committee if I speak also to Amendment No. 227Z(37) standing in our joint names.
This starts a discussion that may be rather vexed because the whole question of whether there should be charges on shares has certainly exercised the legal profession, and indeed the banking profession, for a long time. Professor Diamond spent a considerable time discussing the whole matter.
Generally speaking, we accept the Diamond conclusion that to have charges on all types of shares would lead to serious disadvantages in the operation of the markets. We are not proposing that in Amendment No. 227Z(37). On the the other hand, we find difficulty in accepting Professor Diamond's arguments that there are problems in making registrable charges on shares in subsidiaries.
Professor Diamond argued that the problem is in the risk that a person who searches may be misled into thinking that there is no such charge when the explanation is that the charge was created before the relationship of holding company and subsidiary existed. We find that a curious and tortuous reason for rejecting out of hand the whole issue of charges on shares in subsidiaries.
The Jenkins Committee raised a clear difficulty as regards branches and subsidiaries, but I should like to gloss over that for the moment because in our amendment we are dealing with shares in subsidiaries. The problem, if we do not have the ability to register charges on shares in subsidiaries, is that assets which are otherwise registrable if charged could go without a registration of charge. I give a simple example. Let us suppose a company has a factory and the factory is an asset of the company and it charges that factory to secure a loan. That is a registrable charge. Let us further suppose that the company, instead of doing that, puts the factory into a subsidiary. It owns the shares of the subsidiary. It then uses the shares of the subsidiary as security against a loan. That is a perfectly feasible and sensible transaction. What would happen under those circumstances is that the lender would say to the company, "We will accept the shares of the subsidiary as security but we will also have a covenant which says that you, the company, will procure that your subsidiary will not sell the factory that is the main asset of the subsidiary".
Under present arrangements, as I understand it—and it is a very complicated area—that is not a registrable charge; whereas the charge on the factory directly, if the factory is an asset of the company, is a registrable charge. That seems to be a serious anomaly because people can shift assets around between subsidiaries as often and as quickly as they like.
We should like the Government seriously to look at what Professor Diamond said on this point, to examine again the arguments and to see whether they can move towards eliminating the anomaly I have described. I recognise that these are very difficult problems. I do not expect an immediate answer from the noble Lord. I hope that he will give us an outline of the way in which the Government are thinking at the moment, and how they have arrived at the conclusion not to include shares in subsidiaries in the Bill as drafted. I hope that the noble Lord will also keep an open mind on the matter, and maybe we can think about it again at a later stage. I beg to move.
Lord Strathclyde: The noble Lord, Lord Williams, has put over his case very clearly, and I would not wish to claim that there is no argument in favour of requiring the registration of charges created by companies over shares in their subsidiaries. But I do
122
not think that it is a compelling one while the arguments against are strong.
I believe that Professor Diamond was correct in concluding in Part III of his report that we should not create a new category of registrable charge to cover shares in subsidiaries. The problem of how to deal with a situation where a company owns shares in a second company which subsequently becomes its subsidiary, is a fundamental difficulty. If the noble Lord's amendment were adopted, a charge over such shares would become void upon a relevant event under new Section 399 as from the time that the second company became a subsidiary of the first. This is because it is necessary to register a charge within 21 days of its creation.
But this would not be possible because at that time the second company would not be a subsidiary and so the charge would not be registrable. The creditor who had lent to the first company on the security of the shares would have no means of knowing that the second company was to become a subsidiary in the future. Indeed, when the second company did become a subsidiary, there is no reason to believe that the chargee would become aware of that fact. Late registration under new Section 400 would not help. The chargee would remain void in relation to relevant events occurring prior to the registration. Any person acquiring an interest in the shares—for example another creditor—between the date of creation and the date of registration of the charge would acquire his interest free of charge which would be void against him.
This would be particularly harsh on the chargee who would, as I have said, not be in a position to know whether a company whose shares are charged to him might become a subsidiary at some time in the future. The amendment would create an anomaly very similar to that which applies under the 1985 Act to property of overseas companies that is brought into Great Britain after the date of creation of the charge. There is general agreement that it is unacceptable that a charge should become void perhaps years after its creation because of circumstances over which the chargee has no control. It has been necessary to include in this Bill Clause 88 which contains no fewer than six new sections to overcome the sort of problem that this amendment would create.
It is worth referring finally to the argument usually used by those who favour the registration of charges over shares in subsidiaries. There is thought to be an anomaly in that a charge by a company over the assets of one of its branches is registrable, but a charge over shares in subsidiaries is not. I do not deny that there is some force in this argument. But the fact that subsidiaries are separate legal entities results in them being accorded different treatment from branches in a number of respects, not least in the context of the limitation of their liability. It is consistent therefore that there should be different treatment in respect of the registration of charges, and I see no case for making an exception in this instance in the light of the difficulty that I have described. This is a complicated area and the noble Lord, Lord Williams of Elvel, said so in his remarks. I hope that the noble Lord will study what I have said

123
and in the meantime feel able to withdraw his amendment.
Lord Williams of Elvel: The noble Lord has done exactly what I asked him to do. He has set out the Government's thinking on how they have arrived at this conclusion. We shall look at this aspect and see whether we agree with their reasoning, or whether we wish to pursue this matter in the same form or in a different form at a later stage. I shall be consulting with advisers to that effect. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z(37) not moved.]
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(38):
Page 73, line 29, at end insert ("; and it is immaterial for the purposes of this subsection where the property subject to the charge is situated.").
The noble Lord said: I spoke to this amendment when speaking to Amendment No. 227Z(32). I beg to move.
On Question, amendment agreed to.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(39):
Page 73, line 29, at end insert—
("(1A) In the case of a charge for securing an issue of debentures, or in the case of a floating charge, registration shall be accompanied by a statement of any of the provisions of the charge and of any instrument realating to it which prohibit or restrict the company's power to grant further charges ranking in priority to, or pari passu with, the charge for securing as issue of debentures or the floating charge, as the case may be.").
The noble Lord said: This amendment is similar to the one that I moved regarding shares in subsidiaries. It relates to the negative pledge. The Government have decided not to include negative pledge which I hope I have reasonably well defined in the amendment. We believe that a floating charge without a negative pledge attached to it in some form of instrument does not make a great deal of sense. We feel that some instrument describing a negative pledge should be attached to a floating charge when it is registered. For a reason that I should like to hear, the Government do not adopt that point of view. I beg to move.
Lord Strathclyde: The Government are in sympathy with the intention behind the noble Lord's amendment. We agree with Professor Diamond's recommendation that negative pledge clauses should be registered, and we intend to implement that recommendation. It is not however necessary to do this by way of an amendment to Part IV. Neither does the amendment quite achieve its aim, as I shall explain later if the noble Lord wishes, which he does. In Scotland, under Section 464 of the 1985 Act, negative pledge clauses contained in the instruments of floating charges are already registrable. They will continue to be so under Section 464 as amended by Clause 94 of the Bill, and they will be ineffective if the charge containing them is not registered within 21 days of its creation.
124
We announced in September 1987 our intention to extend the Scottish requirement to floating charges in England. The proper place for statements of negative pledge clauses to appear is in the particulars to be prescribed by the Secretary of State under new Section 398(4). There are two reasons for adopting this approach.
Lord Williams of Elvel: I am sorry to interrupt the noble Lord. Is he saying that my amendment is unnecessary and that the Government are giving an undertaking that under the provisions of Clause 81 there will be in the particulars a description of negative pledge? In that case we need go no further. Can the noble Lord satisfy me on that point?
Lord Strathclyde: That is exactly what we are proposing.
Lord Williams of Elvel: I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(40):
Page 73, line 47, after ("debts") insert ("or to secure a guarantee").
The noble Lord said: This is a very simple amendment which has been suggested to us by our advisers. A charge can secure debts or it can secure guarantees. There is no difference between the two from the banking point of view. I hope that the Government have taken this point. I cannot see why they have left it out. No doubt the noble Lord will be able to explain. I beg to move.
Lord Strathclyde: I fear that the noble Lord's advisers have misunderstood the effect of paragraph (d). A negotiable instrument is a piece of paper that either recites an undertaking to pay a sum of money or contains an order to a third party to pay a sum of money and which may be transferred by delivery and endorsement to a bona fide purchaser for value in such circumstances that he takes free from defects in the title of prior parties. Negotiable instruments are frequently deposited by way of security with a third party in order to secure an advance from that third party. In view of the commercial frequency of such transactions, it is important that the facility to create security by depositing negotiable instruments in this way should be flexible and informal.
However, where the undertaking to pay recited by the instrument is given to a company by way of evidence of a debt owed to the company which would constitute a book debt in the company's hands, the deposit by the company of that negotiable instrument to secure any liability to a third party will constitute a charge over the book debt. This has the undesirable consequence that the deposit gives rise to a registrable charge. In order to ensure that the charge is excluded from registrability, therefore, provision is needed to exclude any such deposit from the category of registrable charges over book debts.
It is quite immaterial whether the liability secured by the deposit is a contingent liability or an immediate liability. All that is material is that the liability is secured on a book debt. If the property on

125
which the liability is secured has a right to receive a sum in the event of a certain contingency, then the conditional right to payment is not a book debt, and a charge over that right will not be registrable unless it can be brought within one of the other categories which are specified as registrable.
If the noble Lord can give an example of any such conditional right which falls into one of the other registrable categories, then we will be happy to give consideration to excluding the deposit of a negotiable instrument given to secure any such conditional right from the category of registrable charge into which it would otherwise fall. But we have received no representations that there is any problem of registrability arising in relation to the deposit of an unregistrable instrument given to secure a guarantee.
6.30 p.m.
Lord Williams of Elvel: I shall have to read what the noble Lord has said. At first sight it does not seem to me that a case has been made for distinguishing between a negotiable instrument to secure a payment of a book debt and one to secure a guarantee, but perhaps in legal terminalogy the guarantee, even if it is conditional, falls into a different category from that of book debt. I shall read what the noble Lord said and take advice. Perhaps we can correspond on the matter but it is not one which we need to go into in great detail in Committee. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(41):
Page 74, line 6, at end insert ("but does not include a charge arising by operation of law").
The noble Lord said: Charges are registrable under the 1985 Act only if they are created by contract. Charges which arise by operation of law are not registrable. This limitation is necessary because many charges arising by operation of law arise in the ordinary course of business, or through disposal of the company's assets, such as business premises. They are for the most part charges which arise automatically in the circumstances and are not deliberately arranged by the parties. It would be an unnecessary burden to register them.
Part IV of the Bill as drafted does not achieve this limitation. Section 398 imposes a duty on a company to register any charge it creates or which exists over property when the property is acquired by the company. This would impose a duty to register charges over acquired property which arose by operation of law. The existing Sections 400(1) and 416(1) of the 1985 Act deal with this point by talking of acquired property.
"which is subject to a charge of any such kind as would, if it had been created by the company after the acquisition of the property, have been required to be registered".
The amendment achieves the same objective with much less fuss by simply excluding charges which arise by operation of law. I beg to move.
On Question, amendment agreed to
Clause 79, as amended agreed to.
Clause 80[The companies' charges register]:
The Principal Deputy Chairman of Committees: In calling Amendment No. 227Z(42), I should point out that it it is agreed to, I cannot call Amendments Nos. 227Z(43) or 227Z(44).
Lord Mottistone Lord Mottistone moved Amendment No. 227Z(42):
Page 74, line 41, leave out from ("seal") to end of line 42 and insert ("and is conclusive evidence that the requirements of this Chapter as to registration have been satisfied.").
The noble Lord said: I understand that the amendment is grouped with Amendments Nos. 227Z(43) and 227Z(44). All three amendments seem to seek the same end. As the Committee will be aware, I am advised by the CBI. It agrees with the Law Society that legal certainty must continue to be paramount in the operation of the register of company charges. In order to observe this, the registrar's certificate given on registration must have been complied with. The registrar must ensure that particulars adequately reflect the charge created and must check whether a change on an alleged charge is registrable. The CBI does not consider, and I agree with it, that the increase in speed of registration which would be effected by the system proposed in the subsection as drafted justifies the reduction in certainty that would follow its implementation. I beg to move.
Lord Mishcon: With admirable brevity and clarity the noble Lord, Lord Mottistone, has moved the amendment, with the purpose of which, as he has rightly said, I entirely agree. It is purely a question of semantics between the two of us. Our amendment is the shorter one and achieves the same end. However, neither the noble Lord nor anybody supporting the amendment will worry at the Committee stage about the wording.
It is absolutely necessary to have the registrar's certificate as being conclusive evidence. Anybody dealing with commercial law will appreciate that at once. One has to have certainty of transactions in, for example, the assignment of charges or the issue of debentures secured by a charge; and generally to avoid liquidators or administrators challenging the validity as against them of a charge on the ground that the date appearing on its face was a later date than the date of its creation. This was laid clown with great certainty by a very distinguished judge, Lord Justice Harman. In the case of R. v. C. L. Nye Ltd reported in Chancery Cases in 1971 at pages 469 and 470, the learned Lord Justice said:
"The whole point of creating the register under section 95"—
he was dealing with the relevant section of the Companies Act at that stage—
"is to give security to persons relying on the certificate. If it were possible to go behind the certificate and show that the date of the creation of the charge made it out of time, no lender on the faith of the charge could be secure and sure that it would not thereafter be attacked by somebody who could successfully prove that there was in fact an interval of more than 21 days between the charge's creation and its registration. This would be disastrous in my opinion and is not a view to be taken unless the language positively compels it".

127
In exactly the same case, Lord Justice Russell, another very distinguished judge, said, at page 474:
"It is therefore to be expected that the group of sections should provide in absolute terms for a marketable security which cannot be achieved unless the certificate of the registrar is in every respect conclusive and unassailable".
I quote those two learned Lord Justices with some confidence that the Minister will not endeavour to support in any way what is a completely retroactive step of introducing uncertainty into the law and into commercial situations where that would be quite unforgiveable. I beg to support the amendment moved so adequately by the noble Lord, Lord Mottistone.
Lord Lloyd of Kilgerran: I am grateful to the noble Lord, Lord Mottistone, for speaking directly to Amendment No. 227Z(44) which I tabled. The three amendments that have been drawn together have the same purpose. The theme is the avoidance of uncertainty. I have also been supplied with the extract from the Law Society's notes which gives the speeches, read by the noble Lord, Lord Mishcon, of the two distinguished judges before whom I have had the privilege of appearing in the Court of Appeal more than once.
The three amendments have the same purpose. Mine, as I say unashamedly, achieves that purpose by striking out nine words from the clause and inserting one. If the noble Lord, Lord Renton, were here, I am sure that I should have his support for having reduced what is in the Bill by even nine words and replacing them by one.
If the noble Lord, Lord Mottistone, withdraws his amendment and the noble Lords, Lord Williams of Elvel and Lord Peston, do not move their amendments—with the hope that the Minister will say that one word is better than nine—I give an undertaking forthwith to move Amendment No. 227Z(44).
Lord Strathclyde: We have had a nice debate on the amendments.I apologise because I shall speak for rather longer than I have done on other amendments as this is an important area and there is a principle to get across. Before I discuss the amendments, I should say that the proposal to discontinue conclusive certificates has been widely supported by the commercial world in response to our consultations in 1987. Representatives of, for example, banks and finance houses are in favour of the changes that we are making. They are the people who will ultimately benefit from the changes.
I shall deal first with the amendment tabled by my noble friend Lord Mottistone. It appears to be an attempt to take us back to a certificate of the sort currently issued by the registrar, one that is conclusive evidence that all the requirements of the chapter as to registration have been satisfied. The amendments tabled by the noble Lords, Lord Williams and Lord Peston, and by the noble Lord, Lord Lloyd of Kilgerran, would have a more modest effect. If accepted, either of those amendments would have the consequence that the certificate issued under new Section 397(4) would be conclusive evidence that
128
the particulars in question had been delivered on the date stated. The certificate would have the comparatively narrow purpose of preventing any challenge by the liquidator, administrator or any other person with an interest in the charge, to the date of delivery as noted by the registrar. I shall deal in turn with the arguments for and against the different types of certificate. But it is worth saying now that I have more than a little sympathy with the intention behind Amendments Nos 227Z(43) and 227Z(44) for reasons that I shall explain in due course.
The first thing to say about Amendment No. 227Z(42) is that it would produce a certificate that would not in fact be possible under the new regime in Part IV of the Bill. Would it mean that the requirements of the chapter had been satisfied? Under the 1985 Act, the meaning is clear—that a charge has been properly registered in all respects and is unassailable in all respects. But Part IV of the Bill contains new Section 400 which envisages the belated delivery of particulars and new Section 401 which envisages the delivery of further particulars to correct errors and omissions in previous particulars. So, unlike the 1985 Act, there are no comprehensive requirements in Part IV in relation to the validity of a charge. It is not clear what a fully conclusive certificate would achieve.
However, I want to concentrate on the arguments of principle about a conclusive certificate, not to enter a technical debate on how one may or may not fit in with our new regime. The existing certificate has advantages and disadvantages. It is necessary to balance those in order to judge why we have decided to dispense with it.
There are two advantages with the existing certificate. First, in order to allow him to issue the certificate, the registrar checks particulars received by him against the instrument of charge to see whether they are accurate. That is not a benefit in itself, as I shall show later, but it means that searchers of the register can have some confidence that the particulars of the charge that they find there reflect with some accuracy the terms of the charge as they applied when the charge was originally registered. The second advantage of the current certificate is that once a chargee has one, he can engage in transactions with third parties without them being in any doubt about the validity of the charge. If, for instance, the chargee wishes to assign the charge to another person, he can show him the certificate as proof that the charge is not void under Section 395 or Section 410 of the 1985 Act.
Those are the principle advantages of the existing certificate, and they are not to be underestimated; but it is important to remember the purpose of the register of charges, because the certificate runs counter to those purposes. It is not the purpose of the register to give security to persons relying on the certificate. The register is there to disclose as comprehensively as possible the details of charges created by companies. The fundamental intention is to allow a company's prospective creditors to find out whether property being offered to them as security is unencumbered. The degree of assurance that those persons can obtain from the register allows them to lend with confidence to companies, which is of

129
advantage to companies themselves. The certificate does nothing to assist that purpose, as I will show. If anything, it undermines it.
The existing certificate gives the searcher of the register some assurance that the particulars on the register were accurate when they were put there; but mistakes inevitably occur in the process of checking by the registrar. Where a conclusive certificate is issued in respect of incorrect particulars due to a clerical oversight, the chargee is protected to the detriment of third parties. There have been a number of reported court cases in which those searching the register have been misled in that way.
Furthermore, under the current regime the register is frozen in time. The holder of a conclusive certificate has no incentive whatever to tell the registrar of any changes to the terms of the charge. Any variation that does not amount to the creation of a new charge may be made with impunity even though it is not reflected on the register. That is the fundamental flaw in the present system. By disposing of the certificate, we can introduce new measures for the updating of the register through the delivery of further particulars which will make it much more complete and reliable. I stress the word "reliable". Any fear that the absence of any checking by the registrar might lead to a less reliable register is misplaced.
The system of partial avoidance under new Section 402 not only provides a new powerful incentive on chargees to ensure that particulars are accurate; it also means that searchers of the register can be assured that the property in question is encumbered only to the extent that the particulars say that it is. Any errors in the particulars, or any omissions caused because of a later change to the terms of the charge, cannot affect the rights of subsequent creditors unless they are corrected by the delivery of further particulars under new Section 401. Unlike the present system, therefore, the searcher will be able to rely on the fact that no error or omission on the register will be capable of causing him loss.
Before I leave Amendment No. 227Z(42) I want to comment on some other aspects of the existing certificate. First, both the Jenkins Company Law Committee in 1962 and Professor Diamond have said that the need to check particulars for accuracy places an unreasonable burden on the registrar. By dispensing with that check and the resulting conclusive certificate, we are placing on the chargee the onus to ensure that particulars are accurate.
Those who argue that the loss of the certificate may undermine the marketability of charges forget that people to whom charges are being assigned have the remedy in their own hands. They need only check the particulars that have been delivered against the instrument of charge which is being assigned to them. It is a simple matter of caveat emptor. I do not believe that anyone would wish to suggest that the registrar should continue to carry out this activity on behalf of the commercial world. As for the original chargee, there is no merit in the existing position by which he is protected by the certificate from his own mistakes or failure to update the register while innocent third parties may suffer from them.
130
In summary, the existing certificate renders the register 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. No one could seriously defend the existing certificate in the light of these disadvantages.
Should there, however, be a certificate that is conclusive to a narrower degree? Under new Section 397(4) a certificate is presumed to show correctly that specific particulars were delivered on the date stated. But the presumption is rebuttable by evidence that proves that the particulars were delivered either earlier (which the chargee might wish to claim) or later (which third parties might wish to claim). It would be possible, therefore, for a third party to prove that a charge was registered out of time and therefore took priority only from the date of its registration and not from the date of its creation. It is important to note that such a claim would not have the consequence of exposing the charge to being found by the court to be wholly void against subsequent creditors or the liquidator or administrator.
The noble Lord, Lord Mishcon, mentioned cases that had occurred in the past, such as that of Re Nye in 1971. The court then commented on the importance of the conclusivity as to date of the existing certificate in the context of challenges which, if successful, would have made the charge wholly void. Their comments have no application to the new regime under Part IV of limited postponement of priority.
Nevertheless the Government believe that there is a strong argument for making a certificate under new Section 397(4) conclusive as to the fact that the particulars were delivered on the date stated. It would then be a simple matter for prospective assignees to check the certificate against the instrument of the charge being assigned to them and to satisfy themselves that the charge was registered within the 21-day period. By making this check, together with one to see that the particulars are accurate in other respects, the prospective assignee would be able to be confident that the charge was fully effective as from the date of creation, as he is under the existing conclusive certificate. I think that such a change to the nature of the certificate under the new Section 397(4) would resolve any doubt as to the effect of the new regime on the marketability of charges.
The Committee will now understand why I said that I had much sympathy with Amendments Nos. 43 and 44. I think indeed that it might be right to go further to help the chargee in this respect: those amendments would have the effect of preventing the chargee from producing evidence that his particulars were delivered earlier than stated by the certificate. If the date demonstrated that his particulars were delivered on Day 22 he would not be able to show that they were in fact delivered on Day 21 and that his charge was therefore protected from the date of its creation. I think the chargee should be given this opportunity. It would be consistent with the possibility open to him to prove under the new Section 400(2) that particulars delivered late, despite

131
the presumption in that subsection, were delivered earlier than a relevant date occurring on the same day as delivery. I hope therefore to return at Report stage with an amendment which would make the certificate conclusive evidence that the particulars were delivered no later than the date stated.
Unlike Amendments Nos. 43 and 44, I would intend also to allow the chargee to show that the particulars were delivered earlier. In this sense I would be going further to help the chargee than the amendments do. I therefore ask noble Lords to withdraw their amendments. I shall not be going as far as the amendment in the name of my noble friend Lord Mottistone, but I hope that in the light of the lengthy explanation I have given—and I apologise for its length—and the commitment I have made, he will feel able to withdraw his amendment.
Lord Mottistone: I thank my noble friend for having taken such tremendous trouble to explain fully the shortcomings of my amendment. I shall have much pleasure in advising those who advise me to read what he has said with great care and see whether they wish to come back to the matter at a later stage.
I would say to the noble Lord, Lord Lloyd of Kilgerran, who claimed that he cut out nine words, that in fact he does not eliminate quite so many words as the noble Lord, Lord Mishcon, who actually cuts out one more. So, if it were just a question of pleasing my noble friend Lord Renton, the noble Lord, Lord Mishcon, would win. However, as I see it both noble Lords have won vis à vis my noble friend the Minister, and accordingly at this stage I beg leave to withdraw my amendment.
Lord Mishcon: I always have a great admiration for the reasonableness and fairness of the noble Lord, Lord Mottistone. It has been increased, if I may say so, by his last remarks. Naturally, when the noble Lord moved his amendment, which goes further than mine, I announced my support for it because I would have been very happy indeed had it been carried. As the noble Lord the Minister has pointed out, it goes further than he is prepared to go—and he is prepared to go quite a long way down the road—in regard to the amendment that I ventured to put before the Committee and also in regard to the amendment of the noble Lord, Lord Lloyd of Kilgerran. I thank him for that.
I think I am right in recalling that he said he would be putting down his amendment at Report stage, and naturally he will understand if I say that I shall await the amendement with great interest and anticipation, to ensure that the very important principle enshrined in the amendment which I ventured to move is in fact in correct order. I am sure it will be, bearing in mind what the noble Lord the Minister has said. In the circumstances, for my part, when the amendment is called I would wish—I believe the amendments are being grouped together—to thank the Minister and in the process of doing so I will ask the Committee's leave to withdraw the amendment.
Lord Lloyd of Kilgerran: I should like to follow the noble Lords, Lord Mishcon and Lord Mottistone,
132
and say how grateful I am for the lengthy and careful speech the noble Lord the Minister has made. I cannot resist saying how much I envy him, having obviously so many people behind the scenes to support him and to do such splendid work for him, because he read his brief without pretty well any interruption originating from himself.
Amendment, by leave, withdrawn.
Lord Mishcon Lord Mishcon had given Notice of his intention to move Amendment No. 227Z(43):
Page 74, line 41, leave out from ("be") to end of line 42 and insert ("conclusive").
The noble Lord said: I had intended to move this amendment but I shall not now do so.
[Amendment No. 227Z(43) not moved.]
Lord Lloyd of Kilgerran Lord Lloyd of Kilgerran had given Notice of his intention to move Amendment No. 227Z(44):
Page 74, line 41, leave out from ("presumed") to end of line 42 and insert ("conclusive").
The noble Lord said: In view of what the noble Lord the Minister has said about reading the papers and bringing the matter back at a later stage, I shall not move the amendment.
[Amendment No. 227Z(44) not moved.]
Lord Mishcon Lord Mishcon moved Amendment No. 227Z(45):
Page 75, line 2, after ("matter") insert ("if he would otherwise be taken to have had notice thereof").
The noble Lord said: I always have tremendous respect for the Law Society, of which I have been a proud member for well over 50 years now. It is therefore with some diffidence that I tell the Committee that the wording that has been adopted here is that of the Law Society. However, I respectfully suggest that a word "not", which is rather vital, may have been omitted. I would ask for the Minister's patience and that of the Committee if I point out that I think it would be clearer if the words of the amendment to be inserted, if accepted, were to read:
"if he would not otherwise be taken to have had notice thereof."
I know the noble Lord the Minister understands very well, whether the "not" is in or not in, exactly what this amendment tries to achieve.
The amendment seeks to make it abundantly clear that the fact that there is something in a charge that has been registered does not necessarily mean that, because the charge has been registered, anyone who is affected or who may be affected by it has notice of everything that might be in the charge. For example, there might be a clause in the charge that talks of not alienating a property subject to the charge in any circumstances set out in the charge or whatever. The fact that it is in the small print of the charge registered or the particulars of it in law does not amount to notice of all the matters contained in the charge. However, there may be a common law constructive notice of certain things in that charge. The amendment seeks to make clear that the mere fact that a charge has been registered does not necessarily give notice to anybody of what at common law he would not be deemed to have constructive notice of.

133
I hope that that renders the amendment clear to the Committee and in particular to the Minister. I beg to move.
7 p.m.
Lord Strathclyde: It may help if I first explain what new Section 397(5) does and does not do. The common law doctrine of constructive notice attributes notice to such persons as could reasonably be expected to make all inquiries that a reasonable and honest man would make. What the new subsection abolishes is any supposed doctrine that the mere registration of a charge in itself automatically has the effect of attributing notice to everyone whether or not, as a question of fact, the particular individual could reasonably be expected to have searched the register.
At present if a person has constructive notice of the existence of a charge, he will thereby have notice of such terms as are required to be contained in the particulars and are actually delivered to the registrar. The provision does not affect the extent of the matters of which a person has notice. It only affects the scope of the category of persons who have notice. Nor is the common law doctrine of constructive notice affected. Those persons who under the general rule both at common law and as enshrined in Section 199 of the Law of Property Act 1925 have notice of the existence of a charge will continue to have such notice.
I think, therefore, that the noble Lord may agree on reflection that his amendment is not entirely necessary. I should tell the Committee that we intend, when we put forward our clauses on the abolition of the ultra vires rules, to include in them a subsection similar to new Section 397(5). The provision in the ultra vires clauses will apply more widely to all documents and registers kept by the registrar, including the register of charges. New Section 397(5) will therefore become unnecessary and we intend to table an amendment to remove it on Report. The noble Lord may wish to come back to this topic when we discuss the ultra vires clauses. For the moment however I am not persuaded by what he has said in support of his amendment and I would ask him to withdraw it.
Lord Mishcon: The Minister's phrase "not entirely necessary" I found an encouraging one. The opinion of the Law Society, which I know that he would respect, in regard to new Section 397(5) is that its present drafting appears to be based on an inaccurate assumption, namely, that under existing law there is a doctrine that provides that everyone is deemed to have notice of the contents of prescribed particulars of a charge. The Minister was good enough to say that this will be dealt with when the rules of ultra vires are dealt with. It is therefore sensible at this time in the day for me to ask whether he can tell me roughly when he expects that will be done. It would obviously be sensible for us to wait and see whether the matter that I endeavoured to bring before the Committee is completely covered. I was much heartened by what he said about the amendment being not entirely necessary". One assumes from those words that he thinks that it has some force of meaning and could be of use.
Lord Strathclyde: I hope that the noble Lord does not read too much into the word "entirely", which is obviously ambiguous.
We shall be coming to the ultra vires clauses while we are still in Committee, not later. I hope that that clarifies the matter.
Lord Williams of Elvel: Can the Minister say under which part of the Bill the ultra vires clauses will be tabled?
Lord Strathclyde: It will be under Part V, to be commenced on Tuesday, 21st February.
Lord Williams of Elvel: Therefore is it correct that we shall be discussing Part V next week and the Government will table new provisions for Part V for discussion in Committee next week?
Lord Strathclyde: The amendments will be tabled before next week.
Lord Mishcon: If I may follow upon what my noble friend Lord Williams of Elvel said, I know that the Minister will appreciate the problem. We should like as much notice as is possible so that we can take advice on whether this important point is covered. In the meantime, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(46):
Page 75, line 6, at end insert—
("( ) Where a form of particulars of provisional registration is completed, registration of that document shall confer priority for a period of 21 days.
( ) The form of particulars referred to above shall be substantially similar to the existing form but shall omit the date of the change.
( ) If the company or prospective chargee named in the form referred to above applies for registration of a newly created charge before the day provisional registration expires, the date of registration of the charge for priority purposes shall be the date of provisional registration; but if the 21-day period lapses without a full registration the form shall be removed from the register.").
The noble Lord said: Professor Diamond in his report made what seems to me a fairly specific recommendation to meet the problem of the 21-day period. It is well known. There is a period in which charges have to be registered. Charges are frequently not registered until towards the end of the period so that anyone making a search of the register in the period in question will not find the charge that has already been established. This has been a problem—in some ways the greatest problem of the public register of charges.
Indeed, in opening Chapter 26 Professor Diamond said that the most severely criticised aspect of the existing register of charges was that because of the 21-day period of registration it could not be relied upon. As a result of the analysis which he made, he produced the recommendation which we have reproduced (if I may put it like that) in our Amendment No. 46. Again, I should like to hear from the Government exactly what led them to reject Professor Diamond's recommendation. When we

135
have received the Government's explanation, we shall see whether or not we agree with it. I beg to move.
Lord Strathclyde: We have followed Professor Diamond's advice and have not allowed for provisional registration in the absence of a system of priorities. The reason for this is quite simply that provisional registration would not solve the major problem of the present system. A charge that had been created but did not yet appear on the register would still take priority over a provisionally registered charge, just as it takes priority over a subsequently created charge. Provisional registration would not help the second chargee any more than the creation of his charge does at present. He comes second either way. Provisional registration would protect a prospective chargee during the period between his search and the date on which the charge is created. He would not run the risk that someone else might get in before him and take a charge over the same property during that period. But this problem is best dealt with by chargees ensuring that they leave as little time as possible between their search and the creation of the charge. To attempt to deal with this by a system of provisional registration would only add to the existing doubt about the register itself.
Under provisional registration, the register would reflect the following situations. First, it might contain no particulars of a charge, because no charge exists. Secondly, it might contain no particulars of a charge although one had in fact been created. Thirdly, it might contain particulars of a charge lodged as formal registration. Fourthly, it might contain particulars of a charge lodged as provisional registration although no formal registration is to follow. Fifthly, it might contain particulars of a charge lodged as provisional registration with a formal registration to follow. Finally, it might contain a mixture of particulars of formal registration and of provisional registration.
I do not think that a register in this form would be calculated to enhance the reliability of the register. Nor do I believe that the small advantage to be gained by provisional registration (that is, protection of the prospective charge between the date of his search and the date of creation of his charge) is sufficient to outweigh the confusion that the system would cause. I therefore hope that with that explanation the noble Lord will be able to withdraw his amendment.
Lord Williams of Elvel: I am most grateful to the noble Lord. He has provided what I hoped he would, which is an explanation of why the Government reject the provisional registration as suggested in Professor Diamond's report. The interpretation of what Professor Diamond has said is disputed, if I may say so, between ourselves and the Government. I have no doubt that we, together with our advisers, will consider what has been said. I am not convinced that Professor Diamond linked the priority system with the provisional registration in the correct manner which the noble Lord indicated. We shall have to look at that.
136
We shall look also at his assertion that this is not an extremely important matter. I cannot remember the exact words he used, and it might create more confusion. I come back to Professor Diamond's own remark that the most severely criticised aspect of the existing register of charges is the fact that because of the 21-day period of registration it cannot be relied upon.
Our amendment is an attempt to make it much more reliable in that respect. To pretend that the 21-day period is not a problem is to fly in the face of all that Professor Diamond has produced by way of evidence. Nevertheless, having heard what the Minister has to say, I shall look at it with my advisers, and we shall come back at the Report stage. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
7.15 p.m.
Lord Williams of Elvel: With the leave of the Committee, before we leave Clause 80, perhaps the noble Lord, Lord Strathclyde, can tell me what is the position of companies which are not Companies Act companies and which therefore do not have to comply with the registration requirements of this part of the Bill and probably do not have to keep a register.
The companies which I am thinking of are those created by charter, such as P&O which is not a Companies Act company, it is a company created by charter; and also companies created by the authority of Parliament. Parliament has the right to create companies by statute. There are two classes of companies which do not appear at first sight to be within the ambit of the Bill. I should be grateful if the Minister could enlighten me as to how the Government intend to treat these companies in the future. Clearly, they are just as significant as or in many ways more significant than some of the Companies Act companies which would be within the ambit of the Bill. Perhaps the noble Lord could reply to my point.
Lord Strathclyde: Perhaps I could clarify to the noble Lord, Lord Williams, what we are going to do. We are extending the rules to include the kinds of unregistered companies which the noble Lord mentioned.
Lord Williams of Elvel: Can the noble Lord tell us in what form these rules are to be extended? Are more amendments to be moved to the Bill or is a new order to be made or a new Bill to be promulgated?
Lord Strathclyde: Perhaps I could write to the noble Lord on that point in the next couple of days and let him know whether we are doing it under the current Bill or whether there will be another order. I think that the noble Lord, Lord Lloyd of Kilgerran, wishes to say something.
Lord Lloyd of Kilgerran: I apologise for interrupting the Minister. I merely wanted to be on the correspondence list for whatever letters will be passing.
Lord Williams of Elvel: In joining the noble Lord, Lord Lloyd, I am always grateful to receive letters from Ministers, I always enjoy them and they give me great pleasure and entertainment. Since I have asked this question which is on a matter of considerable importance, the Minister might feel that it is important for your Lordships' Committee to have a reply now. Nevertheless, I defer to the Minister and if he insists that he is unable to produce the reply for which the noble Lord, Lord Lloyd, and I have been asking, I accept that the Minister will be in contact with me within the next day or two and let me know what the situation is.
Clause 80, agreed to.
Clause 81 [Duty to deliver particulars for registration]:
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(47):
Page 75, line 35, after ("and") insert ("any person appearing from the particulars to be").
The noble Lord said: In speaking to Amendment No. 227Z(47), perhaps I may also with the leave of the Committee speak to Amendments Nos. 227Z(55) and 227Z(63).
The amendments are intended to avoid the imposition of a duty on the registrar which, in certain circumstances outside his control, he could not possibly fulfil. Sections 398(6), 401(5) and 403(4) require the registrar to send copies of forms of particulars, further particulars and memoranda received by him to, among others, the chargee. But the only indication as to who is the chargee will be what the presenter of the form has written on it.
The presenter might identify the wrong person as chargee. Or the charge might be assigned to a new unidentified chargee by the time that the registrar sends out a copy of the form. In these circumstances, the registrar would be in breach of his duty if he failed to send a copy to the true chargee, but he would not have any means to fulfil that duty. The amendments make it clear, therefore, that the registrar is under a duty only to send a copy to the person identified on the particulars or memorandum as the chargee. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(48):
Page 76, line 1, leave out from ("value") to ("acquires") in line 2.
The noble Lord said: With the leave of the Committee, I wish also to speak to Amendments Nos. 227Z(50), (60), (65), (70) and (73). At present, under the 1985 Act, a company can enter into a series of transactions which would make an unregistered charge void against the company itself. The transactions would involve accomplices who could acquire an interest in the relevant property and against whom the charge would be void because it was unregistered. The company could then buy back the property from the accomplices free of the charge. The words to be omitted from the new sections would prevent the charge from being void against the accomplices because they could not claim to have
138
acquired their interest in good faith and without actual notice of the charge.
But this approach would create a circle of priority. New section 399(2) is necessary to break that circle. Without it the approach followed in the Bill would not be possible. Unfortunately, new Section 399(2) creates unfair priorities in some circumstances. On reconsideration, therefore, we think that it is best not to attempt to prevent the mischief, which is possible under the 1985 Act but does not seem to have been prevalent. The amendments would, therefore, return us to the position that prevails under the existing law. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(49):
Page 76, line 3, after ("in") insert ("or right over").
The noble Lord said: With the leave of the Committee I also wish to speak to Amendments Nos. 227Z(61), (66), (71) and (72). These amendments are necessary to ensure that we preserve the effect of the avoidance sanction as it applies currently under the 1985 Act. At present an unregistered charge is void against unsecured creditors if they obtain execution over the property. Such unsecured creditors may have rights over the property to secure value given. But they would not necessarily have an interest in the property. It is necessary, therefore, to make an unregistered charge void against those with rights over property as well as those with an interest in it in order to preserve the protection that these unsecured creditors currently enjoy. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(50):
Page 76, leave out lines 6 to 13.
The noble Lord said: I have already spoken to this amendment. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(51):
Page 77, leave out lines 9 to 28.
The noble Lord said: This amendment omits subsections (5), (6) and (7) from new Section 400. I shall explain why we think this is desirable. New Section 400(3) to (7) creates a form of probationary period prior to insolvency proceedings during which late registration cannot protect the chargee from avoidance against the liquidator or administrator. If a chargee registers his charge within a specified period prior to insolvency proceedings and at a time when the company is unable to pay its debts, his charge will, notwithstanding the late registration, be void as against the liquidator or administrator. This is designed to prevent deliberate late registration. A chargee might deliberately register late in order to encourage other creditors to extend credit to the company so as to swell the assets available in a liquidation.
If after the charge has been registered late, the company goes into liquidation, subsections (5), (6)

139
and (7) allow, on top of that, the liquidator to apply to the court to order the restoration to him of any property in respect of which the chargee has taken steps to enforce his security. In other words, if the chargee has taken possession of the property (and perhaps sold it) during the probationary period, the court could order that the property be returned to the liquidator. This provision is loosely based on Section 241(2) of the Insolvency Act 1986.
On reflection, however, we believe that the provision for applications to the court in subsections (5), (6) and (7) is unlikely to achieve its intended objective. The reason for this is that, under both the 1985 Act and Part IV of the Bill, the holder of an unregistered charge does not suffer from the avoidance sanction if he enforces his security prior to insolvency proceedings. The liquidator is not able to apply for a court order restoring the position where a charge has not been registered at all. It does not make sense, therefore, to allow for such an order where there has been late registration. The chargee could evade the possibility of a court order by deciding not to register at all, rather than registering late, and by enforcing his security shortly before the insolvency proceedings. Indeed, the subsections might run the risk of encouraging chargees not to register at all rather than to register late. That would obviously not be desirable. On balance, therefore, we think that the arguments are in favour of omitting subsections (5), (6) and (7), which is what the amendment would do. I beg to move.
On Question, amendment agreed to.
Clause 81, as amended, agreed to.
Clause 82 [Delivery of further particulars]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(52):
Page 77, line 41, leave out ("amount") and insert ("obligation").
The noble Lord said: Professor Diamond in his report raised the problem of non-monetary obligations and charges to secure a non-monetary obligation, together with a number of other matters. Those other matters appeared in the same set of paragraphs. We believe that non-monetary obligations should be registrable and we can secure this by this very simple amendment. I beg to move.
Lord Strathclyde: It is certainly desirable to avoid any doubt as to whether new Section 401 and Part IV in general apply to charges to secure a non-monetary obligation. Therefore, I am happy to accept the noble Lord's amendment.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(53):
Page 77, line 43, leave out ("addition").
The noble Lord said: This amendment is necessary to avoid the implication that a company and a chargee may vary an existing charge so as to add to the property subject to it. The addition of property to the property already secured by a fixed charge would require a new charge.
New Section 401(2) gives examples of circumstances where further particulars may be delivered because the original ones have become inaccurate due to a variation of the charge. Among the examples, in new Section 401(2)(d) is:
"any addition, substitution or release of property subject to the charge".
But the extension of the terms of a charge to comprise additional property would always constitute a new charge, for which it would be necessary to deliver particulars under new Section 398. Under new Section 398, there is a duty to register new charges, whereas new Section 401 is permissive. We do not want to imply that the duty does not arise where a new charge is created due to the addition of further property. In omitting reference to the addition of property, the amendment would result in a provision more along the lines of that at present contained in Section 466(4) of the 1985 Act as it applies to Scottish floating charges. I beg to move.
Lord Williams of Elvel: The amendment itself causes us no problem. But I cannot quite understand why both the company and the chargee have to sign variations in the particulars when a joint signature is not required in the original particulars themselves.
Lord Strathclyde: Perhaps I can clarify this further. Addition of further property to that already subject to a fixed charge always gives rise to the creation of a new charge. The inclusion of additions in new Section 401(2) implies that it may not. It implies that the addition of property may be achieved simply by variation. We wish to avoid that implication.
On Question, amendment agreed to.
Viscount Davidson: This may be a convenient moment at which to adjourn the Committee stage. I suggest that we return to it at 8.30 p.m. I beg to move that the House do now resume.
Moved accordingly, and, on Question, Motion agreed to.
House resumed.

Access to Personal Files (Social Services) Regulations 1989
7.30 p.m.
The Earl of Arran The Earl of Arran rose to move, That the draft regulations laid before the House on 16th January be approved [5th Report from the Joint Committee].
The noble Earl said: My Lords, in moving this Motion I hope that it will be for the convenience of the House if I also speak to the draft Access to Personal Files (Social Work) (Scotland) Regulations 1989 which were laid before this House on 16th January; the draft Access to Personal Files (Housing) Regulations 1989 which were laid before this House on 17th January and the draft Local Authority Social Services (Designation of Functions) Order 1989, which was laid before this House on 19th December.
Before I come to the substance of the access regulations, it may be helpful to your Lordships if I say a few words about the background to them. The

141
regulations apply the Access to Personal Files Act 1987. That Act, as your Lordships may recall, was promoted initially in another place with great sensitivity and was keenly debated in both Houses.
The Data Protection Act 1984 enables people to know what is recorded about them in computer records. The regulations before us today are concerned with records which are not covered by the data protection legislation; that is, they deal with records kept manually. However, in drafting the regulations we have sought as far as possible to keep in line with the corresponding provisions in the data protection legislation so as to avoid confusion, particularly as an authority may be using both methods for keeping its records.
During the passage of the 1987 Act a commitment was given by my right honourable friend the then Minister of State that, subject to no difficulties being encountered in the consultation process, regulations would be made and that we would endeavour to make them by the end of 1988. We virtually achieved that and the regulations will be made as soon as the necessary approval has been given by Parliament. In their preparation we have consulted widely with organisations representing local authorities, voluntary organisations, health service interests and other concerned bodies.
To allow authorities time to adjust their procedures it is intended that the regulations should be brought into force on 1st April next. To assist authorities we are issuing guidance to them. Circular LAC(89)2 gave advice on social services records and is, of course, subject to approval being given to the regulations by Parliament; a copy of the circular is in the Library of your Lordships' House. Advice on housing records will be issued after the regulations have been approved; a draft of the housing circular has been deposited in the Library.
During the passage of the Act much interest was expressed in access to medical records. Those records were excluded from the Act but we undertook to hold talks with the medical profession on a voluntary code of practice on access to medical records. Those discussions are proceeding. An agreement has not yet been reached, although substantial progress has been made. The Government are determined to see the establishment of a voluntary code very shortly and my honourable friend the Parliamentary Under-Secretary gave an undertaking in another place on 7th February that if there was any question of further delay he would meet the profession's representatives. He said that he thought it right that once agreement had been reached with them there should also be consultation with other non-medical health professionals who maintain records on patients and with those bodies who represent patients' interests.
After that outline of the background to the regulations, I turn now to the regulations themselves, starting with the social services regulations.
The Access to Personal Files Act takes forward the establishment of the right of individuals to know what is recorded about them by local authority social services departments. In 1983 the then Secretaries of State issued to local authorities in England and Wales general guidance on the principles governing
142
disclosure of information in the records in question to people who were the subject of the information. The Secretaries of State said that they shared the increasingly held view that people receiving those services should, subject to adequate safeguards, be able to discover what was said about them in those records.
The following year the Data Protection Act was enacted. That included provisions enabling individuals generally to see what was recorded about them in computer records. Orders were made under that Act to add to the general safeguards in relation to social work records.
There are circumstances where it would not be right to grant access to all the available information and I shall explain those circumstances. First, however, I should emphasise that it should be exceptional for information to be withheld and even then it should be possible to release most of the available information, though some may need to be made anonymous to conceal the identity of a third party. For the most part information held manually in social service records will become readily available. In framing the regulations we have kept as closely as possible to the provisions of the data protection legislation and the guidance issued by the data protection registrar, who has been consulted about them.
Following a request from an individual a local authority will have to tell that person whether it holds information about him and give the person access to it. That includes expressions of opinion. Although the Act does not confer a right of access to any indication of the intentions of the authority towards that person, we have recommended authorities to let him know of them. Generally it is good practice to do so in the course of an individual's continuing care rather than waiting for a formal request for access. We have said that that should be seen as part of a process of encouraging users of services to participate as far as possible in actions concerning them.
Similarly, the Act requires access to be given only to so much of a person's record before these regulations come into force as is necessary to make the accessible information intelligible. We have advised authorities that there is likely to be significant advantage in their making available as much information as possible. That could lead to a greater clarity and understanding of an individual's background, especially in a child care case.
Access may be given by supplying an individual with a copy of the information or by some other means such as letting the individual see the information. If, however, having seen the accessible information the individual requires a copy of it he must be given one. If any of the information is not intelligible without explanation, the individual is to be given an explanation of it. That would apply if, for example, the authority holds the information in a coded or abbreviated form or it is in professional jargon which cannot be understood without the key to the code or meaning. The explanation should be sufficient to make the information intelligible to people unconnected with the authority. In some cases the individual may still not be able fully to

143
understand the information but should be able to take it to another person for advice.
The authority will be able to charge a fee of up to £10 for access at its discretion. We have indicated that we expect authorities to take into account applicants' ability to pay.
Some of the information that the authority holds may contain material provided by a health professional. Where that is the case the local authority will have to notify the health authority, or the health professional if not employed by a health authority, within 14 days of receiving the request. Where the health authority or the health professional says that access must not be given to the information, or part of it, the local authority is relieved of its obligation to grant access. The circumstances where a health authority or health professional may do that are when access is likely to give rise to a risk of serious harm to the health of the individual or another person, or where access would enable a third party (other than a health professional) to be identified or for him to be identified as the source of the information. A definition of a health professional is given in the regulations.
The local authority may withhold other information in certain circumstances. We have told authorities that this decision should be taken at senior management level. Information may be withheld because of a risk of serious harm to the health or emotional condition of the individual or a third party. We have said that withholding information on this ground would be most exceptional.
Information may also be withheld because the identity of a third party (other than a member of the staff or a paid carer) would be revealed or could be identified as its source. The local authority is required to notify a third party of the receipt of a request for access and to seek consent to access, but access may not be given without that consent unless the information can be made anonymous. If the authority does not receive the third party's consent within the 40-day time limit, the authority has to give access to as much of the information as possible without revealing the other person's identity or that the third party is the source of the information, for example, by making the information anonymous.
The local authority may also withhold information where it is held for the prevention of crime, where it comprises reports which magistrates courts may withhold, where it is subject to legal professional privilege or where disclosure is restricted by the law relating to adoption or special educational needs.
Children who have the understanding to make a request for access are entitled, like adults, in accordance with the general law to see what is recorded about them. Where a child does not have this capacity, a parent or a person with the legal power to act as a parent in relation to the child will be able to make a request for access to information recorded about the child. Detailed guidance has been given to authorities about dealing with a request from or in relation to a child along the lines of that given by us in respect of the data protection arrangements.
Finally, these regulations allow an individual aggrieved at being refused access to appeal to appeal to a committee of the local authority. This is of course additional to any general rights that the individual has to apply to the courts; for example, judicial review or in the case of maladministration to the local government ombudsman.
The Scottish regulations are in essence the same as those for England and Wales with one minor exception. That is to be found in Regulation 9, which requires the local authority holding information supplied by the reporter to a childern's panel to consult the reporter on acess. In Scotland most childern who commit offences and children who are in need of care and protection are not dealt with through the courts. Instead they are referred to the children's panel whose job it is to investigate the background to the child's case. Regulation 9 seeks to preserve the position whereby reporters can share with local authorities the often very sensitive information that they hold without fear of unintended disclosure.
As regards housing, we are also considering tonight parallel regulations to give local authority and housing action trust tenants and applicants for tenancies in England and Wales access to their records. These are broadly on the same lines as our social services regulations and the Data Protection Act.
That said, there are inevitably some differences of structure and emphasis. In particular, the person with right of access is the tenant and the right covers not just personal information about himself but also information about members of his family. This is relevant to what exemptions are provided from the requirement to disclose information. Since many, or perhaps most, tenants' records will contain information about members of the tenant's family living with him, it seemed to Ministers that a general requirement to obtain their consent before disclosure would risk bringing the whole procedure for access to a grinding halt. We have therefore provided, in effect, under Regulation 4(1)b, that information about members of his family should be accessible to the tenant unless the authority—or, where relevant, an appropriate health professional—considers that disclosure would cause serious harm to that family member's physical or mental health. We believe that this is a reasonable practical safeguard.
There is also a slight difference in the review procedures provided. Regulation 8(2) and the guidance circular are aimed at obtaining a review internal to the council with as much independence as possible of the original decision. The alternative of reconsideration by a meeting of the full authority is needed to cope with cases where all the members of an authority—as happens in some district councils—are ex officio members of all committees. Tenants who remain dissatisfied after such a review of course retain their general rights to pursue their case with the local government ombudsman or the court. With those differences, the housing regulations remain fully in sympathy with the overall objective of securing, with suitable safeguards, the maximum disclosure of personal information to the customer.
In the housing field, the operation should be broadly self-financing, with the fees charged in particular cases reflecting the costs incurred, and thus part of the more commercial approach that we expect authorities to adopt. Being responsive to tenants' requests for access to their records is also an important ingredient in efficient housing management and very much in line with the more consumer oriented general thrust of the Government's housing policies.
The Local Authority Social Services (Designation of Functions) Order, which applies only to England and Wales, is to designate under the Local Authority Social Services Act 1970 as social service functions those functions of local social services authorities under the Access to Personal Files Act and under the Disabled Persons (Services, Consultation and Representation) Act 1986. The effect of this is that the powers and duties specified stand referred to the social services committee to which those functions may be delegated and the social services department may deal with that work. That is what has always been envisaged.
In summary, the access regulations along with the corresponding parts of the data protection legislation provide individuals comprehensively with a right of access, subject to certain specified safeguards, to the records of the local authority services involved. This will happen whether they are kept on computers or by traditional means. The legislation contributes to the development towards greater sensitivity to the needs of individuals in the delivery of services and support. I commend the regulations and the order to the House.
Moved, That the draft regulations laid before the House on 16th January be approved [5th Report from the Joint Committee].—(The Earl of Arran.)
7.45 p.m.
Baroness Jeger: My Lords, I am sure that your Lordships will be glad to know that I do not propose to go into all these statutory instruments individually. However, I have one or two questions that I should like to ask the Minister.
Like so many of my colleagues on this side of the House, I am worried about the fee of £10 that people will have to pay to obtain access to their records. The noble Lord said that that could be worked out in accordance with ability to pay, but he did not say who will decide what is the ability to pay and how that will be worked out. Will some local authorities insist on the £10 fee while others say that no one need pay anything? In addition, what is the position regarding access by family members—spouses and children, including perhaps adult children? Can a husband demand a right that a wife is denied? Can an adult child demand a right to look at those papers and then be denied access to them? What is the position of family members and their access to these records?
I understand that these rules are due to come into effect on 1st April. What happens before and after that date? What will happen to matters that are now in the pipeline? Without going into all the details of the statutory instruments, those are the main points about which we are worried.
Baroness Elliot of Harwood: My Lords, perhaps I may say a few words with regard to Scotland, and Regulation 9 to which the noble Earl referred. The principle about which we wish to be sure is first and foremost the welfare of the child. The situation in England is rather different from that in Scotland. Scotland has the panel system. The reporter has information from all sources including the child. If he considers it unwise to report what the child has said he can keep this private.
Under the new scheme Regulation 9 provides exemption from access to information from reporters to children's panels provided that the criteria clearly laid down apply. It is not clear, however, whether "information" in this context covers reports provided by social work authorities to reporters as part of their initial investigation under Section 38(1) of the Social Work (Scotland) Act 1968. Nor is any mention made of reports provided by social work authorities to children's hearings in terms of Section 39(4) of the Social Work (Scotland) Act 1968. Do we know, for instance, if reports from social services to juvenile courts in England and Wales are exempt?
A major concern of the children's panels and of children's committees—I was a chairman of one for many years—is a child's right to privacy. Children can and do confide in social workers, foster parents, youth leaders and others about personal matters. It is proper and necessary that they do so. The question therefore arises at what age, and under what circumstances, should children be allowed to keep confidential such disclosures about themselves or their parents? As matters appear to stand, any parent of a child under 16 years of age, including the estranged, abusive, violent and mentally unstable parent, seems to have a right of access to all information about his child, subject only to the criteria for exemption in Regulation 9(4). It is not difficult to imagine a situation where the disclosure could be seen by the child as a gross breach of privacy but where it would be difficult to argue that serious harm would arise from the parent having the information in written form. For example, a child might be placed away from home on a fairly permanent basis with no anticipated parental contact.
In terms of child protection procedures in Scotland, much progress has been made in recent years by all the agencies concerned sharing vital information about children at risk of abuse or neglect. A fear that reporters have about the new regulations is that agencies which hitherto have shared confidential information to social work authorities and reporters' departments might be less willing to do so and that the right of such children to the protective network of the children's hearings systen might be sacrificed to their parents' right to information about them.
There is great agitation and worry about these regulations in Scotland. I am representing the views of a great many people with whom I have been in contact.
Earl Russell: My Lords, on behalf of my noble friends, I should like to extend a warm welcome in principle to these orders. They result from the Access

147
to Personal Files Act, which originally was a Private Member's Bill, moved by my honourable friend Mr. Archy Kirkwood. It was an enabling Act. These regulations give life to the Act. It is a matter that may appear much more important in 10 years' time than now.
As a historian I am well aware of the possibility of inaccurate records. I once saw a record which granted a passport to a gentleman of Chelmsford in the county of Esquire. Not all errors in records have such a visible clarity on the face of them. With computers such errors become much harder to clear up. However, having warmly welcomed these orders in principle I hope that I may be forgiven for a few moments for looking a gift statutory instrument in the small print!
First, I share the Opposition's concern about the fee of £10, which seems to savour of the Conservative doctrine of crossing the palm with silver. I am well aware that account is to be taken of ability to pay. I welcome that. However, I should have thought that among those who are concerned about possible maladministration in social security, ability to pay might be the exception rather than the rule. I wonder whether in the end we shall find that the fees of £10 are a great deal more trouble than they are worth.
I also have some concern about the appeals procedures. Different appeals procedures are laid down under the different orders. In the social services order it does not seem to be entirely clear that those who hear the appeal should not have participated in the original decision. That gives me a certain amount of anxiety.
I also have some concern not about the reasons for exception but about the statement of those reasons. In each case, if the authority is refusing the record, it has to specify the reason. It may withhold a record on grounds that the production of the record may cause serious harm to the physical or mental health of the person concerned. However, if the record would cause such harm, might it not cause equal harm to say to somebody, "I cannot show you your records: it would cause serious harm to your physical or mental health"? It is a little like the case I once encountered of a mental patient who was told, not by a professional, "You are paranoid". The results were not encouraging.
Similarly, information may be withheld if it is liable to be needed for the prevention or prosecution of a crime. But again the reason must be specified. To paraphrase, one may have to say, "I cannot show you your record because the answer might tend to incriminate you". This again might be a little unwelcome.
There is a real dilemma here. It is difficult to see how one can have a withholding procedure—which I agree there must be—without the specification. When we review the operations of these regulations, as no doubt will be done, might it be possible to connect this question of the grounds of refusal, or their specification, with the provision of an appeal procedure and perhaps to consider whether in some cases the reason might be stated to a third party?
148
I am also a little concerned about the position of a member of the person's family. There is a provision for withholding a report if it might disclose the identity of a third person except when that person is a member of the tenant's or claimant's family. However, I can imagine cases concerning, for example, the spouses of mental patients where it might be of some importance to conceal that the spouse had been in communication with the local authority. I can envisage some awkward situations there.
We have also other problems which we shall have to consider in the future. The noble Earl drew attention to the major problem of medical records. That is still ahead of us. I am glad to hear that consultations are still proceeding on that. I hope that they will lead to success. I was also delighted by what the noble Earl said about records of housing action trusts. I am sure that this information will be equally welcome to my noble friend Lord Tordoff, who raised the matter at Committee stage of the Housing Bill.
Perhaps I may ask one final question. I should be glad to know whether we shall have any access to housing records in Scotland.
Baroness Faithfull: My Lords, I rise to support my noble friend Lady Elliot in what she said about the Access to Personal Files (Social Work) (Scotland) Regulations. The Minister said that in essence the regulations for Scotland and England were the same except for Regulation 9. However, perhaps I may underline what my noble friend Lady Elliot said. In fact the situation is very different in Scotland from England. We are very much concerned that in Scotland the panel system should not lose the confidence of parents, of children, of social workers or of the police. If the confidentiality is not safeguarded, the panels will lose the present extraordinarily good reputation that they have in the community. The position in England is quite different because a child coming before the court has to see the report which has been submitted to the court. That does not necessarily break confidence but there is not always the full information in that report.
In the regulations it is not very clear who the client is. Is the client the child or the parent? This principle is not clarified in the regulations as I understand them. As my noble friend Lady Elliot has asked, at what stage and age can the child's disclosures, particularly about his parents, be kept confidential?
There is another matter. Why do the draft regulations in Scotland concerning educational interests differ from these regulations? Is it right that the two sets of regulations should be different? The atmosphere that has been built up in Scotland has been built up on trust and confidentiality. I hope that the regulations will not break that down which I believe they may if they are allowed to go forward as they are at the moment. I put forward that as a question.
8 p.m.
The Earl of Arran: My Lords, I am grateful to your Lordships for the contributions to the debate this evening upon these regulations. I should like to deal

149
as closely and as succinctly as possible with the points raised.
First, I take the comments made by the noble Baroness, Lady Jeger. She was particularly concerned about the £10 fee. Many having dealings with social services departments are among the poorest in the community and many social services clients are in receipt of income support. We have taken the view that local authorities should be able to exercise discretion in setting the fee within a ceiling and to waive their fees altogether if circumstances so warrant.
Another point that the noble Baroness, Lady Jeger, made concerned housing regulations. Access is by tenant to information on himself or the family. Safeguard for sensitive information is invoked if, in the view of the authority or a health professional, there is the likelihood of serious harm to a family or member from disclosure. There is no requirement to get the family member's consent. If the husband and wife are joint tenants, each will have access to information about the other and other family members on the above basis.
I now turn to the remarks of my noble friend and kinswoman, Lady Elliot. I should like to thank my noble friend for raising these matters before the debate. If the House will forgive me, I should like to spend a few minutes on the situation in Scotland and the comparison which my noble friend makes between England and Scotland. I am sure your Lordships will know that the Scottish children's hearings system is unique in Great Britain and not immediately comparable with the arrangements for juvenile courts in England and Wales. Openness is a strong feature of the hearings procedure. The chairman of the hearing is already required to disclose the substance of the social background reports to the child and his family in the course of the hearing where that would not be detrimental to the interests of the child.
The Scottish regulations are designed to suit the special circumstances of the hearings system in Scotland. The reporter to the children's hearings holds records which are not covered by the terms of the 1987 Act. There is no question, therefore, of information which is in the hands of the reporter but not passed on by him being accessible in terms of the present regulations. Regulation 9, however, requires that a local authority must consult the reporter to the children's panel if it has on its files information which originated from him. The reporter can tell the local authority to withhold information which would cause serious harm to the child or another person or disclosure of a third party's identity. Where the reporter sees the need to withhold his consent on the grounds available to him, the authority must comply. We believe that the protection of sources afforded by these provisions will enable the supply of information to proceed as at present.
Secondly, there is the point concerning parents and the children's age. As regards the relationship between parents and children, the regulations provide for access by a person to information about himself. A parent could have access on his own account or, in Scotland, if acting for a child under the age of 12 or 14, if a boy. Above those ages a child has the right to access on his or her own account or can,
150
if he or she so wishes, allow access by another person on his or her behalf. In other circumstances, where the parent is the de facto applicant, the local authority has to exercise judgment to decide whether any information would cause serious harm to the subject of the information or to another person. The relationship between parents and children can be a difficult area. Guidance issued to local authorities in Scotland will make clear that they should act with caution where parents seek access to personal information on behalf of a child.
Thirdly, there is the comparison between social work regulations and the proposals on access to education records. My noble friend said that the Government's proposals for access to school education records seem to offer a greater privacy to the child than under the social work regulations before us this evening. The education proposals contain some differences of approach, but we emphasise that they are only proposals at present. They provide for the parent of a child under 16 years to have the right of access to the child's school record without the child's consent and for children over 16 years of age to have access with the same rights as those afforded to their parents.
We have just outlined the rather different age thresholds applying in the case of social work regulations while from some perspectives the arrangements for access by children to their social work records may be said to be more protective of the child's privacy. We do not think at the end of the day that the different thresholds will affect significantly the rights of children vis-?-vis access to social work records or to education records when the latter are finalised. The Government will, however, have close regard to the position now embodied in the social work regulations when they consider the results of the consultations on access to education records.
Finally, my noble friend raised the possibility of damage to relationships. As regards my noble friend's point about damage to relationships between professionals and within families, we must bear in mind that the essence of the regulations is the provision of access subject to certain safeguards. The regulations do not apply, as I have said, to records maintained by reporters to children's hearings and the reporter will have the right to veto the disclosure of information provided by him to the social work departments. In addition third parties generally will be asked for their consent to disclosure where they have supplied information. If their consent is not forthcoming authorities will have to "anonymise" such information to protect the identity of its source. We are sure that local authorities will act responsibly in providing access and we are confident that relationships developed over the years will not be impaired if the regulations are operated, as we intend, with due care.
As regards the final point of the noble Earl, Lord Russell, who asked whether there would be access to records for housing in Scotland, the answer is yes. I note the points that the noble Earl made.
The noble Earl raised the question of housing and the requirement to state which exemption is to be used. We accept that housing regulations are different from social services regulations However,

151
we believe that it is less likely that sensitive information will be held on tenants' records. We are concerned only with access to information held for the purposes of the tenancy. Therefore, we think it best to give more reason to the desirability of being open about the exemption relied upon.
Finally, I note carefully the matters raised by my noble friend Lady Faithfull. In case there are points which I have not dealt with tonight I shall read Hansard and reply in writing.
On Question, Motion agreed to.

Access to Personal Files (Social Work) (Scotland) Regulations 1989
8.10 p.m.
The Earl of Arran: My Lords, I beg to move.
Moved, That the draft regulations laid before the House on 16th January be approved [5th Report from the Joint Committee].—(The Earl of Arran.)
On Question, Motion agreed to.

Access to Personal Files (Housing) Regulations 1989
The Earl of Arran: My Lords, I beg to move.
Moved, That the draft regulations laid before the House on 17th January be approved [7th Report from the Joint Committee].—(The Earl of Arran.)
On Question, Motion agreed to.

Local Authority Social Services (Designation of Functions) Order 1989
The Earl of Arran: My Lords, I beg to move.
Moved, That the draft order laid before the House on 19th December 1988 be approved [5th Report from the Joint Committee].—(The Earl of Arran.)
On Question, Motion agreed to.
The Earl of Dundee: My Lords, I beg to move that the House do now adjourn during pleasure until 8.30 p.m.
Moved accordingly, and, on Question, Motion agreed to.
[The Sitting was suspended from 8.11 to 830 p.m.]

Companies Bill [H.L.]
House again in Committee on Clause 82.
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(54):
Page 78, line I, after ("refuses") insert ("or fails after being requested to do so").
The noble Lord said: Here we are dealing with the possibility that the further particulars might fail to be
152
signed by either the company or the chargee. It seems to us that there is a supplementary amendment to subsection(3)(a) of new Section 401 of the Companies Act, which covers an eventuality not covered at the moment; namely, where the company or the chargee does not refuse and yet does not sign. In our view he must be requested to do so and fails if he does not sign when requested to do so. This is a relatively small point but it rounds out the solution to all the possibilities, which at the moment I do not believe is rounded out in the Bill as at present drafted. This is not a very important amendment, but it has been suggested to us by a member of the Law Society and I hope that the Government are able to respond to it. I beg to move.
Lord Strathclyde: I do not believe that this amendment is necessary or desirable. It is unnecessary because if the company or chargee fails to sign after a reasonable number of reminders, any court would take the view that it was being recalcitrant and was refusing to sign. The amendment is undesirable because it is much better left to the court to decide what is or is not a refusal. The amendment would allow an application to be made to the court at the shortest delay on the part of the person whose signature was being sought.
Presumably it is not the intention behind the amendment that any delay, however minimal, should permit an application to the court. The delay would have to be unreasonable. But if it is unreasonable, the court is free on the existing wording of the section to take the view that the delay amounts to a refusal anyway. In the light of this, I ask the noble Lord to withdraw his amendment.
Lord Williams of Elvel: What happens if the court makes a decision and the matter goes to appeal and further appeal on the grounds that there is a failure in time? Should we not have something in the Bill if it is uncontentious? It would allow the court to take a perfectly reasonable decision that there has been a failure after the request. The fact of the request can be established very simply.
Lord Strathclyde: Perhaps I have not explained fully to the noble Lord what is suggested by our wording. We believe that our wording already allows an application to the court if a person fails to sign. However, I am prepared to look at what the noble Lord said and if we feel that he has a point, we shall consider whether an amendment is necessary.
Lord Williams of Elvel: I am grateful to the noble Lord. As I said, this is a matter of rounding out—a little more than drafting. If the Minister will look at it and perhaps produce something on Report, I shall be happy to withdraw the amendment.
Amendment, by leave, withdrawn.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(55):
Page 78, line 15, after ("and") insert ("any person appearing from the particulars to be").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(56):
Page 78, line 16, after ("chargee") insert (", and if the particulars were delivered by another person interested in the charge to that person,").
The noble Lord said: Perhaps I may also speak to Amendment No. 227Z(64). These amendments rectify omissions in new Sections 401(5) and 404(4) to bring them into line with new Section 398(6). Particulars under new Section 398, further particulars under new Section 401 and memoranda of satisfaction or release under new Section 403 may be delivered by the company, the chargee or any other person interested in the charge. New Section 398(6) requires the registrar to send a copy of particulars received to the company and the chargee. If the particulars were delivered by another person interested in that charge, he must also send a copy to that person. New Sections 401(5) and 403(4) as drafted do not include this last requirement. The amendments put the omission right. If further particulars or a memorandum are delivered by another person interested in the charge, the registrar will be required to send a copy to that person. I beg to move.
Lord Williams of Elvel: There is no problem with this amendment. However, I should like the noble Lord to clarify that the other person interested in the charge is a person whose interest is registered in the particulars of the charge and not somebody who may be extraneously interested in the particulars of the charge.
Lord Strathclyde: Perhaps I may clarify what we are trying to do. The requirement for the signatures of both the company and the chargee provides a safeguard for both of them. Without the requirement, the company might deliver particulars that understated the extent of the charge or a memorandum that claimed incorrectly that a charge had been discharged. In those circumstances the charge would be void in respect of the inaccuracy. It is necessary, therefore, for the chargee to approve any further particulars or memorandum. Similarly, if the chargee delivers further particulars that result in an overstatement of the extent of the charge, the company will suffer because the register may exaggerate its indebtedness, putting off other potential creditors.
The noble Lord, Lord Williams, asked a specific question concerning whether the other person would be in the particulars of the charge. I assure him that the answer is that it will be a assignee or guarantor.
On Question, amendment agreed to.
Clause 82, as amended, agreed to.
Clause 83 [Effects of errors and omissions in particulars delivered]:
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(57):
Page 78, leave out lines 23 to 25 and insert ("are incomplete or inaccurate").
The noble Lord said: In speaking to this amendment I should like also to speak to
154
Amendments Nos. 227Z(58), (59) and (62). These amendments deal with two related points, one of them technical and the other of substance, but it is convenient to deal with them together.
It is necessary to recast the drafting of new Section 402(1), together with new Section 402(6) to improve the drafting and make it more precise. The provisions as drafted apply the avoidance sanction only in respect of rights which
"should have been disclosed by the particulars…but were not so disclosed".
In the case of particulars delivered under new Section 398, the reference to "should have been" is appropriate since there is a duty to deliver complete particulars in the prescribed form. But in the case of particulars under new Section 401, the expression "should have been" is less satisfactory because there is no duty to deliver further particulars—the new section is permissive. The only reason why such further particulars "should have been" delivered is that the charge will be partially ineffective if they are not delivered.
The amendments deal with this point by referring in new Section 402(1) to particulars that are "incomplete or inaccurate" and providing that a charge is void to the extent that it confers rights which "would be" rather than "should have been",
"disclosed by the particulars delivered for registration if those particulars were complete and accurate but are not disclosed".
Because of this recasting of new Section 402(1) it is necessary to interpret "complete" in new Section 402(6). The interpretation of "complete" inserted in new Section 402(6) contains a substantive change. Amendment No. 227Z(62) would create a new subsection (6)(b) saying that,
"particulars shall not be regarded as incomplete or inaccurate by reason only of their omitting or mis-stating the name of the chargee".
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. 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. I beg to move.
8.45 p.m.
Lord Williams of Elvel: The noble Lord described one of the amendments as being material. Indeed, it is material. The expression in Amendment No. 227Z(62) that,
"particulars shall not be regarded as incomplete or inaccurate by reason only of their omitting or mis-stating the name of the chargee",
does seem to be a material change in the Bill.
If I lend some money, which I would never dream of doing, to the noble Lord, Lord Lloyd of Kilgerran, and he omits to put his name to the bill I am discounting for him, or I omit to put my name when he lends me money, that would appear to be a serious problem. If the particulars are not complete through that fact I do not understand how the charge can be valid. Perhaps the noble Lord can explain.
Lord Lloyd of Kilgerran: I am inclined to agree. I agree that the first three amendments are a

155
considerable improvement on the original clause. However, I cannot understand why,
"omitting or mistaking the name of the chargee",
should be put into subsection (6)(b) in the way that it has been. I agree entirely with the noble Lord, Lord Williams of Elvel, on this point.
Lord Strathclyde: Perhaps I can answer the questions put by both noble Lords by saying this. The exception would also preclude avoidance where particulars become inaccurate because of a change in the identity of the chargee. It would be a considerable burden if all those in whom the security rights of the charge were newly vested had to deliver further particulars. Particulars would have to be delivered, for example, every time there was an assignment of a charge. Since the identity of the chargee is not a crucial piece of information which third parties would rely on for their own assurance or to secure their own position, it is unnecessary to impose such a burden.
Lord Williams of Elvel: With respect, the identity of the chargee is very important. If the identity of the chargee is the Bank of England, no one will challenge that charge. However, if the identity of the chargee is the lowest citizen in the land someone can walk across that charge and fight it in the courts. If the lowest citizen in the land cannot fight it in the courts like the Bank of England can, then there is a difference. The Government are treating this in a slightly cavalier manner—I make no such comment—on a personal basis—and it is a matter that requires further examination.
Lord Lloyd of Kilgerran: If the reference was to "mis-spelling" the name of the chargee instead of "mis-stating" the name of the chargee, I would be perfectly happy. However, to have
"omitting and mis-stating the name of the chargee"
seems to be impracticable.
Lord Strathclyde: There is obviously no desire on the part of the Government to be cavalier in their attitude and I take note of the strong feelings of both noble Lords. The amendment addresses a concern expressed by many outside bodies, which is why it has been brought forward in this form. The whole charge might become void because of a relatively minor mistake. The main purpose of the register is to know whether the property itself is encumbered.
I can see the noble Lord, Lord Williams of Elvel, is shaking his head, but what is not so important is to whom it is encumbered. The point of the register is to make sure whether or not a property has a charge on it.
Lord Williams of Elvel: I am sorry to intervene, but there is a serious disagreement between the Government and myself and the noble Lord, Lord Lloyd of Kilgerran, on the matter of who has the lien over the property in question. It makes a difference. If one goes to the register to make a search and discovers that the Bank of England is the chargee, that is something to which you pay attention. if you discover, as I suggested, that the lowest citizen in the
156
land is the chargee, you may pay less attention. That in itself is a matter of importance.
I accept the noble Lord's point that the fact of whether or not a property is encumbered is the central point, but there is nevertheless the subsidiary point I have just made. If the noble Lord could accept the suggestion made by the noble Lord, Lord Lloyd of Kilgerran, that a mis-spelling or misprint could not render the particulars invalid, I can see no problem; but "omitting" or "mis-stating" the name of the chargee seems to be much more serious.
Lord Strathclyde: There is obviously considerable strength of feeling from Members opposite. Therefore, I shall be happy to look at what has been said without giving any undertaking that we will come back with amendments.
I have already said, but perhaps I may repeat it, that the principal purpose of the register of charges at Companies House is to allow searchers to assess the indebtedness of the company and to allow potential secured creditors to check whether the property they are being offered as security is already subject to a prior charge. If particulars of a charge appear on the register, the identity if the chargee will be a matter of little significance to them. On the rare occasion where it might be, they would be able to inspect the register and instrument of charge kept at the company's registered office under new Section 408.
Earlier the noble Lord, Lord Williams of Elvel, referred to the Bank of England, but the point he made is not as important as he believes it to be because a charge is valid irrespective of the status or identity of the chargee. I said I would look at what has been said. If we can agree this amendment in the meantime, then I shall look at the Official Report to see if any further amendment needs to be brought forward at the next stage.
Lord Lloyd of Kilgerran: I did not understand what the noble Lord said regarding the substitute Section 408. It is entirely my fault and I am sorry. It may be that it is immaterial.
Lord Strathclyde: Very briefly, the point is that if the identity of the chargee is a matter of significance to a searcher, then he can inspect the register and the instrument of the charge itself, which is kept at the company's registered office under the new Section 408.
Lord Lloyd of Kilgerran: I am very much obliged.
Lord Williams of Elvel: I am also obliged to the noble Lord and I accept his reference to Section 408. We have problems with this new section which is the object of amendment. Until we have discussed that we cannot accept the Government's assurance that all will be solved by the new Section 408. I understand that we do not wish to delay matters. I am not prepared to oppose this amendment, but I wish the noble Lord and the Government to understand that the register is not simply a record of whether a property is encumbered or not. It is whether there is indebtedness and the quality of that indebtedness. That is why we have the particulars set out in the Act.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendments Nos. 227Z(58) and 227Z(59):
Page 78, line 27, leave out ("should have been") and insert ("would be").
Page 78, line 28, leave out ("but were") and insert ("if those particulars were complete and accurate, but are").
On Question, amendments agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(60):
Page 78, line 35, leave out from ("value") to ("acquires") in line 37.
The noble Lord said: This amendment has already been spoken to and I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(61):
Page 78, line 37, after ("in") insert ("or right over").
The noble Lord said: Since I have spoken to Amendments Nos. 227Z(61) to (65), would it be convenient if I dealt with these together?
Lord Williams of Elvel: No.
Lord Strathclyde: I beg to move Amendment No. 227Z(61).
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(62):
Page 79, line 18, leave out from beginning to ("the") in line 21 and insert—
("6) In this section—

(a) references to the particulars of a charge delivered for registration are to such particulars and further particulars as may have been delivered from time to time;

(b) 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 charges; and

(c)").

The noble Lord said: I have already spoken to this amendment.
On Question, amendment agreed to.
Clause 83, as amended, agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(63):
Page 80, line 5, after ("and") insert ("any person appearing from the memorandum to be").
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendments Nos. 227Z(64), (65) and (66):
Page 80, line 6, after ("chargee") insert (", and if the memorandum was delivered by another person interested in the charge to that person,").
Page 80, line 14, leave out from ("value") to ("acquires") in line 16.
Page 80, line 16, after ("in") insert ("or right over").
The noble Lord said: I beg to move these amendments en bloc.
On Question, amendments agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(67):
Page 80, line 23, at end insert—
("(6) Where a relevant event occurs as a result of which a charge becomes void to any extent by virtue of this section, the whole of the money secured by it is repayable (together with any interest) on demand.").
The noble Lord said: This amendment puts right a simple omisson from new Section 403. New Sections 399 and 402 already provide that where a charge becomes void or partially void upon a relevant event, the whole of the money secured by it is repayable (together with any interest) on demand. A similar provision is already contained in Sections 395(2) and 410(3) of the 1985 Act. The amendment will apply the provision to avoidance arising out of the delivery of a memorandum of satisfaction or release in circumstances where the debt has not been satisfied and the charge has not been released. I beg to move.
On Question, amendment agreed to.
Clause 84, as amended, agreed to.
Clause 85 [Further particulars to be delivered]:
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(68):
Page 81, line 9, at end insert—
("(5) This section does not apply in relation to companies registered in Scotland (for which corresponding provision is made by sections 53, 54 and 62 of the Insolvency Act l986).").
The noble Lord said: New Section 405 repeats Section 405 of the 1985 Act. There is no equivalent section in Chapter II of the 1985 Act in respect of companies registered in Scotland, because corresponding provision is made in the Insolvency Act 1986 (and was included in preceding legislation). The amendment, therefore, disapplies new Section 405 in relation to Scotland, where it is unnecessary. I beg to move.
On Question, amendment agreed to.
Lord Lloyd of Kilgerran Lord Lloyd of Kilgerran moved Amendment No. 227Z(69):
Page 81, leave out lines 13 to 16.
The noble Lord said: The effect of the substituted Section 406 is that the Secretary of State will have the power to make regulations to require 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 specified assets. I shall not make any complaint a t this stage and at this late hour, but this raises another issue of principle. The noble Lord, Lord Rippon, reminded us earlier this evening that it raised the question of the powers of the Secretary of State.
There is a major problem arising in the substitute Section 406 (1)(a) to be found in lines 13 to 16 of the Bill. This amendment is directed to delete that subsection (1)(a). As I read the subsection, the lender will be obliged to give public notice of an event and entitle him to crystallise a floating charge whether or not he exercises this entitlement. I am advised that this can be damaging to the commercial lending process as well as being virtually impossible in practice. The lender will frequently become aware of a technical default and will not ask the borrower to correct it. It will be corrected and that will be the end of the matter.
A public notice may cause panic among all creditors of that company and trigger cross-default clauses in other charging documents. I do not believe that the Government have thought through the

159
applications of these four lines. I beg to move for their deletion.
Lord Williams of Elvel: The noble Lord, Lord Lloyd of Kilgerran, has brought to the attention of the Committee a very important point. As I understand it the point is that the Secretary of State may by regulation require notice in some form that he is to prescribe to be given to the registrar of whatever he decides are the events and the occurrence of such events. The Bill as drafted continues at page 81, line 14,
"affecting the nature of the security under a floating charge".
A floating charge is a charge on the assets or the partial assets of a company. A floating charge may be affected in its nature by a variation in the current asset ratio of a company, by a variation in the ratio of net worth to current assets of a company or by other factors. The nature of the charge may be affected by any number of considerations. If the floating charge has been registered and particulars have said that it is a charge of a floating nature on all the assets of the company, which is a perfectly normal way of expressing it, anything which affects the assets of that company could affect the nature of that charge. I do not see how the Secretary of State could specify or prescribe what events could affect that charge and how they might occur. The drafting is loose to the point of absurdity, and the noble Lord, Lloyd of Kilgerran, has drawn our attention to an important defect in the Bill.
9 p.m.
Lord Strathclyde: I think I should explain first the reason for giving the Secretary of State a power to require notice of events in new Section 406(1)(a) that cause a floating charge to crystallise. The knowledge that a floating charge has crystallised is important to other prospective chargees. For example, a crystallised floating charge will take priority over a subsequently created equitable fixed charge. It is desirable, therefore, to have a means of providing for disclosure of the crystallisation of floating charges. Without the power to require notice of events prescribed under new Section 406(1)(a), the Secretary of State would not be able to ensure that the register of charges disclosed full information about floating charges.
I am aware that there is some concern that certain events causing a floating charge to crystallise might not be in the knowledge of either the company or the chargee. The use of "automatic crystallisation clauses" has become accepted commercial practice. These clauses might provide that a floating charge shall automatically crystallise if, say, the company exceeds a specified borrowing limit. The company might not know immediately that the limit had been reached, and the chargee would not know either unless the company told him. Some have said that this sort of automatic crystallisation should not be allowed, and, indeed—
Lord Williams of Elvel: I am sorry to interrupt. Is the noble Lord distinguishing between covenants in a loan agreement, which cover the point he has just raised, and a floating charge?
Lord Strathclyde: I do not see that that question arises.
Lord Williams of Elvel: The noble Lord described what I would call an event of default in a loan agreement where, if a current ratio or an indebtedness ratio goes above a certain limit, there is an event of default. That is not a floating charge.
Lord Strathclyde: No, but that is what could trigger off an automatic crystallisation of a floating charge. A charge could be over a variety of assets which would therefore justify it as being a floating charge.
Lord Williams of Elvel: It might or might not trigger off a floating charge. It would depend on the loan agreement. If the loan agreement simply says that in the event of a current ratio becoming this, that or thus, there will be an event of default, then, under usual loan agreements the company will have a period of time during which it can rectify that event of default. Only in the event of it being unable to rectify that default are charges triggered. Those may be floating charges or other charges.
Lord Strathclyde: I must point out that the example I am using is only an example. I do not see that the difficulties the noble Lord has with it are necessarily valid. All we are trying to point out in this instance is that, if the terms of the floating charge specified that it would automatically crystallise if the company exceeded a specified borrowing limit, the company might not know immediately that the limit had been reached and the chargee would not be able to know unless the company had already told him.
Under new Section 406(1)(a) the Secretary of State would have the power to make such a crystallisation ineffective. It is not, however, his intention to require the notification of any events which are not of such a nature as to be within the knowledge of the party on whom the obligation to notify is imposed. He would intend to use his powers under this new section to require the company or the chargee (as the case may be) to notify only those events which would be within the knowledge of the company or the chargee. I do not think that it is possible to argue that such events should not be notifiable. An aspect of the policy underlying Part IV of the Bill is that chargees should have to deliver particulars notifying any change in the terms of a charge if they want to enjoy any extra protection afforded by the new terms as against third parties. This principle is behind new Section 402. It is entirely consistent with that principle that the holder of a floating charge should have to give notice when it crystallises and in effect attaches to property as a fixed charge.
I know that there has been a certain amount of concern about the provision. Perhaps the noble Lord, Lord Lloyd of Kilgerran, would like to say something at this stage.
Lord Williams of Elvel: Before the noble Lord decides what he wants to do with his amendment, I should like to say that the Government's response to it has been somewhat less than we might have expected. There is a difference between a floating charge, which is a perfectly clear arrangement, and the covenants that may appear in loan agreements and other documents. The triggering off of cross-default clauses in other loan agreements, which the noble Lord, Lord Lloyd, mentioned in his original introduction, can be through a crystallisation of a

161
floating charge or an event of default under one of the loan agreements which form part of the cross-default mechanism that most companies now have.
The point is that a floating charge is a charge. It is not a covenant under a loan agreement. A great deal of what the noble Lord has been saying is irrelevant to the crystallisation of a charge. When a charge, whether floating or fixed, is crystallised, then, as the Bill properly says, there is no legal impediment to the money which has been lent on the charge being repaid at sight; but that is different from an event of default under a loan agreement. It is different from a cross-default clause under a loan agreement which, again, may give time for the company to repay or to correct the default if the whole thing is not brought down and the repayment is at sight.
We are dealing with a technical and difficult matter. I hope that the noble Lord will look at this point. Perhaps we can have a further discussion, because it is too late for us to concentrate on the point. I am sure that the noble Lord, Lord Lloyd of Kilgerran, will wish to add his word after the Minister has replied to me.
Lord Strathclyde: Before the noble Lord, Lord Lloyd of Kilgerran replies, perhaps I may say that the noble Lord spoke of loose drafting. Consideration was given to framing the power in such a way that notice would be required only of events within the knowledge of prescribed persons. However, there are a number of difficulties with that requirement. To avoid unnecessary complexities, the power is framed in general terms. As I said, however, the intention is that it should be exercised in relation to prescribed events which are known to the company which is charging.
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.
Lord Lloyd of Kilgerran: When I moved the amendment I spoke rather bluntly. I said that I did not believe that the Government had thought through the implications of the four lines in the subsection. Frankly, I am reinforced in that view having regard to our discussions. In view of the fact that the Minister has agreed to look at the matter again, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 85, as amended, agreed to.
Clause 86 [Interpretation]:
Lord Strathclyde Lord Strathclyde moved Amendments Nos. 227Z(70) to 227Z(73):
Page 82, leave out lines 8 and 9.
Page 82, line 21, at end insert ("or right over").
Page 82, line 23, at end insert ("or right").
Page 82, leave out lines 24 to 30.
On Question, amendments agreed to.
Clause 86, as amended, agreed to.
Clause 87 [Copies of instruments and register to be kept by companies]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(74):
Page 83, line 4, leave out ("a") and insert ("an up to date").
The noble Lord said: It may be for the convenience of the Committee if I speak also to Amendment No. 227Z(75). I mentioned a few moments ago that the reliance on new Section 408 of the Companies Act, which is suggested in Clause 87, was perhaps a rather doubtful crutch upon which the Government should lean because in many cases a company's register is not kept up to date and there is no check that it is kept up to date.
Amendments Nos. 227Z(74) and 227Z(75) are designed to ensure that companies' registers are kept up to date and are properly verified as being up to date. I accept that there may be a dispute about whether the register of charges in a company should be inspected once or twice a year, once a quarter or whatever it might be; but at least the company auditors should inspect the register in the way that they inspect the company's schedule or assets. It is obvious that if we are to rely on companies' registers—it is right to rely on them, and they should keep up-to-date registers of charges—the statutory obligations are necessary. I hope that the Government will accept them. I beg to move.
Lord Strathclyde: I do not disagree with the intention behind these amendments. I do not think anyone would wish to argue against the proposition that a company should keep its register properly and up to date. Unfortunately, these amendments would not assist that objective. Amendment No. 227Z(74) was based on the belief that the new Section 408(2) does not require companies to keep an up-to-date register, but the section as drafted does impose that requirement. It imposes a duty on a company to keep a register of all charges containing certain entries. Those entries must be accurate and up to date if the duty is to be fulfilled.
The noble Lord's amendment might have been necessary if the requirement had been for companies to enter in a register details of a charge when it was created. However, the duty is to keep a register: this is a continuing duty to maintain an accurate register. The addition of the words "up to date" is therefore unnecessary.
The more substantial proposal is contained in Amendment No. 227Z(75). I am aware that, as part of their audit, some auditors regard it as best practice to inspect the register of charges. But what would an annual inspection by auditors achieve in so far as the maintenance of the register was concerned? It would not ensure that the register was properly kept during the remainder of the year, and even lithe auditors did discover that the register was inadequate, they could not be expected to do much more than inform the company itself that it was failing in a statutory duty.
I do not think it worth while imposing another task by statute on a company's auditors such little purpose. There are many duties that are placed upon companies which are not subject to inspection by their auditors. The maintenance of a register of charges is only one of them. While the intention behind the amendments is sensible, we should not add unnecessary words to the Bill or make unnecessary work for company auditors. Therefore, I would ask the noble Lord to withdraw his amendment.
Lord Williams of Elvel: I accept that the Government's interpretation of subsection (2) of the new Section 408 might well render my Amendment No. 227Z(74) otiose. I am still doubtful about it and wish to take advice but I accept the noble Lord's point, subject to reading carefully what he has said, and subject to further advice.
I am not prepared to accept that there should be no effort at all at enforcement in regard to company registers. The fact is that company registers are not kept up to date and anybody who has been in the real world and dealt with the matter will know this. One of the original reasons why there was a public register in the first place was that company registers were not kept up to date. I believe that the Government have to take company registers and the enforcement of this obligation upon companies much more seriously than they have hitherto. So I should like to hear the noble Lord say to me that he will think about this again. I am quite certain that if the Government do not put this in they are not recognising a major problem and a major difficulty with this Bill—that the company register is a fallible object at the moment. Whether the auditor inspects the register once every three months, once a year or whatever it may be, at least he has the right to go and look at it and to remind companies of their statutory duty. If there is no policeman I am afraid the register will get out of date, as it has in the case of very many companies. I can produce a number of instances from my own personal knowledge, where bankers have relied on registers being up to date and they have not been up to date. So I hope the Government will pause and think again before rejecting this second amendment. Perhaps we might have another discussion on this at Report stage after they have thought.
Lord Lloyd of Kilgerran: I do not wish to appear to be otiose at this late hour in having any difference at all with the views of the noble Lord, Lord Williams of Elvel, on this matter. The noble Lord the Minister raised the question of cost and I wondered whether the noble Lord, Lord Williams, has thought that this inspection of the register by the company's auditors every year should not be forced upon the companies which are colloquially called SMEs, the smaller companies and not the larger companies.
Lord Williams of Elvel: I have no particular views on this. I regard the cost of an audit, the additional marginal cost of doing this, as opposed to looking at the schedule of fixed assets, to be absolutely minimal. We are probably talking about another £500 on the audit fee. If that is going to be critical to a public company or an SME, I would say there is something wrong with the company. So I do not regard the marginal cost of doing this as being something essentially important.
Lord Strathclyde: I find myself surprised that the noble Lord, Lord Williams, is being so forceful about this point. I thought I had explained the matter rather carefully in my original reply to his Amendment No. 227Z(75). I must point out that there are so many duties of companies which are not subject to audit. As the noble Lord knows, there are 600 pages in the 1985 Companies Act and the vast majority of them concern duties which are not related to accounting and audit matters.
164
The noble Lord does not need me to tell him that the Government are firmly committed to lifting the burden of regulation that is not necessary. We cannot accept a new requirement that will create extra work for auditors and extra costs for companies, with no benefit to anyone.
Lord Williams of Elvel: What would happen if an auditor discovered that the schedule of fixed assets of a company was incorrect?
Lord Strathclyde: Auditors audit registers as part of their duties in relation to the company's accounts. It is not part of their job to inspect those registers. The alleged difficulty has not been apparent in our consultations. There have been no complaints at Companies House.
Lord Williams of Elvel: If the Minister says that auditors audit or examine these registers as part of their audit, I am afraid that that is not the truth: they do not do so. I believe that they should do so. There is no difference between examining and inspecting in auditing terms. One can use whatever expression one likes. I want the auditors every year to look at the register and ensure that it is as up to date and properly kept as the schedule of fixed assets. They do not do that at present.
Lord Strathclyde: This may not be the appropriate time to debate what should or should not be included in the work carried out under an audit. Part IV is specifically about the registration of company charges. Any proposal for an inspection of the register must be justified on its merits, not because it would be relevant to an entirely different function. I know that the noble Lord feels strongly about the point. Perhaps he would look at what has been said in Hansard, and then, if he feels strongly about it, he can bring it back at a later stage.
Lord Williams of Elvel: I shall certainly look at what has been said in Hansard, but nothing that has been said so far persuades me that the Government have answered the points that I have made at all.
However, I accept that it may be appropriate to bring in an amendment in Part I of the Bill—that is probably the place that I shall do it—on Report. I am afraid that the Minister will not rest easy because I shall come back to the matter. It is an important point. A lot of the backing of the public register is from the companies register itself. We must make sure that it is right, up to date and properly checked. I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z (75) not moved.]
Clause 87 agreed to.
Claue 88 [Charges on property of oversea company]:
Lord Williams of Elvel Lord Williams of Elvel moved Amendment No. 227Z(76):
Page 86, line 1, leave out ("400 and 402") and insert ("and 400").
The noble Lord said: I beg to move Amendment No. 227Z(76). It may be for the convenience of the Committee if I speak also to Amendment No. 77.
The amendments may seem very small in terms of wording, but they are important. The Law Society of England and Wales at least considers them to be very important. The society has made representations to us, of which I am sure the Minister is aware—it has

165
sent the appropriate representations to the department—that it does not agree with the retention of provisions in relation to registration of charges by foreign companies which have the effect that such charges are void unless registered within a specified period. The society believes that what is proposed is unworkable and will lead to great uncertainty. Furthermore, it considers that the provision in the new Section 703 for determining when charges created by foreign companies are registrable raises serious practical difficulties.
I do not wish to expand on the Law Society's reasons at this late hour. I believe that the department has received the representations, which I am sure will have been studied also by the noble Viscount, Lord Long.
Lord Lloyd of Kilgerran: I wish briefly to intervene to say that I also have been instructed by the Law Society. I accept its submissions, which are largely along the lines of what the noble Lord, Lord Williams, said.
Lord Strathclyde: I am grateful to both the noble Lords for having spoken relatively briefly. We have obviously received representations from the Law Society.
Prospective creditors who search the register in order to discover the existence of any prior charges created by companies are just as much in need of protection from unregistered charges where the company is an overseas company as they are where the company is a domestic company. It is quite true that the holder of a charge created over the property of an overseas company may not necessarily know whether the property is situated in Great Britain at the expiry of the period allowed for delivery of the particulars. But the chargee has the remedy in his own hands. He can register the charge as a prudent precaution in the light of the likelihood of the property subject to the charge being situated in Great Britain on the relevant date.
As regards property which is situated abroad at the date of the charge or property which is not yet owned by the company at that date, if the chargee considers that the risk of the property becoming situated in Great Britain without his knowledge is unacceptable, he has only to register his charge at the time of creating. This does not seem by any means an unreasonable demand to make of such chargees. The obligation to register charges applies only in respect of those overseas companies which have registered in Great Britain under Section 691 of the Companies Act 1985. The sanction of avoidance of failure to do so will not apply in respect of those charges granted before the date when the overseas company is registered under Section 691.
If a chargee wishes to have the benefit of his security in respect of property which may at a later date be situated in Great Britain, he need only register the charge in Great Britain. If he does not know whether the company is registered in Great Britain, he need only inquire. A chargee who wishes to have the benefit of the security and priority to other creditors in this country can reasonably be expected to comply with the requirements and conditions which apply in this country for securing such a priority.
166
An overseas company which has a place of business in this country and is registered for business in this country is very likely to be seeking credit in this country. It is almost certain to be disposing of its property in this country. No creditor can reasonably treat his charge as though it existed in a vacuum, insulated from the competing claims of other persons who acquire interests in the same property, and no chargee can treat his charge as though it existed in a vacuum of immunity from the law of the country where he seeks to enforce his claim to priority.
It is perfectly reasonable to expect a company of any foreign nationality and a chargee of any nationality to register charges created by the foreign company in any country in which that company is registered for business and in which therefore it is likely to be dealing with its property and soliciting business. In light of that I ask the noble Lord to withdraw his amendments.
Lord Hacking: I am a little reluctant to rise at this stage in the proceedings of the Committee because I have not had an adequate opportunity to participate in the same detail at this stage as I should have liked on such a highly technical Bill as this. However, the company law committee of the Law Society has given a very detailed paper to the Government. The Minister has been kind enough to acknowledge that.
I do not wish to debate the problem in detail but it is complicated. It is of extreme importance that persons who are examining a company should have access to a register with information that is wholly up to date, and information on which the company making the inquiry can rely. The difficulty with this amendment is that by a movement of dates, which I can explain in more detail, it does not give the protection that should be given to persons who examine the register. Without going further into the technicalities, I ask the Government to look very carefully at this long memorandum. I know that it was prepared only a matter of days before the Second Reading. The Government have not had an opportunity to give it the detailed consideration that it truly deserves. I would be grateful if the Minister could at least assure the Committee that this detailed memorandum will be given very careful consideration before Report.
Lord Williams of Elvel: I am sure he Committee will echo the words of the noble Lord, Lord Hacking, that the Government should give the views of the Law Society the attention that they deserve.
On the particular point that we haw. discussed this evening and on these two amendments to which I have been speaking, I accept that we have been through the process of exploring how the Government arrived at the decision they did. It is now for us to look at the reasons that the noble Lord has set out. We shall analyse those and see whether we agree with them and wish to move the matter further on Report. Unless any other Member of the Committee wishes to speak to these amendments, I beg leave to withdraw the amendment.
Amendment, by leave, withdrawn.
[Amendment No. 227Z(77) not moved.]
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(78):
Page 86, line 36, leave out from ("Chapter)" to end of line 41 and insert
("(2) In relation to such a company Section 408 applies with the substitution, for the reference to the company's registered office, of a reference to its principal place of business in Great Britain.").
The noble Lord said: This amendment takes out an incorrect reference to new Section 409(3) in new Section 703E. The reference has the effect of disapplying new Section 409(3) from the provisions on overseas companies. This was not intended. I beg to move.
On Question, amendment agreed to.
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(79):
Page 87, leave out lines 1 to 7 and insert—
("(2) The following provisions apply for determining for the purposes of this Chapter whether a vehicle which is the property of an oversea company is situated in Great Britain—

(a) a ship, aircraft, or hovercraft shall be regarded as situated in Great Britain if, and only if, it is registered in Great Britain;

(b) any other description of vehicle shall be regarded as situated in Great Britain on a day if, and only if, at any time on that day the management of the vehicle is directed from a place of business of the company in Great Britain.").

The noble Lord said: Under new Section 703F(2) as drafted the decision as to where a ship, aircraft or hovercraft is situated is determined according to the place from which it is managed. It has been pointed out to us that this might result in potential conflicts of priority with the registration procedures for such ships, aircraft or hovercraft under the laws of foreign countries. The amendment therefore determines their situation according to whether they are registered in Great Britain. The amendment also replaces an incorrect reference to England with one to Great Britain. I beg to move.
Lord Williams of Elvel: The Government amendment rectifies a couple of points. I am still unclear as to the definition of "vehicle" in either the orginal Bill or the Government's amendment as drafted.
Lord Strathclyde: I am sorry the noble Lord is worried about the definition of "vehicle". I presume that that comes from new subsection (2). Vehicles are those things which are not ships, aircraft or hovercraft.
Lord Williams of Elvel: The Government amendment rectifies a couple of points. I am still carriage which is mobile but which has no independent means of propulsion would come within the definition of "vehicle". If a railway waggon or carriage is not itself a vehicle, we can foresee confusion arising in practice in relation to charges over trains where it is intended to charge both the train and railway waggons or carriages coupled to it, given the different rules relating to registration of charges which would then apply.
The whole question of the Eurotunnel or the Channel Tunnel will come into operation. Similar issues arise in relation to mobile caravans and trailers. I hope by now that the noble Lord may have a different definition of the word "vehicle".
Lord Strathclyde: I certainly do not in any way wish to confuse the noble Lord or the other Members
168
of the Committee. The term "vehicle" means any mobile conveyance for the carriage of goods and persons. So a cart without a horse is a vehicle, as are trailers and rolling stock without a tractor unit. I hope that that covers the point.
On Question, amendment agreed to.
Clause 88, as amended, agreed to.
Clause 89 agreed to.
Clause 90 [Consequential amendments]:
Lord Strathclyde Lord Strathclyde moved Amendment No. 227Z(80):
Page 87, line 46, after ("sections") insert (",45(5)").
The noble Lord said: Clause 90(2) discontinues the daily default fine in respect of offences of failing to deliver documents relating to the appointment or cessation of the appointment of a receiver. This is consequential upon the discontinuance of the daily default fine under new Section 405. The amendment corrects a failure to refer to Section 45(5) of the Insolvency Act, which concerns the variation of his office by an administrative receiver if he ceases to be qualified to act as an insolvency practioner. I beg to move.
On Question, amendment agreed to.
Clause 90, as amended, agreed to.
Lord Strathclyde: I beg to move that the House do now resume.
Moved accordingly and, on Question, Motion agreed to.
House resumed.
House adjourned at twenty four minutes before ten o'clock.