Companies Bill [H.L.]

HL Deb 30 January 1989 vol 503 cc890-977

3.55 p.m.

House again in Committee on Clause 1.

Lord Williams of Elvel moved Amendment No. 2: Page 1. line 13, at end insert ("and (c) inserting a new provision to modify the presentation of company accounts so as to allow shareholders, to consider contributions for political purposes separately from other business in general meeting").

The noble Lord said: I have already spoken to the amendment. I beg to move.

Clause 1, as amended, agreed to.

Clause 2 [Accounting records]:

Lord Williams of Elvel moved Amendment No. 3: Page 2, line 35, at end insert— ("( ) The directors of a public limited company shall take all such steps as are resonably open to them to ensure that a satisfactory system of internal control over the accounting records, registers and assets of the company is in operation.").

The noble Lord said: We propose this change to assist in the prevention of fraud, especially by those who happen to be working in companies. The Committee will know that well managed companies already have an adequate system of internal control. The Committee will also know that in the Banking Act, the Building Societies Act and the Housing Act similar wording is included to enjoin upon all those companies which operate within the purview of those Acts the obligation to have some form of internal control.

There seems to me and my noble friends no particular reason why what is enjoined on banks, building societies and certain housing associations should not also be enjoined on companies. As I said, properly managed companies already have this system. I have no complaint that the concept of internal control is not perfectly well understood by good managements.

I limit the amendment to plcs because I do not wish to impose burdens on private companies. Here I join with the Government in not wishing to impose a statutory burden upon those companies which may not be able to cope with it. The amendment also reinforces the obligation imposed on directors of plcs to ensure that their companies are properly managed. The Opposition feel that the amendment is desirable. I hope that the Government will agree with it. It will bring plcs in the non-banking and non-building society sector—if I may use that rather inelegant expression—into line with those sectors. It will reinforce the obligation of directors of plcs to ensure that their companies are properly managed. This is a system which should now extend right across the range of the public company sector. All I am trying to do is to bring all plcs in line with what banks and building societies have to do at present. I beg to move.

4 p.m.

Lord Strathclyde

The Government do not believe that it is appropriate for companies legislation to prescribe such obligations for the internal management of companies. Perhaps I may explain why company law sets out to ensure that companies deal properly with their shareholders' assets and that they are accountable to shareholders. It does not set out to make them efficient. That is the function of markets. In the interests of accountability the law requires companies to keep adequate accounting records and auditors to check that proper accounting records are kept before making their report. That is quite right and proper. In practice, auditors frequently report to companies about their systems of internal control before making their report. That, too, is all to the good. But to make the maintenance of a satisfactory system of internal control a statutory requirement, in the Government's view, crosses over the line dividing propriety from efficiency.

The noble Lord, Lord Williams, mentioned the prevention of fraud and in particular banks and building societies. As he knows, these are subject to a system of regulation under their own statutes because they are responsible for sums deposited. It is therefore not appropriate to apply such a regime to the generality of companies.

Lord Williams of Elvel

I am grateful to the noble Lord but I find his argument somewhat lacking in logic. I do not want to name any names, but major companies nowadays handle large sums of cash. They are responsible for operating, perhaps not in the same way as banks—but they are operating in the money markets to an extent much greater than a number of banks.

Further, I argue to the noble Lord that if a building society converts itself into a bank it still has to adhere to the regulation that it has to have an internal control system which meets the Banking Act. If it then tries to convert itself from a bank into something else by being taken over perhaps or taking over other organisations—to turn itself into a chemical company, just to name an example —it seems under this Bill, to escape the provision that existed under the Banking Act.

I find it very odd that a company which may have a bank as a subsidiary but itself is a plc is not required to adopt the same internal controls as its subsidiary bank. Perhaps I may refer back to previous Acts. The Companies Act 1947, the Companies Act 1985 and the general note in the Companies Act 1947 make reference to registers, the index, minute books and accounting records to be kept by companies in making entries in bound books, and all the rest of it. I am trying to reinforce this by making sure that that principle, which was enunciated a long time ago and carried right through into the Companies Act 1985, is extended to make sure that the comparison between banks, building societies and other plcs is not vitiated. That is the point of the amendment. Perhaps the noble Lord will reply.

Lord Strathclyde

I am still not sure that it is appropriate to apply the regime of banks and building societies to companies overall. I can understand why the noble Lord believes that it makes sense that all companies should have a satisfactory system of internal control. I think it is pointless to impose such a requirement without having an accepted view of what is and what is not a satisfactory system of control or at least an accepted means of testing a system. In practice the testing would become the responsibility of the auditors themselves.

I believe that there is a risk that under a statutory system auditors would devise a series of standard tests which would not provide sufficient scope for innovation and diversity by company managements. If a company turns into a bank, as the noble Lord suggested it might do earlier, or has a subsidiary bank, it does or should come within banking supervision. Therefore I think that the example the noble Lord gave that it would be able to bypass these provisions would not come into effect.

Lord Williams of Elvel

I still do not follow the noble Lord. I am afraid. The Banking Act and the Building Societies Act contain provisions which require auditors to make sure that internal controls are in place. So with the argument about auditors, why do we not have a similar provision in the case of industrial companies which are plcs?

As regards the point the noble Lord tried to answer about building societies turning themselves into banks, he did not answer my second point, which was that plcs of any description can have banks as subsidiaries but they themselves are not required under any legislation to have proper internal controls. It is only the banking subsidiaries that are required to do that. This seems to be an extraordinary way to go about matters. I should like to see something in the legislation which would ensure that all plcs should have internal controls which are vetted by the auditors. Everybody knows that that happens. It happens in the case at the moment, as I know as somebody who has been in charge of a plc. Auditors will always look at the internal controls. I cannot see any reason why this should not be written into the Bill.

Lord Strathclyde

I still have to say what I said in my opening remarks, that company law sets out to ensure that companies deal properly with their assets. But it does not set out to make them efficient. Therefore the internal running of the management systems must be up to companies themselves. There should be no question, I believe, that these should be brought into legislation.

As for the point about auditors and banking, to widen auditors' responsibilities would raise a whole variety of questions. These are under discussion in the profession but there are some very deep implications in what the noble Lord proposes. I do not think that they are necessary, and nor would they produce the effects that he wants.

Lord Williams of Elvel

I am grateful to the noble Lord for telling me that there are deep implications in what I propose. I hope very much that he will set out to me in writing exactly what those implications are before Report stage. It seems to me to be a perfectly logical amendment that I am producing; it does not seem to me that the noble Lord has advanced any great arguments against it. I hope very much that before the Report stage we shall have a considered government view of what these deep implications are.

As far as I am aware, any competent auditor will look at the internal control mechanisms of the company which he or she audits. It does not seem to me to be very deep at all. However, no doubt the noble Lord will be writing to me before Report stage letting me know exactly what he has in mind. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 4: Page 2, line 35, at end insert— ("( ) A parent company having a subsidiary undertaking which is not a body corporate incorporated in Great Britain shall take all such steps as are reasonably open to it to ensure that that subsidiary undertaking shall keep accounting records in relation to itself which are sufficient to show and explain the matters referred to in section 221 (1) above.").

The noble Lord said: I beg leave to move Amendment No. 4 standing in my name and that of my noble friend Lord Peston. It may be for the convenience of the Committee if I also speak to Amendment No. 6.

The new definition of "subsidiary" in the Bill before the Committee includes further entities which are not subject to the present Companies Act. Foreign subsidiaries are of course already in this position. The change that I am proposing is primarily aimed at UK partnerships. In our view, all components of a group should have suitable underlying records and accounts to enable preparation of true and fair group accounts giving the required information under the statute. If I may say so, the amendment also clarifies the responsibilities of directors. Amendment No. 6 goes a little further and makes sure that the directors have an obligation to ensure this rather than being enabled to compile group accounts. Well managed groups can already do what we have in mind. While overseas companies, which are mentioned in the Bill in extenso, may be subject to audit and therefore have adequate records, this, in our view, is less likely to arise with partnerships. It is that small loophole in the Bill that we hope to close by this amendment.

Lord Strathclyde

I, too, shall speak to Amendments Nos. 4 and 6. The noble Lord will be pleased to hear that the Government have some sympathy with the first of these amendments. It would serve to remind companies of their responsibility to get adequate information from subsidiary undertakings which are not Companies Act companies to enable the proper preparation of consolidated accounts. But it would not impose an unreasonable requirement. We would, however, like to consider further whether it would have an effect in practice and return to the point at a later stage. I hope the noble Lord will therefore feel this is a sufficient basis on which he can withdraw his amendment.

The second amendment does not seem to add anything to the existing requirements of new Section 226 in Clause 4 that companies should prepare accounts and that those accounts shall comply with the Act. I hope that we shall be able to return to that at a later stage.

Lord Williams of Elvel

I am most grateful to the noble Lord for his assurance on Amendment No. 4. I hope that he will look again—I understand that it is without commitment—at Amendment No. 6, as I feel that it strengthens the obligation on directors. That is something we should like to see. However, in the light of the noble Lord's undertaking to come back at a later stage with the Government's view, I beg leave to withdraw Amendment No. 4.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 5: Page 2, line 39, leave out ("honestly") and insert ("with due care and attention").

The noble Lord said: The word "honestly" occurs in the Companies Act 1985. When statutes are repeated in the Chamber in the form of a Bill, I think the Committee will agree that the original words of the statute are not necessarily sacrosanct. In other words, we can have further debates about what was originally accepted in the statute.

The word "honestly" has, I think, been understood over the years as meaning without intention to fraud or to criminality. On the other hand, we are dealing with a Bill that seeks to upgrade the responsibilities of directors. Our amendment which specifies the words, with due care and attention

goes beyond the word "honestly". The expression, with due care and attention

subsumes the word "honestly". I do not see how anyone can act. with due care and attention who is acting dishonestly. It is also consistent with measures taken elsewhere in the Bill to upgrade the behaviour of directors. This is a modest amendment. I am not claiming that it is earthshattering, but I think it would be useful. I beg to move.

Lord Lloyd of Kilgerran

I support this small amendment. The word "honestly" has often caused trouble in interpreting statutes. But the words "without due care and attention" are becoming increasingly well known for other reasons. I support the amendment.

4.15 p.m.

Lord Strathclyde

New Section 221(4), the subject of the amendment, reproduces the existing offences in the 1985 Act. It makes it an offence to fail to keep proper accounting records. The offence is committed by any "officer in default"—meaning an officer who knowingly and wilfully authorises or permits the default. It is however a defence under Section 730(5) of the 1985 Act for the officer to prove that the default was committed honestly and was excusable in the circumstances in which the company's business was carried on.

We have carried forward the structure of the offence provisions in the 1985 Act. We do not consider, at present, that there is any significant inconsistency in the wording of these offence provisions which is not merited by their different contexts. We hope therefore that the noble Lords, Lord Lloyd of Kilgerran and Lord Williams of Elvel, will not feel that they need press this matter further.

Lord Williams of Elvel

I am grateful to the noble Lord for his reply. However, I do not think he has answered the point made by the noble Lord, Lord Lloyd of Kilgerran, that the words, with due care and attention or the opposite, "with undue care and attention" are now becoming more and more recognised as a quality to which directors must pay attention. While I am quite happy that the words, with due care and attention should be used as a defence, we want to improve on the word "honestly". I hope the noble Lord will comment on what I have said.

Lord Strathclyde

I thank the noble Lord, Lord Williams, for saying that. Perhaps this is an occasion where we could consider the points that have been made in Committee and look at them at greater leisure than is possible today.

Lord Williams of Elvel

I am most grateful to the noble Lord. With that assurance, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 6 not moved.]

Lord Lloyd of Kilgerran moved Amendment No. 7: Page 3. line 23, after ("company") insert ("including a single member company").

The noble Lord said: With the leave of the Committee I wish to speak also to Amendments Nos. 124, 126, 127, 243 and 244. I first wish to thank the noble Lord, Lord Strathclyde, for his recent letter to me. I must also thank his advisers. The letter was most helpful. It dealt with a number of points that I raised on Second Reading.

As I mentioned to the noble Lord, Lord Strathclyde, last week, these amendments are of a probing nature. Their objective is to introduce into UK company law provisions for the setting up of single member private limited companies. The amendments reflect the subject of a directive from Brussels last summer, known as the twelfth council directive, on provisions for a single member company. The provision would give access to company status to individual entrepreneurs and would generally promote enterprise.

Many member states of the Community allow single member companies to be formed. Denmark has had them since 1973, Germany since 1980, France since 1985, the Netherlands since 1986 and Belgium since 1987. I am instructed that draft legislation is before Parliament in Luxembourg and Portugal.

The amendments cover the initial formation of a single member company and also enable a single member private limited company to arise when one individual acquires all the shareholdings in the company. There are obvious advantages, which I do not propose to deal with at great length, in enabling a small business to be a single member company. Often in the UK, small companies have only one owner. The present requirement that there should be more than one member for private limited companies means that the individual business man or woman, or the sole trader, must secure the co-operation of a second member, who is often nothing more than a front man. That, of course, adds to the cost and complication of running a small business.

The sole trader would by these amendments be encouraged to take the risk of setting up a business in company form and not merely as a sole trader. Safeguards are obviously necessary, particularly regarding disclosures and dealing with accounts which would allow the company's funds to be kept separate from the sole member's private assets and liabilities. Thus a single member company whose sole member is a legal person could not be the sole member of another company.

I have also suggested in the amendments that the section of the Companies Act with the well-known Tables A, B, C and D should be amended to include a Table F which should deal only with regulations in regard to single-member companies. As the amendments are probing amendments I have not prepared an amendment to cover a draft Table F.

There are clear advantages to UK industry in having single member companies with proper safeguards and subject to many of the regulations governing small private limited companies. It seems to me that the proposals would in principle conform with the Government's general policy of encouraging private enterprise and harmonise with the views of the European Community in this limited but useful field.

As I have said, the amendments are of a probing nature. I fully accept that much redrafting would be necessary if the general principle were acceptable to the Government. I hope that the Government can express some sympathy for the theme of the amendments which is to introduce into UK law the concept of a single member private limited company. I beg to move.

Lord Strathclyde

I am most grateful to the noble Lord, Lord Lloyd of Kilgerran, for thanking me for the letters I wrote to him last week. It is nice to know that they arrived and that they did some good.

I shall speak to the same amendments as the noble Lord. The effect of the amendment to Clause 2 would be to emphasise that private companies with only one member were required, as are all private companies, to keep accounting records for three years from the date on which they were made. The effect of the amendments to Clause 12 would be to extend to single-member companies, whatever their size, certain exemptions given to small and medium-sized companies under Schedule 8 to the Companies Act 1985 and also to make provision for a new Part IV in Schedule 8 relating exclusively to single-member companies.

The Government are opposed to the proposals. It may help the Committee more readily to understand the reasons for our opposition if I explain very briefly what is happening in connection with a related initiative that has been taken by the European Commission, to which the noble Lord, Lord Lloyd of Kilgerran, also referred.

Last year the Commission published a draft twelfth directive on single member companies. The effect of that directive, if it were eventually accepted by the Council, would be to oblige each member state to provide for the formation and operation of private limited companies with a single member, subject to any safeguards against abuse which would be contained in the directive. That would result in some significant changes in the UK's company law because at present at least two members are required to form a company and when the membership of an existing company falls to one that company and its member will normally lose the privilege of limited liability after a period of six months.

The Commission's proposal was considered last year by the Select Committee on European Legislation which concluded that it raised questions of legal and political importance. As a result the committee recommended that the directive should be debated by the House, most suitably in a Standing Committee on European documents. I am pleased to be able to inform Members that the arrangements for that debate are now well in hand. The Government are of the view that such a debate, devoted specifically to that one topic, would provide a better opportunity than this present debate for the consideration both of the underlying principles involved and of the safeguards which it might be considered desirable to apply to such companies if they were permitted.

Moreover, discussions on points of detail contained in the draft directive are only now beginning in the Council's working group. It is therefore possible that if we legislate now on the formation and conduct of such companies we shall shortly find that we have approved measures that are incompatible with the directive, thus necessitating additional legislation in the near future. We believe that it makes sense to have just one bite at the cherry and to wait until we are clearly in the picture before we do so.

I hope that this explanation gives the noble Lord, Lord Lloyd of Kilgerran, some succour and that he is clearer in his own mind as to where we should now go. The noble Lord described amendments as merely probing amendments. I hope that if he has not followed everything that I have said it will become clear when he reads Hansard tomorrow.

Lord Lloyd of Kilgerran

I am obliged to the Minister. Can he say when the debate to which he referred is to take place? Will it be in the near future? Will it be before Report stage? Is he indicating, without commitment, that the matter can be reconsidered at Report stage?

Lord Strathclyde

I hope that the noble Lord will feel that we do not need to raise the matter again at Report stage. The Government do not feel that it is worth raising the subject again until we know what is happening at the European level. I am afraid that I cannot offer the noble Lord any information at the moment as to the date of the debate. I sincerely hope that it will take place before too long.

Lord Lloyd of Kilgerran

I am rather confused. Did the noble Lord wish to intervene?

Lord Bruce of Donington

No, thank you.

Lord Lloyd of Kilgerran

In view of what the Minister has said it seems that there is some hope of harmonisation with Community law on this important matter. In those circumstances I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 2 agreed to.

Clause 3 agreed to.

Clause 4 [Individual company accounts]:

Lord Bruce of Donington moved Amendment No. 8 Page 6, line 14, leave out second ("the").

The noble Lord said: The Minister will be able to dispose of the next amendment very speedily. In the accountancy profession we have always been accustomed to refer to "a state of affairs". When it comes to liquidations we always refer to the "statement of affairs" that is required to be made in certain circumstances.

The Institute of Chartered Accountants in Scotland wrote to me to inquire whether there was any special reason why the word "the" should be inserted. I am bound to say that the word "the" already appears in the Companies Act 1985 at Section 523. So it is not new. However, if the noble Lord can satisfy my curiosity as to why the word "the" should be inserted I shall have no difficulty in withdrawing the amendment in due course with the leave of the House. I beg to move.

Lord Strathclyde

The explanation given by the noble Lord, Lord Bruce of Donington, is very interesting. We do not consider that whether or not the Bill at this point refers to "the state of affairs" or "the state of the affairs" is of consequence. Moreover, although the amendment brings the provision in new Section 226(2) in line with that in new Section 227(2)(a) it puts it out of alignment with the reference in new Section 227(3). I hope that this explanation is sufficient.

Lord Bruce of Donington

Yes, that is quite satisfactory. I ask the leave of the Committee to withdraw the amendment.

Amendment, by leave, withdrawn.

4.30 p.m.

Viscount Caldecote moved Amendment No. 9: Page 6, line 17, at end insert— ("(2A) The profit and loss account shall also show the expenditure on research and development which has been charged against profits.").

The noble Viscount said: In moving Amendment No. 9 I should like also to speak to Amendment No. 15. As the Committee will see, Amendment No. 9 has wide cross-party support. This is in no sense a political point. The objective of the amendment is to ensure that the accounts of companies do indeed give a fair and true view and to remove a disincentive to R&D investment which I believe tp be of very great importance.

Where research and development expenditure is charged to the profit and loss account and is significant, or has been in previous years, any change in the charge is, I submit, very relevant information if the accounts are to show a true and fair view. Such information is of particular importance to analysts and others who draw conclusions from the accounts and act upon them. Where no disclosure is made, declared profits can give a misleading impression of strength. For instance, suppose a company decides to cut back on its research and development expenditure. Profits will rise in the short term but in the long term the prospects are pretty poor because there will not be any new products to carry the company forward.

Perhaps even more serious is the effect of undisclosed increases in R&D expenditure. The profits then fall, and all too often in the United Kingdom the share price also falls, making companies vulnerable to takeover in the current circumstances. That substantially discourages directors from investing, particularly in the development of new products, which involves both high cost and risk although it is of the utmost importance to the future strength of the company. It is also of the utmost importance from the national standpoint if the massive deficit that we now have on our overseas trade of manufactured goods is to be corrected.

In the United States of America disclosure of R&D expenditure of that type is mandatory. There is clear evidence in the United States that when R&D expenditure is increased analysts see that the company is investing for the future and the share price tends to rise rather than fall, as it does in this country. So there is no disincentive to investment.

Some Members of the Committee may say, "But there is nothing to prevent directors disclosing this information in their company reports". That is true, but it is seldom done because if one company does it, particularly a single-product company, it confers an advantage on its competitors. Of course that would not be the case if all companies must disclose that type of expenditure.

Very recently a Statement of Standard Accounting Practice, SSAP.13 was agreed and it is shortly to be issued. It requires the disclosure of R&D expenditure in company accounts. I believe that that is a real step forward. It also has the advantage that R&D expenditure is clearly defined in that SSAP. I submit that disclosure of R&D expenditure is so important, for the reasons I have given, that is should be made statutory. We should take this opportunity to make that simple addition to the Companies Act, for it will be a long time before we shall have another opportunity to do that if it so happens that SSAP.13 does not appear to be effective.

Lastly, it may be said that other information is of equal importance to the future strength of a company. I certainly agree that that is the case as far as training is concerned. I should be very happy to see that type of expenditure included on a mandatory disclosure basis, but there may be problems with definition. I believe that it would be wise in the present circumstances to confine the amendent to the specific and important issue of the disclosure of R&D expenditure as it is set out in SSAP.13.

I hope that my noble friend the Minister who is to reply will accept the amendment because, in paragraph 25 of the Government's response to the first report of the Select Committee on Science and Technology on Civil Research and Development, Command Paper 185 of July 1987, the Government state: It is for companies to ensure that their bankers and major shareholders understand the advantages of investing in R&D. The reporting of R&D expenditure in annual accounts will promote this understanding". I entirely agree with that. I beg leave to move the amendment.

Lord Sherfield

I rise to support the two amendments. As the noble Viscount, Lord Caldecote, has indicated, this is a subject which has been before the Select Committee on Science and Technology for a number of years. In its report on research and development in the engineering industry, which was published in 1983, the recommendation was first made that companies should disclose their research and development expenditure in their annual accounts. In 1987 the committee's report on civil R&D reiterated that recommendation and said that since the voluntary system had not resulted in much progress in the matter it should be made compulsory and legislation should be introduced for that purpose.

The noble Viscount has indicated the nature of the Government's reply. They did not rule out legislation. They said they hoped that the new SSAP.13 might achieve the objective. A few weeks ago the matter came up in evidence again before the committee when we were having a discussion with Sir Francis Tombs, the chairman of the Advisory Committee on Science and Technology. He said that the need for disclosing the accounts on R&D expenditure was overdue and should now be made statutory.

There has thus been a consistent record of advice and recommendation. As the noble Viscount has said, this seems to be a most opportune moment to give effect to the recommendation by introducing these amendments into the Bill. I therefore support them.

Lord Tordoff

I am speaking deliberately from the Back Benches since this is not a party issue, as the noble Viscount has said, but as a retired member of the Select Committee on Science and Technology I should like to offer my support to the amendment.

One of the great problems in British industry is the degree of "short-termism" which is inflicted on it by the City. There is very considerable pressure for the short-term considerations. I am sure that if the noble Lord, Lord Gregson, had been able to be in his place this afternoon—he, too, has his name to this amendment —he would have told the story of the chief executive of a well-known engineering company in this country which is dear to the heart of the right honourable lady the Prime Minister who told him that on the day that they first published their research and development costs in their accounts two things happened: their shares went up on the American stock exchange and down on the London stock exchange. That seems to exemplify the position that we find. It is a ridiculous situation. If we believe in restoring industry to long-term profitability, and if there is any belief by the Government in long-term enterprise in industry in this country, R&D is the fundamental cornerstone of that development.

Therefore I hope that the Government will accept not only that the amendment is worthwhile but that it should be encouraged.

The Earl of Limerick

In speaking for the first time on this Bill, perhaps I may express my regret that I was unable to he present on Second Reading. I speak very briefly in support of the amendments.

Two points have very rightly been made. The first concerns the way in which the publication of an R&D figure can act in rebuttal to short-term pressures which so often arise when cashflow or earnings per share come under pressure. The second point is that if we are looking for truth in accountancy, expenditure on R&D being of a capital nature is very different in quality from other forms of revenue expenditure which would he lost in the profit and loss account. It is right and proper that those seeking to evaluate the worth and progress of the company should have a chance to see the investment that it has made in the past in the vital area.

As is known, when a company comes under pressure one of the first and easiest things to do is to cut R&D expenditure. If that is going to happen it should be seen to be happening.

Lord Peston

On the Opposition Front Bench, we warmly support the amendment. In particular, we support the arguments that have been put forward in favour of it. I believe that there is no difference between any of us on the importance of research and development, and I fully accept that the Government have taken a very strong and positive view on the desirability of encouraging research and development. There is no argument between any of us on that matter. This is very much a matter of what ought to appear in the company's accounts and what is relevant to a Companies Bill as we have it before us. We share the view of the noble Viscount, Lord Caldecote, and the noble Lord, Lord Sherfield, first, that this is overdue and that there is nothing original about it; secondly that this is the opportunity to act. We hope for a sympathetic and, if possible, full acceptance of the amendment by the Government. If not now, when would we ever get around to doing something of this sort?

Some of us would argue that research and development is the most valuable part of a company's assets. That ought to be made abundantly clear. Sometimes the emphasis put on physical equipment is less significant than that placed on research and development because ultimately it is upon new products and new processes that the long term survival of the company depends. Again, there is nothing between us. The survival of the nation depends on long-term survival of companies. It has been previously argued that our future depends on science and technology. It depends on industry in which there is enormously high value-added as the noble Viscount, Lord Caldecote, in his reference to the balance of payments makes clear. That point, major though it is, is minor compared with one's fears about the long run future.

Clearly we must take every opportunity to emphasise the desirability of research and development. Equally, if I might put it negatively, companies that do not engage in research and development, in which little will appear on that account, might well he asked by one or two interested parties—not least the shareholders—why there is this vacuum. I do not see it simply as a positive incentive. We can all agree that we see it as the kind of pinprick that we should like to have the companies feel.

The noble Viscount, Lord Caldecote, mentioned training. There are many other aspects of the company that we could refer to. I would argue that of all the things that we are talking about, research and development is the most important. Therefore, the general view: why not this and why not that? I do not think that that is an apposite argument at this time. The important thing is to concentrate on the enormous value of research and development and the advantages of placing that in the accounts. I agree that there are problems of definition, and that there are many matters that we could go into. If the noble Lord in reply says that he agrees but that he has worries about detail, we would all accept that there may be details that we could adjust to. The important thing is for the Government to take this opportunity either to accept the amendment or to say that it would lay before the Committee in due course a better-worded amendment. Having said that, on behalf of my noble friends, we strongly support the amendment.

Lord Ezra

As the contributions from noble Lords who have spoken have shown, there is a degree of ambivalence about research and development. While in general virtually everybody supports the concept, in practical terms, so far as concerns individual companies various reticences often emerge. As the noble Earl, Lord Limerick, has pointed out, there is an obsession with earnings per share upon which (for very good reason no doubt) company chairmen and their boards concentrate.

There have been many cases in recent times when those companies which have ventured into major research and development situations have found themselves disadvantaged. The company which comes most readily to mind is Pilkingtons which, at a particular time, allocated a substantial amount to its research and development (for which it is renowned). That weakened its share price and it was made the subject of an unwelcome bid. It was a pretty close-run thing, but it managed to stave off that bid. If however the amendment were carried and all companies had to indicate the amount of resources they put into research and development, that situation would not arise. This amendment would make it very clear that those who invested most in that area would be likely to succeed most in the long term.

4.45 p.m.

Lord Strathclyde

It has been an interesting and far-ranging debate on the subject. I am grateful to my noble friend and others who have raised it.

The Government are well aware of the importance that noble Lords, particularly those connected with the Select Committee on Science and Technology, attach to the disclosure of expenditure on research and development in company accounts. The Government share the view that such disclosure is desirable and could lead to greater understanding of the importance of research and development by shareholders, managers and others. However, the Government's preferred method of achieving this end is not through legislation, but by encouraging the accounting profession to provide for disclosure through a revision to Statement of Standard Accounting Practice 13 (Accounting for Research and Development). The noble Viscount, Lord Caldecote, mentioned that point.

I am pleased to say that such a revised standard has been agreed by all six major accounting bodies in the United Kingdom, and was published on 26th January 1989. The new standard will require all public limited companies, and very large private companies, to disclose their expenditure on research and development in their accounts. That meets the Government's objectives, particularly as we believe that the case for disclosure of expenditure on research and development by non-public companies other than very large private companies, is outweighed by the burdens that disclosure is likely to involve for them.

While accounting standards do not have the force of law, compliance is monitored by the accounting profession, and a departure from the terms of a standard may lead to the qualification of the relevant accounts by the company's auditors. the Government therefore regard the outcome in respect of achieving disclosure of expenditure on research and development in company accounts as satisfactory and believes there to be no need for legislation.

I hope that what I have said will put noble Lords' minds at ease. It is important to point out that we do not feel that this requirement needs to be on a statutory basis; that it is best monitored by the accountancy profession.

Viscount Caldecote

I am grateful to the Minister for his support for the principle of this amendment in that he says that it is important that this information should be disclosed. I simply cannot understand why, if it is so important, that there is an objection to making it statutory. The Minister did not mention that at all. Perhaps he could help us by saying what is the objection to making it statutory.

Lord Strathclyde

Making it statutory simply adds another regulation, which we are keen not to do. We feel that the revised standard of accountancy will improve the situation and that therefore there is no need to make that statutory. However, as I take it that noble Lords feel very strongly about this matter, perhaps I could take it away and come back at Report stage; then we could discuss it further.

Lord Williams of Elvel

Can we have an assurance that when the noble Lord takes it away, he will come back with an amendment along the lines that the noble Viscount, Lord Caldecote, has moved?

Lord Strathclyde

No, I cannot give that assurance.

Lord Tordoff

May I urge the Committee to consider this matter very carefully before deciding what to do? Frankly, the Minister's reassurance is not of very great reassurance at all to me, particularly in the light of the intervention by the noble Lord, Lord Williams of Elvel. We have not had a satisfactory answer as to why the Government do not wish this to go on the statute book.

There is general agreement all round that firm steps should be taken to make sure that this happens. Having listened to noble Lords, I would encourage the noble Viscount, Lord Caldecote, to divide the Committee if he does not get greater reassurance.

Lord Strathclyde

To pre-empt the noble Lord, the amendments are not, as I am sure he will realise, technically correct. I hope that the noble Lord does not feel the need to press them at this stage. We will look at what he has said and discuss it when we get to Report stage. Accounting standards have a role to play. If one brought all disclosure requirements into statute one would have a very unwieldly statute book. The noble Lord, Lord Peston, said that there were many special cases that one would wish to bring in and that this was a special special case. However, I believe that the accounting standards that we have provided for deal with this matter very effectively. But that does not pre-empt what I have already said. We shall take this away and look at it extremely closely in the next few weeks.

Viscount Caldecote

It is rather a red herring to say that if you have one SSAP made statutory, you have to have them all made statutory. We are not asking for that. We are asking for the principle of one SSAP to be made statutory.

Perhaps I can give the Minister a way out. Would he agree at Report stage to bring in an amendment on the lines of my amendment? I fully accept that it is not in the exact form that it should be but I am advised that that is for the Government to settle if they accept the principle of the amendment. Will he agree either to propose an amendment on these lines or one which gives delegated power to the Secretary of State to bring in the principle of this amendment if it is found that the SSAPis not effective in making companies disclose R&D in their published accounts?

Lord Strathclyde

Before I reply to that point, the proposed amendment would apply to all companies. I believe that this goes too far. The case for disclosure by small companies is not made out; the case for disclosure by public companies is considerably stronger. This needs to be considered further.

We shall look at this again before Report stage. I am afraid that I cannot promise any more than that. I am not sure that the Government will be able to bring in their own amendment. Perhaps we can wait and see what amendment my noble friend will put forward.

Viscount Caldecote

With regard to small companies, if it would help the Minister I am perfectly happy to agree that my amendment should apply only to plcs. There is no problem about that. That is what we should like the Government to consider and to bring in as an amendment at Report stage, either on the lines of this amendment or to give delegated power to the Secretary of State.

Lord Strathclyde

We shall consider what the noble Viscount has said, including the idea of bringing in a power for the Secretary of State. However, I cannot confirm that the Government will put forward an amendment at the next stage.

Lord Williams of Elvel

Is the Minister saying that he can make no commitment whatsoever to his noble friend on the Government's procedure at Report stage?

Lord Strathclyde

There already is a power to amend disclosure requirements assuming that Clause 18 is passed. I hope that that makes a difference. I can certainly give an undertaking that we shall consider using that power if the standard proves ineffective.

Lord Peston

I apologise for intervening yet again. I am at a loss as to why the Minister is unable to be more positive. I can well understand, if he were to go away and then to discover on reflection that we were all wrong, that he would come back and say, "You didn't really understand and we can explain it". I doubt that any of us would be churlish if we were all wrong. However, for the noble Lord to have considered this amendment with advice and to have discovered that we are entirely right, then to be told that in a Bill of this size the Government cannot find room for such an amendment seems very far fetched. I can find 50 things in the Bill that I should be happy for him to take out. All we ask is that he considers the points that the noble Viscount is making. If he discovers that they are valid and appropriate in the form in which he puts them, will he come back with an appropriate government amendment? That seems a moderate request on the part of Members of the Committee.

Lord Strathclyde

What the noble Lord suggests is moderate and, yes, we are happy to do that. What I felt was being proposed earlier was that we should take this amendment away and simply bring it back at Report stage. I cannot confirm that. We shall look at it very closely and discuss it with the relevant officials and all parties who are involved. We shall make a point of looking at it very thoroughly indeed. I hope that that goes far enough.

Viscount Caldecote

To avoid all possibilities of misunderstanding, is the Minister saying that the Secretary of State now has power under the Companies Act, as it will be amended by this Bill, to bring in by delegated legislation amendments to what needs to be disclosed in company reports and in particular that he could bring in delegated legislation to meet the point in this amendment?

Lord Strathclyde

Yes. My noble friend is quite correct. As I said earlier, there is a power to amend the disclosure requirements by a statutory instrument, assuming that Clause 18—to which we shall come in the next few days—is passed. I can give an undertaking that we shall consider using that power if the standard that we are going to introduce proves ineffective. Perhaps that is what he wished to understand some time ago.

Viscount Caldecote

On that understanding, I beg leave to withdraw my amendment.

Amendment, by leave, withdrawn.

Lord Lloyd of Kilgerran

had given notice of his intention to move Amendment No. 10: Page 6, line 17, at end insert— ("2A) The profit and loss account shall also show the expenditure arising out of the use of gas, electricity and oil which has been charged against profits.").

The noble Lord said: Having regard to the interesting debate on the previous amendment, this amendment will not be moved.

[Amendment No. 10 not moved.]

Lord Peston moved Amendment No. 11: Page 6, line 19, after ("Schedule 4") insert ("and all applicable statements of Standard Accounting Practice").

The noble Lord said: In moving Amendment No. 11, I speak also to Amendments Nos. 13, 22, 24 and 110 with the permission of the Committee. Amendment No. 11 is a technical accounting amendment. We introduce it in order to probe the Government's intentions and to listen to the reply of the noble Lord by way of clarification on a matter that I raised at Second Reading.

The purpose of the amendment is to strengthen reporting practice. It is not unconnected with the debate that we have just had. It strengthens reporting practice by requiring observance of the relevant SSAPs. It raises again the issue that has just been raised about how far we can rely on voluntary compliance with those SSAPs.

The noble Lord knows that I am as inexpert in this field—I was about to say, as perhaps he is, but perhaps we are equally inexpert. I am advised of two matters. There are precedents for this move elsewhere. I am also advised that in practice no additional burden will be placed on companies behaving in the way that would then be laid down in statute. As I understand it, the Dearing Committee on page 43 of its report also indicated that we ought to be moving in this general direction. This will give the Minister an opportunity, to say a word or two about the Government's view of the Dearing Committee in this matter. I am aware that we have a logical paradox here. It is one that has troubled me a little. One could say that the whole point of the standard accounting practices is that they are standard accounting practice and that they ought to be obeyed voluntarily. In a sense one can logically argue: why have a statutory back-up for them? I quite understand that. I can turn the argument on its head; on the assumption that this is the correct way to behave, it seems to me that the minimum the Government ought to do is to give them a statutory back-up. I have been pondering backwards and forwards on this matter.

My noble friend Lord Williams of Elvel and I have put down the amendment mostly to seek clarification so that we may understand the Government's mind and so that the accounting profession can hear what the noble Lord has to say and can understand where the Government think the profession ought to be going.

5 p.m.

Lord Benson

The accounting profession, on behalf of whom I speak, is foremost in wanting statements of standard accounting practice to be observed both by companies and by the profession. We wholly support the principle. My doubt is whether this is the right time and place to introduce this provision. I am not privy to this, but I understand that discussions are already taking place with the Government on the outcome of the Ronald Dearing Report, which will be wide and comprehensive and is likely to require some form of statutory backing. I hope that the noble Lord, Lord Strathclyde, will be able to tell us or give some indication of what is likely to happen. But in its present form it would be unwise to put in a provision of this kind. The principle we wholly support.

There is one other minor matter. If we are to have hacking for standard accounting practice we also ought to have backing for international accounting standards which are equally important to international companies.

Lord Strathclyde

I entirely appreciate the desire of the noble Lord, Lord Peston, to give accounting standards greater force by making compliance with them a statutory requirement. There has been growing concern in recent years about the effectiveness of accounting standards in dealing with new and not always welcome developments in accounting practices. The concern has focused on various aspects of the standard-setting arrangements, not least on the enforcement of standards—and it is that problem which I assume that these amendments are intended to address.

As noble Lords may be aware, the accountancy profession itself shared the general feeling of unease and for that reason set up a committee, as we have heard, under Sir Ronald Dearing late in 1987 to review the whole standard setting process. The Dearing Report was published in November. Interestingly, the Dearing Committee considered the question of giving legal backing to accounting standards, but concluded—I hope I am not repeating things that noble Lords already know, but it is worth putting on the record— We do not recommend a general move towards incorporating accountancy standards into law because this inescapably requires a legalistic approach and a reduction in the ability of the financial community to respond quickly to new developments. So far as possible, we recommend that the development of accounting standards should be the responsibility of auditors, preparers and users of accounts. The Government share that view.

The Government welcome the Dearing Report and we shall very shortly be issuing a consultative document to seek views, particularly on those recommendations which could involve legislation. I hope that the noble Lord, Lord Benson, welcomes that. We shall be seeking views in time to propose amendments to this Bill if consultation shows that the recommendations command a measure of support from those most directly affected. Even at this stage, however, and without seeking to pre-empt that public consultation, I can say that the Government are broadly sympathetic to the range of the Dearing conclusions.

I therefore ask the Committee to await the outcome of those wider consultations, and in the meantime I invite the noble Lord to withdraw these amendments.

Lord Williams of Elvel

I apologise to the noble Lord for intervening in the debate because I was not present at the beginning, but he read an extract from paragraph 10.2 of the Dearing Committee Report. If he were to go on to paragraph 10.3 he would see the words: While we attach importance to avoiding a legalistic approach, we recommend that government introduce legislation along the following lines in order to facilitate the work of the financial community in monitoring and promoting compliance with accounting standards and in order to help provide a sound basis for financing the work of developing and implementing accounting standards. In the case of all large companies, as defined in 15.6, directors should be required to state in the notes to the annual accounts whether these are drawn up in accordance with applicable accounting standards and to draw attention to any material departures explaining the reasons for the departures. This is in addition to the present provisional, but non-statutory requirement upon auditors to note any departures from accounting standards that do not have their support. Is the noble Lord saying that the Government support paragraph 10.3 of the Dearing Committee Report as well as paragraph 10.2?

Lord Strathclyde

What the noble Lord has just said is all very well, but the form of words that I used earlier was that the Government welcome the Dearing Report. I do not believe that I need to add any more to that except to say that we are issuing a consultative document to seek everybody's views on it.

Lord Peston

Briefly, I just wish to clarify something. As I understand it, what the noble Lord has said is that it is too early to decide along the lines of this amendment but that he will consult and if in due course, as the noble Lord, Lord Benson, pointed out, it became abundantly clear that a statutory back-up would be required, the Government in following Dearing would not at this stage turn their face against that idea. Before withdrawing the amendment I should like to be clear in my own mind that that is what the noble Lord is saying.

Lord Strathclyde

Yes, we shall consult. The Dearing Committee recommends that, although accounting standards should not be incorporated into the law, there should be a statutory requirement on companies to disclose whether or not their accounts comply with accounting standards and to explain any departures. The Government are sympathetic to this recommendation, although they do not wish to take a final view of it until the consultation procedures that I have already mentioned have been completed.

Lord Peston

Subject to that, I beg leave to withdraw the amendment on behalf of the noble Lord, Lord Williams and myself.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 12: Page 6, line 24, leave out ("that") and insert ("this").

The noble Lord said: This amendment simply corrects a wrong reference. The relevant statute being referred to is the Companies Act 1985. It might be convenient, with the agreement of the Committee, to take with this amendment, Amendment No. 23 which stands in the names of the noble Lords, Lord Williams and Lord Peston. Without wishing to prejudge what the noble Lord opposite has to say, Amendment No. 23 offers to have a similar purpose in mind, but I think that noble Lords will find on careful consideration that the existing reference to "this Act" in that context is correct. I beg to move.

Lord Williams of Elvel

I also shall speak to Amendment No. 23, with the leave of the Committee. The noble Lord has correctly anticipated my reaction to the Government's amendment. It is rare, but I accept that the Government's wording is more correct than our wording. I shall not be moving Amendment No. 23 when we come to it. I am happy to agree to government Amendment No. 12.

On Question, amendment agreed to.

[Amendment No. 13 not moved.]

Lord Williams of Elvel moved Amendment No. 14: Page 6, line 33, at end insert ("to the extent necessary to give a true and fair view").

The noble Lord said: It may be convenient also if I were to speak to Amendment No. 25. This is in the nature of a probing amendment because we wish to ascertain the Government's intentions.

The present drafting appears to be unclear and to give directors wider discretion than is intended in ignoring the statutory provisions. It appears to be more relaxed than the wording in the fourth directive—Article 2.5 dealing with individual companies—and in Section 22 of the 1985 Companies Act. It is not qualified by a reference to "a true and fair view".

What is the purpose in rewriting the act in that way? It is a sensitive area in which changes can have unexpected results. In particular, do the Government not consider that the reformulation will enable controlled non-subsidiaries—that is, off balance sheet financing vehicles—to be brought into consolidation?

If Members of the Committee wish I can read extracts from the fourth directive and from Section 22(8) of the Companies Act. However. I shall not burden the Committee by doing so because I hope that the department has taken the point and that the noble Lord will be able to respond. I beg to move.

Lord Strathclyde

It was interesting to listen to the noble Lord, Lord Willliams. We do not consider that the amendments make a change of substance to the Bill. They are not strictly necessary. This is another case where people feel more comfortable with something close to the wording of the existing Act and look for a change of substance wherever words have been used slightly differently. That said, these particular amendments are not objectionable and the Government can accept them.

Lord Williams of Elvel

I am bowled over by the noble Lord's surprising assent to my amendment and I am grateful to him.

Clause 4, as amended, agreed to.

Schedule 1 [Form and content of company accounts]:

[Amendments Nos. 15 and 16 not moved.]

Lord Strathclyde moved Amendment No. 17: Page 131, line 15, at end insert— ("( ) In sub-paragraph (3)(b) "capitalisation", in relation to an amount standing to the credit of the revaluation reserve, means applying it in wholly or partly paying up unissued shares in the company to be allotted to members of the company as fully or partly paid shares.").

The noble Lord said: Amendments Nos. 17, 18 and 19 are technical amendments to Schedule 1 of the Bill dealing with the form and content of company accounts. The first inserts a definition of "on capitalisation" to prevent a possible abuse of a company's revaluation reserve. The other two amendments correct wrong cross-references contained in the Bill. I beg to move.

Lord Bruce of Donington

Can the Minister indicate an instance where there are partly paid capitalisation issues? Should not all capitalisation issues be fully paid?

Lord Strathclyde

On capitalisation is one of the permitted ways in which a company can reduce a revaluation reserve. Essentially it is intended to allow a reduction for the purpose of an issue of bonus shares to members.

It has been suggested to us that the use of the term "capitalisation" in this context, without a definition, could be abused. We agree with that. The introduction of a definition therefore is intended to prevent exploitation of any ambiguity as to its meaning. Some companies have shown that they are keen to use the revaluation reserve for purposes for which it is not our intention that it should be allowed and which in our view are not permitted under the relevant European Community directives.

On Question, amendment agreed to.

Lord Strathclyde moved Amendments Nos. 18 and 19: Page 131, line 27, leave out from ("2") to end of line and insert ("8(3), 16, 21(4) and (5), 22(4) and (5), 24(3) and (4) and 27(3) and (4)"). Page 131. line 29, leave out from beginning to ("and") in line 30 and insert ("Parts II and III of Schedule 6 (loans and other dealings in favour of directors and others)").

[Amendment No. 20 not moved.]

Schedule 1, as amended, agreed to.

Clause 5 [Group accounts]:

Lord Mottistone moved Amendment No. 21: Page 7, line 7, leave out from first ("The") to end of line 11 and insert ("consolidated accounts shall give a true and fair view of the assets, liabilities, financial position and profit or loss of the undertakings included therein taken as a whole.").

The noble Lord said: This is a probing amendment intended to ask the Government why in the proposed new subsection (3) of Section 227 of the 1985 Act they sought to deviate from Article 16.3 in the seventh directive from which it is derived. I beg to move.

Lord Strathclyde

I am grateful to my noble friend for raising the issue. Of course it is important to give proper effect to the directive in our domestic law. That is our Community obligation. However, our obligation under the Treaty of Rome is not to repeat the directive word for word.

Lord Mottistone

I am grateful to my noble friend. It is the first time that I have received that reply. On other occasions when Members opposite were sitting on these Benches I remember being shot down because we were not repeating the provisions word for word. No doubt circumstances have changed over the past 10 or 12 years and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 22 not moved].

Lord Williams of Elvel

had given notice of his intention to move Amendment No. 23: Page 7, line 18, leave out ("this") and insert ("that").

[Amendments Nos. 24 and 25 not moved.]

Lord Bruce of Donington moved Amendment No. 26: Page 7, line 28, leave out ("its") and insert ("a quantification of its financial").

The noble Lord said: The amendment stands in the names of my noble friends Lord Williams and Lord Peston. I believe that to eliminate the word "its" and substitute the more precise term "a quantification of its financial" makes the provision a good deal clearer. The subsection will then read: Particulars of any such departure, the reasons for it and a quantification of its financial effect". The word "its" is too general and we are trying to help the noble Lord in this regard. I beg to move.

Lord Strathclyde

I thank the noble Lord for raising the point. I have not had an opportunity to welcome him to the Committee and I do so now. I hope that he will be with us for a while.

The noble Lord suggested that these amendments are intended to confirm that the effect of the departure in these cases is the financial effect. We find it difficult to see that there is a need for the clarification. There does not seem to be an effect other than a financial effect which could be inferred from the present wording.

Lord Bruce of Donington

Is there any reason why the wording of the seventh directive should not be followed in this respect, in view of the noble Lord's known devotion to it?

Lord Strathclyde

Perhaps I could refer the noble Lord to the answer which I have just given to my noble friend Lord Mottistone.

Lord Morris

Does the Bill as drafted have precisely the same effect as the intended effect of the original drafting of the directive?

Lord Strathclyde

I hope that my noble friend Lord Morris is not confusing the word "effect" with the word "effect" as in the Bill.

Lord Morris

Oddly enough, I mean precisely what I asked.

Lord Strathclyde

This deals with the effect of the departure in these cases, whether or not it is the financial effect. We find it difficult to see any need for the clarification. Therefore, I do not believe that there is any more to say.

Lord Bruce of Donington

I do not press the point any further and I ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 27: Page 7, line 48, at end insert ("in the case of a public company, or (iii) 10 per cent. of the total shares in the company in the case of a private company.").

The noble Lord said: Article 8 of the seventh directive states that the exemptions should be not more than 10 per cent. for plcs and 20 per cent. for other types; that is to say, private companies and perhaps partnerships. This is a probing amendment to ask why the Government chose the figure of 5 per cent. rather than going a bit further in the direction of the directive, and also why they have made a distinction between plcs and private companies. I beg to move.

Lord Strathclyde

There is no great point of principle here. This is a matter of judgment as to the precise circumstances in which minority shareholders should be able to require consolidated accounts to be prepared, notwithstanding the exemptions from that requirement provided for in new Section 228 for certain intermediate holding companies; that is, for parent companies which are themselves a subsidiary of someone else. The seventh directive, from which this protection for minority shareholders derives, would allow either what the Bill provides at present or the scheme envisaged by this amendment. In our judgment there is no real reason to make a distinction between private and public companies in this context, although I acknowledge that the directive refers to the possibility of such a distinction.

Lord Williams of Elvel

Perhaps the noble Lord could tell us what other countries in the Community are doing in this respect. Are they making a distinction between private and public companies?

Lord Strathclyde

I am advised that other countries do not make a distinction.

Lord Williams of Elvel

And in implementing this directive, they are not proposing to do so?

Lord Strathclyde

Since there is no point of principle involved for the Government and the noble Lord feels strongly about this, perhaps I can take back this amendment and consider it further.

Lord Williams of Elvel

I am grateful to the noble Lord. At the outset I mentioned that this was a probing amendment. I do not necessarily wish the Government to bring forward an amendment along the lines I suggested so I shall not hold the noble Lord to any commitment which he might have just made.

However, I ask him to look at this matter and to write to me on how the Government see the interpretation of the directive and what other countries in the Community are doing to implement it. Understandably without commitment, I hope that he will be able to assure me that there is no great merit in my probing amendment and that other countries are quite happy about this. If he can do that, then I shall be quite satisfied.

Lord Strathclyde

I believe that the noble Lord is quite right. This is a probing amendment and I shall write to the noble Lord in the next few days.

Lord Lloyd of Kilgerran

Perhaps we could have a copy of this kind letter explaining the position.

Lord Strathclyde

By all means.

Lord Williams of Elvel

I am most grateful to the noble Lord. I understand that we are going to receive rather voluminous correspondence. Nevertheless, as with all letters from the noble Lord, we shall read them diligently. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 28: Page 8, line 42, at end insert ("or traded on the Unlisted Securities Market").

The noble Lord said: The companies whose shares or other securities are traded on the Unlisted Securities Market do not qualify as "listed". That is the definition of the Unlisted Securities Market. The disapplication to the USM, if I may use that expression, of companies seems to be desirable given the public interest in such companies. It seems to me wrong to confine this entirely and solely to listed companies. I believe that we should extend this to companies whose securities are traded on a market which, although it does not have to comply with all the listing requirements of the official markets, has its own rules and therefore should be included. I beg to move.

Lord Strathclyde

The formulation in the Bill simply follows the directive. This refers to securities admitted to official listing on a stock exchange in a member state. I understand that that term does not include companies whose shares are traded on the Unlisted Securities Market. In any event, I cannot see that the amendment proposed by the noble Lord would have a significant effect. There cannot be many companies listed on the Unlisted Securities Market which are themselves subsidiaries of someone else. Therefore, I cannot really see the point of the noble Lord's amendment.

Lord Williams of Elvel

I do not have in my head all those companies whose securities are listed on the Unlisted Securities Market, but my impression is—and it is only my impression—that there may be a number of companies on the USM which are subsidiaries of other companies. Indeed, a common way of realising the cash value of the equity in a company is to float off a minority on the USM. I may be quite wrong about that. It may be that what was practised when I was dealing in these sort of matters a year or two ago is no longer practised and that all USM companies have become majority owned by the shareholders whose shares are traded on the market. However, if so, that is a development about which I did not know.

On the substantive point about the directive, we have always agreed, and I hope that the noble Lord is not going back on it, that the United Kingdom can go further than the directive. Clearly, we have to do all which the directive states but there is no reason why we should not go further than the directive. As we all know, the United Kingdom market is much richer, not in the monetary sense but in terms of diversity of securities which are traded, than the Frankfurt, Milan or Paris markets. We have a thriving USM market which is to be encouraged. I see no reason why the Government should not go further and put USM companies in the same category as the directive requires us to put listed companies.

Lord Strathclyde

Everything which the noble Lord says is very interesting. However, in this instance we believe that we may be bound by the directive. It may be possible to introduce a more stringent regime. Therefore I suggest that we discuss this with companies first before going any further.

Lord Williams of Elvel

Perhaps the noble Lord will clarify what he meant by that last comment. Clearly we cannot discuss the matter with companies in this Chamber. Are the Government taking away the amendment to look at it and will they perhaps come back with something along the lines of my suggestion?

Lord Strathclyde

There are two points here. First, we believe that we may be bound by the directive and its terms. Secondly, we should like to discuss the matter with the companies involved before going further. To that extent, yes, we should like to have an opportunity to discuss the matter further on Report.

5.30 p.m.

Lord Williams of Elvel

I am most grateful to the noble Lord. I do not mean to be offensive, but I cannot understand why the lawyers in the Department of Trade and Industry have not yet made up their minds on whether or not this amendment is contrary to the directive. I should have thought that it is a relatively easy view for the lawyers to take. As regards consulting the companies which may be on the USM, I take entirely the point made by the noble Lord and I am sure that such consultation will prove fruitful. I do hope that when we put down amendments in proper and due time we shall not in future be told that the Government cannot make up their mind on whether an amendment is contrary to the directive or is covered by the directive. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 29: Page 8, line 48, leave out ("or voting rights").

The noble Lord said: This amendment removes three redundant words. Do noble Lords wish me to explain why? I beg to move.

Lord Bruce of Donington

We should be grateful if the noble Lord could give us his original thinking behind the words as they now stand in the Bill. Perhaps he can give us some information about his attitude towards the exemption in Article 7.1.b of the directive.

Lord Strathclyde

For the benefit of the noble Lord, Lord Bruce of Donington, I shall endeavour to bring a little original thought to this amendment. These words are redundant because new Section 228(1)(b) to which subsection (5) refers makes no reference to voting rights. I hope that explains the situation.

Lord Bruce of Donington

What about Article 7.1.b of the directive?

Lord Strathclyde

I am not sure where the noble Lord finds that reference.

Lord Williams of Elvel

In Article 7.1.b of the directive there is exemption for those companies whose shares are 90 per cent. held by the parent company and other shareholders agree. That does not appear in the Bill at present. It appears to be obligatory in the directive, but it may be an option.

Lord Strathclyde

Article 7.1.b of the directive is not relevant in this context as we have decided to implement Article 8. The question therefore does not arise.

Lord Williams of Elvel

Is the noble Lord sure?

Lord Strathclyde

That is what I am advised. On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 30: Page 9, line 26, after ("material") insert ("for the purpose of giving a true and fair view").

The noble Lord said: I should like to take Amendments Nos. 68 and 172 at the same time. These are related minor technical amendments. The general definition of "material" is not appopriate for certain uses of the term in the Act and the Bill. I beg to move.

Lord Bruce of Donington

We support the amendment.

Lord Bruce of Donington moved Amendment No. 31: Page 9, leave out lines 35 to 37 and insert— ("(b) it would involve expense or delay out of proportion to the value to members, or").

The noble Lord said: The wording of the Bill gives no indication as to the meaning of "disproportionate". The word "disproportionate" must be disproportionate to something. The amendment is calculated to clarify that position and we hope that the noble Lord will accept it. I beg to move.

Lord Strathclyde

I am sympathetic to the thinking behind this amendment, and I recognise that it may be sensible to make a change here. We are certainly willing to consider the point carefully and report back.

Lord Bruce of Donington

I am grateful to the noble Lord. In those circumstances, I ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Bruce of Donington moved Amendment No. 32: Page 9, line 38, leave out ("was acquired and").

The noble Lord said: The existing wording of subsection (3) in the proposed new Section 229 to the Companies Act 1985 reads: the interest of the parent company was acquired and is held exclusively with a view to subsequent resale.

We suggest to the noble Lord that perhaps that is being extremely strict—stricter, in fact, than the Seventh Directive, Article 13.3.c, which refers to "held" for resale not "acquired" for resale. It is also somewhat tougher than SSAP No. 14 which refers to "temporary control". In our view, it could lead to consolidation of companies which ought properly to be excluded from consolidation. We ask that the noble Lord consider this matter. I beg to move.

Lord Strathclyde

I find myself again grateful to the noble Lord, Lord Bruce of Donington. We recognise that there is an important point here and we see considerable attractions in the noble Lord's amendments, taken as a package. I cannot accept them today; but I agree to consider them most carefully and to report back.

Lord Bruce of Donington

I am grateful to the noble Lord and ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 33 not moved.]

Lord Strathclyde moved Amendment No. 34: Page 10, line 27, after ("that") insert ("the notes to").

The noble Lord said: This is another small, technical amendment. There is a requirement in new Section 230 that a company show its profit and loss for the year in its individual balance sheet where it enjoys concessions for its individual profit and loss account. These amendments allow this amount to be shown in the notes to the accounts rather than on the face of the balance sheet. In the UK the notes are the appropriate place for such disclosure. I beg to move.

Lord Strathclyde moved Amendment No. 35: Page 10, line 28, leave out ("shows") and insert ("show").

Lord Strathclyde moved Amendment No. 36: Page 10, line 31, after ("company's") insert ("annual").

The noble Lord said: These parallel amendments are purely for clarification and I hope I do not need to say any more than that. I beg to move.

Lord Bruce of Donington

I have only one small question. Why is it "annual"? A company's accounts are not necessarily annual. There are certain periods called accounting periods. They are not necessarily always annual accounts, as the noble Lord will be aware.

Lord Strathclyde

The noble Lord is quite correct. But in these provisions the phrase "company's accounts" is used. This is not a defined term in the Bill. Therefore it is not entirely clear what is being referred to. By contrast "company's annual accounts" is defined in the new Section 262(1) and encompasses the individual accounts and any group accounts required to be prepared.

Lord Bruce of Donington

What happens when there is a change in the year end?

Lord Strathclyde

I am not sure that that necessarily makes any difference. From time to time a company may well change its annual year. Whether its annual reports are for nine, 12 or 18 months, they are still called annual accounts.

Lord Williams of Elvel

Are the Government seriously suggesting that if a company reports every 18 months it should be called an annual account?

Lord Strathclyde

I gather that is the situation under existing legislation.

On Question, amendment agreed to.

The Deputy Chairman of Committees (Lord Nugent of Guildford)

I wish to make a correction, with the leave of the Committee. I erroneously moved Amendment No. 23 into the Bill. In fact that amendment was not moved by the noble Lord, Lord Williams of Elvel. He agreed not to move it when the noble Lord, Lord Strathclyde, was moving his previous amendment. Therefore I move that Clause 5, as amended, stand part of the Bill, omitting Amendment No. 23.

[Amendment No. 23 not moved.]

Clause 5, as amended, agreed to.

Schedule 2 [Form and content of group accounts]:

Lord Strathclyde moved Amendment No. 37: Page 133, line 2, after ("valued") insert ("or otherwise determined").

The noble Lord said: With this I shall also speak to Amendment No. 38. They are both minor technical amendments once more. They are needed to ensure that the amounts of assets and liabilities arc adjusted to conform with the accounting rules used for the consolidated accounts. I beg to move.

Lord Bruce of Donington

I am still not entirely clear as to why these words should be used; namely, "or otherwise determined". All assets are valued and there is no other determination in so doing. One may be valuing on one basis or another, but one is essentially placing a value upon the assets. The words or amounts that are inserted after "values" in line 3 give rise to exactly the same observations. It may well be that the directors consider that the value of something is a figure already in the books. This is a valuation and they are required to value. How can one determine otherwise than by value?

Lord Strathclyde

The noble Lord makes a valid point. It has been pointed out to us that strictly speaking one does not value assets by historical cost accounting rules. They are recognised at cost. Paragraph (3) of Schedule 2 to the Bill implements Article 29(3) of the seventh directive which refers to "valuation" and "valuation method". We have interpreted the reference to valuation methods as a reference to accounting rules in Schedule 4 to the 1985 Act. These provide for historical cost accounting rules and alternative accounting rules.

Lord Bruce of Donington

The noble Lord has used the term "value". The assets are either valued or they are not. There may be a variety of methods of determining value. In a much wider context one can value a business on a net asset basis; one can value a business on a net asset basis with the assets brought up to current values; one can value a company on the basis of a capitalisation of its future earnings. Essentially one values. There is no "otherwise determined". A valuation by whatever method is surely the term to use. It does not need further qualification.

5.45 p.m.

Lord Strathclyde

We are dealing here with a very specialised interpretation of words. Perhaps it will help if I write to the noble Lord to let him know exactly what it is that we mean.

Lord Bruce of Donington

I am always very grateful to receive communications from the noble Lord. We are dealing with an interpretation of English as it is generally perceived and understood. Because the noble Lord and the Government do not like complicated legislation with an unnecessary use of words, and one should always be economical with them, I believe that the Minister can leave matters as they stand. It may be that his original instinct was right but it was the second doubt that caused the difficulty. However, we shall await his communication with very great interest.

Lord Whaddon

Will the noble Lord place a copy of that letter in the Library so that the rest of us may be informed?

Lord Williams of Elvel

Before the noble Lord responds to the noble Lord, Lord Whaddon, the Government have produced a Bill. In producing it they are meant to write into it what they mean. If they do not know what various provisions mean, the Government should not produce the Bill. If they know what a certain provision means, the Minister should be properly briefed to explain to the Committee what it means.

Lord Strathclyde

I object to that. It is nothing to do with whether the Government do or do not know what is written in the Bill. The noble Lord, Lord Bruce, is trying to put another interpretation on the meaning. I have explained what the Government think the provision means, but the noble Lord simply does not agree. On that basis I am willing to write to him to explain it. It has nothing to do with my briefing, my knowledge; how much my officials know or whether the Government know what this Bill means. Of course they do.

Lord Williams of Elvel

It is not a question of what the Government think it means but a question of what the Bill means. We know from the words of the noble and learned Lord the Lord Chancellor the other day that it does not matter what the Minister believes a Bill to mean. What matters is what the courts think the Bill means and what Parliament intended. That is the problem.

Lord Lloyd of Kilgerran

I do not wish to increase my correspondence unduly but obviously it is going to be an interesting letter that the Minister will have to write. I should like to have a copy.

Lord Strathclyde

I made the point that we shall write to the noble Lord, Lord Bruce, and copy letters will be sent to all Members of the Committee who participated in this debate.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 38: Page 133, line 3, after ("values") insert ("or amounts").

The noble Lord said: I spoke to this amendment with the last one. I beg to move.

[Amendment No. 39 not moved.]

Lord Strathclyde moved Amendment No. 40: Page 134, line 12, leave out paragraph 10 and insert— ("10.—(1) The conditions for accounting for an acquisition as a merger are—

1. (a) that at least 90% of the nominal value of the relevant shares in the undertaking acquired is held by or on behalf of the parent company and its subsidiary undertakings,
2. (b) that the proportion referred to in paragraph (a) was attained pursuant to an arrangement providing for the issue of equity shares by the parent company or one or more of its subsidiary undertakings,
3. (c) that the fair value of any consideration other than the issue of equity shares given pursuant to the arrangement did not exceed 10% of the nominal value of the equity shares issued, and
4. (d) that adoption of the merger method of accounting accords with generally accepted accounting principles or practice.

(2) The reference in sub-paragraph (1)(a) to the "relevant shares" in an undertaking acquired is to those carrying unrestricted rights to participate both in distributions and in the assets of the undertaking upon liquidation.").

The noble Lord said: The amendment is largely of a technical nature but is of some importance. Following comments made by the accountancy profession and the Law Society, the Government have reconsidered the conditions written into the Bill which have to be met before what is known as the merger method of accounting can be used. The present text has caused some perplexity and, on reflection, we believe that the best course is to reflect the minimum conditions in the seventh directive more closely.

The Government have also long made it clear that it is open to accounting standards to set a tougher test. The present accounting standard is presently under review. Noble Lords will see that the amendment also restricts the use of the merger method to cases where its use accords with generally accepted accounting principles of practices. We believe this provides a useful peg for a revised accounting standard. I beg to move.

Lord Williams of Elvel

I agree with the noble Lord when he says that the amendment is clearer than the original version of the Bill. I also believe that it tracks the wording of the directive rather better than the original wording. Nevertheless, as in all these matters, there are some difficulties because merger accounting is one of the great problems, financially speaking, of the day.

The problems which I shall outline relate, first, to the definition of "relevant shares"; and, secondly, to the definition of "fair value" of the consideration in respect of the outstanding 10 per cent. In subsection (2) of the amendment "relevant shares" is defined as those, carrying unrestricted rights to participate both in distributions and in the assets of the undertaking upon liquidation". It refers to unrestricted rights in distributions and in the liquidation of assets. We must ask about voting power in respect of such shares. What about preferred shares which are convertible at any time into ordinary shares with full rights? Are they relevant shares? There are other devices such as preferred shares, subordinated shares, second preferred shares, third preferred shares, preferred shares cum dividend and so on. I need not continue. A variety of instruments are used. At what point do we have to draw the line and say that these are not relevant shares?

Paragraph (c) of the amendment says: the fair value of any consideration other than the issue of the equity shares … did not exceed 10 per cent. of the nominal value of the equity shares issued". That is an extraordinary expression. The "nominal value" of the equity shares issued could be one penny a share but the shares themselves could have a market price of £5. I do not understand how this will work and correspond with current practice. When applying merger accounting in the United States it is 10 per cent. not of the nominal value but of the market value of the equity shares issued for the other 90 per cent. I should be grateful if the noble Lord could clarify that point.

Lord Strathclyde

Perhaps I may offer some background information on the amendment. The rules set out in the schedule reflect detailed consultation with outside bodies, in particular on the issues raised by the two methods of accounting for business combinations. Acquisition accounting and merger accounting are the source of much debate within the accounting profession. In the light of this the department consulted particularly carefully on the legislative changes which might be made in the context of implementing the directive rules in Article 19, acquisition accounting, and Article 20, merger accounting. The department put forward deliberately wide-ranging options for discussion at the end of December 1987. At about the same time the Accounting Standards Committee announced that it would embark on a review of the relevant accounting standards.

The department announced in July 1988 that it would be wrong radically to change permitted accounting treatments for mergers and acquisitions at a time when views within the accounting profession differed and the relevant accounting standards were under examination. However, the consultation revealed widespread agreement on the need for much improved statutory disclosure. The July announcement therefore said that the next Companies Bill would, first, give effect to the seventh directive rules on acquisition accounting; secondly, would make provision for merger accounting as permitted under the directive; and, thirdly, would introduce improved statutory disclosure rules. The announcement went on to make clear that the department would reconsider the possibility of making further changes once the outcome of the ASC review was known.

The noble Lord asked one or two questions. On the definition of "relevant shares", voting rights are not of any relevance in this context. The wording comes from the directive which excludes preference shares and all those shares listed by the noble Lord.

Lord Williams of Elvel

I am most grateful to the noble Lord for that answer so far as it goes but I must ask some consequential questions. The directive may eliminate the other types of shares which I mentioned. However, it refers in Article 21 to shares but does not mention the voting rights of those shares. Presumably they could be shares with no vote, with a full vote or with a partial vote. I say this in the context of a general Roman law provision that all ordinary shares carry the same vote. Non-voting ordinary shares in countries with Roman law provisions—France, Germany, Italy, Belgium, Spain and Portugal—are not generally allowed. It may be that the directive is influenced by that, whereas nonvoting ordinary shares are allowed under United Kingdom law. I am unclear as to what the noble Lord means in his response to me.

Secondly, in Article 21(a) the directive says that merger accounting is allowed in cases where the shares held represent at least 90 per cent. of the nominal value, or, in the absence of a nominal value, of the accounting par value of the shares of that undertaking other than shares of the kind described in Article 9 of the directive. In United Kingdom company law we do not have any par value shares. Shares must have a nominal value. Are we to take it that in countries which have shares with no par value there can be an accounting par value which is established by reference to the net asset value per share, and that companies established in those countries will have an advantage over United Kingdom companies which do not have any par value shares? Some countries follow the United States' example where there are no par value shares. If the country law allows no par value shares, are those companies to have an advantage over United Kingdom companies where a par value or a nominal value for a share is required by law?

I am sorry to weary the Committee with such complex technical points but the Government have written a Bill and have now written an amendment to their Bill. They owe us an explanation on this point.

6 p.m.

Lord Strathclyde

We are always delighted to offer explanations on our own amendments to the Bill. The noble Lord asked a question earlier about fair values. The directive refers to cash payments not exceeding 10 per cent. if the nominal value of shares is used. We have interpreted that as referring to the fair value of non-cash elements to ensure effective operation of the directive. There is also no accounting for values in the United Kingdom. The general definition in the new Section 259(3) is expressed as where a target is in a country where such a concept exists. The question of advantage is, I believe, too complex to resolve on the spot.

Lord Williams of Elvel

I am most grateful to the noble Lord for what he said. I really think that he is doing his best in the matter. However, as he said, it is a most complex question. There are countries in the world which have no par value shares. Therefore, if one looks at the directive one can see that the accounting par value must equal, on any rational interpretation, the net asset value per share. That is the standard which is set for the "90%". In the case where there is a nominal value, then apparently we must look at the nominal value to set the value of the "90%", which, as I said before, could he Ip a share, whereas the asset value per share could be £100 or £500. Indeed, I do not know what it is.

Are we therefore saying that countries which have a no par value system will support their companies over countries which have a par value system, as we do? If I may say so, all the talk about the extra 10 per cent. is irrelevant to the question I raised.

Lord Strathclyde

In the light of what the noble Lord has said I think that the best action to take at this stage would be to withdraw the amendment so that we may look at it again.

Lord Williams of Elvel

I am most grateful to the noble Lord, I think that that is the right course of action at this stage. We look forward to further debate on this interesting subject on Report.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 41: Page 134, line 30, leave out from ("year") to first ("the") in line 31 and insert ("including").

The noble Lord said: I should like to take Amendments Nos. 41 to 44 together. These are all minor amendments. The first two remove ambiguities in the present wording. The last two are technical amendments which seek to ensure that the correct amounts are used when making the set off required by paragraph 11(5) of Schedule 2. I beg to move.

Lord Williams of Elvel

I should like to speak to this grouping of amendments also. I do not wish to knock out the Government's amendments one by one as they come forward, but, again, I have some problems with the amendments proposed.

Amendment No. 41 seems to me, if I interpret it right, to say exactly the opposite to what is contained in the Bill as drafted. It also gives rise to the question: what is the period before acquisition? Further, what if the financial year of the acquired company is different to that of the acquirer? Is there to be a reconstruction of the acquired company's accounts to match the accounting year of the acquirer? If that is the case, is it not an extremely laborious exercise to impose on the acquiring company the necessity to realign all the acquired company's accounts, together with all the problems involved with reauditing, and so on, in order to match up with the financial year? That is a situation which happens the whole time.

Amendment No. 42 at first sight makes almost as little sense as the original Bill. If the year ends are different, what happens then? I simply cannot understand what the consequences of these amendments are if the year ends are different. I believe that it will impose an enormous load on accountants.

As regards Amendment No. 43, I am rather baffled to see that the Government propose to leave out the word "equity". The word was mentioned in Amendment No. 40—an amendment which has since been withdrawn—but they now propose to leave out something which seems to be integral in the whole question of merger accounting.

I turn now to Amendment No. 44. Again, what is the treatment for paper consideration for shares with restricted rights? I am sorry to impose all these technical questions on the noble Lord, but he has moved the amendments and I must respond to them.

Lord Strathclyde

As I said earlier, we are always delighted to discuss the Government's amendments. I shall attempt once more to explain exactly what the Government mean. I take first Amendment No. 41. It is designed to remove an ambiguity about the term, "without any adjustment", which appears at line 30. The amendment makes it clear that income and expenditure should be included for that part of the financial year before the acquisition.

Lord Williams of Elvel

Perhaps the noble Lord would be kind enough to stop there. He said, "For that part of the financial year". If I interpret rightly what he is saying, that means that the accounts of the acquired company have to be reworked in their entirety for the period of "that part of the year before acquisition". That period could be six months, seven months, eight-and-a-half months, nine months, or it could even be three weeks. Is that really what the Government propose?

Lord Strathclyde

On a different year entry the financial year of the parent is the important financial year, not that of the subsidiary. That is the point of the amendment. As regards Amendment No. 42, that is also to remove an ambiguity about the term "at all material times". The amendment makes it clear that group accounts must show corresponding amounts on the assumption that the undertakings had been merged throughout the previous year.

Finally, I turn to Amendments Nos. 43 and 44. They are to ensure that the book value of any shares issued in exchange for shares in the acquired undertaking can be used for the purposes of the set off involved when the merger method of accounting is used. The term "book value" covers both "fair value" and "nominal value". That is important to cover a situation when merger relief is available. As I said, the amendments are technical but they are also important. I hope that what I have said now explains the issues raised by the noble Lord.

Lord Williams of Elvel

The noble Lord has explained that the financial year which is relevant in the case of Amendment No. 41 is the financial year of the new parent; that is, the acquiring company. I fully accept that fact. However, perhaps I may read out to the Committee what sub-paragraph (3) of paragraph 11 of Schedule 2 says, including the Government's amendment—assuming that Members of the Committee accept it. It reads: The income and expenditure of the undertaking acquired shall be included in the group accounts for the entire financial year, including the period before the acquisition". This means that if the acquisition does not match the financial year of the acquiring company—if, for example, the acquired company's year end is in June and it is acquired in September, but the new parent has its year end in December—then all the accounts of the acquired company have to be reworked for the process of making group accounts. If that is what the Government want, I am happy that they should want that. However, I cannot put any interpretation on the provision other than the one I have given.

Lord Strathclyde

I know that it sounds confusing and looks awkward and as though it is more complicated than it needs to be, but the amendment covers adjustments on lines generally accepted in accounting practice.

Lord Williams of Elvel

With great respect, the amendment does not cover such adjustments. It is perfectly proper for companies to ask their auditors to rework accounts and to make comparisons; but they are not being accused of a criminal offence if in some way they get it wrong. It is not written into statute. I know from my experience that it is an enormous burden on companies which have to try to adjust merger accounting procedures to their own year-end. It can be worthwhile for companies to do that. I am not saying that is necessarily something which companies do not wish to do. I take the view that if merger accounting is to be allowed in the statute, it should not be the easiest thing in the world for companies to do because people have got away with a lot of tricks on it. Nevertheless, it seems to me that the amendment imposes an extraordinary burden on acquiring companies and auditors who will have to audit those accounts. To have to go back over three or five months and have a month end! I must say that the noble Lord is pushing us a bit hard on that point.

Lord Strathclyde

What the noble Lord, Lord Williams, said is fair enough; but this practice is carried on at present. The need for proper disclosure does not seem to be an intolerable burden.

On Question, amendment agreed to.

Lord Strathclyde moved Amendments Nos. 42 to 44: Page 134, line 34, leave out ("at all material times") and insert ("throughout that year"). Page 134, line 38, leave out ("equity"). Page 134, line 39, leave out ("relevant").

Lord Strathclyde moved Amendment No. 45: Page 135, line 10, leave out first ("the") and insert ("each class or).

The noble Lord said: I hate to say again that this is a minor technical amendment, because I am sure that the noble Lord, Lord Williams, has other plans for it. It is intended that companies need only disclose information about the book values and fair values of each class of assets and liabilities. I beg to move.

Lord Williams of Elvel

I am grateful to the noble Lord. He correctly anticipated that I have problems with the amendment. Will he answer two questions? First, how is a class to be defined? Secondly, will there be netting-off within a class?

Lord Strathclyde

I am sorry that the noble Lord does not know the answer to those two questions. I shall endeavour to get them for him as quickly as possible. The effect of the amendment is to clarify the fact that companies in this context need only disclose that information about each class of assets and liabilities. When he asks what each class is, I am not sure what he is trying to say. Presumably he seeks to know what each class is. I can now tell him that class is to be defined by professional guidance. Guidance will also cover netting-off. I hope that that will please him.

Lord Williams of Elvel

I am most grateful to the noble Lord for providing that answer so quickly. Perhaps he can tell me whether there will be any professional guidance which is consistent with other professional guidance; in other words, will there be an SSAP or some steer from the accounting profession? Secondly, when we talk about netting-off, will he be clear that we understand each other; that if there is a substantial good will element in one class of assets, it is only within that class—if there is negative goodwill—that it can be netted-off? It cannot be netted-off against goodwill in another class of asset, however defined.

6.15 p.m.

Lord Strathclyde

The noble Lord again asks two pertinent points. As I said before, class is to be defined by professional guidance. There is a draft standard by the profession already in existence. We shall be seeing it at any moment now.

Lord Williams of Elvel

When?

Lord Strathclyde

Very soon.

Lord Williams of Elvel

As I understand it, we are discussing legislation. Does the statute take account of the fact that there will be an SSAP on this matter? Can we have some view on when it will be with us and whether the accounting profession and others who will be deeply affected can look at the statute in the light of the SSAP that will be produced?

Lord Strathclyde

Yes, the statute can be carried out in the light of what I have just said. As for the noble Lord's other problem on netting-or, the Bill, as amended, could not net-off between classes. The other things left have to be defined specifically and therefore do not play a part.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment 46: Page 135, line 23, leave out ("subsequently").

The noble Lord said: With the leave of the Committee, I shall speak also to Amendment No. 46. The effect of the amendments is to clear up an ambiguity in that the disclosure required by paragraph 13(2) of Schedule 2 is after deducting any goodwill attributable to disposals prior to the balance sheet date and not after it. I beg to move.

Lord Williams of Elvel

I too shall speak to Amendments Nos. 46 and 47. I understand paragraph 13(2) of Schedule 2, as amended; what I did not understand was the, original version. I can understand that at a balance sheet date a company would eliminate from its calculations its assets and the goodwill relating thereto on those properties that had been disposed of prior to that balance sheet date. What I could not understand was that in the original clause the figure should be shown net of any goodwill attributable to subsidiary undertakings and businesses subsequently disposed of. I am happy to assent to the Government amendments. I would be happier if I knew what the Government originally intended, and what they are now trying to amend.

Lord Strathclyde

I understand that the problem is that the noble Lord, Lord Williams, did not understand what we meant before we amended the provisions, and that now he does. The Government are in the same situation. That is precisely why we amended the provision.

Lord Williams of Elvel

I am most grateful to the noble Lord for explaining that the Government did not understand their own Bill. When the Government present a Bill before this place, they should try to understand it.

Lord Strathclyde

I must say again that Bills are often published, and that we have to make minor technical amendments here and there to clarify what we meant and occasionally to change one or two things. It is the Opposition who are trying considerably to change the Bill. The Government are trying to make it easy for everybody to understand. That is what they have just done in these amendments.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 47: Page 135, line 23, after ("of') insert ("prior to the balance sheet date").

Lord Strathclyde moved Amendment No. 48: Page 135, line 24, leave out paragraph 14 and insert ("14. Where during the financial year a subsidiary undertaking which significantly affects the figures shown in the group accounts has been disposed of, there shall be stated in a note to the accounts

1. (a) the name of the undertaking, and
2. (b) its profit or loss for the period up to the date of the disposal.").

The noble Lord said: This amendment deals with disposals of subsidiary undertakings. I beg to move.

Lord Bruce of Donington

I am quite sure that the noble Lord and ourselves are at one in trying to get the legislation right so that everyone knows exactly what is meant and that it is capable of proper legal interpretation, even though it may involve the occasional indignity, which one knows Parliamentary Counsel do not like, of having the original wording altered. Paragraph 14, line 24, page 135 says: Where there has been a disposal of a material subsidiary undertaking during the financial year, there shall be stated in a note to the accounts its profit or loss for the period up to the date of the disposal". As far as I am concerned that appears to be a very clear statement.

When we come to the proposed amendment, we find that it leaves out the entire paragraph and substitues the words on the Marshalled List which the Committee will observe say: Where during the financial year a subsidiary undertaking which significantly affects the figures shown". The word "material" is well understood in legal terms; it has often been the subject of numerous learned judgments. However, why substitute "significantly", which can mean anything according to the time of day, the subjective condition of the person reading the words and a whole series of other possibilities? The substitution of this word for "material" in the original wording of the small subsection is what it is desired to put forward.

One agrees that there is a valuable addition in the proposed amendment which requires a note in the accounts to state the name of the undertaking. This was not originally included in paragraph 14 and that is an improvement. Would it not have been much simpler to have left paragraph 14 where it was and added the condition that the name of the undertaking should be shown? I should have thought that that would have met the position quite satisfactorily without having to introduce the term "significantly" into the argument. If the noble Lord disagrees then we shall have to accept that. We are only trying to help him. He may agree however that on this occasion we are probably right.

Lord Strathclyde

I am always delighted to discuss such issues with the noble Lord. At the beginning of the debate I was going to say that the amendment was a minor technical one but that never seems to be the case. What we have done here is to make it clear that disclosure is only required where a subsidiary is disposed of in respect of those subsidiaries which significantly affect the figures in the group accounts. It also requires the name of the subsidiary to be stated. The noble Lord is well aware of that.

The reason we changed the word "material" to "significantly" was because "significantly" was chosen to align with and mirror paragraph 12(2). It is purely a matter of judgment which of the two is better. The Government have chosen "significantly". So be it.

Lord Bruce of Donington

The noble Lord has said it. So be it.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 49: Page 135, line 41, after ("1,") insert ("either after item J or"). The noble Lord said: With the leave of the Committee, I should like to take Amendments Nos. 49, 50 and 51 together. These are three relatively technical amendments. Amendment No. 49 gives companies a choice of two phases where they can show the item "minority interests" on their balance sheets. Amendment No. 51 ensures that minority interests are shown on the face of the balance sheet. Amendment No. 50 merely improves the wording in line 44 by referring to the: capital and reserves attributable to shares in subsidiary undertakings".

I beg to move.

Lord Bruce of Donington

I am grateful to the noble Lord for having given that explanation. As regards Amendment No. 49, we accept it as being a technical amendment. As regards Amendment No. 50, we entirely sympathise with the insertion of the words after the amount "capital and reserves". However surely that requires a further consequential amendment in the same line. In its amended form it would read: that item shall he shown the amount of capital and reserves attributable to shares". Would it not be better to put "equity" instead of "shares"? The noble Lord has used "equity" before and possibly it makes the wording a little clearer if that is used.

Lord Strathclyde

I am delighted that the noble Lord is quite happy with Amendment No. 49, and, I presume, with Amendment No. 51 as well. I am sorry that he is not quite so happy with Amendment No. 50 but I understand that his suggestion would create difficulties which appear to be unforeseen. Therefore we cannot accept it.

Lord Bruce of Donington

It would be helpful if the noble Lord could give some account of what the "unforeseen" difficulties are or may be conceived to be. I do not want to tax the noble Lord at this stage but perhaps he would be kind enough to leave the wording as it is at the moment and come back with a further explanation. The point appears to be one of substance. It reads far better and makes greater sense if one uses the term "equity" there.

Lord Strathclyde

Perhaps I may take advantage of what the noble Lord has said and withdraw these amendments in order to look at them at a later stage.

[Amendments Nos. 50 and 51 not moved.]

Lord Strathclyde moved Amendment No. 52: Page 136, line 25, leave out first ("included")

The noble Lord said: This is a simple drafting amendment; an extra "included" should be deleted. I beg to move.

6.30 p.m.

Lord Bruce of Donington

May we have the noble Lord's assurance that the omission does not involve a matter of substance?

Lord Strathclyde

Absolutely, this is genuinely a drafting error.

Lord Williams of Elvel

Am I right in thinking that this is a drafting error, or is it a printing error? There is a distinction there. Perhaps I can raise a general point, although I do not wish the noble Lord to respond to this at the moment. I have received advice that when we put down amendments which are designed to rectify what the clerks regard as printing errors that is not in order. In other words, there is a latitude granted to the printer.

The distinction between a printing error and a drafting error is one which I have to date failed to grasp. By putting that on the record, I hope that we shall obtain some guidance on which is which. I should have regarded this amendment as dealing with a printing error. I think that the word "included" has been printed twice in the same line. I think it is a printing error rather than a drafting error.

Lord Strathclyde

I take the noble Lord's point. I shall make sure that he is informed as regards what the guidance is. On Question, amendment agreed to.

Lord Williams of Elvel moved Amendment No. 53: Page 136, line 35, leave out ("capital") and insert ("assets, liabilities, income or expenditure").

The noble Lord said: This amendment stands in my name and that of my noble friend Lord Peston. It may be for the convenience of the Committee if I also speak to Amendment No. 54.

The object of these amendments is in the case of Amendment No. 53 to clarify the nature of what is constituted by a qualifying interest to permit a somewhat wider range of entity to be consolidated where it is appropriate. We believe that the present definition is rather restrictive and may well be open to abuse.

Amendment No. 54 is consequential on Amendment No. 53; in other words consequential in the effort to allow a wide range of entity to be consolidated where appropriate. To clarify Amendment No. 54, I should bring in evidence the arrangements that are made for sharing assets, liabilities or expenditure in extractive industries—for instance, oil or coal industries where one venturer may provide a rig or dig a mine and where another may provide manpower, technical expertise, assistance or technological help. That might not mean an equal share in the capital or the results. A joint interest need not be an equal interest, taking the venture as a whole. We believe there are problems here which the Government may wish to look at. I do not necessarily insist on the wording of the amendments, but I hope that the Government will pay attention to the arguments we are putting forward. I beg to move.

Lord Strathclyde

As the noble Lord said, the amendments appear to restrict joint ventures to non-corporate bodies such as partnerships. We have some sympathy with this. We wish, however, to look again at the whole definition of a joint venture in this context in the light of comments we have received from a number of experts in this highly specialised area. I undertake that the Government will return to this subject at a later stage if the noble Lord is willing to withdraw the amendments.

Lord Mottistone

If I may intervene, I was provided with an amendment to this part of the Bill this very morning but it was too late to put it down. But in view of what my noble friend has just said, I should be most grateful to see the comments. I shall send him a copy of my amendment which would have been tabled if we had been a little sharper off the mark.

Lord Strathclyde

We would be delighted to receive my noble friend's amendment.

Lord Williams of Elvel

I am most grateful to the noble Lord. This is an important point and I am glad that the Government will have another look at it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 54 not moved.]

Lord Williams of Elvel moved Amendment No. 55: Page 137, line 4, after ("exercises") insert ("or has the ability to exercise").

The noble Lord said: I beg to move Amendment No. 55 standing in my name and that of my noble friend Lord Peston. Again this is a relatively technical amendment. We are seeking to give a rather broader definition to the expression "exercises". We believe that the insertion: has the ability to exercise", has a closer relationship to SSAP 1 and indeed to current practice. We believe it would also permit account to be taken of influence, even if not actually exercised during the period in question.

This test is somewhat less artificial than the actual exercise test that we have in front of us at the moment but is consistent with the logic behind the definition already included in the expression exercisable at any time "during the period". That appears on page 137 at line 22 of the Bill. We think it is consistent with the presumption of significant influence which is included in the seventh directive, Article 33. So, all in all, we would prefer our amendment to the Government's wording. I accept that this is a fairly technical discussion and that the noble Lord may wish to look at it further. I believe we are on slightly stronger ground than the Government, although we recognise that this is a difficult point.

Lord Strathclyde

The amendments are intended to align the definition of "associated undertaking" in the Bill more closely with the definition in accounting standards. I understand that wish. However, the wording in the Bill reflects Article 33 of the seventh directive. We are constrained by the wording of the directive, the main principle of which is to achieve a greater harmonisation of accounting treatment within the European Community. I hope therefore that the noble Lord will see that there is not a great deal we can do. In the light of that, I ask him to withdraw the amendments.

Lord Williams of Elvel

There is of course a dispute between us about the significance of Article 33 of the seventh directive. The text states: An undertaking shall be presumed to exercise a significant influence over another undertaking where it has 20 per cent. or more of the shareholders' or members' voting rights in that undertaking". There is therefore a presumption. It seems that the Government's wording is not dictated by the seventh directive and that our wording is permitted by that directive. But if the noble Lord's legal advisers feel strongly that that is not the case, I shall pay attention to that.

Lord Strathclyde

My legal advisers do feel strongly about that.

Lord Williams of Elvel

Very well, people can obviously take a different view of the meaning of the directive. Other legal advisers take a somewhat more relaxed view. Nevertheless, if that is what the Government's lawyers say, we must accept that. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 56 not moved.]

Lord Williams of Elvel moved Amendment No. 57: Page 137, line 10, at end insert ("and where an undertaking does not hold 20 per cent. or more of the voting rights of another undertaking it shall not be presumed to exercise, or have the ability to exercise, such an influence over it unless the contrary is shown").

The noble Lord said: Amendment No. 57 stands in my name and that of the noble Lord, Lord Peston.

The amendment seeks to clarify the definition by providing what is known as a mirror image test. It allows a presumption which is rebuttable either way. It is in line with current accounting practice and, we believe, with SSAP1. In our view, being in line with SSAP1 it has the merit of giving consistency to companies operating under that accounting standard. We believe that the Government may wish to pay attention to those arguments because consistency with current practice is desirable, as long as it is allowed by the directive. I beg to move.

Lord Strathclyde

The amendment would change the burden of proof in determining whether one undertaking is an associate of another where 20 per cent. of voting rights are not held by that other undertaking. I understand that, as the noble Lord outlined, there is a similar presumption in the relevant Statement of Standard Accounting Practice. The presumption may have been included in the standard because the definition of an associate in that context is wider than that used in the Bill.

The standard's definition is based on the investing group being in a position to exercise a significant influence. Arguably, therefore, it was considered necessary to cover specifically cases where less than 20 per cent. of voting rights are held. The Bill, in contrast, requires that the investing group actually exercises a significant influence over the operating and financial policy of that other undertaking. I therefore do not believe that the amendment is appropriate.

Lord Williams of Elvel

I am grateful to the noble Lord for that response. I think that the amendment concerns somewhat more than just a technical point: it relates to who can exercise influence and on what grounds some form of accounting procedures should apply thereto.

I cannot quite understand why the Government are departing from SSAP1. I think that we agree that SSAP1expresses what my amendment seeks to put into the statute. The Government seek to depart from that practice, but I have not yet heard from the noble Lord why the Government are asking companies to do something other than what they have done hitherto. I should be grateful if the noble Lord could explain the reason.

Lord Strathclyde

The answer is that we have followed the scheme in the directive and stuck to it. The presumption contained in the noble Lord's amendment is not included in the directive, and therefore the same is true of the SSAP.

Lord Williams of Elvel

I understand that it is not in the directive. Nevertheless we have all agreed—and I continue to believe and I am sure that the noble Lord accepts—that it is up to the United Kingdom Government to decide whether or not they wish to go beyond the directive. There is nothing to stop the Government going beyond the directive. Up till now companies have been used to operating on the basis of SSAP1. The Government now seem to be retreating from that position, because SSAP1 is stronger than the directive. If the Government now say that I am wrong and SSAP1 is weaker than the directive—although I do not believe that to be the case—then I shall withdraw. I wonder why the Government are not following SSAP1 when they are allowed to do so by the directive.

Lord Strathclyde

We do not say that SSAP1 is either stronger or weaker than what is proposed in the Bill. It is slightly wider. We have sought to follow the directive and that is exactly what we have done. We have not gone beyond the directive. We are happy with the position.

Lord Williams of Elvel

I am grateful to the noble Lord. It is obvious that we shall not get much further on the point. Perhaps he could write to me and let me know the answer to that question.

Lord Strathclyde

I shall write to the noble Lord on that point in any case. I think that I ought to say that the directive is primarily a harmonisation directive and we cannot depart from the substantive intention of the directive. Therefore the argument about whether we can go further than the directive seems irrelevant. However, I shall write to the noble Lord to make clear exactly what we mean.

Lord Lloyd of Kilgerran

I have endeavoured to follow the directive from time to time. Is the noble Lord now saying that the Government are not accepting amendments which go beyond his interpretation of what the directive says? Is that the Government's position? If that is so, it will save quite a lot of time.

Lord Strathclyde

To paraphrase what the noble Lord said, he asks whether we are willing to accept amendments which go beyond what the directive states.

Lord Willams of Elvel

That is not paraphrasing, that is what he asked.

Lord Strathclyde

The answer to that question is that, where the directive makes a requirement, we cannot go beyond it. However, the noble Lord is of course entitled to put down as many amendments as he wants.

Lord Lloyd of Kilgerran

I know that I can do that. I was not considering the matter from that point of view but from the point of view of whether the directive is purely a harmonising directive and therefore the Government, for certain reasons—political or otherwise—are not going beyond the directive in amending the law. I am not threatening to put down amendments, I just want to know what the position is.

Lord Strathclyde

I hope that that is a point which I can clarify for the noble Lord very soon. I shall let him know the answer in the very near future.

Lord Williams of Elvel

It is a fundamental point. If the Government are saying that they will resist all amendments that go beyond the directive then some of our labours will be in vain. Can he formulate an answer this evening, because otherwise we do not know where we stand?

Lord Strathclyde

That is precisely what I meant by "the very near future". I shall let the Committee know the answer this evening.

Lord Lloyd of Kilgerran

I am not nit-picking, I am trying to be helpful. If we knew that that was the position a lot of us could go home earlier than we had intended.

Lord Williams of Elvel

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

6.45 p.m.

Lord Strathclyde moved Amendment No. 58: Page 137, line 16, leave out ("controlling the exercise of") and insert ("holding").

Amendment No. 58 is a drafting amendment. The concept of controlling the exercise of voting rights is not used in this paragraph; "holding voting rights" is used, and it is to that concept that the provision should apply. The amendment corrects a drafting error.

Lord Lloyd of Kilgerran

I warmly welcome the amendment.

On Question amendment agreed to.

Lord Strathclyde moved Amendment No. 59: Page 137, line 19, at end insert (", that is, shall not be regarded as held by any person or as forming part of the voting rights in the undertaking").

The noble Lord said: This amendment is grouped with Amendment No. 160. These amendments are technical and are tabled in response to points put to us by outside bodies. They seek to explain what is meant by leaving voting rights out of account. This is a concept used in paragraph 19(3) of Schedule 2 in the context of the definition of associated undertaking and in new Section 258(2) in the context of the definition of a subsidiary undertaking. The purpose is to make it clear that when voting rights of an undertaking are left out of account they are to be regarded as not being held by any person and as not thus forming part of the overall voting rights in the undertaking. I beg to move.

Lord Williams of Elvel

I studied this amendment during the weekend, and I have listened to what the noble Lord has said. I feel that I am no further forward. However, I understand from the noble Lord, Lord Lloyd of Kilgerran, that he is satisfied with it—or perhaps he is not satisfied with it—and therefore I shall read very carefully what the noble Lord has said in explanation. I regard it as a complicated amendment, and if we have any problem with it we shall come back at a later stage.

Lord Lloyd of Kilgerran

I have had some difficulty in understanding the amendment. It does not seem to be the practice to have the words "that is"—that is some explanation—in the Bill. Nevertheless, I have heard what the Minister has said. I shall take it away and think about it.

Lord Grantchester

It is very difficult to understand the amendments, and this one in particular. If you are entitled not to require voting rights to be exercised but you do not exercise the right not to so require, then all those votes are not to be regarded for any purpose even though your right not to require the exercise of those votes is not exercised. The whole thing seems to be rather odd. Perhaps the Minister could explain how these matters work.

Lord Strathclyde

If the noble Lord would like a further explanation, for the purposes of paragraph 19(3) of Schedule 2, associated undertakings, and of new Section 258(2), subsidiary undertakings, we are trying to explain exactly what is meant by leaving voting rights out of account. That is precisely what the amendments seek to do.

I know that the amendments are very complicated and technical, but I am advised that they remove a possible ambiguity in the present wording of the relevant provisions which was pointed out to us by our consultees. To be more specific, the voting rights are left out of account for this purpose only.

Lord Williams of Elvel

The noble Lord has not taken us much further in our understanding. In the light of comments made by Members of the Committee in this very short debate, I wonder whether the noble Lord could have a further look at the wording and try to translate it into something that is comprehensible to the average human being whose mother language is English.

Lord Strathclyde

In the light of what Members of the Committee have said, perhaps I should indeed take this away and get further explanations, or possibly even rewrite it for a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 60: Page 137, line 20, leave out sub-paragraph (4) and insert— ("(4) Voting rights which are exercisable only in certain circumstances shall be taken into account only when the circumstances have arisen, and for so long as they continue to obtain, or when the circumstances are under the control of the person having the rights.").

The noble Lord said: This is another technical amendment. I should like to take with it Amendment No. 164. Both amendments are intended to resolve the same ambiguity in the provisions to which they relate. They make it clear that, when rights held by a person are exercisable only when certain circumstances exist, they are only to be counted for the purpose of determining whether one undertaking is an associate or subsidiary of another when and for as long as those circumstances exist. I beg to move.

Lord Williams of Elvel

This may be marginally more comprehensible than the previous amendment, but I wonder whether the noble Lord could explain what sort of circumstances he has in mind that might arise and what is meant by circumstances continuing to obtain. In what circumstances may circumstances be "under the control of the person having the rights"?

Lord Grantchester

Does this amendment cover cases of voting rights not being exercisable by persons being dead and the shares not being registered in the name of anyone who can vote?

Lord Strathclyde

Perhaps I may explain a little further. The present provisions, which the amendments replace, are ambiguous where it has to be determined whether one undertaking is an associate or subsidiary of another during a period. It is not clear whether the rights have to be exercisable at some point only during that period or must be exercisable throughout it, before the relationship is recognised for that period. The amendments adopt a slightly different approach in that under them the relationship will only be recognised for that part of the period during which the voting rights are exercisable. An example of a case covered is voting rights on preference shares where a dividend has passed.

Lord Williams of Elvel

Where a dividend has passed or has been passed? It is a cumulative preference share?

Lord Strathclyde

Where it has been passed.

Lord Williams of Elvel

And it is a cumulative preference share?

Lord Strathclyde

I am not sure that that question really arises.

Lord Lloyd of Kilgerran

Perhaps I may make what I hope is a helpful suggestion. I was very worried about subparagraph (4) and wondered why it could not have been deleted altogether. But to be quite fair to the Minister I will accept the wording of the amendment because I am assuming that there are certain circumstances arising, as indicated in the amendment. I would be prepared to accept this as an improvement on the original subparagraph (4).

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 61: Page 137, line 27, leave out from ("the") to end of line and insert ("purpose of determining whether an undertaking holds 20% or more of the voting rights in another").

The noble Lord said: I should like to take this amendment with Amendments Nos. 62 and 63. The drafting amendment is designed to make it clear beyond doubt that subparagraph (5) only has effect for the purposes of the presumption in subparagraph (2) and not also for the underlying test in subparagraph (1).

Lord Williams of Elvel

We have to accept the noble Lord's word that this is in a sense a drafting amendment and that it is designed to clarify what is seen to be a problem in the initial wording of the Bill. I find this an odd amendment because in paragraph 19(2) there is the clear expression: Where an undertaking holds 20 per cent. or more of the voting rights in another undertaking it shall be presumed to exercise". Then the whole definition contained in subparagraph (5) is a definition of the whole of paragraph 19, which is the definition of an associated undertaking. However, the government amendment goes back to the question of the 20 per cent. I do not quite understand why the Government have seen fit to introduce this amendment. The original wording was more coherent.

Lord Strathclyde

All we are trying to do is clarify beyond doubt. Perhaps we have taken it too far. It is only a drafting amendment. I hope that the noble Lord will accept it.

Lord Williams of Elvel

I understand what the Minister says, but, if I may say so, this is what happens when one tries to put these very difficult concepts into statute. There are bound to be misunderstandings and difficulties. This is one of the problems with this schedule.

On Question, amendment agreed to.

Lord Strathclyde moved Amendments Nos. 62 and 63: Page 137, line 29, after ("(a)") insert ("voting"). Page 137, line 32, after ("(b)") insert ("voting").

Lord Hesketh

Perhaps I may suggest that this is a suitable moment at which to break for dinner and that we resume at eight o'clock. I beg to move that the House do now resume.

[The sitting was suspended from 7.1 to 8 p.m.]

House again in Committee on Schedule 2.

Lord Williams of Elvel moved Amendment No. 64: Page 137, line 44, at end insert ("or their nominees").

The noble Lord said: I beg to move Amendment No. 64 standing in my name and that of my noble friend Lord Peston. Insertion of the words "or their nominees" clarifies the definition in the Bill and is consistent with the specific reference in the seventh directive, Article 2.3. Perhaps for the benefit of the Committee I should explain what I think Article 2.3 means. It reads: The total of the shareholders or members voting rights in the subsidiary undertaking must he reduced"—

I take that to he obligatory— by the voting rights attached to shares held by that undertaking itself by a subsidiary undertaking of that undertaking or by a person acting in his own name but on behalf of those undertakings". It seems to us that the Bill does not quite reflect the point that is made in paragraph 3 of that article in the directive. We think that the amendment clarifies it.

I hope that it is for the convenience of the Committee if I also speak to Amendment No. 166. It is a consequential change and is consistent with the change that we are discussing to Schedule 2. I hope that this introduces a certain clarification and that the Government will be able to accept the amendment.

Lord Strathclyde

I too should like to speak to Amendment No. 166 with this amendment. I am most grateful to the noble Lord for these most helpful suggestions. Without repeating everything that he has said, I accept Amendment No. 166 and would like to think further about the wording of Amendment No. 64 and bring forward our own amendment to the same effect at a later stage as well as to the equivalent provision in new Section 736, Clause 95, if that is acceptable to the noble Lord.

Lord Williams of Elvel

I am most grateful to the noble Lord. I accept that we are not here to draft the Bill. If the Government can come forward with better drafting than ours, I am only too happy to accept it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 65: Page 138, line 11, after ("accounting") insert ("in accordance with the applicable Statement of Standard Accounting Practice").

The noble Lord said: I beg to move Amendment No. 65 standing in my name and that of my noble friend Lord Peston. This amendment seeks to clarify the equity method of accounting which is not defined in the Bill as drafted. Our definition is to make it consistent with the various SSAPs—if I may use that acronym—which are in operation at the moment. We endeavour to make it consistent with the policy of accounting elsewhere, for instance in the second schedule, in acquisition merger accounting and the amendment defining proportional consolidation. Furthermore, the SSAP to which I have referred is based on a widely accepted practice—for instance, in SSAP 21.

We hope that the extension that we propose in this schedule would be acceptable because it puts in in concrete form an accounting practice that we should like to see incorporated in the Bill. I have a doubt in my mind whether the Government will accept this because it is a question of accepting accounting rules that are put forward by bodies which are not yet supervisory bodies. Nevertheless, if the Government would accept the basic thrust of what we are trying to do and produce amendments of their own at a later stage, I should be perfectly happy with that.

Lord Strathclyde

The noble Lord's doubts are indeed well founded. The amendment would require companies using the equity method of accounting to follow the relevant accounting standard. While this is a laudable aim in itself, for the reasons that I gave in speaking to an earlier amendment we agree with Sir Ronald Dearing's conclusions that it is not appropriate to give statutory effect to statements of standard accounting practice. We are therefore unable to accept this amendment.

Lord Williams of Elvel

The noble Lord confirms my doubts. They arise from his previous remarks about the Dearing Report. Nevertheless, there is a case for trying to put into a legislative framework the recommendations or the provisions of the appropriate statement of standard accounting practice.

If the Government have as their aim to try to put as much as possible with clarity into the schedule, we believe that they should follow the SSAP that is appropriate in these circumstances. If the noble Lord is saying that he has sympathy with this amendment but that the amendment itself is not acceptable, I am happy to withdraw it on the basis that the thrust of the amendment might be a matter that the Government will consider. Perhaps they will put it into the appropriate form when they come back at a further stage.

I wonder whether the noble Lord would consider what I regard as a fair compromise between his position and mine. I understand that "statement of standard accounting practice" is an expression which is laid down by the institutes at the moment. We are moving on to a different system now. Nevertheless, the Government are trying to put as much as possible into the schedule, as I understand it. I should be grateful if the noble Lord could clarify the Government's intention in this respect.

Lord Strathclyde

As I said briefly earlier, what the noble Lord suggests is a laudable aim, but we do not agree in principle to giving statutory effect to SSAPs, notwithstanding what it says in the Dearing Report. Without specific reference to accounting standards equity accounting, it would be interpreted in line with generally accepted accounting practice, but not standards binding in themselves. We are happy to consider a specific reference to generally accepted accounting practice, but not to making it statutory. I hope that that helps to clarify matters.

Lord Williams of Elvel

The noble Lord raises a point which I intended to raise later, which is that of generally accepted accounting practice or, as the Americans call it, generally accepted accounting principles, known as GAAP in the United States. While SSAPs are generally understood in this country and GAAP is understood in the United States, I believe that we want to avoid confusion between the two. I should be very reluctant to have written into statute a provision for GAAP. I would rather have something which was differently worded relevant to our situation rather than to that in America.

If the noble Lord can assure me that the Government will take account of what I have said—and perhaps we can have a further discussion at a later stage on that—on that assurance, if that is what the noble Lord is prepared to give, I think I should be prepared to withdraw the amendment.

Lord Strathclyde

We shall take account of what the noble Lord has said. That is an important area. I hope that the noble Lord will feel that he can withdraw his amendment now.

Lord Williams of Elvel

On the basis of that assurance, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendments Nos. 66 and 67: Page 138, line 16, leave out ("amount") and insert ("amounts"). Page 138, line 17, leave out ("is") and insert ("are").

The noble Lord said: With the leave of the Committee, I take Amendments Nos. 66 and 67 together. These are minor drafting amendments. They change the word "amount" from singular to plural. I beg to move.

Lord Williams of Elvel

I accept that these are drafting amendments, but why were they not properly drafted in the first place? I cannot quite understand it. Are these amendments consequential or were they incorrectly drafted in the first place?

Lord Strathclyde

No, I gather that they were incorrectly drafted when the Bill was first published. There is nothing unforeseen or untoward in them.

On Question, amendments agreed to.

Lord Strathclyde moved Amendment No. 68: Page 138, line 17, after ("material') insert ("for the purpose of giving a true and fair view").

Schedule 2, as amended, agreed to.

8.15 p.m.

Clause 6 [Additional disclosure required in notes to accounts]:

Lord Strathclyde moved Amendment No. 69: Page 11, line 12, at end insert ("any provision of").

The noble Lord said: The Committee will find it convenient to take Amendments Nos. 69, 70, 72 and 74 together. They make minor changes to Clause 6, either for clarification or to correct drafting errors. Amendments Nos. 60 and 70 slightly change new Section 231(4). This new section re-enacts an existing provision and allows directors to leave out of the accounts information which is of excessive length and which is otherwise required by Schedule 5, and instead attach the information to the annual return. I beg to move.

Lord Williams of Elvel

I accept that these are drafting amendments to Clause 6. We have no problems with them.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 70: Page 11, line 13, after ("compliance") insert ("with that provision").

Lord Strathclyde moved Amendment No. 71: Page 11, line 19, after ("company's") insert ("annual").

Lord Strathclyde moved Amendment No. 72: Page 11, line 23, leave out ("26") and insert ("29").

Lord Strathclyde moved Amendment No. 73: Page 11, line 27, after ("company's") insert ("annual").

Lord Strathclyde moved Amendment No. 74: Page 11, line 36, leave out ("made") and insert ("delivered to the registrar").

Lord Strathclyde moved Amendment No. 75: Page 12, line 2, after ("company's") insert ("annual").

The noble Lord said: This amendment has already been spoken to.

Clause 6, as amended, agreed to.

Schedule 3 [Disclosure of information: related undertakings]:

Lord Strathclyde moved Amendment No. 76: Page 140. line 47, after ("shall") insert ("also").

The noble Lord said: I shall, with leave of the Committee, speak to Amendments Nos. 90 and 91 with this amendment. These three amendments are exact parallels which apply in slightly differing contexts of Schedule 3. They make it absolutely clear that information required to be disclosed under Schedule 3 in respect of holdings over 20 per cent. in another undertaking is in addition to, and not in place of, information required in respect of holdings over 10 per cent.

Lord Williams of Elvel

There is obviously no problem with this amendment. I have heard the noble Lord's explanation. I wonder whether that is necessary, having heard what he has said. I thought that the original text reflected his opinions. But if he insists on putting that into the Bill, we have no particular difficulty.

Lord Lloyd of Kilgerran

I agree with the noble Lord, Lord Williams. The amendment cannot do any harm and therefore I support it.

On Question, amendment agreed to.

Lord Bruce of Donington moved Amendment No. 77: Page 143, line 23, at end insert ("and the address of the principal place of business").

The noble Lord said: The amendment concerns the particulars of subsidiary undertakings and Clause 15 lays down certain particulars which must be stated. Subsection (3)(a) provides that there shall be stated: if the undertaking is incorporated outside Great Britain, the country in which it is incorporated". We believe that our amendment is necessary and that after the end of that subsection there should be inserted the words: and the address of the principal place of business". We believe that those words make the provision more transparent and therefore more acceptable to a government ostensibly committed to open government and openness in general. It would make easier for creditors and others with a legitimate interest in the accounts of the subsidiary company the obtaining of information about that company.

Similar considerations apply to Amendment No. 78. The existing provisions of subsection (3)(b) state: if it is incorporated in Great Britain, whether it is registered in England and Wales or in Scotland". Such territorial designations may be highly interesting and amusing, and may even have an element of colour. However, they are of little use to anyone. In order to make it easier to obtain information, we wish to add the words: and either the address of its registered office, or its registered number".

As before, it will then be easier to obtain information. The disclosure of the registered number will facilitate a company search at the companies' registries in the United Kingdom.

The two amendments are simple and I am sure that they will commend themselves to the Government. In order to save time later I point out the fact that the same principles are incorporated in Amendments Nos. 81, 82, 85, 86. 88, 89, 93 and 94. We trust that the noble Lord will find the amendments acceptable. I beg to move.

Lord Lloyd of Kilgerran

In the interests of open government I accept the amendments, unless the Government believe that it is too onerous to include such matters. I should like to back the noble Lord, Lord Bruce of Donington. He has had so many winners today that I think I should back him on these amendments.

Lord Strathclyde

It is true that the noble Lord, Lord Bruce, has done rather well today. I am not sure whether his winning run will continue in this series of amendments. They would require companies to give the address—or, in some cases, the registered number—of the various classes of related companies on which disclosure is required by Schedule 3 to the Bill. I recognise that the intention is to give additional information to the users of accounts. But let us pause for a moment and consider whether the value of such additional information warrants the extra burden and costs, which may in some instances be considerable. The present requirement is to give the country of incorporation —which this Bill re-enacts. In the vast majority of cases this enables the reader, if he so wishes, to obtain the information about the company which is on the public register in the country of incorporation. In cases where access to the public register is not easy, or the contents of the register are defective, I find it hard to believe that imposing a requirement to give the principal place of business would be much more effective.

Moreover, we must take account of the paradoxical but real possibility that the amendment might actually reduce the amount of useful information appearing in the accounts. That is because the law permits directors, where they can reasonably conclude that the information required by a particular provision of Schedule 5 is of excessive length, to restrict the information in the accounts to just the principal related bodies. The rest is delegated to a company's annual return. These amendments would almost inevitably increase the number of cases where the directors could legitimately conclude that the information was of excessive length. Perversely, therefore, one effect could be to diminish the usefulness of accounts.

The noble Lord, Lord Bruce, asked a particular question about England and Scotland. The purpose of disclosing whether a company is registered in England or Scotland is that there are separate registers for each country and therefore it is easier to discover where the company is.

I began by saying that there was something in what the noble Lord was saying. However, I hope that, after having heard my explanation, he will realise that his amendment is not entirely compatible with what we are trying to achieve in the Bill. I hope that he will withdraw the amendment.

Lord Bruce of Donington

I have been a Member of this House for quite a time and I have never heard a more extraordinary explanation or reply in my life. To suggest, for example, that incorporating on one's stationery and so forth as required the principal place of business involves an onerous cost is stretching the imagination so far that the mind boggles. Similarly, it is not difficult to state the address of the registered office or the company's registered number. It requires only a sentence; five seconds or less on a pc computer with a daisy-wheel printer. What extra expense is involved in that operation?

On the grounds of cost the noble Lord invites the Committee to omit a few words of information. For reasons which do not concern the Bill but which may concern the taxation statutes, let us suppose that the subsidiary's offices were in Lichtenstein—Vaduz to wit—or the Netherlands Antilles or the Cayman Islands. Does the noble Lord believe that the person interested in the subsidiary should go to the colossal expense of making enquiries in those places in order to discover the required information? Really!

If the noble Lord had produced a more complex argument involving grave and deep difficulties which would be dealt with in correspondence hereafter, I should have understood his logic. However, he has put it in this way and, knowing that I am a simpleminded person, he must believe me to be credulous to the point almost of imbecility to have invited me to accept his explanation.

I ask the noble Lord and the Government the straight question: what is to be lost by such necessary information being given straightforwardly without any further qualification? As regards the excuses that have been given, I point out that I have seen "Yes, Minister" and "Yes, Prime Minister". I know that in those programmes the rejection of the amendment would be described as involving "a considerable degree of political courage on the Minister's part." Surely the Minister has enough common sense, or if that is not sufficient, his Secretary of State (who has been so long and regrettably absent from these proceedings) should have, to know that he cannot get away with nonsense of this kind.

8.30 p.m.

Lord Strathclyde

All afternoon I have been berated for giving answers to some of the noble Lord's amendments which are too complicated. In this case, when I come out with a fair, simple and honest answer, he suggests that I should make it more complex.

Of course that was only one answer which I gave. I also said that one perverse effect of these amendments would be to diminish the usefulness of accounts. Now I can go even further by saying that these amendments require a company to give addresses of all its subsidiaries. Times have changed. In some cases there could be several hundred subsidiary and related companies with considerable cost involved in having all the names and addresses printed out.

Secondly, I must point out that the Bill as drafted reproduces existing law which we have had for quite a time. I am informed that no evidence has ever been quoted that there is a problem in practice. Therefore, I suspect that the arguments put forward by the noble Lord do not amount to much and I ask him to withdraw his amendment.

Lord Bruce of Donington

I must decline the noble Lord's invitation. I shall certainly not reproach him for his honesty, which I sincerely admire. He has been extremely open with the Committee. He may believe that he perhaps could have been helped by the guile of the Secretary of State, who is very skilled in such matters. However, he has been completely honest with us.

The answer that a company may have 100 subsidiaries does not impress me at all. It is very nice to see that these companies have hundreds of subsidiaries. Only then can we know the true ramifications of the concern. Certainly if a parent company has that number of subsidiaries, on the assumption that those subsidiaries do not have sub-subsidiaries and sub-subsidiaries of sub-subsidiaries tucked away in the various tax havens, it is still a fact that a parent company of that magnitude and those resources would not find the extra printing costs very burdensome. They could probably be encompassed within the annual rate of increase which such companies award to their chairmen in addition to stock options. Therefore, I do not believe that the question of cost arises.

I must ask why the Government are so keen on and so coy in preserving anonymity to the point where a company must be described as roughly in the area of the world in which it is without any hint as to where it can be contacted. The noble Lord does not do himself justice. As he says, he has been engagingly frank about it; but the more engagingly frank and honest you are, as I have found out to my cost, the more you put your foot in it. That is common knowledge in Parliament. Normally speaking, Parliament favours those with guile, and here are the noble Lord and I quite naked in our honesty about this matter.

Surely the noble Lord cannot ask me to withdraw amendments of this sort. If he says to me, "Look, there are questions of principle in this and we should like to take a look at them again with a view to seeing whether we can meet the requirements of transparency on which my Government set such great store. We shall have a look at this to see what can be done", I am prepared to withdraw the amendment. Otherwise, I see no logical reason, and nor have I heard any explanation, which enables me to withdraw the amendments, particularly in the light of the support of the noble Lord, Lord Lloyd of Kilgerran, whose devotion to transparency in all these matters is well known to the House. I invite the noble Lord to reconsider this.

Lord Mottistone

Perhaps the noble Lord may believe that he is making something of a mountain out of a molehill. Perhaps he believes that this is a good opportunity, as there is hardly anybody in the Chamber, to waste the time of Committee as much as he likes.

The point at issue is one which I have experienced over many years. One does not have all these details provided. One has to find them out for oneself. One does not find them presented as the Bill will require them to be presented if the noble Lord's amendment is accepted. He seeks something new. However, I suspect that he is trying to make a great issue of this because it is a good opportunity. There are many amendments involved. Rather than pressing my noble friend on the Front Bench, I should have thought it better to say that he is not happy with the answer and he will reserve the right to come back on Report. He can do that, as do most of us. We do not press the Government on little matters but on major issues. If the noble Lord is going to say that this is an important matter, why has it not been so before? I believe that he is making too much of an issue of this. We have spent 17 minutes on it. We have many amendments to discuss. I should think it would be much better if he would give in for once—although I know he does not like to—and say that he will take back the amendment and reserve the right to come back to the matter on Report if it is worth pressing.

Lord Lloyd of Kilgerran

I listened with great care to the noble Lord, Lord Mottistone. Perhaps I can be helpful. The Committee will see that paragraph 15(2) of Schedule 3 to the Bill states: The name of each undertaking shall be stated". Therefore, I could not understand it when the Minister said that it will be terribly difficult to supply the further information because there might be hundreds of such undertakings. If the parent company knows the name of the undertaking, it must know something more about it. Therefore, for the purpose of ordinary transactions and business affairs it is sometimes useful to know where is the place of business of an organisation.

I agree that there are precedents for dealing with these matters, but in this modern age it is useful for a company—and I speak with some experience of these matters—to know where its place of business is so that it can be easily contacted instead of messing about going from place to place to try to find out the place of business and very often being fobbed off. One amendment which I have tabled comes to that point about the difficulty which companies now have of finding out the precise details of an undertaking for the purposes of business transactions, particularly companies abroad.

Lord Bruce of Donington

The noble Lord, Lord Mottistone, reproaches me for the time I have spent on this this evening. If he has been here all day, which I assume he has, he will have noted the unparalleled brevity with which I have dealt with previous amendments that have come before us and the number of times I have sat down within a couple of minutes of moving an amendment.

The fact that I have remained on my feet for a certain time is because I think that the matter is important. The noble Lord says that many of us—I assume he was speaking for those on his side of the Committee—have often pressed amendments. Well, the number of amendments that the noble Lord has pressed on Government legislation has been remarkably few.

Lord Mottistone

Perhaps the noble Lord will forgive me for intervening. I am speaking for Back-Benchers.

Lord Bruce of Donington

I am sure the noble Lord is speaking for Back-Benchers, but I am bound to say that I shall await with interest the onset of Back-Bench spine in rebellion against any Government legislation brought forward in this Chamber. I shall welcome it, particularly from the noble Lord.

Dealing with this amendment, the point has been clearly made by the noble Lord, Lord Lloyd of Kilgerran. If there are 200 subsidiary companies the printing of the names of those companies will occupy a fair space, since I assume the company will have the courtesy of listing them. It will only be a few words at the end so the cost will not amount to anything considerable. There is no reason why it should not be done. I invite the noble Lord to reconsider this matter and give an assurance that it will be dealt with fully on Report; otherwise I may have to divide the Committee.

Lord Strathclyde

The noble Lord, Lord Bruce of Donington, has been extremely frank so I shall be earnest with him. He said many things in the past few minutes about this matter, as has the noble Lord, Lord Lloyd of Kilgerran, but neither has brought a single piece of evidence or proof to show that this has been a problem in the past.

It is not simply the cost, which for each subsidiary may be very little, but for many hundreds of subsidiaries it is also the cost of obtaining, verifying—the noble Lords did not mention verification—printing, and setting out all this material which could amount to a substantial figure for very little benefit. I wonder whether the noble Lord, Lord Bruce of Donington, understands that.

Our debate has covered some time. I doubt whether the noble Lord, Lord Bruce, will actually bring the amendment to a Division, but I am happy to look at the matter again. I cannot promise that we will come back with an amendment to the effect desired and perhaps the noble Lord will wish to raise the matter again on Report. However, we shall consider what has been said in the light of the strength of feeling and on that basis I hope that the noble Lord will withdraw the amendment.

Lord Bruce of Donington

On the basis of that assurance I am only too happy to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 78 not moved.]

Lord Strathclyde moved Amendment No. 79: Page 144, line 8, after ("given") insert ("if the group's investment in the undertaking is included in the accounts by way of the equity method of valuation or").

The noble Lord said: This amendment corrects a small defect in the structure of Schedule 3. It is not the intention that parent companies should have to give details of the capital and reserves, and profit and loss, of subsidiaries excluded from consolidation where the group's interest in that subsidiary undertaking is accounted for by means of the equity method. That, I understand, would be to require the same information to be reflected twice in different guises. Clearly, that is not suitable. I beg to move.

Lord Bruce of Donington

We accept the amendment.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 80: Page 145, line 11, after ("into") insert ("by").

The noble Lord said: This amendment corrects a small grammatical error. I beg to move.

[Amendments Nos. 81 and 82 not moved.]

Lord Strathclyde moved Amendment No. 83. Page 145, line 36, leave out from ("based") to end of line 37.

The noble Lord said: This amendment removes an overlapping disclosure requirement in Schedule 3. Subparagraph (6) of paragraph 21 of that schedule requires substantially the same information on the proportion of shares held in a joint venture as subparagraph (5) of that paragraph. I beg to move.

8.45 p.m.

Lord Bruce of Donington moved Amendment No. 84: Page 145, line 40, at end insert— ("( ) Where in the opinion of the directors the disclosure of any information required by this paragraph would be seriously prejudicial to the interests of the undertaking, that information need not be disclosed, but the fact that any such information has not been disclosed must be stated.").

The noble Lord said: The purpose of this amendment is to make sure that joint ventures have the same protection as single companies in withholding from consolidated accounts "information" which would be seriously prejudicial to the interests of the undertaking.

At the moment there is still some doubt whether the Bill gives that relief, which is granted in the seventh directive. According to Schedule 2 it applies only to subsidiaries included in the consolidation. Joint ventures are subject to proportional rather than full consolidation and therefore are not included in the consolidation according to the definition in Clause 20.

We believe it is important to establish whether or not joint ventures qualify for this relief as they may be established in sensitive areas. I beg to move.

Lord Strathclyde

It is difficult to see that the amendment does much more than the similar but more general provision in new Section 231(3) in Clause 6. That provision allows a reporting company not to disclose the names of certain related undertakings which are established or carry on business outside the United Kingdom where the directors conclude that to do so will be seriously prejudicial to the company's interests. There is therefore a considerable overlap between this amendment and a quite separate provision already in the Bill.

Lord Bruce of Donington

I am not fully satisfied with that reply but I should like to have an opportunity of studying if further. On the basis that we may, if necessary, seek to raise it again on Report I ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 85 and 86 not moved.]

Lord Strathclyde moved Amendment No. 87: Page 146, line 15, leave out from ("Schedule") to ("materiality)") in line 16.

The noble Lord said: This amendment removes an incorrect reference. I beg to move.

Lord Bruce of Donington

We accept the amendment.

[Amendments Nos. 88 and 89 not moved.]

Lord Strathclyde moved Amendment No. 90: Page 146, line 45, after ("shall") insert ("also").

The noble Lord said: This amendment has already been spoken to. I beg to move.

Lord Strathclyde moved Amendment No. 91: Page 147, line 39, after ("shall") insert ("also").

Lord Strathclyde moved Amendment No. 92: Page 149, line 3, leave out ("the parent undertaking of') and insert (the parent undertaking of the company which heads").

The noble Lord said: This is also a minor technical amendment. Paragraph 30(1)(b) of Schedule 3 should require disclosure in relation to the consolidated accounts of the parent of the reporting company. As presently drafted it will always relate to the reporting company's own consolidated accounts. That is because the reporting company is a parent company, and is the parent company of the smallest group of undertakings of which it is itself a member and which draws up consolidated accounts. I beg to move.

Lord Bruce of Donington: We accept the amendment.

[Amendments Nos. 93 and 94 not moved.]

Schedule 3, as amended, agreed to.

Schedule 4 [Disclosure of information: emoluments and other benefits of directors and others]:

Lord Williams of Elvel moved Amendment No. 95: Page 150. line 21 at end insert ("; or (c) his appointment as a director of the company, or any of its subsidiary undertakings").

The noble Lord said: It may be for the convenience of the Committee if I speak also to Amendments Nos. 96, 97, 98 and 99 although I confess I am unaware of what the Government will say in justification of their Amendment No. 99. I shall try to anticipate what they are going to say.

We embark here on an important issue: the question of what should be disclosed by way of information on the recruitment or appointment of directors. As Members of the Committee will know, in the fairly recent past a number of devices have been used to lure people to become directors of companies. They are known as "golden hellos". There are transfer fees and other matters of that kind. The object of Amendment No. 95 is to make sure that disclosure of any benefit received by directors on taking up a post with a company or any of its subsidiaries should he disclosed.

Amendment No. 96 is a paving amendment for Amendment No. 97. It asks for disclosure of the estimated money value of any benefits received by third parties that are known as transfer fees. It may not be a common practice outside the square mile, but it is a relatively common one in the City of London that fees or money are paid to third parties to persuade them to release their executives or directors from employment with them for employment with the company in question. We believe that that should be disclosed.

Amendment No. 98 embraces benefits in kind which may not be cash but the estimated cash value of any benefits which the director may receive on his appointment. As regards Government Amendment No. 99, I anticipate what the Minister has to say, but it does not seem to us to cover all these points. It does not cover the third party question, which is transfer fees. It may be drafted in order to catch the "golden hellos" in terms not only of cash benefits but benefits in kind. But it does not cover transfer fees and we wish to see them covered.

This is a complicated issue but one that is very much in our minds on these Benches because we are aware of this practice in the City of London. It may have spread beyond the City of London. Practices have developed and they are inconsistent with the normal practices that have prevailed hitherto. In our minds—how can I say this delicately?—they prejudice the ability of normal citizens, employees and people who work in ordinary businesses to regard them as being fair and reasonable. We are not asking for a prohibition of these practices because I think that would be impossible. We are asking for full disclosure on a reasoned and legal basis. I beg to move.

Lord Lloyd of Kilgerran

At this late hour perhaps I may merely say that I support the amendments proposed by the noble Lord, Lord Williams of Elvel, for the reasons that he so ably presented to the Committee.

Lord Benson

I hope that the Minister will accept Amendments Nos. 95 to 98. My profession strongly supports these proposals. It has been pressing for them for some time. They are necessary in order to give proper information to shareholders. I entirely support everything that has been said by the noble Lord, Lord Williams of Elvel, in that respect.

Lord Strathclyde

There seems to be a lot of agreement as regards these amendments. This group of amendments has a common theme; namely, blocking two loopholes for unscrupulous boards who seek to evade disclosing to shareholders certain payments made to directors upon joining the board.

The first loophole concerns the so-called "golden hello". This payment is paid to a person in order to receive his services as a director. At present, if that payment is made before the director joins the company and without any obligation to take up the appointment, it could be argued that the payment is not within the present definition of emoluments, and therefore does not need to be disclosed in the notes to the accounts. We have no information on whether this practice is at all common, but it has been represented to us as a weakness in the present disclosure arrangements. Clearly Members of the Committee opposite also believe that it is a loophole that should be blocked. I hope that they will agree that Amendment No. 99 meets their concern too, and will not press their own Amendments Nos. 95 and 98, which seem to me to cover the same ground.

The second loophole is the one dealt with in Amendment No. 97. This is not a problem that has previously come to our notice. I recognise that there may be a loophole here that could be exploited to the detriment of shareholders. I will read with interest what the noble Lord, Lord Williams, has said on the subject. The Government would like to give this further thought. If the Members of the Committee opposite, having registered their concern, would care to withdraw the amendment, we might return to this topic at a later stage when we have had an opportunity to reflect further.

9 p.m.

Lord Williams of Elvel

I am grateful to the noble Lords, Lord Lloyd of Kilgerran and Lord Benson, for their support of the amendments. I have yet to be convinced that government Amendment No. 99 covers what we have set down in Amendments Nos. 95, 96, and 98. However, the noble Lord says that it does. We shall read Hansard carefully to make sure that it does cover those points.

As the noble Lord pointed out, it certainly does not cover my Amendment No. 97. I hope very much that he and his department will consult carefully on this point. The practice does arise and we believe that it should be covered in disclosure. On the basis that that will happen, and that the noble Lord will come forward at Report with the appropriate amendment to his amendment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 96 to 98 not moved.]

Lord Strathclyde moved Amendment No. 99: Page 150, line 33, at end insert— ("; and emoluments in respect of a person's accepting office as director shall be treated as emoluments in respect of his services as director.").

The noble Lord said: I have already spoken to this amendment.

Lord Williams of Elvel

I am sorry to interrupt the proceedings. I understood from our previous discussion that the Government would reconsider their Amendment No. 99 in the light of my Amendment No. 97 and perhaps come forward with a new formulation. It was on that basis that I withdrew my amendments. The noble Lord has now moved his Amendment No. 99 and I ask him courteously whether he would care to withdraw it.

Lord Strathclyde

Yes. My purpose was to move Amendment No. 99 and then seek to amend it later on. However, having given my word to the noble Lord that I shall look at his Amendment No. 97, I withdraw Amendment No. 99 and undertake to look at the position again at Report stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Schedule 4 agreed to.

Clause 7 [Approval and signing of accounts]:

Lord Williams of Elvel moved Amendment No. 100: Page 12. line 29, leave out ("a director or the secretary of the company") and insert ("two directors of the company, or, if there is only one director, by that one").

The noble Lord said: It may be convenient if I speak at the same time to Amendments Nos. 101, 102, 105, 107, 108, and 109. Most of the amendments in this group are consequential upon the main amendment. We are not wholly happy about the issue of who signs accounts. We believe that the signature of company accounts is too important to be left to the company secretary and that directors should be reminded of their duties in this respect.

There is no problem about the present position. I cannot see why the Government seek to change it. I can see difficulties in a secretary of a company whose duties are as yet undefined—at this point I serve notice on the Government that I shall be attempting to define those duties as we go forward with the Bill—being allowed to sign accounts for which the directors are responsible. At present, a committee is normally appointed to sign the accounts. That is sufficient. However, the appointment is made by directors sitting as a full board and it is not written into statute. The directors will be entitled to make that provision if their articles of association so allow. However, to write into statute that a company secretary by himself can sign the accounts seems to be imposing too much of a burden on the company secretary, whose job is not defined in the same statute.

If the Government insist on the amendment I shall consider their position. However, I wish to define the company secretary's duties. If they accept my amendment and go back to the original position, then the question of what the company secretary is meant to do remains as it is under the present Companies Act. But if they want the company secretary to do something on his own brief we shall have to have more in the Bill about the duties of the company secretary. I beg to move.

Lord Benson

It is extremely important that the amendment should be approved. I speak from some experience of this matter over 63 years. In 99 cases out of 100 the secretary has no responsibility either for preparing or presenting the accounts of the company. It would be quite wrong to ask him to sign the accounts, about which, on the whole, he knows little. It is important that the Bill should not be passed in its present form.

We must remember that the secretary is the servant of the directors. The directors could order him to sign accounts for which he has had no responsibility and about which he knows very little. We oppose this proposal tooth and claw. It is extremely important that the secretary should not be identified with signing the accounts or the directors' report.

Lord Lloyd of Kilgerran

I wonder whether the noble Lords, Lord Benson and Lord Williams of Elvel, have perhaps gone a little too far in this matter. I entirely agree with them that the secretary alone should not be permitted to sign the accounts. Perhaps the position should be that instead of having, for instance, two directors in a company signing the accounts, it would be sufficient if one director and the secretary were brought in to sign the accounts. That is not an amendment which is before the Committee at present; but I wonder whether that suggestion would find some sympathy with the Government, or even the noble Lords, Lord Benson and Lord Williams of Elvel.

Lord Benson

I do not think that that arrangement would be suitable. The secretary has no responsibility and in practice takes no part in preparing or presenting the accounts. Further, he is usually not an accountant; he is usually a lawyer. Indeed, his secretarial duties are quite different from preparing and presenting accounts to the public. It is quite wrong to allow his name to go on the document, and apparently carry his signature and his authority, when he has had nothing to do with it. That approach is absolutely wrong when compared to what happens in practice. Therefore I hope that the law can be made to comply with what actually happens in practice.

Lord Strathclyde

Perhaps I too should first comment on Amendments Nos. 100 to 102 which concern the signature of company accounts. I am grateful to the noble Lord for putting the case for retaining the requirements of the existing Act, as indeed did other noble Lords who have spoken. There is no great point of principle here on the part of the Government. But, nevertheless, I am not at all persuaded by the arguments that they have brought to bear that the existing requirement for signature by two directors (or one where there is only one director) has a vital role in making the directors of a company take more seriously their responsibilities in connection with the preparation of accounts.

The signing of accounts by directors does not on its own have an enormous significance. It is separate from the statutory requirement that the accounts should be approved by the board of directors. That important requirement remains. Some commentators tend to regard the signature as the formal approval itself; but it is not. It is rather confirmation that the board of directors has carried out its task. That seems to me to be something which can sensibly be done by the secretary or by a director.

There are sound practical reasons for the change provided in the Bill. All too often the accounts of small companies delivered to Companies House have to be returned by the Registrar of Companies to the company because they bear the signature of only one of the directors. As a result there is unnecessary delay in putting information on the public record, which I think noble Lords would agree is undesirable. The change makes it easier for companies to submit documents in time—for example, where a director is abroad on business. It is a very small piece of deregulation without, in our view, any undesirable side-effects.

Lord Williams of Elvel

I wholly disagree with what the noble Lord has said, I find that the noble Lord's approach to the whole problem—one of deregulation—to be frankly frivolous. The job of the company secretary is undefined; it is not defined in the law. Moreover, as the noble Lord, Lord Benson, said, he normally has a legal training and is probably a member of the Institute of Chartered Secretaries. He has no feeling of responsibility for accounts. He cannot be asked as a servant of the company, which he is—and, moreover, an employed servant of the company—in his present undefined capacity to sign accounts; that is the job of directors. I think that the noble Lord said that the signature of accounts is a small matter, or even an inconsequential matter—although I cannot remember the exact expression that he used. My goodness! I have signed one or two accounts in my time, and I regard it as a very consequential matter indeed. Therefore I hope very much that the noble Lord will think again about what he said, and perhaps he will consider whether the Government are right in their position, and whether they should not come back with something rather different, after consultation with the noble Lord, Lord Benson, and perhaps other people, at the next stage of the Bill's proceedings.

Lord Benson

I agree with that. I thought I heard the Minister say that the signature by the directors was not of great significance, or something to that effect. It is of profound significance. Indeed, putting your name to any document is a matter of the most grave importance. Therefore to suggest that it does not really matter whether it is signed by a director or a secretary totally misunderstands the responsibilities which attach to the presentation and the preparation of annual accounts. I find that argument incomprehensible coming as it does from the Government, who propose a Bill on company law and practice. I hope that they will take this matter in hand and realise that what is proposed is impracticable and does not place responsibility where responsibility lies.

Lord Strathclyde

I am disappointed with the views of the noble Lords, Lord Williams and Lord Benson. It is sad that this point of minor deregulation, which is what it is, on the signing of accounts should raise such deep concern with them. I have listened to their remarks. I do not believe that it is worth pressing this point. I shall read what has been said, and consult the various people who need to be consulted and we can perhaps look at this matter again on Report.

9.15 p.m.

Lord Williams of Elvel

I am grateful 10 the noble Lord for tending to the arguments that have been put forward by the Opposition, the noble Lord, Lord Lloyd of Kilgerran, and, above all, by the noble Lord, Lord Benson. I hope that he will take seriously what the noble Lord, Lord Benson, has said, because these are not party political points; they are points about the operation of companies, the duties of secretaries and the responsibility of directors who sign accounts. I hope that in giving that undertaking the noble Lord will take account of what has been said in Committee and come forward with something more sensible on Report. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 101 and 102 not moved.]

Clause 7 agreed to.

Clause 8 [Directors' report]:

Lord Mottistone moved Amendment No. 103: Page 13, line 24, leave out ("asset values") and insert ("fixed assets").

The noble Lord said: This is a probing amendment. I seek to ask the Government to explain whether the descriptive change to the contents of Part I of Schedule 7 to the Companies Act 1985 has any underlying significance attached to it. I beg to move.

Lord Williams of Elvel

I was interested to hear what the noble Lord, Lord Mottistone, said in support of the amendment. I did not see that it made any change to the Bill. As he pointed out, it is a probing amendment and no doubt the noble Lord will be able to satisfy the noble Lord, Lord Mottistone, with his reply.

Lord Strathclyde

Like the noble Lord, Lord Williams, we were slightly puzzled by the amendment. I am grateful to my noble friend for his explanation of the thinking behind it. We had not previously seen its purpose. If my noble friend wishes, I am willing to undertake to consider the point more carefully.

Lord Mottistone

I thank my noble friend. I do not know whether he feels that he has something else to say. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Williams of Elvel moved Amendment No. 104: Page 13, line 35, at end insert— ("( ) In the case of any failure to comply with the provisions of any applicable Statements of Standard Accounting Procedure, the directors of a public company shall provide particulars of any such departure from it, the reasons for it and a quantification of its financial effect").

The noble Lord said: The amendment addresses the question of the requirement to explain significant departures from SSAPs. The regulation at the moment is that listed companies are required, by continuing obligations as it is known, to explain significant departures and that is extended by the Stock Exchange to USM companies.

The amendment provides further support for the Accounting Standards Committee by a statutory requirement for a suitable explanation from any plc —I emphasise plc -which does follow the applicable SSAP. Recent debates in the business community suggest—the noble Lord, Lord Mottistone, may be able to comment upon it from the CBI point of view—that further measures need to be taken to ensure compliance with SSAPs, which are an important part of the present reporting framework.

As we found out this afternoon, they have a somewhat ambiguous status in the light of the Bill which is before the Committee. The phrase "continuing obligations" is a term of art, if I may put it like that. It is expressed in LA Note No. 39 of the Accounting Standards Committee that the Committee supports the policy of the principal professional accountancy bodies of the United Kingdom and the Republic of Ireland in formulating and publishing accounting standards for the United Kingdom and the Republic of Ireland, and of the International Accounting Standards Committee in formulating and publishing international accounting standards. The committee expects the accounts of listed domestic companies to comply with the United Kingdom accounting standards approved by the principal professional accountancy bodies in the United Kingdom and the Republic of Ireland. Companies should also normally have regard to statements of recommended practice issued by such bodies.

The amendment tries to ensure that any public company which departs from the relevant SSAP should explain why it does so, the reasons why it has done so and the quantification of its financial effect. This seems to us to be wholly in line with the thrust of the Bill. If it is designed to put into statute a lot of the standard accounting practices, we hope very much that the Government will accept it. I beg to move.

Lord Strathclyde

This amendment picks up one of the recommendations of the Dearing Committee, though it goes further than Dearing in suggesting that the financial effect of departures from accounting standards should be quantified. Dearing proposes that in the case of all large companies, the director should be required to state in the notes at the end of accounts whether these are drawn up in accordance with applicable accounting standards and to draw attention to any material departures, explaining the reasons for the departures. The Government are sympathetic to this.

However, it is a feature of our approach on a subject such as this that we usually proceed only after consultation with those involved. The accountancy bodies, which, to their credit, set up the Dearing Committee, have not yet come to a concerted view on its recommendations. Moreover, the report was not published until November, so there has been only limited time for public debate on the important issues which it covers. For our part, the Government welcome the report and are keen not to lose the opportunity which this Bill affords to make any changes in the law which flow from the report and which command general support. The Department of Trade and Industry will therefore shortly be sending out a public consultative document seeking views on the Dearing Report and particularly on those recommendations that involve legislation.

In advance of that consultation, which we aim to conclude in time for any resulting amendments to be tabled at a later stage, the Committee will no doubt understand if I reserve the Government's position and invite the noble Lord to withdraw the amendment.

Lord Williams of Elvel

I am grateful to the noble Lord. He could have saved us a great deal of time if he had said that earlier on in the proceedings. Nevertheless I do not want to be difficult at this time of night. Can I take it that the noble Lord is saying that before the Report stage of this Bill in your Lordships' House we shall have some amendments from the Government which are consequential on the report of the Dearing Committee and subsequent studies?

Lord Strathclyde

No, the noble Lord cannot take that. We shall bring amendments at a later stage, but that later stage will be as soon as possible after we have consulted. There is no point in bringing amendments before we have done that.

Lord Lloyd of Kilgerran

Will the later stage be in this House?

Lord Strathclyde

Either way, the amendments will have to come to this House at some stage. I really cannot say whether or not we shall have amendments brought to the House before or after they have been dealt with in another place.

Lord Williams of Elvel

The noble Lord knows perfectly well that if amendments are produced in another place and then sent back to us as Commons amendments, there is very little we can do about it or indeed discuss. There is no chance at that point for amendment of the Government's amendments.

Lord Strathclyde

The accountancy profession will not come back until April. We might just get the amendments in time for Third Reading, but if not we shall have to deal with them—even if the noble Lord, Lord Williams, disapproves of them—as Lords' amendments to Commons' amendments when we receive them towards the end of the year.

Lord Williams of Elvel

Is the noble Lord saying that I have a special dispensation, when Commons' amendments come back here, to amend them? That, I am afraid, is contrary to our standing orders. I hope that the noble Lord will he able to say that by Third Reading in this Chamber amendments will be produced on this issue.

Lord Strathclyde

We shall bring amendments when we have gone through the consultation process. We shall bring them as quickly as possible. I do not know why the noble Lord is making such a fuss about this because, generally speaking, the amendments we are likely to bring forward will be of the kind that he wants to see—for instance, the amendment with which we have just been dealing.

Lord Williams of Elvel

I am very glad to hear that. I make a fuss about everything; that is my job. I am glad to hear that the noble Lord is prepared to bring amendments along the lines that I have been suggesting. We shall wait in eager anticipation for government amendments along the lines of the amendments that I have proposed. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 105 to 109 not moved.]

Clause 8 agreed to.

Clause 9 [Auditors' report]:

[Amendment No. 110 not moved.]

Lord Williams of Elvel moved Amendment No. 111: Page 14, leave out line 34 and insert ("without prejudice to the foregoing, whether in their opinion a true and fair view is given—

1. (i) in the balance sheet, of the state of the company's affairs at the end of the financial year.
2. (ii) in the profit and loss account (if not framed as a consolidated account), of the company's profit and loss for the financial year, and
3. (iii) in the case of group accounts, of the state of affairs and profit and loss of the company and its subsidiary undertakings dealt with by these accounts, so far as concerns members of the company.").

The noble Lord said: We are dealing here with the question of a "true and fair view". My amendments probe government policy. The amendments that I am moving restore the present wording in the statute. The question that is posed by these amendments is: does the redrafting which the Government have adopted run the risk of altering the subtle meaning of present requirements? The present statute is reasonably well understood. The redrafting poses one or two problems; for instance: does the wording in the Bill require an auditor to report in terms set out in Clause 9, or in the terms set out in Clauses 4 and 5? Would it not be easier if constant cross-reference could be avoided? I believe our amendment achieves those things. I beg to move.

Lord Benson

I support this amendment. There seems to be in the Bill a change for change's sake. It has no valuable effect whatever. The words set out in Amendment No. 111 are well established, well understood and have been in existence probably since the 1948 Act. It is extremely important to keep the emphasis exactly right in the auditors' report. The words have stood the test of time.

Perhaps I can explain why it is particularly important to keep the previous wording. In civil claims and criminal actions the precise responsibility of auditors and exactly what they have to do and report about should be defined with absolute accuracy. That was done years ago. That is set out in Section 236(2)(b) of the Companies Act; it has been there for a very long time and should remain. It is an enormous pity to tamper with something that has stood the test of time and is needed for the purpose of civil and criminal actions which take place every day of the week.

9.30 p.m.

Lord Strathclyde

As the noble Lord, Lord Williams, has explained, the amendment seeks to reinstate the wording used in the 1985 Act. In drafting the Bill the opportunity has been taken to restructure certain provisions. As a consequence the wording of new Section 235(2) refers more simply to the "annual accounts" and a "true and fair view", both terms being defined at the end of Part I of the Bill. While the wording is different, we see the change as having no effect on the present coverage of the auditors' report. We do not believe that the amendment is necessary and I hope that the noble Lord will not press the point.

Lord Benson

I can only repeat what I said. This is change for change's sake and is damaging. I seem to have been unable to convince the Minister that the precise emphasis of what the auditor has to report is important, has been important for years and is vital in the conduct of civil and criminal claims. I do not comprehend how the Government can possibly say that it is not important. I do not think that they have considered the point. From what has been said by the Minister I do not believe that he has known or taken into account the effect on civil and criminal claims. if he had done so, if he had followed the cases which have taken place in the courts, he could not possibly have made the statement that he has made to the Committee. I beg him to reconsider his view.

Lord Mottistone

I think that the noble Lord, Lord Benson, should be listened to. As my noble friend knows, I am only too keen to protect him from attack from the other side. However, I think that when the noble Lord makes remarks of that nature, that is something that the Government should consider. I do not believe that a change of phraseology the implications of which have not been tested in practice let alone in the courts should be undertaken lightly. I think that it would be wise to take the matter hack and think again about it. That does not commit the Government to anything.

Lord Strathclyde

Again this has been a wide debate. The noble Lord, Lord Benson, has come in with some powerful arguments. The Government have consistently tried with various pieces of legislation to renew, to progress, to look forward and therefore to restructure certain provisions. However, the noble Lord has argued very persuasively. I feel that perhaps we should look at this aspect again, read what the noble Lord, Lord Williams, and my noble friend Lord Mottistone have said and discuss the point again at Report stage when we have studied what has been said.

Lord Williams of Elvel

I am most grateful to the noble Lord for his consideration and am happy to accept it.

I should say that I failed formally to move Amendment No. 106 in Clause 8, which was consequential upon Amendments Nos. 1 and 2. I apologise to Members of the Committee. I spoke to the amendment in the first debate. I shall of course move the amendment on Report as appropriate. The principle is set out in Amendment No. 2 and it will therefore be a consequential amendment. Having spoken to Amendment No. 106 in the opening debate, I apologise for failing to move it formally.

In the meantime I am grateful to the noble Lord, and I beg leave to withdraw Amendment No. 111.

Amendment, by leave, withdrawn.

Lord Strathclyde moved Amendment No. 112: Page 15, line 24, leave out ("annual") and insert ("individual").

The noble Lord said: With the leave of the House I should like to deal with Amendments Nos. 112 and 113 together. These are minor technical amendments of the kind that we have already had. They ensure that the provisions of the Bill do not go further than the existing Act in one small respect. They restrict the auditors' duty for consideration of whether the company's individual accounts are in agreement with its accounting records. I beg to move.

Lord Strathclyde moved Amendment No. 113: Page 15, line 31, leave out ("annual") and insert ("individual").

The Deputy Chairman of Committees (Lord Ampthill)

Amendment No. 113 has been spoken to by the noble Lord.

On Question, amendment agreed to.

Lord Williams of Elvel moved Amendment No. 114: Page 15, line 47, leave out ("information and explanations") and insert ("records, information and explanations whether oral or in legible form").

The noble Lord said: I beg to move Amendment No. 114 standing in my name and that of my noble friend Lord Peston. For the convenience of the Committee I shall also speak to Amendment No. 115.

We are dealing here with the question of information, and we wish to widen the scope of auditor access in line with modern methods of recording of data. We should like to make sure that directors of a holding company take reasonable steps to make original evidence available to auditors rather than just provide information or explanations which could be filtered, adjusted or recorded through hearsay.

Access to original records is important with that type of subsidiary because they may not have been examined by other auditors who have the approval of recognised bodies or the Secretary of State, as would normally be the case with incorporated subsidiaries.

We feel that the present drafting of the Bill does not go far enough and if it is unaltered it could lead to audit qualifications, for instance in the case of significant partnership subsidiaries where auditors did not have access to original material. This would be no substitute for proper and accurate reporting.

These are technical auditing points, and we very much hope that the Government will bear them in mind.

Lord Strathclyde

I listened to the noble Lord with interest. We are not aware that the new Section 237(1), which repeats Section 237(3) of the existing Act, has given rise to any problems. Nor are we persuaded that the detailed changes would alter in any significant way auditors' existing rights to information and explanations.

I do not know what else I can add. I am not sure that this changes anything at all, and I cannot accept the amendment.

Perhaps I may briefly go further and say that auditors have rights of access to companies' books. They do not accept amendments to that extent.

The noble Lord raised the question of subsidiaries, and perhaps we should consider that point further.

Lord Williams of Elvel

I am most grateful to the noble Lord for saying that I had absolutely no reason for moving this amendment and agreeing finally to have another look at it. On that basis I am very happy and beg leave to withdraw Amendment No. 114.

Amendment, by leave, withdrawn.

[Amendment, No. 115 not moved.]

Clause 9, as amended, agreed to.

Clause 10 agreed to.

Clause 11 [Laying and delivering of accounts and reports]:

Lord Williams of Elvel moved Amendment No. 116: Page 19, line 8, leave out ("not").

The noble Lord said: I beg to move Amendment No. 116, standing in my name and that of my noble friend Lord Peston.

We believe that the Bill as drafted allows a director honestly and properly to refuse to lay accounts that he knows to be defective, unless the "not" is left out. The problem is that we have the difficulty of knowing quite what the director's responsibilities are. We should like to be absolutely certain that a director who knows that accounts are defective does not have the obligation, other than resignation, to lay accounts.

This is again a very minor point. It is not something on which I am going to insist; but I wonder whether the Government have their drafting quite right in order to cover that eventuality. I beg to move.

Lord Strathclyde

The effect of this amendment would be to reverse the present position whereby it is no defence for directors charged with a failure to lay accounts before the general meeting to claim that they are not liable as the accounts did not exist or were defective. This would he quite unmeritorious because it would give them a defence in such circumstances. For that reason, I must resist this particular amendment and would ask the noble Lords to withdraw it.

Lord Williams of Elvel

I think that we should look to see what the noble Lord is saying and what the problems are. We may return to this matter at a later stage. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 117 not moved.]

Lord Strathclyde moved Amendment No. 118: Page 20, line 26, at end insert— ("If the accounts appended are required by law to be audited, a copy of the auditors' report shall also be appended.").

The noble Lord said: With leave of the Committee I should like to take Amendments Nos. 118 to 122 together. They make a very minor change. Amendment No. 118 requires the auditors' report of an excluded subsidiary undertaking to be attached to the parent company's group accounts in certain circumstances. The auditors' report is an important document and should be included. The other amendments are consequential. I beg to move.

Lord Bruce of Donington

The amendment presents a considerable improvement and we entirely accept it.

Lord Strathclyde moved Amendments Nos. 119 to 122: Page 20, line 30, leave out ("comprised in the accounts") and insert ("required to he appended"). Page 20, line 42, leave out ("the accounts of an undertaking") and insert ("a document"). Page 20, line 43, leave out ("they") and insert ("it"). Page 20, line 46, leave out ("the accounts") and insert ("it").

Lord Strathclyde moved Amendment No. 123: Page 21, line 7, leave out ("to") and insert (", (4) and").

The noble Lord said: This is another minor and very technical amendment which I am sure the noble Lord, Lord Bruce, will approve of.

Clause 11, as amended, agreed to.

Clause 12 [Small and medium-sized companies and groups]:

[Amendment No. 124 not moved.]

9.45 p.m.

Lord Lloyd of Kilgerran moved Amendment No. 125: Page 22, line 27, at end insert ("exempt from the obligation under section 384 to appoint auditors and is").

The noble Lord said: With the leave of the Committee, I should like to speak to Amendments Nos. 128 and 139. These amendments concern relief to small and medium-sized companies M relation to auditing. Amendment No. 125 is a paving amendment. It refers to the companies exempt from the obligation under Section 384 to appoint auditors.

Amendment No. 128 suggests in effect that the accounts should be audited or looked at by an authorised accountant. Perhaps it would be better if I read the amendment rather than make a speech about it. Amendment No. 128 states: Where a company is, at the end of the financial year, a small or medium-sized company"—

and that is defined in the Bill— and exempt by virtue of section 246 from the obligation to appoint auditors"—

that is my Amendment No. 125— it shall appoint an authorised accountant".

Subsection (2) then sets out that this person eligible for appointment as an authorised accountant: shall fulfil the requirement in one (or the requirements in each) of the paragraphs in subsection (3)".

Subsection (3) sets out the requirements in relation to this authorised accountant. He has to be, a member of one or more bodies of accountants established in the United Kingdom and approved for the time being by the Secretary of State for the purposes of this section",

and he should hold, an approved qualification under section 28(1)(c) or section 28(2)". That provision would be a great relief to small companies and would give the protection that is necessarily needed, as is so well known.

The name, status and qualification of the "authorised accountant" would be declared and personal liability would arise if a certificate was deemed to have been given recklessly or negligently. This reporting requirement would thus be as vigorous as that currently required of auditors.

Audit is a time-consuming and costly exercise that often duplicates management effort. Its removal would mean that small company accounts could be prepared in a management context and therefore contribute to business efficiency.

I am instructed in these matters by the Chartered Institute of Management Accountants. I understand that these views have the support of several authorised and well known institutions.

Amendment No. 139 is consequential on Amendments Nos. 125 and 128. If auditors are not required but merely a certificate from an authorised accountant, then subsection (8) would not be required, as I have indicated in Amendment No. 139. I hope that the Government will deal sympathetically with the basic theme of these amendments. I agree that the drafting could possibly be very much improved. However, the basic intention is in keeping with the EC regulations and with the policy of the Government to assist small and medium-sized companies. I feel that these amendments would be of great assistance and would increase the efficiency of small and medium-sized companies. I beg to move.

Lord Strathclyde

I am grateful to the noble Lord for explaining the intention behind these amendments. The Government accept that the statutory audit requirement imposes costs on small companies, and during the last few years we have looked carefully at possible ways of reducing these costs. We have concluded, however, that the involvement of an independent qualified accountant is necessary to safeguard the integrity of accounts, and as a protection against fraud. And after careful consideration we have decided that the statutory audit requirement is, overall, the best way of securing that involvement.

The question is asked: why? In a sentence, it is partly because the audit requirement is already up and running and is widely understood, and partly because no alternative has been found which successfully avoids the twin risks of either being ineffective as a safeguard, or of re-imposing the costs of the audit under another name. I therefore hope that after this explanation, the noble Lord will withdraw his amendment.

Lord Bruce of Donington

We on this side must, I am afraid, on this occasion support the Government in the stand that they have taken on the amendment. The last people to be exempted from a proper statutory audit are precisely small companies. Small companies are those who are often in considerable peril, as those who have been involved in receiverships and liquidations know perfectly well, and they suffer because of the lack of discipline in having to prepare annual accounts. Experience has shown that the responsibility for appointing auditors in the normal way by small companies is in their own best interests.

There is the question of the discipline that the directors of the company must perforce obey if they are to present accounts to the auditors in any event. The discipline is important. In so many cases, as many of us in practice have found, failed companies have failed because they have neglected the preparation of annual accounts that the discipline that a statutory order requires. There are other reasons too, which I shall not go into at any length. But it is well known that for taxation purposes annual accounts have to be prepared anyway. Normally speaking, with a small concern it is the accounts that have to be prepared for taxation purposes for the appropriate accounting period that are used in the normal audit sense of the term. So there is very little duplication of work.

It would be a matter of great regret if this loophole were permitted. I know that the initial thoughts of the Government and indeed those of some of the larger firms in my own profession have very little truck with small firms. They were disposed to say: "Yes, let us have the deregulation". But if one looks at the original document put out by the DTI, Burdens on Business, one would find that among the causes of complaint, or among the burdens on business, any question to do with the preparation of annual accounts occupied a minuscule proportion, under 1 per cent., of the observations made in the survey that was commissioned by the DTI.

With great respect to the noble Lord, Lord Lloyd of Kilgerran, whose views on this I profoundly respect and whose support is so very frequently accorded to us, I am sorry that on this occasion I have to support the stand that the Government have taken.

Lord Lloyd of Kilgerran

In my experience whenever anybody says to me in the epilogue of his speech, as did the noble Lord, Lord Bruce of Donington, that he speaks with great respect to me I know that something very heavy and difficult will be put before me. The Minister has expressed sympathy for the health of small and medium-sized companies. I am deeply disappointed and surprised that such a distinguished member of the Labour Party as the noble Lord, Lord Bruce of Donington, is and has been for so many years in so many places—in the other place and abroad—on behalf of the Labour Party on this occasion at this late hour should not in any way have the slightest sympathy for the difficulties of small and medium-sized companies. I express my surprise with great diffidence at this time of night, but I thought it necessary to have it on record.

I shall read what the Minister has said. I do not think it is necessary for me to read what the noble Lord, Lord Bruce, has said because it is very well impressed upon my mind. With great disappointment, I do not propose to read his speech; but I shall read the Minister's speech to see whether this is a matter that can be taken up later. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 126 to 128 not moved.]

Lord Strathclyde moved Amendment No. 129: Page 24, leave out lines 37 to 40.

The noble Lord said: I shall speak also to Amendment No. 130. These amendments make a relatively minor change to Clause 12. New Section 248 gives certain exemptions for small or medium-sized groups from the requirement to prepare group accounts. Subsection (3) of the new section as first drafted required disclosure in a parent company's individual accounts where the directors take advantage of this exemption. On further reflection we have decided that the auditors should have to express their opinion on whether or not the directors are entitled to take advantage of the exemption. These amendments therefore make it a condition of taking advantage of the exemption that the directors obtain a special auditors' report and that this is included with the company's annual accounts. I beg to move.

Lord Strathclyde moved Amendment No. 130: Page 24, line 40, at end insert— ("( ) If the directors of a company propose to take advantage of the exemption conferred by this section, it is the auditors' duty to provide them with a report stating whether in their opinion the company is entitled to the exemption. (4) The exemption does not apply unless—

1. (a) the auditors' report states that in their opinion the company is so entitled, and
2. (b) that report is attached to the individual accounts of the company.").

Lord Strathclyde moved Amendment No. 131: Page 25, line 4, at end insert ("or").

The noble Lord said: For the sake of consistency this amendment makes a minor drafting change. I beg to move.

[Amendment No. 132 not moved.]

Clause 12, as amended, agreed to.

Schedule 5 [Exemptions for small and medium-sized companies]:

Lord Strathclyde moved Amendment No. 133: Page 154, line 44, leave Out from ("by") to ("only") in line 45 and insert ("Part III of Schedule 4 (information to be given in notes to accounts if not given in the accounts themselves)").

The noble Lord said: I shall speak also to Amendment No. 134. These are technical amendments. Amendment No. 133 limits exemptions from disclosing information to certain requirements of Part III of Schedule 4 to the existing Act. Amendment No. 134 is consequential on Amendment No. 133. Both amendments are necessary correctly to implement the fourth directive. I beg to move.

Lord Strathclyde moved Amendment No. 134: Page 155, line 3, at end insert— ("paragraph 42 (fixed assets), so far as it relates to those items to which a letter or Roman number is assigned in the balance sheet format adopted,").

Lord Strathclyde moved Amendments Nos. 135 to 138: Page 155, line 14, leave out ("5 or 19") and insert ("4"). Page 155, line 15, leave out ("6 or 20") and insert ("5"). Page 155, line 16, leave Out ("7 or 21") and insert ("6"). Page 155, line 18, leave out ("or 27").

The noble Lord said: The Committee may find it convenient ifI speak also to Amendment No. 140. All these amendments make minor changes to Schedule 5 to the Bill either to correct wrong cross-references or to omit references which have no effect. I beg to move.

Lord Bruce of Donington

I am grateful for the amendments. In the course of trying to tease out those various numbers in the notes we were presented with a somewhat tortuous task. We are glad that the Government have simplified it.

On Question, amendments agreed to.

[Amendment No. 139 not moved.]

Lord Strathclyde moved Amendment No. 140: Page 156, line 36, leave out ("9") and insert ("8").

Schedule 5, as amended, agreed to.

10 p.m.

Clause 13 [Dormant companies]:

On Question, Whether Clause 13 shall stand part of the Bill'?

Lord Williams of Elvel

Clause 13 deals with dormant companies. I find it very difficult to see how a dormant company can still be registered as a hank or as an authorised person under the Financial Services Act. I should have thought that if a company is dormant it should be deregistered both as an authorised person and as a bank. I may be quite wrong but that seems to me to be an odd provision. It is a provision which is introduced in this Bill which is not in the Companies Act. Perhaps the noble Lord will explain how a company can he a dormant company and still be authorised under the Financial Services Act or the Banking Act.

Lord Strathclyde

This clause re-enacts with very minor amendments Sections 252 and 253 of the Companies Act 1985 dealing with dormant companies. Companies are defined as dormant if, during the accounting period, no significant accounting transactions take place. The dormant company may exempt itself from the obligations to appoint auditors by passing a special resolution and filing it with the registrar of companies.

The provisions for dormant companies were generally welcomed when they were first introduced by the Companies Act 1981. The Government take the view that their continuation will avoid the necessity and expense of appointing auditors for companies not acting in financial terms. Dormant companies will continue to be required to deliver annual returns and their unaudited accounts to the registrar who will make them available for public inspection.

These provisions could mean that dormant companies could continue to deliver accounts consisting only of a balance sheet provided that they state above the directors' signatures that the company was dormant throughout the financial year. They make it possible for dormant companies to continue to avoid the unnecessary burden and expense of appointing auditors. The exemption is widely used. In 1987-88 accounts were filed in respect of almost 50,000 dormant companies.

The noble Lord asked about financial services companies. A company cannot be a financial services company and dormant.

Lord Williams of Elvel

If they are dormant, how are they in the Bill? If it is dormant, it cannot be a financial services company. I should have thought that dormant companies would be de-authorised, if I may use that vulgar expression, by whoever is required to authorise them under the Financial Services Act and similarly under the Banking Act.

Lord Strathclyde

It is not necessary for companies to be de-authorised; they can simply be dormant. I do not understand the noble Lord's objection to that.

Lord Williams of Elvel

My objection is simple. The noble Lord has said that these are minor amendments but they may be major. If a company is dormant, in other words if it is not active, then it cannot be a bank. If a company is dormant it cannot be authorised under the Financial Services Act. Therefore, why does the Bill amend the Companies Act to make provision for those companies which are dormant under this legislation?

Lord Strathclyde

I hope that I have not misled the noble Lord, Lord Williams, in what I said. The point is that if a company is already authorised then it cannot declare itself dormant. Therefore, I do not believe the question arises. That is what the Bill states.

Lord Williams of Elvel

Under those circumstances, if the Bill said that the registration or authorisation would be removed from the companies, then we have a meeting of minds. However, to say that dormant companies may not pass such a resolution if they are banking or insurance companies or an authorised person under the Financial Services Act—and this is a deliberate amendment to the present Companies Act—seems to be otiose.

Lord Strathclyde

The question as to whether a financial company which declared itself dormant would lose its authorisation simply does not arise because, if a company is already authorised, it cannot declare itself dormant. I hope that that explains the slight confusion.

Lord Bruce of Donington

Can the noble Lord explain what the Government have in mind? Subsection (3) states: no significant accounting transaction occurs". What is meant by "significant accounting transaction"? It is important that we should know. A company may be dormant in the sense that it has slowed down its activities to a point of near immobility. For example, would it be able to pay sums of money to its directors out of accumulated funds? Would a payment to a director of, say, £30,000 in respect of salary be regarded as a significant transaction? Has the department fully considered the taxation position that arises? Taxation does not take into account any question of being dormant. Assessments are raised in the normal way, as the noble Lord well knows. Even if there is only one transaction of 50 pence, the accounts will have to be prepared.

Lord Strathclyde

The noble Lord makes an interesting point. However, I stick to banks and insurance companies. They are already covered by statute on dormant companies. We are merely treating financial services companies in exactly the same way. De-authorisation, as we all know, is for the relevant bodies under the Financial Services Act.

As for the pertinent point made by the noble Lord, Lord Bruce of Donington, as to what is a "significant accounting transaction", he will see that clearly defined in the new Section 250(3), which I hope will put his mind at ease.

Clause 13 agreed to.

Clause 14 [Public listed companies: provision of summary financial statement]:

Lord Strathclyde moved Amendment No. 141: Page 27, line 19. at end insert ("and provided any conditions so specified are complied with").

The noble Lord said: With the leave of the Committee, I speak to Amendments Nos. 141, 142, 143, 145 and 147, which are all government amendments. I understand that noble Lords opposite are happy that we should also discuss Amendments Nos. 144 and 146.

The government amendments seek to leave open the options within the proposals in Clause 14. As noble Lords are aware, this proposal is novel in company law. For the first time it would allow listed public limited companies to send shareholders a summary financial statement instead of the bulky, full report and accounts.

When the Government undertook consultation on the principle of this proposal we found a large measure of support. First, companies with a large number of shareholders may be able to make economies if they no longer need to print and dispatch full sets of accounts. Secondly, shareholders who are not interested in the detail given in the full report and accounts and, indeed, may even be deterred by that very detail, may instead receive a document in more easily digested form.

However, let me make it clear that there is absolutely no intention to deprive shareholders of their existing right to receive full sets of accounts, free of charge. It is simply that in the future listed plcs will he able to give their shareholders a choice between the full report and accounts and a new summary financial statement. That leaves two important matters to be decided; namely, the contents of the summary financial statement and the mechanism for making it available. The Bill envisages that both these matters will be dealt with in secondary legislation.

It is a traditional aspect of legislation in the company law field that we generally proceed only after full consultation with those affected or likely to be affected. We have already discussed this point with regard to numerous other proposals this evening. As regards the content of the summary financial statement, we sketched out some ideas when we went to consultation but that was more by way of illustration.

Members of the Committee opposite in their amendments seek to fix some or maybe all of the contents in the primary legislation. The Government's preference remains to leave this matter entirely for regulations. As I said, this whole proposal is a new concept in company law. We shall watch with interest how companies and shareholders get on with it. I urge Members of the Committee to consider that the more we can leave to secondary legislation on this topic the easier it will be to make subsequent changes in the light of practical experience of the schemes.

Apart from the content, the other matter that the Bill leaves to be settled by regulations is the mechanism for making summary financial statements available to shareholders. That is the other aspect of the proposal on which the Opposition and the Government do not see entirely eye to eye. The sole purpose of the government amendments is to leave open all the options so that decisions may be taken in the light of the public consultations that we intend to conduct later this year. As far as I can see the Opposition want to lay down in primary legislation the circumstances in which a shareholder will receive a summary financial statement.

I believe that these amendments illustrate the basic difference in our respective approaches to this kind of detailed company law legislation. For example, the opposition amendments would rule out the option whereby a listed plc—

Lord Williams of Elvel

I am sorry to interrupt the noble Lord, but which opposition amendment is he referring to?

Lord Strathclyde

I shall get to that if the noble Lord will wait for a moment. One of the opposition amendments which I shall name soon would rule out the option—

Lord Williams of Elvel

Which opposition amendment?

Lord Strathclyde

I have already said which. I will not let the noble Lord interrupt me again until I have finished because I have to get through this. The opposition amendment would rule out the option whereby a listed plc could send its shareholders a summary financial statement accompanied by an invitation to say whether or not they would like to receive a full set of accounts. That may strike many Members of the Committee as being an entirely reasonable option which listed plcs and their shareholders should at least be invited to consider. The government amendments would leave that option in play but opposition Amendment No. 104 seems designed to exclude it.

Lord Williams of Elvel

Is the noble Lord referring to our Amendment No. 144?

Lord Strathclyde

Yes, that is what I thought I said. I am sorry: Amendment No. 144. In a nutshell, the government amendments reflect our preference to leave open options for detailed implementation of this new proposal until we have had the opportunity for full consultation with those concerned. I commend them to the Committee.

The Deputy Chairman of Committees

I remind the Committee that the noble Lord has also spoken to many subsequent amendments. If Amendment No. 143 is agreed to, I shall be unable to call Amendment No. 144.

Lord Williams of Elvel

I shall try to address the amendments that the noble Lord has spoken to; namely, Amendments Nos. 141 to 147, though I believe that he strayed slightly beyond that limited number. Indeed, he gave us a party political blast on the question of deregulation.

Lord Strathclyde

Nonsense!

Lord Williams of Elvel

Did the noble Lord say "nonsense"? If I may, I shall continue. Our Amendment No. 144 seeks to establish how those shareholders who elect to receive a summary financial statement (in the words of the Bill) should elect. We believe that the expression "do not wish" is insufficiently strong. I should like to see a positive expression rather than a negative one. Amendment No. 146 makes the same point. The noble Lord treated us to a rather long disquisition. I shall not say —

10.15 p.m.

Lord Strathclyde

Excellent.

Lord Williams of Elvel

The noble Lord says "excellent". I thought it was party political. He is entitled to make his interventions from a sedentary position if he so wishes. However, for the moment I am speaking from the Dispatch Box, and I should like the opportunity to do so. We are trying seriously to discuss Clause 14. This is an important point. I hope that he will pay attention and not shout and scream—

Lord Strathclyde

I must protest. I was interrupted by the noble Lord on numerous occasions. I am listening carefully to what he is saying and I shall be delighted to continue doing so until he has finished.

Lord Williams of Elvel

I am glad to hear it. The issue of how people elect not to receive full financial statements and to receive summary financial statements is one of considerable importance. We believe that it should be positive rather than negative. Shareholders should be asked to sign a form, or whatever is the appropriate mechanism, to say that they do not wish to receive a full financial statement. They should not be presented with some forms asking them to consult the bank manager or to seek professional advice with an option saying, "If you do not fill in a form saying that you wish to receive the full financial statement, you will not receive it". Our amendment addresses that point. The Bill as drafted does not. The Bill refers to, those members of the company who do not wish to receive them". That is an ambiguous statement. We should like to see written on the face of the Bill that the provision of summary financial statements should be on the positive election of shareholders and not on the negative election of simply not responding to a form. That is the thrust of our Amendments Nos. 144 and 146.

The rest of the government amendments are on the lines of what we would generally wish to see, but they do not address the major problem of how shareholders express their view. I hope that the noble Lord will respond to that point. In his original speech on the amendment he went on to discuss content. We shall come to that in the next group of amendments. This is a question of how people should elect.

Lord Strathclyde

I am not sure that the noble Lord, Lord Williams, provides a serious argument against what we are trying to do. The Government say that if shareholders do not wish to receive their report and accounts they should not have to. The noble Lord seeks what he calls a positive election not to receive them. But if we are already leaving so much to be decided by regulation, after consultation with the people who will ultimately he carrying this out, I think that we are creating a strait-jacket for companies.

When the regulations come out it may well be that we shall ask shareholders very precise questions about whether they want to receive the report and accounts. But I think it best at this stage to leave the matter as wide as possible when we are very often talking about millions of people. Perhaps I may explain by way of example. It is not an entirely justified example because it is imperfect, but it is an example. I was interested to learn that one of the biggest building societies dispatched over 6 million summary financial statements. The society received only two complaints and only 280 requests for its full accounts. Moreover, most of those requests came from analysts, merchant banks and so on.

It is easy to imagine that everyone else shares one's own passion for reports and accounts, but the truth may be otherwise. I believe that what we have been discussing over the past few minutes is a straight difference of view. I feel that the options about which we have been talking should be left open for the regulations set out in the Bill.

Lord Williams of Elvel

That is all very well, but the noble Lord and the Government have insisted upon contracting out for trade unionists—and quite rightly. Indeed, that has been accepted. If shareholders wish to contract out of receiving full information, they should be entitled to do so. I have no problem in that connection. However, it must be a positive decision and not a negative one.

Lord Strathclyde

I am not quite sure what I can add to the debate. I am at a little bit of a loss as to what else the noble Lord wants. I have offered him the possibility of what he said.

Lord Williams of Elvel

I can reply to that by saying to the noble Lord: accept my amendment.

Lord Strathclyde

I do not think that the noble Lord has fully justified the reasons for accepting the amendment. I do not see why he does not withdraw it and look at what has been said. Indeed, he mentioned earlier that I made a substantial opening speech, which I did. If he reads carefully what I said and speaks to some of his advisers, he may see that there is a lot in it which is commendable and which points to the approach which we are taking on this most important question. I hope that he will now see that it is worth withdrawing the amendment and he can bring it back at a later stage.

Lord Bruce of Donington

Surely the point we sought to make was a simple one. There is a principle involved. Irrespective of what form any regulation putting the principle into action may take, we agree, albeit reluctantly, that that is probably the correct vehicle for doing it—to state the manner of election by way of regulations. However, my noble friend is concerned with a principle. We are firmly of the view that regulations are not the place for the principle to be decided; the principle should be decided in the Bill. There is a genuine difference here. In view of what my noble friend said about contracting in and contracting out in another context, I should have thought that his logic was quite irresistible.

I am at a loss to understand why the Government cannot put this simple principle into the Bill. What are they afraid of?

Lord Strathclyde

The noble Lord, Lord Bruce of Donington, is confusing two different principles. The basic principle about which I am talking is whether we should legislate for shareholders to receive summarised reports and accounts. The principle about which the noble Lord, Lord Bruce, is talking is whether shareholders either do not wish to receive or clearly elect not to receive summarised reports and accounts. The principle should be decided after a considerable amount of discussion and consultation with the relevant people.

I still maintain that the noble Lords who have spoken have not provided one shred of evidence to show that what they are saying will clearly be better than what we are offering under the Bill. What they want should be left to be decided by regulation. I repeat—see what has been said and consult the people whom they will undoubtedly consult over the rest of the Bill. If the noble Lord wants to bring the matter back on Report, let us discuss it then.

Viscount Chandos

The noble Lord does not understand what concerns noble Lords on this side of the Committee. He suggests that consultations with professional and outside advisers are essentially more relevant than the views of the Committee and, for that matter, the views of another place when the Bill goes there. That is the issue in question on this clause and many others.

Lord Strathclyde

No.

Lord Williams of Elvel

The noble Viscount, Lord Chandos, is right. I accept that the noble Lord is tired and that we must move on. I do not think that we shall make much progress. The noble Lord has not understood our arguments. We shall have to do what we can when the Bill comes to Report. I shall not be moving Amendments Nos. 144 and 146.

On Question, amendment agreed to.

Lord Strathclyde moved Amendments Nos. 142 and 143: Page 27, line 21, leave out ("those"). Page 27, line 21, leave out ("who do not with to receive them").

[Amendment No. 144 not moved.]

Lord Strathclyde moved Amendment No. 145: Page 27, line 27, leave out ("The") and insert ("Copies of the documents referred to in section 238(1) shall, however, be sent to any member of the company who wishes to receive them; and the").

[Amendment No. 146 not moved.]

Lord Strathclyde moved Amendment No. 147: Page 27, leave out line 30 and insert ("them").

Lord Williams of Elvel moved Amendment No. 148: Page 27, line 37, after ("only") insert ("not more than").

The noble Lord said: We now come to the problem of what is contained in the short report, if I may put it like that. In view of the time and the burden which the noble Lord, Lord Strathclyde, has carried, if I may say so, elegantly and with distinction throughout the day, I do not wish to engage in what would otherwise be a long discussion on the amendment. I would merely say that I beg to move it on the grounds that we believe—the noble Lord has undoubtedly read the amendment—that the short report should contain certain basic material, and that is not covered in the Bill as at present drafted. I beg to move.

Lord Strathclyde

I hope that the noble Lord will not seek to press the amendment any further. I have already spoken to a certain amount of it.

As to the content of the summary financial statement, we sketched out some ideas when we went to consultation. But that was more by way of illustration. The Opposition, in their amendments, seek to fix some or maybe all of the contents in the primary legislation. The Government's preference remains to leave the matter for regulations.

As I have said, the whole proposal is a new concept in company law and we shall watch with interest how companies and shareholders get on with it. I urge the Committee to consider this. I hope that the noble Lord will withdraw the amendment.

Lord Williams of Elvel

As I said, I am grateful to the noble Lord: he has had a hard day. We shall certainly not press the amendment, but I hope that in the intervening stages the Government will look at what should be spelt out in the Bill as the content of the short report. I hope they will consider the text of the amendment and what we have said and act accordingly. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 149 not moved.]

10.30 p.m.

Lord Strathclyde moved Amendment No. 150: Page 28, line 13, at end insert— ("(7) Section 240 (requirements in connection with publication of accounts) does not apply in relation to the provision to members of a company of a summary financial statement it accordance with this section.").

The noble Lord said: Amendment No. 150 corrects a small defect in the provisions on summary financial statements which we have just been discussing. It ensures that where they are published, 'they need not be accompanied by the statement a kind of "health warning"—required by the new Section 240(5). It is not appropriate in the case of summary financial statements because it will be clear on the face of such a financial statement exactly what it is. Therefore, with the leave of the Committee and, I hope, the noble Lord, Lord Williams—if he is still awake at this stage of the evening—I beg to move.

Lord Williams of Elvel

Would the noble Lord like to withdraw his last remark?

Lord Strathclyde

There was no rudeness implied at all.

Lord Williams of Elvel

It was very rude.

Lord Strathclyde

It was not meant to be rude at all. As I have just said, the noble Lord simply looked slightly tired after the exertions of today and I was offering him some comfort; that is all.

Clause 14, as amended, agreed to.

Clauses 15 and 16 agreed to.

Clause 17 [Banking and insurance companies and groups: special provisions]:

Lord Strathclyde moved Amendment No. 151: Page 30, line 22, leave out ("this purpose") and insert ("the purposes of paragraph (b)").

The noble Lord said: Clause 17 contains accounting provisions for banks and insurance companies. This amendment makes a very minor change to those provisions. It ensures that the tailpiece to the new Section 255(2) relates only to subsection (2)(b) rather than subsection (2) as a whole. This is to prevent any confusion that it might have some meaning in relation to subsection (2)(a), where the word "banking" is also used. I beg to move.

Clause 17, as amended, agreed to.

Schedule 6 [Accounts and reports of banking and insurance companies and groups]:

Lord Williams of Elvel moved Amendment No. 152: Page 158, line 11, at end insert— ("9A. Omit paragraph 27.").

The noble Lord said: We come here to an important part of the legislation, which is the preservation of the exceptions for banking companies to present a true and fair view of their accounts. Because the hour is late I do not wish to embark on this debate at the moment because it is a matter of principle. Therefore I simply put down, if I may, a marker that on Report we shall come back to the matter.

In the interests of proceeding with the Committee stage of this Bill, I shall speak briefly to Amendment No. 152. I do not believe, and I have never believed since the 1948 Act, that banking companies should have the right to transfer to inner reserve on an unlimited basis. This has been a matter of tremendous controversy. I believe the time has come to make sure that all banking companies declare a true and fair view of their accounts without hidden transfers which are not disclosed to their shareholders. Having said that, I do not propose, if the Minister will permit me, to go further.

Lord Strathclyde

I thank the noble Lord for saying that he was putting down a marker on this to bring it back on Report. I shall reply to him as briefly as possible. These reserves are now maintained in the UK by a relatively small number of merchant banks and discount houses. In effect they allow disclosed profit in any year to be increased or reduced at the option of the directors. As a result, hidden reserves limit the usefulness of the profit figure in the accounts as an indicator of performance. The Government have been giving thought to this in the context of the European Community's Bank Accounts Directive. We are required to enact this directive in our law by the end of next year.

One of the options in the directive would allow us to continue to permit banks to maintain hidden reserves. As I have already indicated, this would be inconsistent with attempts to allow creditors and shareholders to make informed assessments of a bank's financial strength, short-term performance and long-term trends. That is why we announced last year that we are not inclined to exercise the option in the directive to continue to permit banks to have hidden reserves.

Nevertheless, this is a matter which we believe should properly be decided after consultation with those most directly concerned. I would therefore ask the noble Lord to withdraw the amendment.

Lord Williams of Elvel

I am grateful for the noble Lord's remarks. They go no way at all to satisfy my ambitions of getting this whole business out into the open. I do not believe that the number of banking institutions that take advantage of this is small. I do not believe that the old Leach-Lawson rules, which the noble Lord, Lord Benson, will remember very well, are at all adequate. I believe that banks ought to show in their accounts a true and fair view. That means full openness in transfer to reserves and full provision for their debts. But I do not believe that this is the time of night and the right occasion to pursue this particular argument. Therefore I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 153 not moved.]

Lord Strathclyde moved Amendment No. 154: Page 159, line 16, leave out paragraph 4 and insert ("4.—(1) In paragraph I of Schedule 4A (application to group accounts of provisions applicable to individual accounts), the reference in sub-paragraph (1) to the provisions of Schedule 4 shall be construed as a reference to the provisions of Schedule 9; and accordingly—

1. (a) the reference in sub-paragraph (2) to paragraph 59 of Schedule 4 shall be construed as a reference to paragraph 20 of Schedule 9, and paragraph (a) of that sub-paragraph shall be omitted; and
2. (b) sub-paragraph (3) shall be omitted.

(2) The general application of the provisions of Schedule 9 in place of those of Schedule 4 is subject to the following provisions.").

The noble Lord said: This is a technical amendment. It adapts certain cross-references in Schedule 2 in order to ensure that they are applicable to banking and insurance groups. I beg to move.

The Deputy Chairman of Committees

The question is that this amendment be agreed to—

Lord Williams of Elvel

I am sorry to disappoint the Deputy Chairman, but I wish to make one or two comments. The provision is technical but it reflects on the schedule and introduces a certain number of modifications to the schedule as drafted. I hope that the Government will consider, in the light of events and the time of night, whether the wording in Amendment No. 154 is precise enough to carry the approval of the Committee at a later stage.

I do not think that the Opposition should let this amendment go by without making some observations about the extent of the government amendments that have been produced on this first day of the Committee stage, which may now be coming to its end. We have dealt with any number of government amendments. If I may say so from the Opposition Front Bench, I think it rather depressing that the Government produce a Bill and then seek to amend it extensively in the first day of Committee in this Chamber. That is regrettable, and I wish that from time to time the Government would produce a Bill which is based on what they really think should happen and then accept opposition amendments. After all, in this Chamber debate is really intended for the Opposition to say to the Government what we should like and not for the Government to use the House as a sausage machine for putting amendments into legislation.

Lord Strathclyde

Perhaps I may reply very briefly to those remarks. I think that the noble Lord will find when he reads Hansard tomorrow that the amount of time taken up by government amendments has been very small by comparison with the amount of time that we have spent listening to the Opposition.

On Question, amendment agreed to.

Lord Strathclyde moved Amendment No. 154A: Page 160, line 18, at end insert ("only").

The noble Lord said: This is, I hope, the final technical amendment for this evening. I beg to move.

Schedule 6, as amended, agreed to.

Lord Hesketh

I beg to move that the House do now resume.

House resumed.